Consolidating our presence in Africa

Annual Report 2002 Consolidating our presence in Africa Partnerships Profile The Annual Report 2002 covers the period 1 January 2002 to 31 December 2002. The Eskom Enterprises Group serves as a means by which all the non-regulated activities of Eskom, both inside and outside South Africa, are carried out. Eskom Enterprises' core lines of business are infrastructure development, energy business operations, specialised energy services and the pursuit of key opportunities in related or strategic businesses, such as information technology and telecommunications. Eskom Enterprises' core business comprises: the development, operation and maintenance of infrastructure in the energy and water supply sectors; the provision of contracted research and development, utility management, project management and consulting services; investment in the creation or acquisition of assets and business ventures in the energy generation and transmission fields, in telecommunications and in information technology; the extraction or refinement of primary energy sources prior to conversion into secondary energy forms such as electricity. Countries in which operations are located: Eskom Enterprises has operations on the African continent, with its head office being located in Johannesburg, South Africa. Ownership: Eskom Enterprises is a wholly-owned subsidiary of Eskom Holdings Limited. Breakdown of sales by country/region: The majority of the sales are in South Africa, with growing percentage being in the African region. Contents Eskom Enterprises Key statistics and three year review Board Members Chairman’s statement CEO’s report Operational structure Operational review Corporate governance report Approval of the annual financial statements Report of the independent auditors Report of the audit committee Report of the directors 1 3 4 7 11 14 17 51 54 55 56 57 Balance sheets Income statements Cash flow statements Statements of changes in equity Notes to the annual financial statements Schedule 1 - Investment in subsidiaries, associate and joint venture companies Schedule 2 - Share of operations in associate and joint venture companies Power pools and interconnections Eskom Enterprises activities around the world 63 64 65 66 67 91 92 93 94 Strategic objective The primary strategic objective of Eskom Enterprises is to maximise the value of non-regulated activities of Eskom, and to develop competitive new businesses related to the energy supply industry. Vision To be the leading energy and related services business in emerging markets. Mission To create growing value for Eskom by meeting the energy needs of African and other international customers through the development of, and investment in, energy assets and by providing services to energy-related businesses. Values Integrity Excellence Customer Satisfaction Innovation 1 Key statistics 2 Key statistics and three year review for the year ended 31 December 2002 Group Rm 2002 Balance sheet Non-current assets Current assets Reserves Non-current liabilities Current liabilities 2,282 1,369 3,651 2,090 351 1,210 3,651 Rm 2001 1,178 1,320 2,498 1,191 529 778 2,498 Rm 2000 811 984 1,795 828 328 639 1,795 Rm 2002 1,834 443 2,277 1,780 171 326 2,277 Company Rm 2001 1,128 651 1,779 1,104 412 263 1,779 Rm 2000 756 568 1,324 834 235 255 1,324 Income statement Revenue Cost of sales Gross profit Profit / (loss) before tax Income tax expense Profit / (loss) after tax Outside shareholders' interest Net profit / (loss) for the year 2,907 (2,351) 556 36 (7) 29 (20) 9 2,371 (1,949) 422 130 (22) 108 – 108 2,068 (1,478) 590 30 (13) 17 – 17 968 (788) 180 (83) (2) (85) – (85) 838 (662) 176 37 (11) 26 – 26 753 (354) 399 29 (6) 23 – 23 Cash flow Cash flows from operations 243 Cash utilised in investment activities (1,122) Cash effects of financing activities 685 Net (decrease) / increase in cash and cash equivalents for the year (196) Ratios Profitability ratios Return on total assets, % Return on equity, %. Capital Structure Debt:equity Interest cover Social performance indicators Staff employed, number Employment equity, % Gender equity, % 324 (462) 297 159 316 (983) 1,112 445 24 (806) 603 (179) 143 (444) 284 (17) 172 (863) 1,019 328 2 1 4 9 2 2 (3) (4) 1 1 2 2 0.07 5.39 0.27 46.95 0.22 19.96 0.02 (7.57) 0.26 (14.32) 0.20 24.87 2,998 47.2% 15.7% 2,978 42.9% 13.0% 3,563 41.3% Definitions: Return on total assets - net operating income before interest, fair value and tax, expressed as a percentage of total assets. Return on equity - net profit / (loss) for the year attributable to ordinary shareholders divided by equity. Debt : equity ratio measure the percentage of non-current debt to equity. Interest cover - net operating income after exceptional items and investment income divided by net interest income and expenditure. Employment equity - percentage of black, asian and coloured employees in supervisory and management positions. Gender equity - percentage of women in supervisory and management positions. (Measured from 1 January 2001). 3 Board Members Thulani S Gcabashe (45) Chairman of the Board BA (Botswana), PED (IMD) MURP (Ball State University, USA) Urban and Regional Planning Appointed to the Eskom Enterprises Board on 4 March 1999. Douglas Ramaphosa (45) Non-executive Director MA (Soc. Sc.) Appointed to the Eskom Enterprises Board on 4 March 1999. Chairman of the Board of Rotek Industries. Dawid Mostert (65) Non-executive Director BSc, BEng (Stell), MBA (PUCHE), AMP (Harvard) Appointed to the Eskom Enterprises Board on 4 March 1999. Div Geeringh (61) Non-executive Director B.Com, CA, AMP (Harvard) Appointed to the Eskom Enterprises Board on 31 January 2000. Joe Hlongwane (64) Non-executive Director BA (ICI University,Texas, USA) BEd (CTS, Cape Town), EDP (Wits) Appointed to the Eskom Enterprises Board on 4 March 1999. Salukazi Dakile-Hlongwane (52) Non-executive Director BA (Econ and Statistics) (National University of Lesotho), MA (Dev Economics) (Williams College, Mass, USA) Appointed to the Eskom Enterprises Board on 31 January 2000. 4 Jan de Beer (52) Chief Executive Pr Eng, BSc (Eng) (Pret), MBL (Unisa), AMP (Harvard) Appointed to the Eskom Enterprises Board on 4 March 1999. Retired as at 31 December 2002. Dr Enos Banda (37) Chief Executive Designate BA (Hon), Business Administration (Franklin & Marshall College, Lancaster, Pennsylvania, US) LL.M (International & Comparative Law) (Georgetown University School of Law,Washington, DC, USA) Doctor of Jurisprudence (JD) (Case Western Reserve University School of Law, Cleveland, Ohio, USA) Appointed Chief Executive Designate on 1 August 2002. Appointed to the Eskom Enterprises Board on 1 October 2002. Solly Moloko (48) Executive Director B.Com (Unin), B.Com (Hons) (Unisa), MBA (Rutgers), AMP (Harvard) Appointed to the Eskom Enterprises Board on 19 September 2000. Responsible for the Primary Energy and IT portfolios. Vusi Ngubeni (47) Executive Director BA Admin (Botswana and Swaziland), Executive Programme (Stanford) Executive Programme – Infrastructure (Harvard) Appointed to the Eskom Enterprises Board on 4 March 1999. Responsible for the Commercial and Telecommunications portfolios. Reg Naidoo (45) Executive Director B.Com, Dip Acc (UDW), CA (SA), CAIB, Global Utilities Management Programme Appointed to the Eskom Enterprises Board on 24 May 2002. Responsible for Finance and Services portfolios. Duncan Mbonyana (48) Executive Director MBA (Henley Management College) Appointed to the Eskom Enterprises Board on 4 March 1999. Responsible for the Eskom Enterprises Africa and Investment portfolios. 5 African Renaissance 6 Chairman’s statement Thulani S Gcabashe Consolidating Our Presence in Africa The past financial year has seen Eskom Enterprises consolidating its presence in the African energy and related services markets, where the company has placed considerable emphasis since inception in 1999. The year was taken up in realising the business potential already identified and in getting to grips with different operational cultures and processes associated with different markets. Key imperatives over the past year were to grow the company’s normal business, on the one hand, such as Technology Services International (TSI), Rotek and project management contracts, and on the other, to pursue the large strategic issues such as the Second National Operator (SNO) and Pebble Bed Modular Reactor (PBMR) technology. While normal business generates the income, it has limited growth potential. SNO and PBMR on the other hand, have huge upside potential, but they require substantial capital investment, long-term commitment and, as with all new ventures, they have high attendant risks. Where the company moved rapidly to gain entry into new markets over the first three years of its existence, this past year brought Eskom Enterprises’ partnerships into sharper focus. By the nature of its business, the company must take a long-term view of its commercial relationships. As such, it will always be challenging to find 7 Chairman’s statement continued partners that provide the requisite cultural and commercial fit and share the same long-term view.The company has learned a good deal about choosing suitable partners, and its approach to partnerships has become more diligent. Eskom Enterprises remains fully committed to the goals of the New Partnership for Africa’s Development (NEPAD).The company recognises the seminal role it has to play in sustainable economic and social development across the continent. Eskom Enterprises supported a number of programmes in conjunction with Eskom Holdings Limited geared to developing the country and its people. Firstly, one can mention efforts such as the African Energy Fund that was conceived to act as a vehicle for the infrastructure projects of NEPAD. Secondly, the sponsorship of the empowerment projects such as the Expo for Young Scientists, the Maths and Science Schools project, the Small Business Opportunities Expo, and the ETA awards (Energy Efficiency awards) – all platforms that will advance the country’s science, technology and business skills base. As Eskom Enterprises strives to become the preeminent energy services business on the African continent, Eskom’s record for innovation and technological excellence continues to be tested. I know it will not be found wanting as we draw on our human and intellectual capital, our rich heritage of technological excellence and play our part to ensure the rebirth of our beloved continent. In terms of performance, the company has made considerable progress in Mali, Zambia and Libya, although growth in these markets has not been as rapid as anticipated, primarily due to the global economic downturn. Notable successes over the past year include: The Manantali hydro project in Mali; The Escom Malawi management contract; A seawater intake project in Libya; Electrification contracts in Zambia; The launch of a mobile communications network company in Lesotho; 8 20 year concession to operate and maintain two hydro stations in Uganda; Acquisition of 51% of Lunsemfwa Hydro Power Company in Zambia. Overall it was a difficult trading year for Eskom Enterprises. Sales grew by 23% and the goal of 40% external sales was met comfortably. However, the overall financial performance was adversely impacted by long-term strategic initiatives. Through the year, Eskom Enterprises had to balance its short-term commercial performance with long-term growth opportunities. This was most evident in the telecommunications arena, where the licensing process for the SNO was delayed. It is now due to be issued in the middle of the 2003 financial year. However, the groundwork has been prepared, and Eskom Enterprises remains strategically positioned to take advantage of this opportunity. Telecom Lesotho was launched with new products, brand and image during 2002, and is on track to double the historical fixed line telephone base in Lesotho by the second anniversary of its acquisition by Eskom Enterprises. Telecom Lesotho also successfully launched the second GSM mobile network operator. Lesotho is the first market in which Eskom Telecommunications has launched its mobile brand, EZI~CEL. The innovative products introduced by Econet EZI~CEL Lesotho positioned the company to exceed its first-year connection target within three months. Despite the global downturn, I am optimistic about future prospects for Eskom Enterprises.The company is strategically positioned as a serious contender for new business and for the growth in project activity across Africa. We believe foreign investment is set to increase once conflict on the continent reduces and as the global economic climate improves. Striking the right balance between developing the company’s normal business activities and making commitments to large strategic projects such as SNO and PBMR technology is where the real challenge for Eskom Enterprises lies. I am confident that the right balance will be achieved and that the company will continue to grow exponentially. I am exceptionally proud of the commitment and effort of Eskom Enterprises’ staff at all levels. They instinctively understand the company’s goal of profitable engagement for sustainable development on our continent and have accepted the challenges this poses with great enthusiasm. Africa’s future depends on cheap, accessible and sustainable energy and our staff are committed to the role Eskom Enterprises is playing in providing the energy that will power Africa’s future prosperity. They also know that relationships developing elsewhere on the continent through their efforts will be enduring partnerships for the future. I wish to thank them all for their individual and collective contributions to the future of our company and our continent. I wish to express sincere thanks to the outgoing Chief Executive Officer, Jan de Beer who has served Eskom Enterprises with great distinction since his appointment in March 1999. As of 1 January 2003, Dr Enos Banda takes over as the new CEO. Jan de Beer has left an indelible mark on Eskom Enterprises. He played a seminal role in establishing the company, oversaw its start-up pains and steered it to a commanding position in the African energy market. He hands over an extremely vibrant company to his successor and there is no doubt that everyone who has been part of the Eskom Enterprises’ journey will salute him for his vision, leadership, energy and commitment. He has made a real difference. His successor, Dr Enos Banda, holds a doctorate in law. He joined the company as Chief Executive-designate in August 2002 having made major contributions to the academic, legal and commercial fraternities in South Africa. Since returning to the Republic he has been actively engaged in the promulgation of the broadcasting policy framework, drafting and refining the national telecommunications laws and establishing policies on the restructuring of the national electricity industry. He has also served as Chairman of the National Electricity Regulator. Eskom Enterprises will be in very good hands and we welcome him on board. I wish to thank the Board of Directors of Eskom Enterprises and the Executive Management team for their efforts over the past year. Thanks must also go to Mr Jeff Radebe, Minister of Public Enterprises, and to his officials for their unfailing support and assistance throughout the year. This has been a difficult and challenging year. It has been a test of the company’s people, processes and technologies and none has been found wanting. I am greatly encouraged that the South African economy has been one of the most resilient among emerging economies and that business confidence continues to improve. I have every confidence that Eskom Enterprises will continue to forge ahead on the back of that confidence, driven by commercial considerations on the one hand and on the other by the vision of a stable, prosperous and thriving Africa. Thulani S Gcabashe Chairman 9 Consolidating the gains 10 CEO’s report Jan A de Beer Across and beyond boundaries Having reached the end of its fourth year in business, it is an opportune time for Eskom Enterprises to take stock.We have much to be proud of, but have also learnt valuable lessons. Broadly speaking, Eskom Enterprises met and even exceeded expectations in the traditional power business.The company has become a major force in Africa, working across the continent and expanding successfully beyond its shores. Our strategic forays into telecommunications and primary energy, however, are generally progressing slower than anticipated. Governance The Board and its committees enjoyed another productive year. The Chairman and non-executive Board Members gave valuable direction and input throughout the year and have management’s sincere appreciation for their hard work.The Rotek restructuring process has reached its final stages, and should be concluded early next year. The PBMR programme successfully completed its business case by November 2001 as planned.A fairly attractive picture has emerged in terms of the expected internal rate of return based on conservative cost and market estimates. Technically, critical design aspects have been tested and proven through actual models. The most noteworthy of these is the micro model at the University of Potchefstroom, which successfully proved the application of the Brayton cycle in a multi-shaft configuration – a world first. Current and prospective investors have thus been placed in a position to decide as to whether or not to proceed with the construction of a demonstration plant. Being at the crossroad, the various stakeholders will now determine the way forward. Should this proceed as planned, the governance structure will soon have to be finalised. 11 CEO’s report continued The effects of September 11, 2001 and local market conditions have influenced the restructuring of Eskom Enterprises assets profoundly.The restructuring of the Rotek group, our major restructuring initiative to date, did not proceed as envisaged. However, in order not to destroy value or run unnecessary risks, a change in strategy to incorporate a more optimal approach was required for Rotek Engineering and the property portfolio. The incorporation of the Eskom Holding Company did not have any immediate impact on Eskom Enterprises, although it is expected that this might change as the overall Eskom Group strategy unfolds. Financial performance Sales growth in the traditional business was satisfactory, especially with Rotek at 18% and TSI at 89%, which contributed to the overall growth of 23% against a target of 15%. Eskom Enterprises also achieved its 40% external sales target, a 52% increase on last year. Profitability was adversely affected by the strategic initiatives in telecommunications and primary energy, which did not progress as planned. The overall return on investments of 1% fell substantially short of our 12% target but, on the positive side, it should be noted that the traditional power side of the business performed well. This was despite a difficult business environment in which existing contracts were curtailed in Nigeria, and associate companies did not perform as hoped. Although disappointing, the results are not necessarily indications of a long-term trend and in some cases, such as Lesotho Telecommunications, there was a conscious management decision to sacrifice shortterm performance in the interest of longer-term strategic goals. Expanding the business Our service to Eskom and the South African electricity industry remained as important as in the past. However, 2002 will probably be remembered as the year in which Eskom Enterprises established itself as an operating company in Africa. Working in close association with the Eskom divisions – Generation, Transmission and Distribution – Eskom Enterprises established a utility operating presence in Mali, Uganda, Zimbabwe, Zambia, Malawi and Mozambique, with several more in the making. This does not mean that it moved away from its asset creation and refurbishment-contracting role – as a matter of fact, the latter has grown substantially, as is evident in new Rotek and TSI contracts in Nigeria, Libya and the Gulf region. Good progress has been made as well in positioning this line of business in both India and China. Developing Eskom Enterprises’ involvement in telecommunications is proving to be both more difficult and slower than expected. The worldwide downturn in this industry has taken its toll also on the Second National Operator (SNO) in South Africa. Although the process to identify a strategic equity partner is moving ahead, it takes time and one would have preferred to have seen Eskom Enterprises’ fibre optic infrastructure being put to work sooner rather than later. On a positive note, Eskom Enterprises has been gaining valuable operating experience in Lesotho in both landline and mobile telecommunications, and there is certainly reason to be cautiously optimistic about our future in telecommunications. Telecommunications, as with our Primary Energy Division, has brought to light an important strategic issue for the future expansion of the business. Eskom Enterprises has proved its ability to grow its current business organically. There is, however, a limit to the organic growth rate of any business. In order to realise Eskom’s strategic intent in terms of growth, massive investment will be required. Several initiatives, such as the Eskom Investment Strategy – as approved during the year by the shareholder – and the creation of an equity investment fund, should go a long way to unlock the required capital.The real challenge lies in managing the bottom line impact of these strategic initiatives. Through their long-term nature, the effect on profitability and creditworthiness of the business as a whole will need careful handling. Staff Affirmative action (47.2% against a target of 47%) and gender equity (15.7% against a target of 15%) remain important. The Employees Wellness Programme was implemented across the organisation and showed good results. 12 In closing The year under review, my 25-year career with Eskom and my association with Eskom Enterprises since its inception in 1999 have come to a close and I am handing over to Dr Enos Banda with full confidence in his capable leadership. Eskom Enterprises is a firmly established company, correctly positioned for its new ventures.There is no reason for it not to grow tenfold in the next four years. We know our partners and their capabilities.We have proved that we can generate revenue and growth. Success has a tendency to bring about more success. I wish to thank the Eskom Holdings Board, Eskom Enterprises Board and my colleagues. I am stepping down in the knowledge that the business is left in capable hands. Being at the helm of Eskom Enterprises right from the start has been a tremendous privilege and challenge, and an enormous pleasure. Knowing that our people left behind can develop Eskom Enterprises to its full potential, I would like to take the opportunity to wish everyone in the company the very best of success. Jan A de Beer CEO 13 Operational structure Internal Audit Treasury Confidential Investigations Safety Finance & Services Company Secretary/Legal Human Resources Government Sector Businesses Eskom Enterprises Africa # Investment # TSI Consulting* Rotek Industries* Roshcon* EE Africa: Regions Venture Development TSI Company Rotek Engineering Roshcon Division Electricity Africa Roshprop Division RVS Division EE Marketing Equity Management Trans-Africa Projects Clinker Supplies Bonesa EE Global West Africa Ltd (Nigeria) SKI TSI Division Ash Resources Rotek Eng Co Dormant Eskom Energie Manantali GESCO RVS Co Dormant Roshprop Co Dormant Lunsemfwa (Zambia) HEM~KOM # : Co-ordination, Marketing, Deal Making, Funding 14 Management Audit Remuneration Investment & Procurement Finance Committee PBMR* Primary Energy* Commercial* Telecomms* IT Services* Coal Sapphire Executive Air ET Africa SNO Arivia.kom Golang Coal ALS PTN + Eng FON e-Commerce SDCT Amazing Amanzi EON Solutions Enerweb FBC Mountain Comm’s Natural Gas Tele-Com Lesotho ELGAS Econet EZI~CEL Waste Energy * : Execution 15 Pre-eminent energy services business 16 Operational review Duncan Mbonyana Eskom Enterprises Africa The past year has been challenging and eventful for Eskom Enterprises Africa. The division is now consolidating its presence in Africa and embarking on a new path towards increasing profitability and ensuring future growth for the group. An African player In line with Eskom Enterprises Africa’s strategic objectives, Africa continues to receive priority focus. A number of programmes geared towards developing South Africa and the continent’s people have been initiated. Eskom Enterprises Africa has a major role to play in developmental initiatives, and is involved as a NEPAD partner in the following areas: Project selection and prioritisation; Project planning and design; Packaging of electricity projects with a view to developing an integrated African power system; Equity partners; Implementation. Similarly, legacy projects have been established to address the shortage of energy and electricity infrastructure, which is hampering Africa’s development. Interconnections As the African continent is faced with the challenge of integrating its power systems to increase energy trading and consumption, Eskom Enterprises Africa is poised to enter into co-operation agreements and joint ventures with other African utilities, local investors and multilateral funding institutions. These partnerships will advance the cross-border links necessary to realise the Pan-African grid. Eskom Enterprises Africa is 17 Operational review continued contributing to that goal through the development and implementation of the Malawi-Mozambique, TanzaniaZambia, Kenya-Tanzania and DRC-Angola-NamibiaSouth Africa interconnections. These interconnections are key catalysts for the transformation of societies and the eradication of poverty. They will give a great many more people access to electricity through improved reliability and quality of supplies, thus stimulating the growth and competitiveness of local industries. Highlights A partnership between Eskom Enterprises Africa, Société National d’Electricitè (SNEL) and Magalloy Corporation – a magnesium mining development project in Congo Brazzaville – is developing a transmission line that will supply future mining operations in the Point-Noire region, 450 km west of Congo-Brazzaville. The Nigerian office of Eskom Enterprises Africa is overseeing the facilitation of Afam I-IV and transmission consulting projects that are central to the company’s focus on infrastructure rehabilitation. This office also achieved a breakthrough in positioning a joint venture company in Morocco. Eskom Enterprises Africa facilitated a 20 year operation and maintenance contract for a generation concession to the government of Uganda.The project was developed over two years and gave Eskom Enterprises an opportunity for long-term engagement in East Africa. The Lesotho rural electrification project is a further example of Eskom Enterprises’ consistent leverage of an Eskom key competency. Branding and marketing The Eskom Enterprises logo, and that of other divisions within Eskom Holdings, changed on 1 January 2002 and now forms part of the monolithic structure reflected by the corporate identity.The new logos and typography reflect the company’s desire to position itself as an African business of global stature, embracing partnerships, alliances and agility. During the year, Eskom Enterprises Africa sponsored the Uganda Business Forum during the World Summit on Sustainable Development in Johannesburg. The company also supported the East African Power Industry Convention in Tanzania and the North African Power Industry Convention in Morocco. 18 Conclusion Although its primary focus is commercial, as an African company born of an African utility Eskom Enterprises has the responsibility for enhancing productivity, increasing efficiency and boosting the profitability of its African customers by working jointly and actively with major players in the energy industry. Investment Division The Investment Division comprises two departments, Venture Development and Equity Management. Both play the investment owner’s role on behalf of the Eskom Enterprises’ board of directors and serve as the developer of investment opportunities, as well as the funding facilitator and link with Eskom Holdings Financial Division. Specific functions of the Investment Division include: Developing overall investment strategy and criteria; Screening, evaluation and ranking of prospects and business opportunities as identified or presented by the market; Techno-economic, commercial and legal due diligence studies; Evaluation of mitigation plans; risk and development of maintain the two hydro stations, Nalubale and Kiiri with respective installed capacity of 180 and 200 MW. The two stations are situated at Jinja, the point where the Nile starts its journey from Lake Victoria.The net present value to Eskom Enterprises for the first seven years is US$65 million. With the successful conclusion of the concession for these stations, the Investment Division has concluded concessions or controlling ownership in five hydro stations outside South Africa. Besides the latest two in Uganda, there are two in Zambia – Lunsemfwa and Mulungushi – and one in Mali in West Africa. The combined installed capacity of these stations is 618 MW. All being Base Load Stations, their combined annual generated output is nearly double that of the combined output of all Eskom hydro stations inside South Africa. During the year, a bid was also submitted for the Uganda Electricity Distribution Concession, with CDC Globelec as a leading partner in the joint venture.The joint technical and qualified financial proposals were reviewed and the Ugandan Reform Unit advised the joint venture that it had preferred bidder status. Negotiations leading to finalisation of the terms and conditions were scheduled to start before the end of 2002.The contract will grant Eskom Enterprises a 20year concession to operate and maintain all the distribution network and assets in the Kampala region. Investment envisaged for this concession is in excess of US$100 million. The division continued to play a major role in the development of NEPAD in 2002 by identifying, characterising, screening and prioritising energy and power-related projects in the SADC and COMESA regions on behalf of the NEPAD secretariat. It also worked closely with key role players in Africa and elsewhere, and participated in various local and continental NEPAD forums. The division is currently pursuing numerous investment prospects across Africa, from Morocco to Lesotho, with a view to participating as a developer and investor of choice for energy infrastructure delivery to the sustainable development of the continent. Developing and structuring investment deals and projects to financial closure; Identifying and liaising with financial institutions and agencies; Co-management of equity investment funds. The division secures investment opportunities by collaborating with multi-lateral agencies and by exploiting opportunities arising from bilateral and other cooperation agreements. Additionally, it secures investment by maintaining Eskom Enterprises’ close involvement in NEPAD’s infrastructure development programme, acquiring and partnering in equity with other operating energy sector ventures, and by proactively responding to opportunities arising from the market at large. At the same time, the division is competing aggressively with global companies to secure ownership rights and concessions in the privatisation of African utilities across the continent. During 2002, a bid was submitted for the Uganda Electricity Generation Concession and Eskom Enterprises technical and financial proposals were accepted. Following negotiations with the transaction agents and the Ugandan Government Legal Council, contract documents were finalised and signed in Kampala on 26 November.The contract grants Eskom Enterprises a 20-year concession to operate and 19 Technology for Africa and beyond 20 Operational review Jan Oberholzer Technology Services International (TSI) Technology for Africa and beyond Technology Services International (TSI), a division of Eskom Enterprises, is a leading supplier of technology and engineering solutions in the African energy sector. Additionally, TSI offers research, project management, and operating and maintenance services to related industries locally and in other emerging global markets. TSI markets include Eskom Generation, Transmission, Distribution, Resources & Strategy, South African industrial sectors and utilities. To capitalise on the resources, products and services that were typically only available to Eskom,TSI offers these services to the rest of the world. During 2002,TSI provided support to customers in more than 3 100 projects. Among these were Generation projects in Nigeria, Libya and Vietnam, distribution projects in Turkey and Transmission projects in Georgia. Another exciting year has come to an end; 2002 was most certainly another very positive year for TSI. Our business expansion into Africa has grown in excess of 400% and, more important, we commenced with our first major project in Libya. We have also had various opportunities in Africa (Nigeria, Tunisia, Morocco and Libya) come our way and we hope to reap the benefits of these in the future. TSI won the Technology Top 100 award in the services category for 2002 as well as qualifying as one of the country’s top performers in the energy sector, and will be included in the 2003 issue of “South Africa’s Top 300 Companies – National Edition” (this nomination follows extensive research of over 5 000 of South Africa’s leading companies). Our staff remains our most important asset and, as such, we have embarked on a journey navigation programme to ensure that everyone sees the same vision and fully understands and supports the business objectives. Our expanding business has enabled us to contribute positively to Eskom Enterprises 21 Operational review continued employment equity objectives achieving 52.5% racial equity and 15.6% gender equity. During 2002 TSI received its ISO 9001/2000 (quality management systems) and ISO 14001 (environmental) accrediation, but most importantly TSI has had an accident free year and maintained a Disabling Incident Injury Rate (DIIR) of zero. TSI has contributed R 62.7 million to Black Economic Empowerment (BEE), which is R 17 million over budget. We continously look for more BEE business partners and look to the future when we can take a BEE company as our Original Equipment Manufacturers (OEM) to countries like Libya. Eskom Holdings Limited business as a market is still growing at a healthy 21.4% (R 406.8 million in 2001 compared to R 494.0 million in 2002) but more excitingly is the 107% growth in our external turnover (R 107.6 million in 2001 compared to R 223.7 million in 2002). Our total turnover has grown 39.5% (R 514.5 million in 2001 compared to R 717.7 million in 2002). Considering the growth in turnover, we have done well to reduce our outstanding debtors and maintain a similar balance compared to 2001, specifically within Eskom. Although our debtors days is above the target and has averaged 52 days for 2002. We have however managed to reduce our debtors over 90 days. The positive improvement in debtors and increased business enabled us to generate R 81 million in cash thus allowing us to repay our loan from head office that was R 39.9 million at the start of 2002. We have R 4.4 million now invested with Head Office. On the profit side, we have not achieved what we set out to achieve for 2002 for the following reasons: The impact of growing a business at such a pace specifically beyond the borders of South Africa comes at a price; during 2002 we incurred R 6.8 million on prospecting costs, as well as R 4.6 million in our tender office with the preparation of tenders.We have also had to sacrifice profit margins to ensure market penetration. TSI’s operations are conducted through seven business units: Operating and Maintenance. Operations managers and specialists take responsibility for operating and maintaining utilities, power plant and power installations of independent power producers and transmitters. Past experience enables them to 22 manage fuel, plant, equipment, material and staff to the maximum benefit of the owner. Project Management. Supported by Eskom’s proven expertise and credibility, this unit offers project managers who provide integrated project solutions to utilities and related industries worldwide. Unit staff specialise in power generation, distribution, non-grid electrification, telecommunications, project services, business consulting, project and programme management, utility optimisation and professional services. Electrical and Information Systems. Electrical engineering includes support for electricity tranmission and distribution, electrical and process control engineering, high-voltage engineering and telecommunications research, consulting and testing. The unit also provides information management, including the use of Internet and knowledge-based systems for data capture, training and diagnostic systems. Mechanical, Materials and Civil. This unit provides mechanical engineering support, which includes power plant design and systems, computational fluid dynamics, metrology, coal materials handling and flow studies. This unit also provides materials engineering support, which includes plant integrity assessments, remnant life assessment and corrosion assessments. On the civil side, this unit provides civil design, quantity surveying and architecture, especially in the power utility environment. Audit, Chemical and Environmental. This unit specialises in environmental management, air quality and meteorology, water and applied chemistry, coal and X-ray, petroleum chemistry, technical risk assessment, and vegetation management. The unit is ISO 9002 certified and laboratories within the section are ISO 17025 accredited. Energy Efficiency Services.This unit offers specialised electrical and energy solutions worldwide through the application of end-user Electro technologies and energy assessment surveys. Protection, Telecontrol and Measurement. This was formerly a separate division, but during 2002 it became a business unit of TSI as part of a realignment of services offered. This saw the pooling of complimentary disciplines to ensure delivery of a world-class service to customers.The unit provides electro-technical solutions, and specialises in providing a total outsource service to manage, design, commission, maintain and operate electrical plant systems for utilities and large industries. TSI (Pty) Ltd Technology Services International (TSI) is the holding company for the shares in the several subsidiary and joint ventures.This includes Electricity Africa (Pty) Ltd, Trans-Africa Projects (Pty) Ltd, Bonesa (Pty) Ltd, GESCO (Pty) Ltd, Spatial Knowledge International (Pty) Ltd. Electricity Africa (Pty) Ltd Electricity Africa serves the international distribution market, with a specific focus on utilities. Electricity Africa has increasingly become involved in the utilities in Africa. However, a number of projects have come to an unexpected halt, demonstrating the volatility of these markets. Electricity Africa generated R 4.2 million in turnover and reached break-even in terms of recovering its expenses. Electricity Africa was instrumental in setting up GESCO, the Libyan-based Global Electricity Services Company, in which Eskom Enterprises holds a meaningful share. A contract has been signed with Escom Malawi in terms of which a managing director, technical expert and financial expert have been seconded to Escom. Trans-Africa Projects (Pty) Ltd (TAP) The past year was difficult for TAP in that turnover and profit forecasts had to be reduced significantly towards the end of the year. This was due mainly to payment defaults by three major customers and the deferring of some projects by the National Electricity Power Authority (NEPA) of Nigeria. In line with one of its key strategic objectives, TAP progressed a long way in establishing closer ties with stakeholders during 2002. Arrangements were made with the Fluor office in Delhi, India, to support TAP on two major consultancy services tenders submitted to Indian utilities. On the Eskom Enterprises side, TAP has tied up with TSI in submitting two major turnkey tenders to the Tunisian Company for Electricity and Gas (STEG ) of Tunisia and TAP continues to assist Eskom Enterprises in pursuing major project prospects elsewhere in Africa. Arrangements were concluded with Eskom Enterprises to move the transmission line engineering services that currently reside in TSI to TAP on 1st January 2002. This consolidation of transmission resources within TAP is considered essential to optimise services provided by TAP in the interests of stakeholders and customers. During 2002, TAP moved more actively into Chinese and Indian markets and plans to expand its marketing effort into South East Asia in future. The prospect of contracts being awarded to TAP in both India and China appears good. Indications are that Eskom plans significant extensions to its transmission network over the next few years. TAP will continue to position itself to secure a significant portion of this important business during 2003. Despite a very difficult year,TAP has demonstrated its robustness in a demanding and fluctuating market by still showing a moderate profit for 2002. Bonesa (Pty) Ltd and Efficient Lighting Initiatives Highlights Through TSI and two partners, Africon International and Umongi-Karebo, Eskom Enterprises have set up a company, Bonesa (Pty) Ltd, as an implementing agent for the South African leg of the Efficient Lighting Initiative (ELI). Bonesa means “to lighten up” in Setswana. Funding for the project has come from Global Environment Fund (GEF) (US $ 2.5 million) and Eskom (R 48.8 million), and the latter will continue until 2003. Bonesa’s initial focus was to transform the South African lighting market by increasing the volume of compact fluorescent lamp (CFL) sales into the middleand high-income market sectors.This has driven down the retail price of the technologies, which will establish a solid foundation for penetrating the newly electrified target market in 2003. Highlights include the successful conclusion of lighting audits and upgrades at the Department of Minerals 23 Operational review continued and Energy in Pretoria, Edendale hospital in KwaZulu Natal and the main library at the University of Durban-Westville. Two successful street lighting upgrades were also concluded in Garankuwa (Northwest) and Riverlea in Gauteng. Spatial Knowledge International (Pty) Ltd Spatial Knowledge International (SKI), aims to provide quality integrated spatial data acquisition, management, maintenance and brokering services, to satisfy its customer requirements globally. SKI’s market niche is in the supply of a comprehensive and affordable Spatial Data Management Service to its customers. In the past year SKI focused on a five point strategic plan.This endeavoured to: Focus on quality integrated spatial data; Make use of selected skills, capacity and capabilities from the existing GIS companies; Ensure that duplication of efforts in the market be reduced dramatically; Ensure that the latest, most relevant and affordable technologies are used; Ensure cost-effective services by broadening the customer base. Global Electricity Services Company (Pty) Ltd (GESCO) Libyan registered and based joint venture company GESCO was extremely busy in 2002. Staff numbers grew from 3 to 10 and turnover rose from zero to R31 million. The company will move from temporary premises to take occupation of a new building in January 2003. GESCO was awarded a Steam Power Plant rehabilitation contract by the General Electricity Company of Libya (GECOL) to the value of 50 million Euro. A number of consultancy projects were completed for GECOL and towards the end of 2002 there were up to 60 South Africans in Libya simultaneously. GESCO’s largest project to date is the rehabilitation of the seawater intake at Khoms Power Station, situated 140 km east of Tripoli.The rehabilitation of the plant’s four 24 channels began in September and should be completed by the middle of 2003. GESCO produced proposals for the rehabilitation of 10 units at four of GECOL’s Steam Power Plants, in addition to Units 3 and 4 at Khoms Steam Power Plant. The Libyan Government has made money available for feasibility studies for possible Independent Power Producing (IPP) plants in a number of African countries. Initial reviews have been completed for Sudan, Niger, Benin and Burkina Faso. Other countries being considered are Zanzibar, Sierra Leone and Guinea-Bissau. GECOL decided to proceed with a full feasibility study for Burkina Faso, and this was completed in record time. Negotiations between the governments of Libya and Burkina Faso will begin in January 2003. These will be followed by technical negotiations for the multiple contracts required before the green light can be given to proceed with the erection of the IPP. GESCO plans to introduce leadership training interventions by way of a GESCO leadership-training centre, which will have a number of courses available modelled on Eskom’s experience.This project is in the planning phase, and will become a reality during 2003. HEM~KOM Liveline (Pty) Ltd HEM-KOM is a 50% joint venture (JV) between Eskom Enterprises and Electhem South Africa. HEM~KOM specialises in the installation of fibre optic cable on power lines using the ADLash technique.This technique is quick and cost effective and compares well with other methods of installing fibre optic cable. In addition to the lashing using this specialised technique, HEM~KOM has also got the capability to install ADSS, OPGW, and buried fibre. HEM-KOM was responsible for deploying a 10 000km fibre optic network in preparation for the launch of the second fixed-line telecommunications licence in 2002/2003. Project Highlights Eskom’s Wind Energy Project Eskom has embarked on a Wind Energy Project to demonstrate large wind turbines in South Africa. To this end, three turbines, rated at 3.2 MVA in total and of different size and manufacture, were constructed and commissioned by TSI at Klipheuwel in the Western Cape. The main technology differences in horizontal type turbines will be investigated for stall and pitch control and synchronous and asynchronous generation. The Klipheuwel site will be used for research purposes for three years. The main purpose of the research project is to: Understand the implications in the South African environment; Determine the appropriate scale of future application; Obtain the necessary information for effective implementation (i.e. operating and maintenance under South African conditions – in both the commercial and the natural environment); Introduce the technology to South Africa. Solar Dish/Stirling generator Concentrated Solar Power (CSP) technologies have been developed over the past couple of decades, and differ from well-known solar cells in that CSP technology uses the thermal component of the incident radiation to drive an engine or turbine to generate electricity. Numerous CSP technologies exist today. Eskom’s Research, Development and Demonstration (R&D) Division started its evaluation of these technologies four years ago. This led to the identification of the Dish/Stirling system as a promising technology. To assess whether the technology will be suitable as a Distributed Generation option, Eskom’s R&D Division contracted TSI to install a 25 kW system at the Development Bank of Southern Africa (DBSA) buildings in Midrand. This was commissioned in August 2002 during the World Summit on Sustainable Development. More than 92% of the solar radiation that hits the dish is reflected by the dish-reflector to the collector and engine, resulting in the system having a solar-to-electric conversion efficiency of 29.4%. The project, which is being executed in partnership with the DBSA, will now focus on system assessment and evaluation. Georgia Transmission Operating Contract ESBI, the Irish Electricity Utility, tendered for a contract with the Georgian Utility to provide the services of Transmission Operation Management in Tbilisi, (Georgia) for three and a half years. The Transmission Operation Management contract commenced on 2 December 2002. Manantali Project in Mali Eskom Enterprises has been appointed as the operator for the Manantali Project in Mali for the next 15 years. The scope of the contract includes management and operation of the Manantali Dam, a 200 MW hydro power station, including associated 225 kV transmission lines connecting the three electricity utilities of Mali, Senegal and Mauritania, and dispatching power to the three national utilities. The contract, which was won in the face of strong competition from international companies, includes revenue management and river flow management.The owner of the assets, Organisation pour la Mise en Valeur du Fleuve Sénégal (OMVS), is a trust company formed between the three countries. OMVS has delegated responsibility for this specific project to a sub-trust company called Société d’Exploitation de Mali (SOGEM). SOGEM will control the contract jointly with TSI. Johannson Biomass Gasifier A Johannson Biomass Gasifier (JBG) system was developed, tested and evaluated at TSI in collaboration with Mr Gustav Johannson.The system comprises two fossil-fuelled generator sets, one diesel and the other petroleum. These sets have outputs of 75 kW and 35 kW respectively.The systems can operate on 100% gas produced from wood chips and are ideal for sustainable rural application. Hence a project was identified to pilot the technology. The key focus of the pilot project is to demonstrate the technology in a rural industrial application with a secondary focus on rural development. This will be done in collaboration with the University of Fort Hare. The project will entail construction and installation of a JBG system at a sawmill plant near Tyume River in the Nkokobe region of the Eastern Cape. The system will use available waste wood material at the sawmill to generate electricity. Social and economic development applications where the system can benefit the local and broader community include: Supporting and developing Small Medium and Micro Enterprises in agri-business. These can use electricity from the Gasifier for refrigeration, processing, drying and packing of the fresh produce, thereby producing entrepreneurs with 25 Operational review continued demonstrated capacity to add value to their produce; Supporting community level facilities. For this level, the expense of the biomass power can be offset by community-shared benefits such as communal water pumping for small to medium agricultural irrigation schemes or community water supply; Supporting business in off-grid areas and enhancement of research capacity at Fort Hare University; Improving the competitiveness of South Africa through capacity building, education and the dissemination of information. Infrared granular dryer Energy Efficiency Services has developed a directly heated infrared granular dryer.This unit can be used to dry products such as sand, desiccant granules, roast peanuts, nick-naks and can heat solid food.The unit is extremely effective and is currently used to demonstrate and evaluate technology to customers. It incorporates a new rotary kiln profile that ensures even mixing and thus drying, while reducing the dust and particle carry-over associated with this technology. Infrared liquid heater A liquid heating and evaporation unit has been manufactured with electric infrared as the heating source. The unit is used to heat and concentrate liquids radiantly from food products to waste and effluent streams, and it is particularly effective for continuous heating of a liquid stream in the food industry. It will be used to evaluate a number of different customer products and in our initial quantum chemistry experiments. Trials have been conducted within industry to evaluate these infrared technologies, and have proved to be hugely successful, resulting in full-scale implementation and future business opportunities for TSI. SACECS satellite catfish farm A new concept has been developed for the sustainable aquaculture industry. In this programme a satellite catfish-rearing farm will be established within a rural community. The community will receive baby fish or ‘fingerlings’ and raise them on supplied fish food. At the end of the growth cycle the fish are returned to a centralised facility for processing and marketing. In return, operators are paid a salary and the profits are used to build additional satellite farms and to install 26 additional technologies within the community. The quality of life improves as the community receives facilities from water and lighting to healthcare and education. As a result, dignity is returned to impoverished communities. Management contract – Hwange Zimbabwe Power Corporation and the Zimbabwe Electricity Supply Authority approached Eskom Enterprises in 2000, inviting a proposal to take over the management of Hwange Power Station for a limited period to improve the station's availability and reliability. Under the agreement, TSI provided management support at Hwange for 12 months with the option to extend for another 12 months. TSI’s support resulted in a significant improvement in both the technical and financial performance of the plant. This resulted in the initial support of ten Eskom Power Plant management specialists being reduced to four, but extended for another 12 months. Gas turbine training Two TSI engineers concluded a year’s secondment to ESB International in Dublin. They were specifically assigned to gain experience with project management of gas turbine-related projects, and to operate and maintain gas turbine plant. This expertise is seen as a strategic investment for Eskom Enterprises, as gas is likely to play a role in Eskom’s future local and international projects. Camden Unit 6 return to service To meet the steady increase in demand for power, especially at peak periods, Eskom Enterprises is to recommission three mothballed stations. Unit 6 at Camden Power Station will be the first unit to be recommissioned in January 2004. This unit has been in service for 20 years but has been mothballed for the past 12 years. The initial stage in the return to service is to determine the present condition of the plant. This assessment service has been provided by TSI, which is playing an integral role with the Camden team in supplying a multi-disciplinary project approach. During 2002, 50 projects were completed successfully by TSI for the Camden Unit 6 re-commissioning.These projects, valued at approximately R8 million, have included the specifications for the upgrading of the control and instrumentation and the electrical systems, assessments and recommendations for the refurbishment of civil works and water treatment plant, and intensive metallurgical assessments of the boiler tubing and state of the turbine.The combination of these projects will demonstrate that the unit can be safely returned to service and can operate reliably in a two shifting mode. The safe and reliable return to service of these units and the introduction of two shifting in their operation will be an international first as these units were originally designed for single shift operation. The introduction of two shifting – on load for morning and evening peak – will subject the plant’s components, especially the boiler and turbine, to stresses not originally intended designed to handle. Two shifting also requires a complete new operation and control philosophy and extensive automation. TSI looks forward to assisting in the return to service of the remaining seven units at Camden, followed by a further six units at Grootvlei. Information Communication Technology (ICT) The newly created Information Communication Technology (ICT) section specialises in ICT-type research. ICT has been actively involved in the telecommunications, applied information and market research portfolios of Eskom's research and development programme. Highlights included: Launching of a pilot site together with Eskom Enterprises Telecoms for the new LV Power Line Carrier technology that allows high speed internet and voice services to be available to households through Distribution's LV feeders; An ICT workshop held in October where ICT line groups were invited to put forward their business requirements relating to ICT. South African High Voltage Engineering Centre (SAHVEC) SAHVEC is the High Voltage (HV) research and development section specialising in the areas of insulators, transformers, Gas Insulated Systems (GIS) plant, HV measurements, corona and Electromagnetic Compatibility (EMC). Among the highlights for 2002 were: Developing a commercial test programme to test the insulation integrity of medium voltage metal clad switchgear; Launching an on-line commercial test system for measuring moisture in transformers; Completing the pilot test site for the operation of cellular equipment on a transmission line tower. 27 Technological Excellence 28 Operational review Brendan O’Connor Rotek/Roshcon Group The Rotek/Roshcon Group consists of four divisions operating in the engineering, construction, transport and property sectors.The Group conducts its business activities through two legal entities: Rotek Industries (Pty) Ltd, which owns the Rotek Engineering division and the Group’s properties; Roshcon (Pty) Ltd, which owns the Roshcon and Rosherville Vehicle Services divisions. Eskom Enterprises is engaged in restructuring the Rotek/Roshcon Group. This entails the sale of the Rosherville Vehicle Services division and the non-core properties owned by the Group. In addition, a BEE partner is being sought to take up equity in the Roshcon division. For the third year in succession, the Group achieved significant profit growth. Sales to Eskom Holdings Limited increased from R 694 million to R 758 million and export turnover increased substantially to R 175 million. Capital expenditure for the year was R 41,5 million and high standards of maintenance of our production machinery continued to be enforced at all operational facilities. Return on net asset employed by the group improved from 32.3% in the previous year to 42.1% in 2002. Rotek Engineering Rotek Engineering comprises the following three divisions: Power Generation Services, which repairs and maintains turbo machinery and provides medium to heavy machining services to the general engineering industry; Power Distribution Services, which repairs and maintains transformers and switchgear equipment; Bulk Water Services, which operates, repairs and maintains water schemes. 29 Operational review continued Rotek Engineering earned a higher operating profit than in the previous year and return on assets employed was satisfactory. Workshop capacity utilisation continued to improve and, as a result, the Power Generation Services division achieved excellent results. Demand for smaller power transformers and for site repair of medium-sized transformers and switchgear declined during the year, but this trend is not expected to continue into 2003 when workloads are forecast to return to levels achieved in previous years. The following were features of the year in Rotek Engineering: The Eskom Generation and Transmission service agreements were extended for a period of three years; A three-year contract was signed with Eskom Hydro and Water for operation and maintenance services to be supplied to that section; The number of planned general overhauls of turbine machinery remained constant and 12 of these contracts were completed at various power stations during the year; Although the volume of export work undertaken during 2002 was lower than budget, valuable orders were received from customers in Namibia, Kenya, Nigeria, Mauritius, Zimbabwe, Mozambique, Botswana, Kuwait and Australia. Work has commenced on a refurbishment contract in Libya; The Department of Water Affairs & Forestry awarded two-year maintenance contracts to the Bulk Water Services division. This work will be carried out in Gauteng, Mpumalanga, Limpopo, North West Province and Free State; Activity levels in the heavy machine shop were higher than in previous years as a result of orders from several new customers in the engineering industry; Rotek Engineering became a corporate member of the South Africa Excellence Foundation and qualified as a finalist for the Technology Top 100 awards; Good progress continued to be made in increasing purchases from BEE suppliers, and the division also increased the percentage of its 30 management employees disadvantaged communities. from previously Roshcon Roshcon has the following four operating divisions: Electrical Infrastructure, which constructs, extends and services electrical infrastructure ranging from the installation of meters in domestic homes up to the construction of 132 kV transmission networks. The division also provides electricity revenue management services to its customers; Civil Infrastructure, which is active in general civil construction; Materials (waste beneficiation), which operates a long-term contract for the reclamation of slag; Waste, Environmental and Bulk Materials, which manages domestic, industrial and mining waste, and bulk materials. Once again, Roshcon increased its invoiced sales and operating profit. Export sales contributed 35% of revenue and the division was successful in significantly widening its customer base. On the Electrical Infrastructure front Roshcon continued its drive into the African electrical infrastructure market with successes in Lesotho, Mozambique and Zambia. Roshcon completed the Maputo flood rehabilitation contract worth US$ 4 million.The contract involved rehabilitating and upgrading the electrical network in several suburbs of Maputo, as well as electrifying and providing street lighting. EDM was pleased with Roshcon's performance and the contract improved Roshcon's image and credibility in Mozambique. Roshcon won three electrification contracts in Lesotho early in 2002. The work included the electrification of approximately 6 800 houses in the villages of Ha-Tsiu; Ha-Foso; Ha-Tsolo, around Maseru; Tyatyaneng, 60 km north east of Maseru; and Mafeteng, 80 km south west of Maseru.These contracts required that Roshcon use a number of local sub-contractors. Roshcon continued to work in Zambia in 2002. A power supply to the Bwana Mkubwa mine acid plant was constructed for Zesco, including 85 km of 132 KV power lines and two substations. The Waste, Environmental and Bulk Materials division had a satisfactory year and several new contracts were negotiated for ash dump and coal facility management. Prospects are good for the year ahead, and the profitability achieved by this division in recent years should be sustained. Rosherville Vehicle Services Rosherville Vehicle Services operates the following three major divisions: Rotran Multi-Axles, which manages the abnormal transport fleet, strategic to Eskom Holdings; Rotran, which manages a long-haul transport fleet of vehicles; TAS Automotive, which manages a franchised truck sales, parts and workshop dealership for MAN (SA) (Pty) Ltd. Features of the division’s activities during 2002 included the following: Conclusion of a five-year strategic retainer contract with Eskom’s Generation and Transmission divisions; Renewal of the Eskom Distribution National Contract for road transportation; Renewal of the PEP Stores national contract for long-haul distribution; Entry into a new phase of the Bigen Africa water reticulation warehousing and transport contract; Conclusion of year two of a three-year service and-repair contract with Armscor for certain military vehicles; In conjunction with MAN, delivery of luxury buses to Translux and truck-tractors to Freight Dynamics. Rosherville Vehicle Services continued its turnaround towards acceptable profitability, with TAS Automotive ending the year as its best since the start of the dealership in 1993. The fleet age in Rotran is of concern and this important issue will be addressed as part of the restructuring process. Rosherville Vehicle Services is well positioned to grow its business, either under new ownership or as a continuing component of the Eskom Enterprises family. Rosherville Properties The Rosherville Properties division manages the 240hectare Rotek site at Rosherville, close to the centre of Johannesburg. In addition to the Group’s residential accommodation, there are industrial and commercial buildings (103 000m2) and offices (16 400m2) established on the site. In view of the recommendation to sell non-core properties managed by this division, no new building construction was undertaken. However, major rehabilitation and refurbishment of several buildings and service facilities was completed during the year in line with the division’s aim of maintaining buildings in good repair. Occupancy levels were satisfactory throughout the year, with the exception of some residential accommodation. Demand for office accommodation continued to decline.The returns earned on the total property portfolio were satisfactory and in line with the targets set for the division. Summary The steady growth in profits earned by the Rotek/Roshcon Group over the past three years has been most gratifying. The turnaround achieved by Rosherville Vehicle Services means that all four divisions within the Group are now profitable. Management is confident that this trend will continue in the coming year. Focus points during 2003 will include the growth of export markets, more emphasis on co-operation with black empowerment enterprises, and the development and retention of skilled employees. 31 Reliable and new technology 32 Operational review Dave Nicholson Pebble Bed Modular Reactor (Pty) Ltd General progress The project to develop the PBMR in South Africa made significant progress during 2002 and achieved the key objectives set by the investors. The feasibility study and all associated work were completed, and the results gave the investors a high degree of confidence that the project is both technically and commercially viable. The current investors – Eskom, the Industrial Development Corporation and British Nuclear Fuels are expected to announce the way forward early in 2003. This phase will involve the construction and operation of a 110 MW class demonstration reactor on the Koeberg site near Cape Town, as well as the construction of a fuel manufacturing facility at Pelindaba near Pretoria. The environmental impact assessment (EIA) process was concluded and final reports were submitted to South Africa’s Department of Environmental Affairs and Tourism (DEAT). In addition to approval by the investors and a positive record of decision on the EIA, by the DEAT, proceeding to the next phase is subject to the issue of a construction licence by the South African National Nuclear Regulator and government consent. A setback during the year was the announcement in April 2002 by the US utility of Exelon that, in view of its strategic decision to streamline its business radically, it would not be participating in the project beyond the detailed feasibility phase.There is, however, significant worldwide interest in the PBMR project and PBMR (Pty) Ltd is actively discussing opportunities with other companies interested in becoming investors. If the demonstration plant achieves its targets, the PBMR is expected to have a number of international sales opportunities, especially because of its built-in safety characteristics. Its passive safety features require 33 Operational review continued no human intervention. If a fault occurs during reactor operations, the system, at worst, will come to a standstill and merely dissipate heat on a decreasing curve without any core failure or release of radioactivity into the environment. Achievements A major engineering feat was achieved on |23 September 2002 with the successful start-up of a test rig of the PBMR power conversion system. The test rig, or micro turbine model, represented the first closed-cycle, multi-shaft gas turbine in the world. The model was designed and built by the Faculty of Engineering at Potchefstroom University, with technical input from the PBMR project team. The model is a replica of the functional layout of the PBMR power plant with the same control topology and degrees of freedom as the PBMR plant. It therefore fairly accurately predicts the behaviour of the power plant and addresses one of the main technical risks of the project, namely the integrated controllability of a multi-shaft system. The successful demonstration proved the current configuration of the power conversion unit of the PBMR to be stable and controllable. In addition, the PBMR-developed thermal hydraulic design code, Flownet, accurately predicted various plant parameters, providing a major boost of confidence in the technical feasibility of the PBMR concept. We are extremely proud of this world-first achievement, especially since it has been jointly funded and managed by industry, academia and the South African Government. The South African Nuclear Energy Corporation (NECSA), which is under contract from PBMR (Pty) Ltd to develop the fuel manufacturing capability, has also made excellent progress with the development of the exacting production techniques required for the manufacture of complete fuel spheres. Uranium was recently loaded in the coater at the fuel laboratories for the first time. 34 35 World-class technology 36 Operational review Vusi Ngubeni Commercial Division The Commercial Division, consisting of Sapphire Executive Air Division, Airborne Laser Solutions (Pty) Ltd and Amazing Amanzi Systems (Pty) Ltd, continued its strong growth trend during 2002, with revenue up by 40% against 2001 performance. Higher than expected maintenance costs, bad debts and teething problems on new equipment, however, resulted in the division falling short of operating profit expectations. Sapphire Executive Air Sapphire Executive Air is a division of Eskom Enterprises flying both fixed wing and rotary wing aircraft. Originally, it was established in Eskom to transport management and engineers to construction sites of new power stations. Helicopter Services The division owns and operates a fleet of helicopters from many international manufacturers. Its greatest assets are its full-time and highly-qualified pilots. Operations covering virtually every possible helicopter application have been undertaken, using the precision live centric wire hovering skills of these expert pilots. A Flight Operations department incorporating operational management and air operations makes up the heart of Helicopter Services. A fully-fledged Aircraft Maintenance Organisation supports Flight Operations by supplying technical and maintenance facilities and services, ensuring helicopters are kept in service. Additional support to the business is received through a Ground Services department, which incorporates finances, flight safety management and field support for utility operations. The division’s short- to medium-term strategy is to 37 Operational review continued diversify further into all areas of helicopter applications throughout Africa, with core business still focused on the telecommunications infrastructure and the electrical utility industries. During the year under review, external sales (business derived from non-Eskom related activities) grew from 49% to 64%, with an increase of 38% in revenue. Human resource capacity was increased to cope with this growth, not only on the operational side but also in support of the Flight Operations, Flight Safety and Helicopter Maintenance departments. Fixed Wing Services Fixed Wing Services is a division of Eskom Enterprises. In 2002, with the ringfencing of the two main groups – the fixed wing and rotary sections – the name Sapphire Air (Fixed Wing Services) was adopted. The major highlights for Fixed Wing Services over the past year were the following: A state-of-the-art departure lounge was opened at Lanseria International Airport. The facilities are comparable to the current lounge at Grand Central Airport, though on a smaller scale. The lounge was needed because more than 90% of all Fixed Wing Services’ flights are crossborder, and Grand Central Airport is no longer an international airport. The jet fleet is also being moved to Lanseria International Airport in order to reduce the "short cycle" fees currently incurred by Fixed Wing Services; A new addition to the Fixed Wing services fleet arrived in August 2002.This aircraft will reduce the work load on the existing fleet and reduce Fixed Wing services’ dependence on other charter companies; A three-year contract was signed with Eskom Energie Manantali (Mali) in August to provide an aircraft for transportation and medical evacuation. Fixed Wing Services suffered a major blow at the beginning of the year when an aircraft based in Mali suffered a high number of bird strikes and ingestion of birds into the engines. The result was an unplanned R 2.8 million expenditure for essential repairs. Airborne Laser Solutions (Pty) Ltd (ALS) ALS, a wholly-owned subsidiary of Eskom Enterprises, consists of 13 full-time employees qualified at various levels in surveying and geodesics.The company focuses 38 on opportunities within sub-Saharan Africa, West Africa, South America and Australia. The high technology field in which ALS operates means that computer expenses and maintenance charges will always be high, while high finance charges are something the company has in common with the rest of the economy. As a result of these factors and some extraordinary capital expenditure – the purchase of the new ALTM system – during 2002,ALS has incurred a loss in this financial year. This loss position is to change in 2003 due to the high sales growth potential of the upgraded and modernised systems. Highlights of the year included the following: Work was completed in Cameroon and Namibia in the first two months of 2002; Consulting work was done in Germany in July 2002; Sales to Eskom increased from 9% of turnover in 2001 to 40% of turnover in 2002, thanks largely to work completed for the Transmission and Distribution divisions; ALS has commenced a contract for Spoornet valued at R6-million. Amazing Amanzi Systems (Pty) Ltd In pursuit of its strategic intent to change itself into a multifaceted energy corporation, Eskom Holdings Limited through Eskom Enterprises has invested in Amazing Amanzi Systems (Pty) Ltd. This initiative epitomises Eskom’s determination to stand up for the poor by implementing its vision to improve their quality of life by finding mutually acceptable solutions to benefit those that have the power to make a difference where it is most needed.Alternative energy is the reality to enable the demand on resources in Africa to be met without compromise. Turnover for the financial year ending December 2000 was R1.2 m.To December 2001 it was R1.3 m (+2.4%) and to December 2002 it was R3.4 m (+166%). The order book is growing monthly, especially in export markets. The third and final generation of the water heater and two-plate stove has been successfully integrated on the manufacturers assembly line.The space heater and steam iron are supplementary to this system, and will be ready in time to meet winter sales demand. New products will be introduced during 2003 to enhance the range. Project highlights for the year included: Distribution networks in local and international markets were established; DNA/Sherwood International was appointed to support the supply chain on the 264 components of the system; Distribution agreements with Electrolux international, McCarthy Exports and with Quattro (a subsidiary of African Bank) are being negotiated for implementation; Occupation of the company’s Kyalami Business Park premises, which include warehouse and office facilities, commenced during November 2002. The company aims to be the leading supplier of alternative energy appliances and, at the same time, it is proud to be involved in the government’s initiatives on job creation and reskilling of rural communities for sustainability. On 9 November 2002, President Mbeki opened the first of 50 Integrated Energy Centres at Kgalagadi, Kuruman. These centres are an initiative of the Department of Minerals and Energy, Total RSA, E-Seta/Managed Empowerment (Training) and Eskom (Distribution). 39 Operational review continued Telecommunications Division Eskom Enterprises Telecommunications Division continued to operate its core internal business – providing mission critical private telecommunications services to Eskom throughout 2002, while pursuing its two main strategic goals. The two strategic goals are to: Enter public telecommunications in South Africa by participation in the SNO; Develop a portfolio of telecommunications opportunities and businesses in Africa. Preparation for participation in the SNO has included the construction of a full services network (jointly with Transtel) based largely on power-line-attached fibre optic cables and systems, and securing an appropriate stake in the future SNO licence. African business included progress in rehabilitating and expanding Telecom Lesotho (fixed line), the launch of the second GSM mobile operator in Lesotho and screening and development of a number of licence and equity opportunities in other African countries. During the year, and in compliance with the global rebranding of Eskom Holdings Limited, all Eskom Enterprises telecommunications operations were relaunched under the banner of "Eskom Telecommunications". Earlier sub-brands such as ESI~TEL and EE~KOM were demarketed. Second National Operator (SNO) Significant progress has been made in establishing South Africa’s second national fixed line telecommunications operator - the SNO. During 2002, the government confirmed Nexus Connexion as the black economic empowerment partner in the SNO. Nexus will hold 19% and this will ensure significant participation of the previously disadvantaged. In 2002, government also confirmed that Eskom Enterprises and Transnet would each hold 15% in the SNO. This will mark Eskom Enterprises’ entry into public telecommunications in South Africa. The SNO will enhance the use of Eskom Enterprises’ telecommunications assets, hone the skills of its employees in the area of public telecommunications, 40 and provide a long-term investment return to the company. Eskom Enterprises plans to be an active member of the SNO, participating in all aspects of operations, with appropriate representations in the management and on the board of the SNO. Full Service Network development Eskom Telecommunications spent significant capital resources during 2002 establishing the Full Service Network (FSN) infrastructure. This was done to prepare for its participation in public telecommunications as part of the SNO.The planning, design, engineering and implementation of the FSN is in accordance with international best practice, and Next Generation Network architecture will empower the SNO to provide bundled voice, data and Internet service offerings to its future customers. Leveraging Eskom power lines and servitude rights has enabled Eskom Telecommunications to install in excess of 4 800 km of fibre optic cable during the past year to all major commercial centres in South Africa. The installation of the associated long-distance optical transport terminal equipment is also very well advanced. Fibre optic rings in metropolitan areas and broadband connections to various sites are also in the process of being established to provide access to customers. The equipping of the Network Management Centre, which will ensure an integrated service provisioning and assurance solution, has also been completed and is ready for final commissioning and testing of the various network components. Design of the operational and business support system architecture is complete and the implementation of various support system solutions is underway. In excess of R350 million of project expenditure has been spent with BEE vendors and contractors during the execution of the FSN. Eskom Telecommunications believes that the value-added resources committed to the FSN project will enable the SNO to enjoy a significant time-to-market advantage, and enable the new telecommunications operator to compete effectively in this recently liberalised sector. The business success of the SNO will be founded on the capital cost advantage and operational readiness of the FSN, the innovative customer products and services on offer and excellent customer relationship management at attractive prices. The Private Telecommunication Network (PTN) and Engineering Divisions The PTN and Engineering Divisions have completed their second successful year of commercial operations and house the majority of the Telecommunications Division’s 300 technical staff. Personnel are dispersed in six key geographic locations around the country to enable the maintenance of PTN plant and to ensure that local situations are taken into account in the development of customer solutions. Eskom regulated has benefited significantly from the activities of the PTN, in that telecommunications costs to the regulated Eskom business have been reduced by 30% over the past two years of operations. At the same time, the move towards market-related pricing is nearing completion, while maintaining the premium high-availability and high-performance characteristics of the service offerings as required by a world-class utility with mission-critical applications. As a function of the development of market-based pricing, the capability to deliver and bill on an actual usage base has been introduced. A Customer Relationship Management initiative is currently in progress. This is intended to support further the strategic vision of a customer-centric organisation, minimise disparities, and hence ensure that the customer value proposition is always appropriate. The nature of the licence underpinning PTN operations, however, has only allowed the leveraging of abilities in respect of serving the Eskom Regulated business. Despite this limitation, the business has expanded beyond the regulatory constraints placed on it by leveraging the key professional and technical skills it is endowed with in terms of a consultancy model and by focusing on the unregulated business opportunities in the market. In addition to deployment of key staff to facilitate the planning, design and implementation of key projects, the division has also applied itself to strategic research (in conjunction with TSI and Corporate Research) and Product Development, especially in the areas of nonregulated business. Investment in this research is intended to produce products and services that can be deployed in any active arena matching the strategic intent of the business. Examples of such initiatives included: Advanced work in Distribution Powerline Carrier deployments has been done, with a key pilot system being deployed in the Johannesburg Sunninghill area. Potentially this will provide significant advantage to the SNO as an alternate access medium; Implementation of a pilot Unified Messaging technology (in conjunction with arivia.kom); Video surveillance technology/business development; GSM cell extender technology investigations; Product and pricing benchmarking. The major challenges for the PTN and Engineering in 2003 will be to diversify its business focus further and to increase and leverage productivity to successfully position and entrench itself in the highly competitive external market. Eskom Telecommunications Africa (ET Africa) ET Africa is a section within Eskom Enterprises that focuses on developing telecommunications investment and turnkey project business opportunities in the greater African market. The Telecommunications division of Eskom Enterprises is aligned with the company’s vision of spearheading the South African government’s NEPAD initiative through the ET Africa section. During 2002, ET Africa made some significant advances, among them the following: Conducting due diligence and screening of eight opportunities in Africa; In partnership with NEPA (the Nigerian power utility), being awarded a long-distance licence to construct and operate the first Long Distance Carrier in Nigeria and to develop a full-detailed network design and roll out plan. NEPSKOM will hold the licence to implement the transaction; A concessionaire licence was obtained to develop a long-distance digital backbone in the Democratic Republic of Congo that included rights to install Wireless Local Loop and submarine cable international connections; 41 Operational review continued ET Africa was represented on the South African Government delegation to the ITU Plenipotentiary 2002 where the Department of Communications was noted for its involvement of the RSA telecommunications industry in matters of telecommunications governance at the ITU conference. ET Africa and PTN Engineering operate synergistically to capitalise on opportunities presented by the African telecommunications market. Telecom Lesotho ET Africa has become the majority shareholder in Telecom Lesotho following its acquisition in 2001. During the past year,Telecom Lesotho made significant progress. The company launched its mobile company, Econet EZI~CEL Lesotho during May 2002, introducing competition to the market for the first time. The fixed line company has been using various technologies to connect new customers, and is set to connect 25 000 new customers by February 2003, thereby more than doubling its subscriber base since privatisation. Profits of the fixed-line company have been growing well, and are expected to grow by more than 200% each year. The company was restructured during the first three months of the year and launched an extensive business process re-engineering programme to revamp its internal processes. Apart from launching its new corporate identity and its prepaid services, the company made major improvements to its network. Highlights of the year included the following: A Wireless Local Loop project to provide new customer lines was launched; 2 000 fixed cellular terminals were installed; Switch capacity was upgraded by 40 000 subscriber ports; A Satellite Earth Station – the international gateway – was rehabilitated; Copper Plant Rehabilitation and Expansion progressed well with 6 000 new customers connected to date; A Line Interface Card Replacement programme was completed; A contract was signed to replace the transmission network with a fibre optic network and the first phases have been completed; An IT integration and upgrade project was completed. Econet EZI~CEL Lesotho Econet EZI~CEL Lesotho was successfully launched in May 2002 with a network of 27 cell sites and capacity for 25 000 subscribers. In the six months since launch, the company secured around 30% of market share with more than 33 000 subscribers. The company has the widest coverage of towns and villages, covering the capital city, Maseru, and the other nine major administrative districts. Further expansion of the network for capacity to meet increasing demand and for coverage of new areas has already begun. This expansion will provide coverage in all towns and major villages, providing access to communications to 80% of the population of Lesotho. EON~Solutions Africa EON~Solutions Africa (EON) is a 50% joint venture between Eskom Enterprises and BEE partner, Kutlwano Engineering Consulting (Pty) Ltd. During the year, the company concentrated on building capacity to deliver solutions to support the telecommunications and utility industries’ need for efficient and effective processes and procedures to manage business and customer requirements. External markets were developed and the company paid its second dividend to shareholders during the year. The company has successfully delivered a private telecommunications network billing solution to the PTN Engineering division of the Telecommunications Business Unit. EON has supported the Telecommunications Business Unit in the Zambia venture, and will continue to provide resources to the organisation where swift response is required to compete effectively in the African marketplace. EON will continue to explore ventures in Southern African Development Community (SADC) countries. with a number of opportunities being pursued. 42 43 Integrated energy solutions 44 Operational review Solly Moloko IT Services Division Ariviakom (Pty) Ltd arivia.kom is a leading South African company offering Information Technology (IT) solutions that have a powerful influence on the fundamentals of life in South Africa and other African markets. Formed through consolidation of the state-owned assets of Eskom, Denel and Transnet into a profitable public enterprise in 2001, arivia.kom has made noteworthy advances in the deployment of effective IT solutions throughout Africa in its first year of existence. The company specialises in solutions, not commodities, and functions primarily as an integrator. The Eskom Enterprises group’s partnerships form an integral part of arivia.kom’s business model, while it remains vendor agnostic. The company offers a large skills base of more than 1 500 IT professionals, a national infrastructure, a diversity of services and an understanding of customer requirements with regard to large-scale, critical systems. Strategy arivia.kom’s stated objective is to become the dominant Infomation and Communication Technology (ICT) solutions company in Africa, its premier target market and where it sees vast, untapped potential.The division believes that solutions developed in South Africa must be viable for all African countries, therefore arivia.kom provides IT solutions and services for the technology and infrastructure needs of Africa and plays a broad-based role in implementing relevant, effective home-grown solutions. As emphasised by its track record, arivia.kom develops "real world" solutions that visibly affect the lives of ordinary people across the African continent, from national identification cards and voter registration systems to secure mobile pension payments. This direct positive impact on the lives of African citizens has attracted attention from Algeria to Zimbabwe and gives arivia.kom its competitive edge. 45 Operational review continued arivia.kom builds solutions through partnerships and alliances. Its partner relationships are nurtured in an environment of long-term mutual gain and shared fundamental business objectives. Through these partnerships, the division is able to draw on best-ofbreed industry strengths, while simultaneously addressing the development of professional IT skills. Structure arivia.kom is organised into three operating divisions – Infrastructure Business, Focused Business Solutions and Niche Markets. Infrastructure Business This is the largest division in arivia.kom. It offers local and wide area networking, as well as Internet and other connectivity-related services. It runs some of the largest data centres in the southern hemisphere, and provides a wide range of server and application hosting facilities. It also provides desktop support and repairs of desktop PCs and servers, with its customers having access to seventeen service centres throughout the southern African region. Focused Business Solutions This division offers a range of professional services, from consulting to e-business integration and customer-specific application development. It specialises in enterprise management systems (specifically SAP), package-enabled re-engineering, system integration, project management and application development for high-availability business systems. Niche Markets This division delivers IT solutions relevant to specific industry segments and customised for its markets throughout the African continent, such as: Intersolve Health Informatics – data flow and IT systems for public and private sector hospitals; Computer Foundation – geographical information systems, knowledge and document management; Face Technologies – mass identification systems for traffic control, voter registration and pension payment systems, using smart cards, biometrics, and electronic signature solutions. Performance arivia.kom announced its financial results on 11 July 2002, for the 15-month financial period ending 31 March 2002. In its first year of operation, the company became a significant IT player in South Africa and in the process created sustainable value for its shareholders.The financial results were commendable, especially when viewed in the context of the significant business, operational and financial challenges faced by the company, as well as the difficult market conditions which prevailed during the period. The division achieved revenue of R1.51 billion and Earnings before Interest, Tax, Depreciation and Amortisation of R159 million, which equates to a 10.5% margin. It turned a pre-formation combined loss into a R33.7 million net profit for the period under review.The company generated a positive cash balance of R47.2 million after investing R55 million in new businesses and technology assets, net of lease financing. arivia.kom has also been awarded new business contracts in excess of R640 million. Analysis of the results indicates that aggressive revenue targets were met with 73% being earned from the company’s traditional customers – Eskom, Denel and Transnet. Non-related party revenue is high at 27% of total revenue, considering the initial low base. All three divisions have shown respectable levels of revenue with the Infrastructure Business contributing 71.4% of total revenue. The majority of this division’s revenues are long-term annuity-based income. The Focused Business Solutions division contributed 16.9% of total revenue. During most of the past financial period, the division operated without an enterprise solutions capability, resulting in a significant dependence on sub-contracting. The acquisition of Csiper Consulting (Pty) Ltd has changed that position dramatically. The Niche Markets division contributed 11.7% of total revenue. arivia.kom believes this division’s capability in biometric and geographical information systems will be in demand in the public sector. Major achievements Since its establishment, arivia.kom has obtained major new contracts, including the State Information Technology Agency (SITA) contract to implement the Virtual Private Network (VPN)-enabled Government 46 Core Network, and a five-year strategic partnership agreement with Spoornet to provide a total outsourced IT solution. Other major projects included: Implementation of CRM and Logistics SAP R/3 systems for Vector Logistics, a distribution company in the AngloVaal Industries Group, by Csiper Consulting (2001-2002); As part of a consortium, the provision of a Broadcast Technology Strategy and the Information Systems and IT Strategy for the South African Broadcasting Corporation (2002); An implementation project for Eskom Holdings Limited to ensure compliance with the legal requirements of the Promotion of Access to Information Act (PAIA) of 2000, using the arivia.kom "PAIAPAC" solution (2002); A five-year National Traffic Information System (NaTIS) contract to overhaul the South African Department of Transportation’s technology system (2001). special deal transactions handled by Enerweb has increased from R200 million a month to almost R700 million a month. Other new projects in 2002 included the development of the Southern African Power Exchange (SAPX) demonstration project. This is a highly successful initiative demonstrating a fully operational power exchange (based on the Nord Pool model), which enables potential future participants to learn the integral parts of the complex world of energy trading without risking real financial loss. Over 120 participants were involved and, due to its high profile, it has served as a statement of Eskom’s strategic intent in this new and exciting field. With the imminent establishment of the SAPX in 2003, this is expected to be a major growth area for Enerweb, not only on the exchange side but also in the establishment of analytical tools and participant support systems. The Surplus Forward Energy Market was established using Enerweb’s e-Xchange platform to enable the current Southern African (Transmission) Market Administrator to establish a forward market mechanism for the trading of Eskom’s surplus capacity. Enerweb is devoted to providing first-class service and applications to the energy industry. It is filling an important niche in this sector by anticipating the needs of its customers and by providing them with highly specialised solutions. In order to add value to customers’ business, Enerweb is always striving to be at the forefront of technology in an industry that is changing rapidly. The division places a high premium on innovation and closely monitors local and international markets, keeping abreast of technology and industry developments and investing in product development for local customer applications. Enerweb, for the first time, posted a profit before tax of R 1.3 million for 2002 on a turnover of R 14.2 million. Enerweb The Enerweb division was established two years ago and has already become the industry leader in energy trading and related systems and services. The division specialises in Energy Information Services, offering innovative and cutting-edge solutions for the deregulating energy market. Its financial performance has been commendable, having shown positive returns and cash flow even after its first year of operation, which is considered abnormal for new e-business dominant companies. Enerweb is conservatively projecting a compounded annual growth rate of over 20% over the next three years and intends expanding its business into other parts of the African market. Online trading systems, remote-metering services and specialised billing services are just some examples of the products and services provided. Over 85% of Eskom’s revenue is derived from its 1 000 largest customers (6 500 metering points). Enerweb was awarded the contract to manage the automated metering and data management systems for these customers, feeding the data directly into the new Distribution billing system. With Eskom providing customised tariff agreements to many of its larger customers, the growth in demand for Enerweb’s services is such that over the past year, the value of e-Business Programme Office (eBPO) The e-Business Programme Office (eBPO) is a business incubator venture using virtual teams of resources on an as-and-when-required basis. It is responsible for research, development and business case compilation. Projects at present are catalogue procurement, on-line forms, e-Learning and a number of mobile commerce applications to enhance efficiencies. 47 Operational review continued Primary Energy Division Golang Coal (Pty) Ltd Golang Coal is a joint venture (JV) company between Eskom Enterprises and Shosholoza. Shosholoza, for its part, is a JV between Anker Coal and Sebenza, with 17% of equity to be sold on open tender to a BEE company once the project has been established. The JV has been impacted negatively by the delay in establishing the 10Mt Phase V expansion project at Richards Bay Coal Terminal.This delay has come about as a result of a deadlock between the coal terminal company and the National Ports Authority on the lease of additional land. Substantial progress was made in the last quarter of 2002. However, the project is targeted to commence in April 2003, with first coal throughput towards the end of 2005. In addition to the proposed 3Mt annual exports, Eskom’s decision to re-commission the first unit of Camden Power Station increases the supply base of Golang with up to 2Mt per annum coal supply to the power station. South Dunes Coal Terminal Company (Pty) Ltd (SDCT) SDCT will have a 65% stake in the 10Mt Phase V expansion, with Golang Coal being a 50% shareholder in SDCT. Natural Gas The Primary Energy Division’s mandate as outlined by Eskom is to identify and exploit opportunities in energy within and beyond the South African borders, as well as to strategically position Eskom in the natural gas market. With this mandate the Primary Energy Division has proceeded with the detailed techno-economic investigations neccessary to determine business cases for implementation of natural gas projects from 2003 onwards. Exploratory meetings and discussions were undertaken throughout the year to position the Primary Energy Division in the natural gas arena. African countries, with significant natural gas resources and/or reserves, have been specifically identified and targeted in order to explore potential business opportunities. ELGAS S.A.R.L ELGAS S.A.R.L, a joint venture company based in Maputo, Mozambique, was formed with Eskom Enterprises, Electricidade de Mozambique, Empressa Nacional de Hidrocarbonetos de Mozambique, African Legend, Sensor, Makubar and Consultinvest, to explore business opportunities in energy and related services with particular focus on natural gas. ELGAS provides its customers in Vilanculos and on the Bazarutho Group of Islands in Mozambique with electricity generated from gas-fuelled generators (1.8 MW), as well as gas to fulfill all their energy needs. ELGAS has secured a US$ 1.7 million contract with Electricidade de Mozambique (EDM) to rehabilitate the 100 kV transmission lines to Beira. Future secured projects are the extension of the submerged gas pipeline to São Sebastião, the installation of a 1.2 MW generating capacity at the Vilanculos Wildlife Sanctuary, and the extension of the gas distribution network to energise villages through the erection of communal kitchens on Bazarutho Island. 48 49 Adherence to good corporate governance 50 Corporate governance report Corporate governance and ethics Eskom Enterprises subscribes to all the principles of good corporate governance and high ethical standards, principles that the company brings to all of its business in South Africa and across the African continent. The Board of Eskom Enterprises conducts its business in accordance with recommendations of King Report on Corporate Governance of 1994. The Board supports the recommendations of King II of March 2002, and initiatives were undertaken to review the current board practices to align them appropriately. The Board of Directors Eskom Enterprises has a unitary Board comprising a Non-executive Chairman, five independent Nonexecutive Directors and six Executive Directors. The diversity of the sectors of business from which the Non-executive Directors have been appointed gives the company the necessary directions in decisionmaking processes. In addition, the role of the Board in giving strategic direction, determining investment policy and setting adequate risk parameters has been successfully accomplished. The Non-executive Directors have no fixed term of service, while the Executive Directors are on five-year contracts, which may be extended if necessary. There were changes to the Board of Directors at the Annual General Meeting in May 2002. Mr Ramachandra Naidoo was appointed Executive Director: Finance and Services on 24 May 2002. The Chief Executive Officer’s contract expired on 31 December 2002. In line with good governance practices, and to ensure business continuity, Dr Enos N Banda was appointed Chief Executive Designate and Director of the company, effective 1 August 2002 and 1 October 2002 respectively. The Company Secretary, Mr R Viljoen resigned from the company effective 1 November 2002 and Mrs L Mokoatle was appointed Acting Company Secretary in his stead. All Directors have access to the advice and service of the Company Secretary and equally of senior management when necessary. Through monthly and quarterly reporting of operational business performance to the Board, the Board has been able to monitor compliance with policies, achievement of set objectives and, over and above that, holding management accountable for its activities. Eskom Enterprises makes sure that similar governance structures exist in each of its subsidiaries and joint venture companies where it has majority shareholdings. The Board has undertaken to ensure that the company does not enter into any partnership agreement with an entity that does not subscribe to principles of good corporate governance. The Board has met ten times on prearranged and special meetings during the 2002 financial year. The Board has assigned certain responsibilities to its committees.These are as follows: Audit Committee There has been no change to the membership of the Audit Committee. However, processes are in progress to increase the number of independent Non-executive Directors serving on this committee. Mr J Hlongwane is an independent Non-executive Chairman; Mr D Mostert, also a Non-executive Director, supports him. Other members of the committee are Dr W Kok, Non-executive Director (Eskom Holdings’ Financial Director); and Mr R Naidoo, Executive Director; Finance and Services. Representatives of the Internal Audit Department and an external audit partner attend the meetings as exofficio members. The Chief Executive Officer attends the Audit Committee meeting by invitation only. Furthermore, members of management have also attended the meetings by invitation. The committee met seven times on prearranged meetings during the 2002 financial year and special meetings were convened when necessary. It has written terms of reference, which sets its duties to include having responsibility for the quality, integrity and reliability of the Group’s internal compliance systems together with internal and external accounting control systems. The committee reviews any matter necessary to fulfil its role, including reports from Eskom’s internal and external auditors on shortcomings in accounting and operational controls. This committee reviews the performance of some of the wholly-owned subsidiaries and Joint Venture companies. Finance Committee The Finance Committee comprises two Nonexecutive Directors Messrs DB Mostert, Chairman; and DR Geeringh.The other members are JA de Beer, 51 Corporate governance report Chief Executive Officer; RS Moloko, Executive Director; and R Naidoo, Executive Director (Finance and Services). Dr Enos Banda was co-opted as a member of the committee from 1 August 2002. Mrs S Dakile-Hlongwane resigned as a member of the committee due to other commitments. The committee met 14 times during 2002. The committee’s main duties are: To oversee all the financial aspects of Eskom Enterprises; To oversee the duties of the finance functionaries and to approve special finance arrangements; To ensure that the applicable and approved accounting procedures and systems are in place and are being followed. Investment and Procurement Committee The committee comprises Messrs VTL Ngubeni, Chairman; Mr JA de Beer, Chief Executive Officer; and PD Mbonyana, Executive Director. DR Geeringh and Mrs S Dakile-Hlongwane are Non-executive Directors and Mrs L Mokoatle and Mr W Swart are ex-officio members. Mr R Naidoo and Dr E Banda were appointed as members of this committee effective from May and August respectively. The committee met 12 times during 2002. The committee’s main duties are: To ensure compliance with the Companies Act, the Public Finance Management Act, the memorandum and articles of association of the company, and common law; To ensure that good commercial practices are followed; To ensure that contracts and investments are dealt with consistently and uniformly; To ensure that the procurement process is auditable. Remuneration Committee The Remuneration Committee comprises Messrs TS Gcabashe, Chairman; KJ Hlongwane and DM Ramaphosa, who are Non-executive Directors; and Mr JA de Beer, Chief Executive Officer. The Chief 52 Executive Officer Designate Dr EN Banda was appointed member of this committee. The committee met five times during 2002. The committee also convened special meetings to consider the appointment of the Chief Executive Designate. The committee’s main duties are: To ensure that all remuneration packages are fair and reasonable; To ensure the fair and equitable reimbursement for fees and expenses incurred by Eskom Enterprises Board members and executive officers; To ensure that all appointments by Eskom Enterprises are in line with the Companies Act, the Employment Equity Act, Eskom Enterprises’ affirmative action and gender and disability equity policies, and any other relevant human resources legislation and policies. Management Committee The Chief Executive Officer chairs this committee, comprising the Executive Directors, General Managers and certain other senior executives. The committee meets weekly and has as its purpose to deal with operational issues and to improve communication and co-ordination throughout the company. A Human Resources Committee assists the Management Committee with the appointment of senior management. Internal control The Board acknowledges that it bears the ultimate responsibility for the Group’s system of internal control. It has delegated the detailed design and operation of the system of internal control to the Executive Directors. Public Finance Management Act The Public Finance Management Act (PFMA) Act 1, of 1999, as amended by Act 29 of 1999, came into effect on 1 April 2000. The Act applies to Eskom Enterprises and its subsidiaries as categorised under Schedule 2 of the PFMA. The Act prescribes various duties and responsibilities to the Board in its capacity as the designated accounting authority for Eskom Enterprises. These include the implementation and reasonable operation of systems of financial and risk management and internal control, internal audit, procurement and major capital expenditure evaluation, as well as effective revenue collection, working capital management, asset and liability management, statutory compliance and disciplinary process.The Executive Directors, who are responsible for the day-to-day affairs of the organisation under the direction of the Board, oversee the effective operation of these and other systems. An awareness programme was run by Eskom to communicate the implications of the Act. Risk management A process has been introduced to implement risk management systems.This process is ongoing. In order to remain globally competitive, we have invested resources in acquiring skills and competencies that are necessary for the growth of the organisation. Workers participation An ongoing consultation between employees and their representatives creates a harmonious working relationship. The National Eskom Enterprises Forum, which deals with issues of broader interest in Eskom Enterprises achieved the Long-term Wage Agreement in the last quarter of 2002. Employment equity The eradication of racial tension, gender and other forms of discrimination were focus areas in the Human Resources Management. Employment equity targets of 47% blacks in supervisory and professional positions and that of 15% gender were met successfully. Skills development Skills development is conducted within the framework of the Skills Development Act and our Workplace Skills Plan is reviewed within the Group’s consultative structures. This is further monitored by the Eskom Enterprises Training Forum Committee, which is representative of Management and Labour. Skills Planning within Eskom Enterprises has enjoyed the success of meeting the Energy Sector Education Training Authority (ESETA) requirements and recovering the Skills Levy rebates as set out by the Skills Development Act, and at the same time ensuring the development of our employees. Code of conduct The code of conduct clearly encourages employees at all levels to be ethical. In all our formal meetings the issue of ethics was always on the agenda for members to disclose their interest if any, on the matters to be discussed. Employees declare their business involvement and interests in the prescribed forms. Awareness programmes are in place to ensure a two–way communication and better understanding of the code. HIV and AIDS Eskom Enterprises demonstrated its commitment to address HIV and Aids in a positive and nondiscriminatory manner by the following activities: Education and information programmes are developed in order to impart a basic knowledge of the disease and information on prevention thereof; Information on the rights of, and services available to, infected employees. Safety The safety performance indicators have improved since last year. Only three of the major business units have reported Disabling Incident Injury Rate (DIIR) which accounted for 35 and no fatalities were reported.This resulted in the overall DIIR of 0.60. 53 Annual financial statements for the year ended 31 December 2002 Contents Approval of the annual financial statements Report of the independent auditor Report of the Audit committee Report of the directors Historical cost financial statements Balance sheets Income statements Cash flow statements Statements of changes in equity Notes to the annual financial statements Schedule 1: Investment in associate, joint venture and subsidiary companies Schedule 2: Share of operations in associate and joint venture companies Approval of the annual financial statement The group annual financial statements for the year ended 31 December 2002, set out on pages 54 to 90, have been approved by the Board of Directors and signed on their behalf on 11 February 2003 by: T S Gcabashe Chairman of the Board J A de Beer Chief Executive E N Banda Chief Executive: Designate Certificate by company secretary In my capacity as the Company Secretary, I hereby confirm, in terms of the Companies Act, 1973, that for the year ended 31 December 2002, Eskom Enterprises (Pty) Ltd has lodged with the Registrar of Companies all such returns as required of a private company in terms of this Act, and that all such returns are, to the best of my knowledge and belief, true, correct and up to date. L Mokoatle Acting Company Secretary 54 Report of the independent auditors To the shareholders We have audited the annual financial statements and the group annual financial statements of Eskom Enterprises set out on pages 54 to 90 for the year ended 31 December 2002. The financial statements are the responsibility of management. Our responsibility is to express an opinion on these financial statements based on our audit. Scope We conducted our audit in accordance with statements of South African Auditing Standards issued by The South African Institute of Chartered Accountants. These standards require that we plan and perform the audit to obtain reasonable assurance that the financial statements are free of material misstatement. The audit was also planned and performed to obtain reasonable assurance that our duties in terms of sections 60 and 61 of the Public Finance Management Act of 1999, as amended, have been complied with. An audit includes: Examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements; Assessing the accounting principles used and significant estimates made by management; Evaluating the presentation. overall financial statement in South Africa, the Eskom Act of 1987, and the Public Finance Management Act of 1999, as amended; The performance information of Eskom Enterprises (Proprietary) Limited furnished in terms of Section 55 (2) (a) of the Public Finance Management Act, of 1999, as amended, fairly presents in all material respects Eskom Enterprises (Proprietary) Limited’s performance for the year ended at 31 December 2002 against predetermined objectives, and is where applicable, consistent with that of the preceding year; and The transactions of Eskom Enterprises (Proprietary) Limited and the group that had come to our attention during the course of our audit were in all material respects in accordance with mandatory functions of Eskom Enterprises (Proprietary) Limited and the group, as determined by law or otherwise. Public Finance Management Act (‘PFMA’) contravention Without qualifying our opinion above, we draw your attention to the fact that there was non-compliance with the PFMA relating to the investment in Mountain Communications (Proprietary) Limited. The details thereof are set out in the Report of the Directors. We believe that our audit provides a reasonable basis for our opinion. Audit opinion In our opinion: The financial statements fairly present, in all material respects, the financial position of Eskom Enterprises (Proprietary) Limited and the group at 31 December 2002, and the results of their operations and cash flows for the year ended, in accordance with South African Statements of Generally Accepted Accounting Practice issued by the Accounting Practices Board of The South African Institute of Chartered Accountants and International Accounting Standards issued by the International Accounting Standards Board applied on a basis consistent with that of the previous year; and in the manner required by the applicable sections of the Companies Act of 1973 SizweNtsaluba VSP Inc. Registered Accountants and Auditors Chartered Accountants (SA) Johannesburg 28 February 2003 55 Report of the Audit Committee for the year ended 31 December 2002 Report of the Audit Committee in terms of regulations 27(1)(7)(b) and (c) of the Public Finance Management Act of 1999, as amended. In execution of its duties during the past financial year, the Audit Committee has: q of the position, performance and prospects of Eskom Enterprises and the group; q reviewed the external auditor’s report; discussed problems and reservations arising from the external audit, and any matters the external auditor wished to discuss (in the absence, where requested by the Committee, of executive directors and any other person who is not a member of the Committee); reviewed the external auditor’s management letter and management’s response; q reviewed the procedures for identifying business risks and controlling their impact on Eskom Enterprises; reviewed Eskom Enterprises’ policies and procedures for detecting and preventing fraud; q q q reviewed the operational effectiveness of Eskom Enterprises’ policies, systems and procedures; q q considered whether the independence, objectives, organisation staffing plans, financial budgets, audit plans and standing of the internal audit function provide adequate support to enable the Committee to meet its objectives; reviewed the results of the work performed by the internal audit function regarding financial reporting, corporate governance, internal control and any significant investigations and management response; reviewed the co-ordination between the internal audit function and the external auditors and dealt with any issues of significant dispute or concern; reviewed such significant transactions not directly related to Eskom Enterprises’ normal business as the Committee deemed appropriate; reviewed such significant cases of employee conflicts of interest, misconduct or fraud, or any other unethical activity by employees or Eskom Enterprises; reviewed the controls over significant financial and certain operational risks; reviewed any other relevant matters referred to it by the Board; reviewed the quality of financial information; reviewed the annual report and financial statements taken as a whole to ensure they present a balanced and understandable assessment reviewed the credibility, independence and objectivity of the external auditor, taking into account the audit fees. Where weaknesses were identified in internal controls, corrective action has been taken to eliminate or reduce the concomitant risks. Accordingly, in our opinion, the internal controls of Eskom Enterprises operated effectively throughout the year under review to ensure the company’s assets were safeguarded, proper accounting records were maintained and resources were utilised efficiently. Following our review of the group annual financial statements for the year ended 31 December 2002, we are of the opinion that, in all material respects, they comply with the relevant provisions of the Public Finance Management Act of 1999, as amended, and Statements of South African Generally Accepted Accounting Practice and International Accounting Standards, and that they fairly present the results of the operations, cash flow and financial position of Eskom and the group. We therefore recommend the financial statements as submitted be approved. On behalf of the Audit Committee q q q q q q q KJ Hlongwane Chairman 28 February 2003 q 56 Report of the directors for the year ended 31 December 2002 Introduction The directors have pleasure in presenting their report for the year ended 31 December 2002. The Directors' report should be read in conjunction with the Chairman's statement, Chief Executive's statement and the operational review contained in this Annual Report which include information on the individual business sectors of the Group. In the opinion of the Directors, the financial statements fairly present the financial position of Eskom Enterprises (Pty) Ltd ('Eskom Enterprises') and the group at 31 December 2002 and the results of its operations and cash flow information for the year then ended. The business Eskom Enterprises is a company domiciled in the Republic of South Africa. It was registered in 1999 to accommodate all the non-regulated energy-related activities of Eskom Holdings Ltd. ('Eskom') in South Africa and all its other energy-related activities outside South Africa. Eskom Enterprises and its subsidiaries, associate companies and joint ventures, leverage the competencies and facilities of Eskom and focus on the following lines of business: Energy business operations (Management contracts; operating, maintenance and refurbishment contracts and the purchase of operating entities); Infrastructure development (Asset creation; project management; consulting services; contract research and development); Key opportunities in energy-related strategic businesses (such as telecommunications and information technology); Primary energy sources (such as gas); Specialised energy services (Utility services and equity investment in energy-related services). The company conducts its operations through numerous autonomous operating divisions and a corporate head office. Into Africa The company has made considerable progress into external markets and established itself as an operating company in Africa. In January 2002 the company acquired a 51% stake in Lunsemfwa Hydro Power Company to own, operate and maintain the Mulungushi and Lunsemfwa hydro power stations in Zambia. During November 2002, Eskom Enterprises finalised a contract for the Uganda Electricity Generation Concession, which will give the company a 20-year concession to operate and maintain two hydro stations in Uganda. A bid was also submitted for the Uganda Electricity Distribution Concession, with CDC Globeleq as a leading partner in the joint venture. Negotiations leading to finalisation of the terms and conditions are in progress.The contract will grant Eskom Enterprises a 20-year concession to operate and maintain all the distribution network assets in the Kampala region. Beyond Africa Prospects in India and China have been explored and we are confident that contracts will be entered into in 2003. Contracts were also signed in Georgia and Vietnam. Mountain Communications (Pty) Ltd. Mountain Communications (Pty) Ltd. ('MKC'), through its subsidiaries Tele-Com Lesotho Ltd and Econet Ezi-Cel Ltd, operates a fixed and mobile telecommunications business in Lesotho. Aggressive infrastructure roll-out has taken place during the year, laying the foundation for future growth. During the year the company increased its shareholding in MKC by 1% to secure a controlling interest. MKC made a capital commitment to the government of Lesotho to invest roll-out capital of US$56 million (over a three year period from 2001) for Tele-Com Lesotho Ltd and Econet Ezi-Cel Ltd. Capital expenditure incurred to date amount to US$30 million. Eskom Enterprises provided a parent company guarantee on behalf of MKC for non-performance in terms of the commitment. The Group's potential exposure disclosed in note 34 in the annual financial statements was understated in 2001, but this has since 57 Report of the directors been noted and rectified resulting in a restatement of the prior year disclosure. Second National Operator Eskom Enterprises has been earmarked for a 15% stake in the Second National Operator ('SNO'). In preparation for participation in the SNO Eskom Enterprises has invested R669 million in the fibre optic network ('FON'). As the licence for the SNO has not been issued as yet the carrying value of all assets, including the FON, need to be reviewed for impairment on an annual basis. The Directors are positive that Eskom Enterprises' participation in the SNO is secure and that the SNO will be a viable business in the future. Therefore the Board believes that there is no need for impairment. However, any significant licensing delays will adversely impact the viability of the SNO. Restructuring of the Rotek Group; Roshcon; Rosherville Vehicle Services and Rosherville Properties The restructuring of the Rotek Group is still ongoing. A detailed disposal process in terms of the divestiture strategy was initiated and has reached its final stages. No suitable offers were received for Rosherville Properties. A piecemeal disposal of non-core properties will be pursued subject to approval from government. The disposal of the entire Rosherville Vehicle Services business and a 26% stake in Roshcon is still in progress. Subsidiaries, associates and joint ventures Subsidiaries, associate and joint venture companies of Eskom Enterprises are listed in schedule 1, and associate and joint venture operations in schedule 2 on pages 91 and 92 respectively. Management of subsidiary Through its subsidiary, Pebble Bed Modular Reactor (Pty) Ltd, Eskom Enterprises managed the Pebble Bed Modular Reactor project on behalf of Eskom, the Industrial Development Corporation and British Nuclear Fuels Ltd. During the year Exelon Generation LLC withdrew from the project. The future of the project is under consideration by stakeholders and the company may not be a going concern.The termination of the project 58 will not have a significant impact on Eskom Enterprises. Financial results and activities Entry into markets outside South Africa progressed in line with the group's strategic intent to be the leading energy and related services provider in emerging markets. Group An operating profit, before interest, exceptional expenditure and fair value gains, of R97 million was made in 2002 (2001: R135 million). Turnover increased by 23% (2001: 15%). Sales to non-Eskom customers comprised 43% (2001: 35%) of total turnover. Services to Eskom remained as important as it did in the past but continued to yield low returns. The situation was addressed by increasing expansion initiatives into external markets. The financial performance for the year was disappointing. Although revenue grew by 23% and gross margins were within expectations, there was a significant erosion of profits arising from a number of unplanned activities including strategic long term initiatives which do not contribute to current year revenues. These include the commencement of the telecommunication mobile operation in Lesotho which made an operating loss of R29 million for the first year, costs incurred to develop positioning for the SNO (R33 million), transaction advisory costs for the restructuring of the Rotek Group (R6 million), restructuring of the Eskom Enterprises Head Office (R11 million), Municipal Capacity Building business development (R4 million), business development costs not recovered from projects (R50 million) and accounting adjustments for fair value losses on financial instruments (R11 million). The Rotek Group performed well and improvements were achieved in parts of the telecommunication business, notably for the fixed line operations in Lesotho. The subsidiary ventures in Mali and Zambia were profitable. A small loss was incurred by the Trans-Africa Projects joint venture company due to delays on Nigerian projects. The Hem-Kom joint venture company also incurred significant losses largely due to cost overruns on Nigerian work and on the FON project for Eskom Enterprises. Profits from the TSI Division were lower than expected mainly due to high business development costs outside South Africa.The Sapphire Executive Air Division and Airborne Laser Solutions (Pty) Ltd company performances were adversely impacted by equipment failure and bad debt provisions. Eskom Enterprises' group results 2002 R million Revenue – Eskom – External Profit before interest and exceptional items Net interest expense Exceptional expenditure Fair value (losses) / gains Profit before tax 2,907 1,666 1,241 97 (11) (39) (11) 36 Eskom Enterprises’ company results 2002 2001 R million R million Revenue – Eskom – External (Loss) / profit before interest and exceptional items Net interest (expense)/income Exceptional expenditure Fair value (losses)/gains (Loss) /profit before tax 968 747 221 (29) (9) (39) (6) (83) 838 714 124 46 1 (27) 17 37 2001 R million 2,371 1,553 818 135 (3) (27) 25 130 Integrated risk management Eskom Enterprises endeavours to minimise risk by ensuring that the appropriate infrastructure, systems, personnel and controls are in place throughout the organisation, and has formalised the integration of risk management into management processes. Internal controls The Board has ultimate responsibility for the system of internal controls, including an appropriate procurement and provisioning system. The controls throughout Eskom Enterprises focus on those critical risk areas identified by operational risk management, confirmed by executive management and endorsed by the auditors.The controls are designed to provide cost effective assurance that assets are safeguarded, and that liabilities and working capital are efficiently managed. Organisational policies, structures and approval frameworks provide direction, accountability and the division of responsibilities, and contain self-monitoring mechanisms. Both management and the internal auditors closely monitor the controls, and actions are taken to correct deficiencies as they are identified. Internal audit In line with the PFMA and the King II Report requirements, Eskom Corporate Audit provides the Audit Committee and management with assurance that the internal controls are appropriate and effective.This is achieved by means of an independent, objective appraisal, and evaluation of the risk management processes, internal controls and governance processes, as well as identifying corrective actions and suggested enhancements to the controls and processes. The risk based audit plan is based on the major risks emanating from Eskom Enterprises’ 59 Company A corporate head office renders overall services such as strategic management, group marketing and investment evaluations. In addition, the company conducted its operations through the following operating divisions: Enerweb; Primary Energy; Sapphire Executive Air; Technology Services International; Telecommunications. A net loss of R29 million, before interest, tax, exceptional expenditure and fair value adjustments, was made in 2002 (2001: net profit of R46 million). The operating divisions' contributions were unsatisfactory except for Telecommunications and Enerweb. Significant losses were incurred by the Sapphire Executive Air Division due mainly to bad debt provisions, equipment failure and increased insurance costs. Profits were further reduced due to marketing and investment evaluation infrastructure costs not recovered, restructuring of the corporate office, Municipal Capacity Building business development, fair value losses on financial instruments, the restructuring of the Rotek Group and development costs for the SNO. Report of the directors Integrated Risk Management process. The audit plan is responsive to changes in Eskom Enterprises' risk profile. Eskom Corporate Audit is fully supported by the Board and the Audit Committee, having full, free and unrestricted access to all organisational activities, records, property and personnel. Corporate governance The Eskom Enterprises Group supports and complies with King II on Corporate Governance, and the Directors endorse its aims of conducting the affairs of the company with the highest standards of corporate practice. Additional information on corporate governance appears on pages 51 to 53 of this report. The behaviour of employees and management is governed in terms of the Business Conduct Policy. Public Finance Management Act ('PFMA') Apart from the contraventions mentioned below, Eskom Enterprises complies with the provisions of the PFMA. PFMA non-compliance At the end of 2002 the following instances of noncompliance with the PFMA were recognised: In 2000, Eskom Enterprises invested and participated in Mountain Communications (Pty) Ltd (trading as MKC), a Lesotho company, and obtained approval for the initial investment of R46 million in terms of section 54 of the PFMA. The full extent of all the investment transactions was not disclosed and, in particular, a guarantee that gave rise to a contingent liability to Eskom Enterprises of R424 million at the date of the investment. At 31 December 2002 the contingent liability has reduced to approximately R217 million. The guarantee relates to a commitment by MKC to a capital expansion programme amounting to US$56 million (R424 million) in its subsidiaries for the period to 9 February 2004, where Eskom Enterprises guarantees the short fall to the extent that the MKC group does not meet their commitments. The above non-disclosure constituted procedural non-compliance with the PFMA. Of the total investment of R213 million, transactions to the value of R167 million were not in compliance with section 54 of the PFMA, which requires that approval of the executive authority be obtained before the conclusion of the transactions. The outcome of a forensic investigation to determine the action that needs to be taken, is awaited. The necessary steps have been taken to strengthen the procedural processes, in particular with regards to PFMA applications, to prevent similar eventualities. A process is currently underway towards seeking approval for the above transactions from Eskom and the executive authority. Irregular, fruitless and wasteful expenditure Processes have been put in place to report on material losses caused by criminal conduct and irregular, fruitless and wasteful expenditure, as required by the Act. During the period under review, the Rotek Group uncovered fraud of R4.3 million due to criminal conduct of an employee. This was however subsequently recovered in terms of insurance cover. Appropriate measures have been taken to counteract against such actions in the future. Objectives of the business A medium-term, three-year business plan setting out the strategic direction of the Eskom Enterprises group, as well as critical key performance indicators ('KPIs') to manage the business effectively, were developed in consultation with key stakeholders using input from all divisions and subsidiaries. The Eskom Holdings and the Eskom Enterprises Boards approved the medium-term business plan, including the annual budget. The objectives, which include KPIs for the year, have been included in a shareholder compact with Eskom Holdings and the performance against the KPIs is discussed on the next page. 60 Objectives 1. Expand into external markets and increase revenue from these new sources 2. Achieve an acceptable after tax return on Equity 3. Achieve sales growth in excess of 15% per annum Key performance indicators Non-Eskom sales as % of total sales Return % per audited annual financial statements Sales growth year on year per audited annual financial statements Black management, professional and supervisory staff at 31 December 2002 % women supervisory staff at 31 December 2002 Targets Actual 40% 43% 12% 1% 15% 23% 4. Implement employment equity by changing the staff profile to target ratios 47.0% 47.2% 15.0% 15.7% 5. Achieve black economic empowerment development Procurement expenditure, both capital and operating, for group R250 million, including VAT R279 million, including VAT Expand into external markets and increase revenue from these new sources The group increased non-Eskom sales revenue from R818 million to R1 241 million including work on the Pebble Bed Modular Reactor project. The main sources were the Rotek Group, MKC Group, Sapphire Air Division, the Technology Services International Division, Eskom Energie Manantali, Global Electricity Services Company, Lunsemfwa Hydro Power Company and Trans-Africa Projects. Achieve an acceptable return on equity The group achieved an unsatisfactory after-tax return on equity. The main factors affecting the return are losses on the Lesotho mobile telecommunication business, the SNO positioning costs, restructuring cost, high business development costs, fair value losses on financial instruments and low margins on Eskom work that still represents the bulk of sales. The telecommunications business currently yields very low returns due to the exclusivity restraint in terms of the Eskom utility. Also, the FON asset of R669 million is currently, not generating income and returns from the arivia.kom (Pty) Ltd investment remains low. Achieve sales growth in excess of 15% per annum All the businesses in Eskom Enterprises, in a combined capacity, achieved the prescribed sales growth target. The 33% growth in the Rotek Group was the main contributor to the Group achieving external growth of 23%. Employment equity Eskom Enterprises set itself an employment equity target for 2002 in terms of which more than 47% of its management, professional and supervisory staff would be black. At the end of 2002, a total of 47.2% (2001 : 43%) of its staff in these categories were black, thereby exceeding the target by 0.2 percentage points. Eskom Enterprises also exceeded its gender equity targets of women in management, professional and supervisory level by achieving 15.7% (2001 : 13%) against the target of 15% for 2002. In addition, 36.4% (2001 : 17%) of staff on all levels were women. Black economic empowerment Eskom Enterprises contributes to black economic empowerment by procuring goods and services of R279 million in 2002 from black businesses. 61 Report of the directors (This excludes R283 million spent on the fibre optic network). Safety, health and environment The disabling injury incident rate ('DIIR') of Eskom Enterprises has decreased significantly from 0.93 in 2001 to 0.60 with no fatal incidents reported for the period under review. Three business units accounted for 35 disabling injuries, resulting in an Eskom Enterprises' DIIR of 0.60. The group demonstrated its commitment to address HIV and Aids in a positive and non-discriminatory manner. Education and information programs to impart a basic knowledge of the disease, information on prevention thereof and the rights of, and services available to, infected employees is ongoing. Eskom Enterprises implicitly endorses the Eskom Environmental Policy. A business objective for 2003 is to ensure that all businesses are compliant with Eskom policy and that selected individual business groups are ISO 14001 certified by the end of the year. Approximately R2.2 million was spent by the group on operational environmental activities. Going concern We are of the opinion that the Eskom Enterprises' group has adequate financial resources at its disposal to continue with operations in the year ahead and therefore continue to adopt the going concern basis in preparing the group annual financial statements. Share capital During the period under review no additional ordinary shares were issued. Shares issued to date amount to 9 936 335. The shareholder's equity loan of R1 855 million (2001 : R994 million) at R99.99 per share was increased by R861 million (2001 : R161 million) accordingly as part of the above capitalisation. Dividends No dividends were proposed or paid in 2002 (2001 : nil). Capital expenditure Excluding assets acquired from Eskom (R8.7 million), fixed assets to the value of R1 075 million (2001 : R426 million) were acquired by the group during the year, and R620 million (2001 : R272 million) for the company. To date, R669 million has been spent on the fibre optic network. Directorate and Secretariat The changes in the composition of the Board and the names of the Directors, Company Secretary and the members of the various committees of the Board at the date of this report appears on pages 51 to 53. Holding company The company is a wholly-owned subsidiary of Eskom. Post-balance sheet events A decision was taken on 11 February 2003 by the Eskom Enterprises Board to apply for the liquidation of the joint venture company Hem~Kom Live Line Engineering (Pty) Ltd in which Eskom Enterprises has a 50% shareholding. All known exposures have been provided for. 62 Balance sheets for the year ended 31 December 2002 Group Notes Assets Non-current assets Property, plant and equipment Goodwill Intangible assets Deferred tax asset Investment in associate and joint venture companies Investment in subsidiaries Other investments Current assets Inventories Trade and other receivables Financial market assets Cash and cash equivalents Total assets Equity and liabilities Capital and reserves Issued capital Shareholder’s equity loan Non-distributable reserve Distributable reserves/(Accumulated loss) Outside shareholders interest Non-current liabilities Borrowings Provisions Deferred tax liabilities Current liabilities Trade and other payables Financial market liabilities Bank overdrafts Advances received Current portion of interest bearing borrowings Provisions Total equity and liabilities 2,089,798 99 1,854,744 1,328 97,309 136,318 351,164 143,942 204,086 3,136 1,209,663 792,856 10,878 85,890 232,570 10,220 77,249 3,650,625 1,191,339 99 993,524 116,138 78,205 3,373 529,243 317,283 198,789 13,171 777,416 644,542 – 30,121 16,183 4,695 81,875 2,497,998 2002 R’000 2,281,451 1,850,353 128,864 84,154 79,977 137,409 – 694 1,369,174 196,319 678,035 – 494,820 3,650,625 2001 R’000 1,177,770 953,354 31,237 7,297 49,023 125,124 – 11,735 1,320,228 88,291 480,823 116,080 635,034 2,497,998 Company 2002 2001 R’000 R’000 1,833,630 1,244,721 – 543 59,662 119,163 409,541 – 443,181 1,539 307,396 – 134,246 2,276,811 1,127,803 734,855 – 719 48,806 217,219 115,059 11,145 651,019 6,013 216,939 100,267 327,800 1,778,822 3 4 5 6 7 8 9 10 11 12 13 14 15 1,780,153 99 1,854,744 – (74,690) – 170,732 32,097 135,499 3,136 325,926 209,167 6,131 1,609 34,888 3,504 70,627 2,276,811 1,103,987 99 993,524 100,267 10,097 – 411,948 289,699 109,078 13,171 262,887 158,125 – 16,125 16,183 2,464 69,990 1,778,822 16 17 18 19 11 12 20 16 21 63 Income statements for the year ended 31 December 2002 Group Notes Revenue Cost of sales Gross Profit Operating expenditure Net operating income / (loss) Interest income Interest expenditure Investment income – dividends from subsidiaries and joint ventures Income from associates Profit / (loss) before exceptional items and fair value gains Exceptional expenditure Fair value (losses) / gains on financial instruments Profit / (loss) before tax Income tax expense Profit / (loss) after tax Outside shareholders interest Net profit / (loss) for the year attributable to ordinary shareholders 23 2002 R’000 2,906,752 (2,350,745) 556,007 (473,109) 82,898 37,590 (48,319) – 13,611 85,780 (38,708) (10,878) 36,194 (7,228) 28,966 (19,913) 9,053 2001 R’000 2,370,776 (1,949,070) 421,706 (292,132) 129,574 27,503 (30,366) – 4,843 131,554 (26,555) 25,496 130,495 (22,170) 108,325 – 108,325 Company 2002 R’000 967,703 (788,359) 179,344 (210,286) (30,942) 17,453 (26,401) 1,750 168 (37,972) (38,708) (6,131) (82,811) (1,976) (84,787) – (84,787) 2001 R’000 837,858 (661,613) 176,245 (134,970) 41,275 22,005 (20,680) 4,250 – 46,850 (26,555) 17,166 37,461 (11,480) 25,981 – 25,981 24 25 26 27 64 Cash flow statements for the year ended 31 December 2002 Group Notes 2002 R’000 274,967 37,590 (48,319) (35,321) 13,611 242,528 (1,123,262) (1,029,621) (78,302) 11,041 2001 R’000 352,281 27,503 (30,366) (30,610) 4,843 323,651 (462,073) (426,340) – (120,928) – – 85,195 (138,422) 297,341 158,919 445,994 604,913 Company 2002 R’000 46,859 17,453 (26,401) (16,079) 1,918 23,750 (806,406) (619,870) (355) 11,145 (37,844) – (159,482) – (782,656) 603,618 (179,038) 311,675 132,637 2001 R’000 162,484 22,005 (20,680) (25,180) 4,250 142,879 (443,900) (272,099) – (181,564) – – 9,763 (301,021) 284,426 (16,595) 328,270 311,675 Cash generated from trading operations Interest income Interest expenditure Tax paid Investment income Net cash inflows from operating activities 28 29 Cash flows from investing activities Purchase of property, plant and equipment Purchase of intangible assets Disposal of investments Acquisition of interest in associate and joint venture companies Acquistion of interest in subsidiary companies 30 Loans to subsidiaries, associate and joint venture companies Proceeds on disposal of property, plant and equipment Net cash outflows Cash effects of financing activities Net (decrease) / increase in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year 31 (30,960) – 4,580 (880,734) 684,751 (195,983) 604,913 408,930 32 65 Statement of changes in equity for the year ended 31 December 2002 Non- (Accumulated Outside Share Shareholder's loss)/ Shareholders capital equity loan distributable reserves Distributable Interest * reserves R’000 R’000 R’000 R’000 Group Balance at 1 January 2001 Assets and liabilities acquired – funded by proceeds from shares issued and equity loan advanced Available-for-sale assets movements (fair value gains) Net profit for the year after tax Outside shareholders interest Earnings of associate company transferred to non-distributable reserve Balance at 31 December 2001 Prior year adjustments (note 2) Available for sale asset realised Equity loan advanced Net profit for the year after tax Outside shareholders interest - Share of current year's profits - Change in degree of control Earnings of associate company transferred to non-distributable reserve Balance at 31 December 2002 Company Balance at 1 January 2001 Assets and liabilities acquired– funded by proceeds from shares issued and equity loan advanced Available-for-sale assets movements (fair value gains) Net profit for the year after tax Balance at 31 December 2001 Prior year adjustment (note 2) Available for sale asset realised Equity loan advanced Net loss for the year after tax Balance at 31 December 2002 * Nominal amounts Total R’000 83 832,188 239) (4,624) - 827,886) 16 161,336 -) 116,080) (25,496) 108,325) 78,205) 127,401) (116,080) 9,053) - 161,352) 90,584) 108,325) 3,373) (181) 1,191,339) 11,321) (116,080) 861,220) 9,053) 19,913) 113,032) 99 993,524 -) (181) 116,138) (116,080) 3,373 3,373 861,220 19,913 113,032 1,270) 1,328) (1,270) 97,309) 99 1,854,744 136,318 2,089,798) 83 832,188 )-) 1,282) - 833,553) 16 161,336 -) 100,267) -) 100,267) (100,267) (17,166) 25,981) 10,097 100,267) (100,267) (84,787) (74,690) - 161,352) 83,101) 25,981) 1,103,987) (100,267) 861,220) (84,787) 1,780,153) 99 993,524 - 861,220 99 1,854,744 -) - 66 Notes to the annual financial statements for the year ended 31 December 2002 1. Accounting policies The principal accounting policies which are followed by the group and which are consistent with those of the previous year, unless as otherwise indicated are set out below. The accounting policies of the subsidiaries and associates are consistent with those of the holding company. 1.1 Basis of preparation These financial statements are presented in South African rand since that is the currency in which the majority of the group’s transactions are denominated. The group annual financial statements have been prepared on the going concern principle and the historical cost basis in accordance with the applicable requirement of the Companies Act of 1973 and comply with South African statements of generally accepted accounting practice and with International Accounting Standards (IAS). The group annual financial statements are prepared on the historical cost basis except for certain financial instruments. Foreign loans, derivative financial instruments, available for sale investments and trading assets and liabilities are stated at fair value at balance sheet date. 1.2 Basis of consolidation The group annual financial statements incorporate the financial statements of the company and the enterprises controlled by the company (its subsidiaries) up to 31 December 2002. Subsidiaries are those entities in which the group has an interest of more than one half of the voting rights and the power to exercise control.The financial statements of subsidiaries are included in the consolidated financial statements from the date that control effectively commences until the date that control effectively ceases. The results of subsidiaries are included for the duration in which the group exercises control over the subsidiary. All significant intercompany transactions and resulting profits and losses between the group companies have been eliminated. 1.3 Property, plant and equipment Property, plant and equipment are stated at cost of acquisition or construction, less accumulated depreciation thereon. Freehold land is not depreciated. Other property, plant and equipment are depreciated on a straight-line basis over their respective estimated useful lives, which are as follows: Class Years Aircraft 5 Buildings and facilities 10 to 40 Computer equipment 3 Equipment 10 Office furniture and equipment 10 Test and telecommunication equipment 8 to 15 Vehicles 5 The cost of renewal and maintenance of assets is expensed as incurred. Where the life of an asset is extended, such costs are capitalised and depreciated over the adjusted useful life of the asset. Works under construction are stated at cost, which includes all cost necessarily incurred to bring plant to the condition and location essential for its intended use. Costs include overheads and borrowing costs where applicable. 67 Notes to the annual financial statements for the year ended 31 December 2002 1.4 Capitalisation of borrowing cost Borrowing costs that are directly attributable to the construction of qualifying assets are capitalised as part of the cost of these assets over the period of construction to the extent that financial instruments finance the assets. Capitalisation continues up to the date that the assets are substantially complete.The capitalisation rate applied is the specific borrowing rate on funding acquired for the project. Leased assets Assets subject to finance lease agreements are capitalised at their cash cost equivalent and the corresponding liabilities are recognised. The assets are depreciated on the straight-line basis over the shorter of their estimated useful lives or the lease term. Lease finance charges are included in interest expenditure as they become due. Operating lease installments are accounted for against income on a systematic basis over the period of the lease. Deferred lease payments are recorded as an asset and amortised over the period of the lease. Sale and leaseback transactions in terms of which the group assumes substantially all the risks and rewards of ownership are classified as finance leases.The sale and leaseback assets are kept at their carrying amount and depreciated over their remaining useful lives. 1.5 1.6 Impairment of assets The carrying amounts of the group’s assets stated in the balance sheet, other than inventories and deferred tax assets, are reviewed at each balance sheet date to determine whether there is any indication of impairment. If any such indication exists, the recoverable amount of the asset is estimated as the higher of the net selling price and its value in use. An impairment loss is recognised in the income statement to the extent that the carrying amount exceeds the recoverable amount. In assessing value in use, the expected future cash flows are discounted to their present value that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate cash inflows largely independent of those from other assets, the recoverable amount is determined for the cash-generating unit to which the asset belongs. A previously recognised impairment loss is only reversed if there has been a change in the estimates used to determine the recoverable amount; however, not to an amount higher than the carrying amount that would have been determined (net of depreciation and amortisation) had no impairment loss been recognised in previous years. An impairment loss in respect of goodwill is not reversed unless the loss was caused by a specific external event of an exceptional nature that is not expected to recur, and the increase in the recoverable amount relates clearly to the reversal of the effect of that special event. 1.7 Goodwill and negative goodwill Goodwill arising on consolidation represents the excess of cost of acquisition over the group’s interest in the fair value of the identifiable assets and liabilities of a subsidiary, associate or jointly controlled entity at the date of acquisition. Goodwill is amortised to the income statement on a straight-line basis over its useful economic life, a period generally not exceeding 20 years. Negative goodwill, which represents the excess of the group’s interest in the fair value of the identifiable assets and liabilities acquired over the cost of the acquisition, is eliminated proportionately against the fair value of the non-monetary assets acquired. Any amount in excess of the fair values of the non-monetary assets 68 acquired is recognised as income on a straight-line basis over a period generally not exceeding 5 years. On disposal of a subsidiary, associate or jointly controlled entity, the unamortised goodwill or negative goodwill is included in the determination of the profit or loss on disposal. 1.8 Intangible assets Computer software is depreciated on the straight-line basis over its estimated useful life of 3 years. Deferred tax Deferred tax is provided on the comprehensive basis using the balance sheet liability method on all temporary differences between the carrying amounts of assets or liabilities for financial reporting purposes and the amounts used for taxation purposes, except differences relating to goodwill and negative goodwill not deductible for taxation purposes and the initial recognition of assets or liabilities that affect neither accounting nor computed taxable profits or losses. Deferred tax is calculated at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled and is charged to the income statement. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the associate unused tax losses and credits can be utilised. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realised. 1.10 Investments Investments in subsidiaries Investments in subsidiaries are stated at cost less accumulated impairment loss. Investments in associate companies An associate company is an entity in which the group has a long-term equity interest and exercises significant influence over the financial and operating policies of that company. Investments in associate companies are accounted for in the group and Eskom Enterprises financial statements the equity method for the duration that the group has the ability to exercise significant influence. If an associate company applies accounting policies that are recognised as being materially different from those adopted by the group, appropriate adjustments are made to the financial statements of the associate company, where it is practicable to do so, prior to equity accounting in order to obtain consistency of approach to profit recognition. Investments in joint venture companies A joint venture is an entity jointly controlled by the group and one or more other venturers in terms of a contractual arrangement. Joint venture arrangements, which involve the establishment of a separate entity in which each venture has an interest, are referred to as jointly controlled entities.The group reports its interest in jointly controlled entities using proportional consolidation – the group’s share of the assets, liabilities, income and expenses of such jointly controlled entities are combined with the equivalent items in the consolidated financial statements on a line-by-line basis. 1.9 69 Notes to the annual financial statements for the year ended 31 December 2002 1.11 Inventories Inventories are valued at the lower of cost or net realisable value. The cost comprises direct materials and, where applicable, direct labour costs and those overheads that have been incurred in bringing the inventories to its present location and condition. Cost is calculated using the first-in first-out method. Net realisable value represents the estimated selling price less all estimated costs to completion and costs to be incurred in marketing, selling and distribution. 1.12 Advances Advances consist of prepayments and deposits received from customers before commencing the project or contract. 1.13 Financial instruments Financial market assets Held to maturity assets, originated loans and receivables are measured at amortised cost. Available for sale assets are measured at fair value with resultant gains or losses recognised in equity until the financial asset is sold, or otherwise disposed of, or found to be impaired at which the cumulative gains or losses previously recognised in equity are included in interest income and interest expenditure respectively. Fair value gains or losses recognised in equity exclude interest, which are reported in net profit or loss on an accrual basis. Foreign currency financial instruments Transactions in foreign currencies are initially recognised at the exchange rates prevailing at the transaction date. Foreign loans are non-trading and are recorded at the exchange rates ruling at the date of the transaction. At balance sheet date, foreign loans are revalued at the closing rates and the gains or losses are recognised in the net profit or loss for the period.The initial measurement of foreign loans is adjusted for amortised discounts or premiums.The discounts or premiums are amortised over the period of the relevant loan, using the yield to maturity method. Other monetary assets, liabilities and commitments in foreign currencies are translated at the exchange rates ruling at the balance sheet date. Forward exchange contracts and similar instruments, designated as cash flow hedges for future anticipated foreign currency denominated transactions, are measured to fair value with the resultant gains or losses being recognised in equity. Forward exchange contracts and similar instruments, designated as fair value hedges for recognised foreign denominated transactions, are measured to fair value with the resultant gains or losses being charged to net profit or loss for the period. If the hedged forecasted transactions result in the recognition of an asset or liability, then the cumulative amount recognised in equity is adjusted against the initial measurement of the asset or liability. For other cash flow hedges, the cumulative amount recognised in equity is included in net profit or loss in the period when the commitment or forecasted transaction affects profits or losses. Trade and other receivables Trade and other receivables are stated at cost less provision for doubtful debts. Debts considered to be irrecoverable are written off. 70 for the year ended 31 December 2002 Trade and other payables Local trade and other payables are stated at nominal value, which approximates fair value. Foreign entities The financial statements of foreign entities are translated into the reporting currency as follows: - Assets and liabilities are translated at rates of exchange ruling at the financial year-end; - Income and expenditure and cash flow items are translated at rates of exchange ruling at the date of the transaction. Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the exchange rate at the balance sheet date. Exchange differences arising from the translation of foreign entities are taken directly to a foreign currency translation reserve. 1.14 Cash and cash equivalents Cash and cash equivalents are defined as cash and bank balances and money market assets and liabilities that mature within one year. 1.15 Retirement benefits Retirement benefits are provided for all employees through the Eskom Pension and Provident Fund. Contributions to the Fund are based on a percentage of pensionable emoluments and are expensed in the period in which they are incurred. The net benefit liability or asset at the balance sheet date is not accounted for in the financial statements. The rules of the Eskom Pension and Provident Fund state that any deficit on the valuation of the Fund will be funded by increases in future contribution or reduction in benefits. If there is a substantial surplus on the valuation of the Fund, future contributions may be decreased or benefits may be improved as determined by the Trustees of the Fund. The estimated cost of gratuities is accounted for over the estimated working life of the employees based on the assessment of independent actuaries which takes into account the probability of employees staying until retirement. Post-retirement medical benefits are provided for employees through various medical aid schemes. Provision is made for such benefits in the income statement for the estimated costs over the expected period to retirement of the employees. The cost of providing the benefits is determined by using the projected unit credit method, with actuarial valuations being carried out at each balance sheet date. Actuarial gains and losses which exceed 10% of the present value of the post-retirement medical aid obligation are amortised to the income statement over the lesser of 10 years or the expected remaining working lives of the participating employees. The amount recognised in the balance sheet represents the present value of the post-retirement medical aid benefit as adjusted for unrecognised actuarial gains and losses. 1.16 Provisions Provisions are recognised when the group has a present legal or constructive obligation as a result of past events, for which it is probable that an outflow of economic benefits will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. 71 Notes to the annual financial statements for the year ended 31 December 2002 An onerous contract is a contract under which the unavoidable cost of meeting the obligation exceeds the expected economic benefit to be received under it. When a contract becomes onerous, the present obligation under a contract is recognised and measured as a provision. If the effect is material, provisions are determined by discounting the expected future cash flows that reflect current market assessments of the time value of money and, where appropriate, the risk specific to the liability. 1.17 Discontinued operations A discontinued operation is a significant distinguishable component of the group’s business that is abandoned or terminated pursuant to a single formal plan which represents a separate major line of business or geographical area of operations. The profit or loss on the sales or abandonment of a discontinuing operation is determined from the formalised discontinuance date. 1.18 Revenue Revenue, which exlcudes value-added tax, represents the aggregate sales of goods, services, completed contracts and separately identifiable portions of contracts delivered to customers (including that related to contracts which have been accounted for using the percentage of completion method) and attributable revenue of associates. Revenue is recognised when the significant risks and rewards associated with ownership have been transferred to the customer and the amount of revenue can be measured reliably. Interest income Interest income is accrued on a time proportionate basis, by reference to the principal outstanding and at the interest rate applicable. Investment income Dividends received are recognised on the date that the shareholder’s right to receive payment has been established, i.e. registration date. 1.19 Environment and rehabilitation Expenditure on property, plant and equipment for pollution control is capitalised and depreciated over the useful lives of the assets.The cost of current ongoing programmes to prevent and control pollution and to rehabilitate the environment is charged to the income statement as incurred, unless a present constructive or legal obligation exists to recognise such expenditure. In such cases, a provision is created based on the best estimates available. Any subsequent change to the provision regarding a change in the estimate of the environment and rehabilitation cost is charged to the income statement. 1.20 Exceptional items Exceptional items are material items that derive from events or transactions that fall within the ordinary activities of the group and individually or, if of a similar type, in aggregate, that need to be disclosed by virtue of their size or incidence. 72 for the year ended 31 December 2002 1.21 Comparative figures Where necessary, comparative figures have been adjusted to conform with changes in presentation in the current year. 2. Prior year adjustments During the current year the group correctly accounted for gains and losses resulting from fair value adjustments. The prior year gains were incorrectly accounted for in the non-distributable reserve. The overprovision of taxation charges in MKC was adjusted for.The effect of these adjustments are accounted for in the statement of changes in equity and are as follows: Group 2002 R’000 Fair value gains MKC tax adjustment Tax effect 116,080 11,321 – 127,401 2001 R’000 – – – – Company 2002 R’000 100,267 – – 100,267 2001 R’000 – – – – 73 Notes to the annual financial statements for the year ended 31 December 2002 Group Cost Accumulated depreciation R’000 R’000 3. Property, plant and equipment 2002 Owned assets Aircraft Buildings and facilities Freehold land Test and telecommunication equipment Vehicles Computer equipment Office equipment Office furniture Equipment and vehicles Total in commission Works under construction Leased assets Aircraft Total assets 2001 Aircraft Buildings and facilities Freehold land Test and telecommunication equipment Vehicles Computer equipment Office equipment Office furniture Equipment and vehicles Total in commission Works under construction Leased assets Aircraft Total assets Carrying amount R’000 Company Cost Accumulated depreciation R’000 R’000 Carrying amount R’000 80,697 119,695 30,587 1,104,356 60,060 39,016 43,281 31,299 663,686 2,172,677 867,803 3,040,480 8,311 3,048,791 25,118 40,929 702,308 20,917 26,910 27,636 20,375 333,277 1,197,470 6 1,197,476 962 1,198,438 55,579 78,766 30,587 402,048 39,143 12,106 15,645 10,924 330,409 975,207 867,797 1,843,004 7,349 1,850,353 80,697 31,108 4,306 1,104,301 9,071 29,371 6,490 1,644 137,226 1,404,214 703,273 2,107,487 8,311 2,115,798 25,118 10,960 702,254 7,017 21,184 3,627 1,506 98,449 870,115 – 870,115 962 871,077 55,579 20,148 4,306 402,047 2,054 8,187 2,863 138 38,777 534,099 703,273 1,237,372 7,349 1,244,721 52,043 105,814 30,518 1,069,966 61,077 33,203 32,365 12,235 362,283 1,759,504 182,233 1,941,737 4,907 1,946,644 17,602 28,795 624,842 23,177 25,471 21,549 6,942 244,905 993,283 7 993,290 993,290 34,441 77,019 30,518 445,124 37,900 7,732 10,816 5,293 117,378 766,221 182,226 948,447 4,907 953,354 52,043 31,014 4,306 1,069,911 8,248 29,201 5,214 588 129,905 1,330,430 172,741 1,503,171 4,907 1,508,078 17,602 5,403 624,787 6,408 23,541 3,232 538 91,712 773,223 773,223 773,223 34,441 25,611 4,306 445,124 1,840 5,660 1,982 50 38,193 557,207 172,741 729,948 4,907 734,855 74 for the year ended 31 December 2002 Carrying value beginning of year R’000 3. Property, plant and equipment (continued) Reconciliation of movements Group 2002 Owned assets Aircraft Buildings and facilities Freehold land Test and telecommunication equipment Vehicles Computer equipment Office equipment Office furniture Equipment and vehicles Works under construction Leased assets Aircraft Total assets Company 2002 Owned assets Aircraft Buildings and facilities Freehold land Test and telecommunication equipment Vehicles Computer equipment Office equipment Office furniture Equipment and vehicles Works under construction Leased assets Aircraft Total assets Additions / Transfers Disposals Impairment Depreciation Carrying value end of year R’000 R’000 R’000 R’000 R’000 34,441 77,019 30,518 445,124 37,900 7,732 10,816 5,293 117,378 182,226 948,447 4,907 953,354 27,361 11,342 69 34,463 8,105 12,415 12,525 12,704 266,789 686,000 1,071,773 3,404 1,075,177 –) (675) –) (38) (1,079) (264) (115) –) (997) (429) (3,597) –) (3,597) –) –) –) –) –) –) –) –) –) –) –) –) –) (6,223) (8,920) –) (77,501) (5,783) (7,777) (7,581) (7,073) (52,761) –) (173,619) (962) (174,581) 55,579 78,766 30,587 402,048 39,143 12,106 15,645 10,924 330,409 867,797 1,843,004 7,349 1,850,353 34,441 25,611 4,306 445,124 1,840 5,660 1,982 50 38,193 172,741 729,948 4,907 734,855 27,361 769 34,463 1,174 6,759 1,760 998 12,650 530,532 616,466 3,404 619,870 –) (675) –) (38) –) (253) (73) –) (48) –) (1,087) –) (1,087) –) –) –) –) –) –) –) –) –) –) – – – (6,223) (5,557) –) (77,502) (960) (3,979) (806) (910) (12,018) – (107,955) (962) (108,917) 55,579 20,148 4,306 402,047 2,054 8,187 2,863 138 38,777 703,273 1,237,372 7,349 1,244,721 Details of property are available for inspection at the registered offices of the companies. 75 Notes to the annual financial statements for the year ended 31 December 2002 Group 2002 R’000 4. Goodwill Cost Balance at beginning of year Arising on acquisition of subsidiaries and joint ventures (Amortised) / Recognised as income during the year Balance at end of year 2001 R’000 Company 2002 R’000 2001 R’000 31,237 106,965 (9,338) 128,864 (7,426) 31,237 7,426 31,237 – – – – – – – – Group Cost Accumulated depreciation R’000 R’000 5. Intangible assets 2002 Computer software Operating licence fee Carrying amount R’000 Company Cost Accumulated depreciation R’000 R’000 Carrying amount R’000 69,779 17,400 87,179 2,127 6,450 8,577 1,402 1,623 3,025 904 376 1,280 68,377 15,777 84,154 1,223 6,074 7,297 1,902 1,902 1,547 1,547 1,359 1,359 828 828 543 543 719 719 2001 Computer software Operating licence fee Carrying value beginning of year R’000 Reconciliation of movements Group 2002 Computer software Operating licence fee Company 2002 Computer software Additions / Transfers Disposals Impairment Depreciation Carrying losses value end of year R’000 R’000 R’000 R’000 R’000 1,223 6,074 7,297 67,728 10,574 78,302 - - (574) (871) (1,445) 68,377 15,777 84,154 719 355 - - (531) 543 76 for the year ended 31 December 2002 Group 2002 R’000 6. Deferred tax asset Post-retirement medical aid and gratuity provisions Other provisions Advance receipts Balance at end of year Computed tax losses available for set-off against future taxable income Analysis of movement: Balance at the beginning of the year Increase in deferred tax asset Balance at the end of the year 2001 R’000 Company 2002 R’000 2001 R’000 34,094 29,659 16,224 79,977 34,094 10,075 4,854 49,023 49,294 4,683 5,685 59,662 33,877 10,075 4,854 48,806 85,251 143,918 49,023 30,954 79,977 30,802 18,221 49,023 48,806 10,856 59,662 30,802 18,004 48,806 7. Investments in associate and joint venture companies Associate and joint venture companies (refer schedule 1) Shares at cost less provision for impairment loss Share of equity accounted earnings of associate companies Directors’ valuation Summarised financial statements of significant associates (refer schedule 2). 137,409 119,164 18,245 137,409 125,124 125,124 – 125,124 119,163 119,163 – 137,202 217,219 217,219 – 217,798 8. Investments in subsidiaries Subsidiary companies (refer schedule 1) Shares at cost less provision for impairment loss Indebtedness Directors’ valuation 409,541 141,874 267,667 631,717 115,059 5,376 109,683 128,002 9. Inventories Comprising: Raw materials Work in progress Finished goods 41,517 154,764 38 196,319 27,134 60,880 277 88,291 – 1,539 – 1,539 2,544 3,469 – 6,013 77 Notes to the annual financial statements for the year ended 31 December 2002 Group 2002 R’000 10. Trade and other receivables Trade Contract customers Other Receiver of Revenue Prepayments Provision for bad debts 2001 R’000 Company 2002 R’000 2001 R’000 565,893 28,453 69,277 54,811 6,510 724,944 (46,909) 678,035 438,425 46,623 36,728 – 1,415 523,191 (42,368) 480,823 244,813 28,453 9,031 45,438 – 327,735 (20,339) 307,396 210,582 – 12,486 – 1,415 224,483 (7,544) 216,939 11. Financial instruments Financial Assets: Available-for-sale assets Financial market assets Originated loans and receivables Cash and cash equivalents (refer to note 12) Trade and other receivables (refer to note 10) Financial Liabilities: Liabilities carried at fair value Financial market liabilities Bank overdraft Trade and other payables (refer to note 19) Advances received (refer to note 20) Borrowings (refer to note 16) Non-current Current – 494,820 678,035 1,172,855 116,080 635,034 480,823 1,231,937 – 134,246 307,396 441,642 100,267 327,800 216,939 645,006 10,878 85,890 792,856 232,570 143,942 10,220 1,276,356 – 30,121 644,542 16,183 317,283 4,695 1,012,824 6,131 1,609 209,167 34,888 32,097 3,504 287,396 – 16,125 158,125 16,183 289,699 2,464 482,596 The management of risks arising from fluctuations in currency exchange rates and interest rates is managed by the treasury department of Eskom Holdings Ltd. At 31 December 2002 the carrying amounts of financial assets and liabilities approximate their fair values due to the maturity terms of these assets and liabilities. 78 for the year ended 31 December 2002 Group 2002 R’000 12. Cash and cash equivalents Funds on call Funds on deposit Current accounts Cash on hand Bank overdrafts 2001 R’000 Company 2002 R’000 2001 R’000 34,676 2,672 457,322 150 494,820 (85,890) 408,930 213,965 64,978 355,951 140 635,034 (30,121) 604,913 33,066 – 101,078 102 134,246 (1,609) 132,637 185,022 – 142,678 100 327,800 (16,125) 311,675 13. Share capital Authorised share capital 25 000 000 ordinary par value shares of R0.01 each (2001: 25 000 000 ordinary par value shares of R0.01 each) Issued share capital 9 936 335 ordinary par value shares of R0.01 each (2001: 9 936 335 ordinary par value shares of R0.01 each) 250 250 250 250 99 99 99 99 14. Shareholder’s equity loan The equity loan results from an interest-free parent company loan and has no fixed repayment terms. Eskom Holdings Limited has subordinated its loan in favour of designated lenders to the company. This subordination remains in effect until the company’s assets, fairly valued, exceed its liabilities. 1,854,744 993,524 1,854,744 993,524 15. Non-distributable reserves Fair value gains on foreign exchange contracts Share of net retained earnings of associate companies – 1,328 1,328 116,080 58 116,138 – – – 100,267 – 100,267 79 Notes to the annual financial statements for the year ended 31 December 2002 Group 2002 R’000 16. Borrowings Secured Loans Secured under finance lease agreements Less: Short-term portion shown under current liabilities The financial lease liabilities are secured by moveable assets with a net book value of R14.5 million (2001: R27.0 million). These loans are repayable between January 2003 and December 2007. The loans bear interest at rates varying from 12% to prime overdraft rate minus 3.1%. Unsecured Operating loans from Eskom Holdings Ltd The operating loans have no fixed terms of repayment. The loans bear interest at Eskom Holdings' cost of capital plus 0.5% and prime overdraft rate minus 0.5% as applicable. 2001 R’000 Company 2002 R’000 2001 R’000 128,230 21,453 149,683 (10,220) 139,463 – 51,671 51,671 (4,695) 46,976 – 35,601 35,601 (3,504) 32,097 – 21,856 21,856 (2,464) 19,392 4,479 270,307 – 270,307 143,942 317,283 32,097 289,699 17. Long-term provisions Gratuities Post-retirement medical aid Current portion Analysis of movement: 79,174 131,001 210,175 (6,089) 204,086 93,019 112,554 205,573 (6,784) 198,789 71,621 67,710 139,331 (3,832) 135,499 57,500 55,300 112,800 (3,722) 109,078 17.1 Gratuities Balance at beginning of the year Interest adjustment Provisions raised during the year Expenditure incurred Balance at the end of the year Current portion 93,019 9,767 5,257 (28,869) 79,174 (1,766) 77,408 60,789 7,903 24,327 – 93,019 (3,070) 89,949 57,500 6,038 8,083 – 71,621 (1,597) 70,024 30,934 4,021 22,545 – 57,500 (1,898) 55,602 80 for the year ended 31 December 2002 Group 2002 R’000 17.2 Post-retirement medical aid Balance at beginning of the year Interest adjustment Provisions raised during the year Balance at the end of the year Current portion 2001 R’000 Company 2002 R’000 2001 R’000 112,554 11,818 6,629 131,001 (4,323) 126,678 83,486 10,853 18,215 112,554 (3,714) 108,840 55,300 5,807 6,603 67,710 (2,234) 65,476 34,711 4,512 16,077 55,300 (1,825) 53,475 A service gratuity, where applicable, is payable on retirement or death. The estimated present value of the anticipated expenditure for gratuities was calculated by independent actuaries at 31 December 2002. The probability of employees staying until retirement is taken into account when calculating the provision. 18. Deferred tax liabilities Deferred tax liabilities Comprising: Property, plant and equipment Other Analysis of movement: Balance at the beginning of the year (Decrease) / increase in deferred tax liabilities Provision prior year Balance at the end of the year 3,136 14,418 (11,282) 13,171 12,983 188 3,136 14,418 (11,282) 13,171 12,983 188 13,171 (9,483) (552) 3,136 2,541 10,630 – 13,171 13,171 (9,483) (552) 3,136 2,541 10,630 – 13,171 19. Trade and other payables Trade Contract Customers Receiver of Revenue - company tax Receiver of Revenue - other Accruals 361,023 62,739 36,189 482 332,423 792,856 277,834 85,724 23,294 (9,304) 266,994 644,542 79,499 32,789 13,923 – 82,956 209,167 51,720 64,942 7,135 (2,016) 36,344 158,125 20. Advances received Down payments received on contracts 232,570 16,183 34,888 16,183 81 Notes to the annual financial statements for the year ended 31 December 2002 Group 2002 R’000 21. Short-term provisions Employee benefits Short-term portion of long-term provisions Other 2001 R’000 Company 2002 R’000 2001 R’000 71,160 6,089 – 77,249 73,524 6,784 1,567 81,875 Other R’000 66,795 3,832 – 70,627 Employee benefits R’000 76,678 29,825 (32,979) 73,524 (2,364) 71,160 66,268 3,722 – 69,990 Total R’000 166,889 31,392 (123,190) 75,091 (3,931) 71,160 Analysis of movement: Group Balance 1 January 2001 Provisions raised during the year Provisions used during the year Balance as at 31 December 2001 Provisions used during the year Balance as at 31 December 2002 Company Balance 1 January 2001 Provisions raised during the year Provisions used during the year Balance as at 31 December 2001 Provisions raised during the year Balance as at 31 December 2002 90,211 1,567 (90,211) 1,567 (1,567) – 71,309 – (71,309) – – – 58,520 40,583 (32,835) 66,268 527 66,795 129,829 40,583 (104,144) 66,268 527 66,795 82 for the year ended 31 December 2002 Salary/ fees R'000 22. Directors' Remuneration Eskom Enterprises (Pty) Ltd Non-executive directors TS Gcabashe (paid by Eskom) JK Hlongwane DB Mostert DM Ramaphosa DR Geeringh S Dakile-Hlongwane Executive directors JA de Beer (resigned 31/12/2002) E Banda (appointed 01/08/2002) VTL Ngubeni PD Mbonyana RS Moloko R Naidoo Bonus related R'000 Contributions payments R'000 Expense Allowance R'000 Other Total 2002 R'000 Total 2001 R'000 R'000 – 84 118 46 78 54 – – – – – – – – – – – – – – – – – – – 84 118 46 78 54 – 66 130 40 80 62 1,037 647 829 742 803 714 5,152 940 – 790 825 799 486 3,840 184 109 216 200 229 129 1,067 140 118 185 316 201 178 1,138 3,252 – – – – – 3,252 5,553 874 2,020 2,083 2,032 1,507 14,449 1,897 – 1,683 1,656 1,725 – 7,339 Contributions include Eskom Enterprises' contribution to the Eskom Pension and Provident Fund, the Executive Group Life Insurance Scheme and medical contributions. All the executive directors have normal employment contracts with Eskom Enterprises. The continuation of their service is dependent on satisfactory performance. There are no fixed-term service contracts for non-executive directors. Loans to directors Housing loans VTL Ngubeni PD Mbonyana RS Moloko R Naidoo 200 791 – 487 1,478 137 729 106 – 972 The interest rate on the loan from Eskom Finance Company (Pty) Ltd at the end of the year was 5% (2001: 11.5%). The loan is repayable over a maximum period of 30 years. On resignation, the loan is repayable in full within 90 days from date of resignation. 83 Notes to the annual financial statements for the year ended 31 December 2002 Salary/ fees R'000 22. Directors' Remuneration (continued) Subsidiary Companies Rotek Industries (Pty) Ltd Non-executive directors D Ramaphosa GF Van der Merwe SJ Ramagopa Dr I McRae Executive directors ED Miller M Cary JT Burger BP O'Connor Bonus related payments R'000 Contributions R'000 Expense Allowance R'000 Other Total 2002 R'000 Total 2001 R'000 R'000 47 44 22 23 – – – – – – – – – – – – – – – – 47 44 22 23 81 42 21 24 416 650 – 437 1,639 145 338 – 168 651 73 112 – 10 195 91 104 – 71 266 – – – – – 725 1,204 – 686 2,751 – – 822 1,223 2,213 Roshcon (Pty) Ltd Non-executive directors D Ramaphosa DW Bath SJ Ratsethaba MM Mohohlo HS Nkosi Executive directors M Cawood ED Miller JT Burger BP O'Connor 46 27 25 26 29 – – – – – – – – – – – – – – – – – – – – 46 27 25 26 29 3 45 – 21 – 515 – 578 510 1,756 206 – 240 196 642 111 – 95 11 217 191 – 201 83 475 – – – – – 1,023 – 1,114 800 3,090 874 874 – – 1,817 Group 2002 R’000 23. Revenue Construction and engineering Technical consulting services Telecommunications Commercial Sales / services to customers Refer to segment reporting (note 33) Company 2002 R’000 2001 R’000 2001 R’000 1,290,548 1,101,808 432,948 81,448 2,906,752 1,077,223 862,235 375,272 56,046 2,370,776 – 648,946 280,419 38,338 967,703 – 498,606 317,511 21,741 837,858 84 for the year ended 31 December 2002 Group 2002 R’000 24. Profit from operations Profit from operations is stated after charging the following: Auditors’ remuneration Audit Other services Directors’ remuneration Executive Non-executive Depreciation of property, plant and equipment Depreciation of intangible assets Fleet and motor vehicle expenses Foreign exchange gains realised Foreign exchange losses realised Goodwill amortised Impairment losses Marketing and advertising Materials Net (profit) / loss on sale of property, plant and equipment Operating lease charges Production overheads Repairs and maintenance Staff costs 2001 R’000 Company 2002 R’000 2001 R’000 3,285 106 19,621 670 174,581 1,445 25,291 (53,299) 46,244 9,338 900 13,957 1,146,484 (983) 17,260 338,110 13,425 935,677 1,523 658 10,754 615 117,065 1,008 17,169 (10,763) 1,585 (7,426) 2,500 5,044 629,147 (508) 4,408 682,507 12,593 721,695 2,164 57 14,069 380 108,917 531 13,783 (53,026) 43,157 – 900 5,951 205,055 1,087 16,375 67,921 8,726 519,474 1,254 650 6,961 378 89,366 627 14,480 (1,550) 380 – 1,499 4,866 187,120 (60) 2,790 65,279 9,457 404,114 25. Interest expenditure Interest and discount amortised Unwinding of discount on provisions (refer to note 17.1 and 17.2) 26,734 21,585 48,319 11,610 18,756 30,366 14,557 11,844 26,401 12,146 8,534 20,680 26. Exceptional expenditure Amounts provided for: Exceptional increases in provision for gratuities and post-retirement medical aid Provision for impairment of loans Development costs incurred for the SNO – 11,794 26,914 38,708 26,555 – – 26,555 – 11,794 26,914 38,708 26,555 – – 26,555 85 Notes to the annual financial statements for the year ended 31 December 2002 Group 2002 R’000 27. Income tax expense South African normal taxation Current taxation Under provision in prior years Deferred taxation Deferred taxation under provision previous year Secondary tax on companies 2001 R’000 Company 2002 R’000 2001 R’000 35,432 12,754 (35,875) (5,114) 31 7,228 % 20 (1) 37 (53) 1 – 21 – 5 30 16,004 6,351 (216) – 31 22,170 % 17 – 12 – – 6 (5) – – 30 10,040 12,754 (15,704) (5,114) – 1,976 % (2) – 47 (23) (1) – 9 – – 30 12,503 6,351 (7,374) – – 11,480 % 31 – – (1) 3 14 (17) – – 30 Reconciliation of effective tax rate Taxation as a percentage of profit before taxation Taxation effect of: Impairment of asset Computed tax losses utilised Disallowable expenditure Dividends received Non-taxable income Under provision prior years Secondary tax on companies Foreign tax differential Standard tax rate 28. Cash generated from trading operations Profit / (loss) for the year before taxation Adjustments for items separately disclosed Interest income Interest expenses Investment income Adjustments for non-cash items: Depreciation of property, plant and equipment Depreciation of intangible assets Goodwill amortised Impairment of assets Movements in provisions Fair value adjustment Net (profit) / loss on sale of property, plant and equipment Changes in working capital: (Increase) / decrease in inventories (Increase) / decrease in accounts receivable Increase in current portion of long-term borrowings Increase in advances received Increase in accounts payable 36,194 (2,882) (37,590) 48,319 (13,611) 196,830 174,581 1,445 9,338 900 671 10,878 (983) 44,825 (105,684) (174,567) 5,525 216,387 103,164 274,967 130,495 (1,980) (27,503) 30,366 (4,843) 61,069 117,065 1,008 (7,426) 2,500 (26,074) (25,496) (508) 162,697 (17,958) (13,771) – – 194,426 352,281 (82,811) 7,030 (17,453) 26,401 (1,918) 144,624 108,917 531 – 900 27,058 6,131 1,087 (21,984) 4,474 (90,457) 1,040 18,705 44,254 46,859 37,461 (5,575) (22,005) 20,680 (4,250) 55,794 89,366 627 – 1,499 (18,472) (17,166) (60) 74,804 (4,555) 20,796 – – 58,563 162,484 86 for the year ended 31 December 2002 Group 2002 R’000 29. Tax paid Amounts unpaid at the beginning of the year Current taxation charged to income statement Movement on deferred tax Amounts unpaid at the end of the year 2001 R’000 Company 2002 R’000 2001 R’000 (23,293) (7,228) (40,989) 36,189 (35,321) (24,142) (22,170) (7,591) 23,293 (30,610) (7,135) (1,976) (20,891) 13,923 (16,079) (13,461) (11,480) (7,374) 7,135 (25,180) 30. Acquisition of subsidiaries During the year the company acquired controlling interest in Lunsemfwa Hydro Power Company (51%) and Mountain Communications (Pty) Ltd (71%). Property plant and equipment Inventories Goodwill acquired Accounts receivable Bank balances and cash Accounts payable and accrual Loans Net assets at acquisition Outside shareholders interest Goodwill Consideration on acquisition Cash purchased Net cash outflow on acquisition (45,554) (2,344) (106,965) (22,646) (54,850) 32,255 3,128 (196,976) 114,622 (82,354) (3,456) (85,810) 54,850 (30,960) – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 31. Cash effects of financing activities Long-term borrowings raised (Decrease) / increase in Eskom loan Proceeds from shares issued Increase in shareholder equity loan 89,359 (265,828) – 861,220 684,751 26,052 109,937 16 161,336 297,341 12,705 (270,307) – 861,220 603,618 12,616 110,458 16 161,336 284,426 32. Cash and cash equivalents Bank balances and cash Bank overdrafts 494,820 (85,890) 408,930 635,034 (30,121) 604,913 134,246 (1,609) 132,637 327,800 (16,125) 311,675 87 Notes to the annual financial statements for the year ended 31 December 2002 Construction and Engineering 2002) R’000) 2001) R’000) Technical consulting services 2002) R’000) 2001) R’000) Telecommunications 2002) R’000) 2001) R’000) Commercial Total 2002) R’000) 2001) R’000) 2002) R’000) 2001) R’000) 33. Segment reporting for the Group Segment revenue External Eskom Intergroup 505,975) 364,581) 508,213) 758,615) 693,937) 653,426 ) 25,958) 18,705) (59,831) 1,290,548) 1,077,223) 1,101,808) 68,861) 5,239) (9,529) 64,571) (9,448) 44,686) 3,546) (134) 48,098) (700) 62,670) 20,642) (21,479) 61,833) (15,242) 345,734) 546,612) (30,111) 862,235) 107,070) 6,198) (21,156) 92,112) (9,873) 182,360) 243,542) 7,046) 432,948) (9,287) 11,169) (14,910) (13,028) 15,310) 85,047) 285,387) 4,838) 375,272) 34,308) 17,310) (8,158) 43,460) (12,067) 44,499) 10,122) 26,827) 81,448) (18,656) 540) (2,401) (20,517) 2,152) 22,745) 1,241,047) 818,107) 26,733) 1,665,705) 1,552,669) 6,568 ) –) –) 56,046) 2,906,752) 2,370,776) (1,118) 449) (918) (1,587) 470) 103,588) 37,590) (48,319) 92,859) (7,228) 184,946) 27,503) (30,366) 182,083) (22,170) Segment operating profit/(loss) Interest income Interest expenditure Profit before tax Income tax expense Net profit (loss) for the year after tax before exceptional items and outside shareholders Segment assets and liabilities Assets Liabilities 55,123) 47,398) 46,591) 82,239) 2,282) 31,393) (18,365) (1,117) 85,631 ) 159,913) 305,823) (507,440) 568,781) 2,743,124) 1,486,816) 578,355) (425,379) (625,597) (650,260) (375,876) 422,586) (217,588) 23,322) (51,914) 19,815) 3,650,625) 2,497,998) (13,432) (1,560,828) (1,306,659) Group 2002 R’000 34. Contingent liabilities The group has the following contingent liabilities arising from its interests in subsidiaries and joint ventures: Performance guarantees provided Letters of suretyship issued on behalf of group companies and third parties 92,708 104,291 196,999 70,928 31,715 102,643 2001 R’000 Company 2002 R’000 2001 R’000 12,136 312,489 324,625 46,041 692,265 738,306 Eskom Enterprises has issued letters of support amounting to a total of R156 458 000 to The Standard Bank of Lesotho Ltd and Lesotho Bank (1999) Ltd in respect of overdraft facilities extended to Tele-Com Lesotho (Pty) Ltd. These facilities expire on 30 April 2003. At 31 Dec 2002, the overdraft amounted to R84 280 254. MKC committed to a capital expansion program in its subsidiaries amounting to R424 million (US $56 million) until 9 February 2004. To 31 December 2002 the group has incurred expenditure of approximately R257 million (US $30 million) (31 December 2001: approximately R12 million (US $1 million)).To the extent that the Group has not met its commitments MKC and therefore Eskom Enterprises’ is required to fund the shortfall. 88 for the year ended 31 December 2002 Group 2002 R’000 35. 35.1 Commitments Capital Commitments Estimated capital expenditure Contracted for, but not provided in the financial statements Approved, but not yet contracted MKC committed to a capital expansion program in its subsidiaries amounting to R424 million (US $56 million) until 9 February 2004.To 31 December 2002 the group has incurred expenditure of approximately R257 million (US $30 million) (2001: approximately R12 million (US $1 million)). This expenditure will be financed from equity, debt and internally generated funds. 182,711 165,211 17,500 141,418 750,443 660,975 2001 R’000 Company 2002 R’000 2001 R’000 59,587 59,587 – 750,599 750,443 156 35.2 Future Commitments Operating leases Payable within one year Payable after one year within five years Payable thereafter 86,340 14,376 71,964 – 4,784 2,341 2,443 – – – – – 4,784 2,341 2,443 – 36. Related party transactions During the year the company and its subsidiaries, in the ordinary course of business, entered into various sale and purchase transactions with Eskom, associate and joint venture companies.These transactions occurred under terms that are no less favourable than those arranged with third parties. Associate and joint venture companies Details of investment in associate and joint venture companies are disclosed in note 7 and schedule 1. No material related-party transactions were entered into. Subsidiaries Details of investments in subsidiaries are disclosed in note 8 and schedule 1. No material related-party transactions were entered into. Directors Details relating to directors' remuneration are disclosed in note 22. Shareholder Eskom Holdings Ltd is the only shareholder. Eskom Enterprises derived revenue of R747 million (2001: R714 million) and the group revenue was R1 666 million (2001: R1 553 million) from Eskom. 89 Notes to the annual financial statements for the year ended 31 December 2002 37. 37.1 Retirement Benefits The Eskom Pension and Provident Fund is registered in terms of the Pension Funds Act, 1956, as amended.All the employees are members of the Fund. Contributions comprise 20.8% of pensionable emoluments of which members pay 7.3%.The assets of the Fund are held separately from those of the group in respect of funds under the control of the trustees. The last valuation was performed at 31 December 2002.The Fund is actuarially valued annually.The actuarial present value of promised retirement benefits at 31 December 2002 was R21 070 million (2001: R19 584 million), while the fair value of the Fund’s assets at this date was R21 345 million (2000: R20 665 million), indicating an estimated surplus of R275 million (2001: R1 081 million). The principal actuarial assumptions used for actuarial valuation purposes were: Long-term interest rate before tax Salary inflation rate Future pension increases 2002 10.50% 7.10% 6.00% 2001 13.00% 10.30% 8.50% A process is under way to convert the current Eskom Pension and Provident Fund into a defined contribution fund. 37.2 The group has anticipated expenditure in terms of continued contributions to medical aid subscriptions in respect of employees that retire. The estimated present value of the anticipated expenditure, for both in-service and continuation members, was recalculated by independent actuaries at 31 December 2002.An independent actuarial valuation is performed annually. Group 2002 R’000 The amount provided is as follows: Present value of obligation Unrecognised actuarial gain Total provision The principal actuarial assumptions used for actuarial valuation purposes were: Long-term interest rate, % Medical aid inflation, % Investigations are currently being undertaken to restructure the medical aid benefit of employees and to allow for the build-up of a personal post-retirement fund. 2001 R’000 Company 2002 R’000 2001 R’000 131,001 – 131,001 112,554 – 112,554 67,710 – 67,710 55,300 – 55,300 10.5% 8.5% 13.0% 11.0% 10.5% 8.5% 13.0% 11.0% 90 Schedule 1: Investment in subsidiaries, associate and joint venture companies for the year ended 31 December 2002 Company Investment Country of Incorporation Effective holding 2002 2001 % % 100 70 100 100 51 71 100 100 100 100 100 100 100 70 100 100 – 50 100 100 100 100 100 100 Indebtedness Name Subsidiary companies Airborne Laser Solutions (Pty) Ltd Amazing Amanzi Systems(Pty) Ltd Eskom Energie Manantali S.A. Nature of operation Issued/ stated capital R 1 100 1,000 100 1,825 2002 R 1 1 116,279 250,000 4,032,525 2001 R 1 1,500,000 116,279 250,000 – – 100 2002 R 4,630,672 4,998,328 81,769,766 – 26,966,307 81,163,076 252,100 2001 R 4,316,690 3,062,509 11,855,602 4,353,213 – – 1,303,159 – – 101,636,606 313,219,723 – Aerial surveying South Africa Low energy utility devices South Africa Operations and Maintenance Mali Services Nigeria Eskom Enterprises Global West Africa Operations Management Operations and Maintenance Zambia Lunsemfwa Hydro Power Company Services Telecommunications holding Lesotho Mountain Communications (Pty) Ltd company in Lesotho Pebble Bed Modular Reactor Company Reactor-driven generation project South Africa (Pty) Ltd Properties South Africa Rosherville Properties (Pty) Ltd South Africa Rosherville Vehicle Services (Pty) Ltd Transport Construction South Africa Roshcon (Pty) Ltd Maintenance and services South Africa Rotek Industries (Pty) Ltd South Africa Technology Services International (Pty) Technical consulting services Ltd Provision for impairment Total subsidiaries 1,646 132,466,273 100 1 1 1 4,000 100 100 1 1 1 4,000 5,005,129 141,874,311 – 141,874,311 1 – 1 – 1 67,636,606 4,000 330,314,000 5,005,129 – 6,875,512 597,730,855 439,747,502 (1,499,999) (330,064,006) (330,064,006) 5,375,513 267,666,849 109,683,496 Associate & Joint venture companies ariviakom (Pty) Ltd Elgas S.A.R.L EON Solutions Africa ((Pty) Ltd Global Electricity Services Company Golang Coal (Pty) Ltd Hem~Kom Liveline Engineering (Pty) Ltd Mountain Communications (Pty) Ltd South Dunes Coal Terminal (Pty) Ltd Trans-Africa Projects (Pty) Ltd Provision for impairment Total associate and joint venture companies Total subsidiaries, associate and joint venture companies Information Technology Services Gas Energy Telecommunication consulting Maintenance and services Coal exports Live-line maintenance Telecommunications holding company in Lesotho Coal Terminal Transmission projects South Africa Mozambique South Africa Libya South Africa South Africa Lesotho South Africa South Africa 45.06 25 50 49 66.6 50 – 50 50 45.06 25 50 49 66.6 50 50 50 – 109,062,000 8,022,621 50 2,027,880 33,667 900,000 – 109,062,000 8,022,621 50 2,027,880 33,667 900,000 97,155,862 – – – – – – – – – – – – – – – – – – – – – – – – 17,000 17,000 – – 120,063,218 217,219,080 (900,000) – 119,163,218 217,219,080 261,037,529 222,594,593 267,666,849 109,683,496 91 Schedule 2: Share of operations in associate & joint venture companies for the year ended 31 December 2002 Group 2002 R’000 The group’s effective share of balance sheet and income statement items in respect of associate and joint ventures companies are as follows: Associate companies Income statement Revenue Operating expenses Net operating profit Net financing expense Profit before taxation Taxation Net profit attributable to ordinary shareholders Balance sheet Non-current assets Current assets Total assets Reserves Non-current liabilities Current liabilities Total equity and liabilities 2001 R’000 Company 2002 R’000 2001 R’000 652,604 (641,013) 11,591 (1,763) 9,828 3,783 13,611 545,407 (536,552) 8,855 (817) 8,038 (3,195) 4,843 – – – – – – – – – – – – – – 124,011 216,595 340,606 161,453 20,052 159,101 340,606 107,630 197,095 304,725 151,253 9,838 143,634 304,725 – – – – – – – – – – – – – – Joint venture companies Income statement Revenue Operating expenses Net operating profit Net financing income Profit before taxation Taxation Net (loss) / profit attributable to ordinary shareholders Balance sheet Non-current assets Current assets Total assets Reserves Non-current liabilities Non-interest-bearing loan Other Current liabilities Total equity and liabilities 67,819 (66,819) 1,000 288 1,288 (1,937) (649) 97,494 (69,656) 27,838 907 28,745 (6,044) 22,701 36,561 (35,321) 1,240 67 1,307 (508) 799 53,804 (52,900) 904 224 1,128 (45) 1,083 5,616 41,620 47,236 16,366 943 379 564 29,927 47,236 43,451 111,687 155,138 74,789 12,504 – 12,504 67,845 155,138 4,398 20,062 24,460 2,379 593 379 214 21,488 24,460 42,231 85,741 127,972 58,476 12,317 – 12,317 57,179 127,972 92 Power pools and interconnections for the year ended 31 December 2002 93 Eskom Enterprises’ activities around the world (2002) 94 95 Published by Eskom Enterprises Marketing Megawatt Park Maxwell Drive Sunninghill 2157 Telephone + 27 11 800 2696 Postal address PO Box 40712 Cleveland 2022 Website www.eskomenterprises.co.za Luyolo Graphix 011 646 1503 Eskom Enterprises (Pty) Ltd Reg No 1999/002761/07 www.eskomenterprises.co.za