Presented by: P Nzimande CEO - EDI Holdings 19 November 2003

11

Presented by: P Nzimande

CEO - EDI Holdings

19 November 2003

Notes

22

Presentation OutlinePresentation Outline

History of Restructuring

Challenges Facing the Industry

Vision of Restructuring

Main Features of The Blueprint

Maps of REDs

Restructuring Process

REDs Characteristics

Effects On Stakeholders

EDI Holdings Company and Role

Co-operative Agreements

Key Milestones

Benefits of Restructuring

Short-term Objectives

Risks

Conclusion

33

History of RestructuringHistory of Restructuring

Early 1990s 1997 1999 End 1999 April 2000 Aug 2000

Considerable Debate over EDI

RED s Approach EndorsedERIC Report

Cabinet ApprovedStart of Restructuring Process

EDIRC Established Appointment of

PWC

Blue Print Blue Print Approved by Cabinet: May 2001Approved by Cabinet: May 2001

Blueprint Submitted to EDIRC

44





Maps of REDs






Key Milestones



Risks

Conclusion


55

EskomDistribution

EskomDistribution

40%

60% 60%

40%

Current SituationCurrent Situation

PERCENTAGE OF CONSUMERS

234 Municipalities

234 Municipalities

SALES VOLUME

EskomDistribution

EskomDistribution

234 Municipalities

234 Municipalities

66

Current industry structure is highly inefficient owing to fragmentation

Inadequate maintenance of networks

Inability to supply electricity to the indigent

Unequal treatment of consumers across the country

Significant disparities in tariffs

Current industry structure is highly inefficient owing to fragmentation

Absence of economies of scale in respect of investing in assets, sharing of facilities, services, regulation, people development etc.

Limited opportunity to introduce competition

Challenges Facing the IndustryChallenges Facing the Industry

77





Maps of REDs






Key Milestones



Risks

Conclusion


88

To Consolidate the To Consolidate the South African South African

Electricity Distribution IndustryElectricity Distribution Industry

Into Into

Six Financially ViableSix Financially Viable

Regional Electricity DistributorsRegional Electricity Distributors

Vision of RestructuringVision of Restructuring

99





Maps of REDs






Key Milestones



Risks

Conclusion


1010

Six REDS

Creation of EDI holdings

EDI holdings to have effective control over REDS

Human Resources Planning including Social Plan

RED ownership

Cost reflective tariffs

Prices to poor households to be capped

Local government levy on electricity prices

Main Features of Blue PrintMain Features of Blue Print

1111

Special deals for large industry to be honoured

Mitigate the required increase in tariffs

Electrification to continue

Competition for large customers

Regulation of EDI

Transitional support to the weakest distributors

Support from EDI Holdings for the restructuring

process

Main Features of Blue Print (Cont..)Main Features of Blue Print (Cont..)

1212





Maps of REDs






Key Milestones



Risks

Conclusion


1313

Rationale For BoundariesRationale For Boundaries

Size

Ensuring economies of scale

To ensure benchmarking

Critical mass in the competitive wholesale electricity market

Balance

Urban / rural balance

Rural electrification

Customer numbers (700 000 – 1.4m rising to 1.1m – 2.4m)

Load mix (domestic consumption which is the key driver of customer service costs, is balanced)

Assets employed (line length and transformer capacity per customer)

Income per household

1414

Implementation costs

Minimization of network re-configuration requirements

Contain at least one existing distribution control centre

Contain at least one work management centre, one call centre and a reasonable distribution of local stores / depots

Do not violate significant geographical boundaries / features

Financial viability

Each RED must be able to fund their:

On-going operations

Required new capital

Service debt to a gearing level of up to 70%

Earn a reasonable return on equity on the business

Rationale For BoundariesRationale For Boundaries

1515

Preferred option - Six REDs

4

2

56

DURBAN

PORT ELIZABETHCAPETOWN

BLOEMFNTN

PRETORIAJOHANNESBURG

3

1

5

4

6

2

PIETERMARITZBURG

EASTLONDON

PREFERED OPTION - SIX REDSPREFERED OPTION - SIX REDS

1

6

4

2

3

5

1616

East RandEast Rand

Bloemfontein Pietermaritzburg

Witbank

Durban Durban

Port ElizabethPort ElizabethCape TownCape TownCape TownCape Town

JohannesburgJohannesburg

PretoriaPretoria

Calvinia

Upington

Vryburg

Prieska

Rustenburg

Kroonstad

Lichtenberg

Pietersburg

Kimberley

Nelspruit

Lydenburg

Harrismith

De Aar

Newcastle

Bergville Richards

Bay

Ulundi

Umtata

East London

Graaf Reinet

Victoria West

PretoriaPretoria

JohannesburgJohannesburg

4

5

2

52

1

3

6

6

4

Household income less than R15,000 per yearDistrict Management Areas (few customers)

Large Industrial Customers

Customers (000’s) 1008Load (TWh) 28Electrified (%) 60


RED 6RED 6



RED 5RED 5



RED 3RED 3



RED 4RED 4



RED 2RED 2



RED 1RED 1

Gauteng area enlarged

East RandEast Rand

2

2020





Maps of REDs






Key Milestones



Risks

Conclusion


2121

May 01 June 03 18 Months 24 Months 24 Months +-6 Months

Restructuring ProcessRestructuring Process

BluePrint

Establish Holding

Company

Planning andRing fencingOf EDBs

Establish REDs

SupportAndOversee REDs

Phasing OutOf

HoldingCo

Stakeholder Management

EDIR Project Office EDI Holdings

EDIRC EDI Holdings Board

2222

restructuring process will take place in a controlled manner

with minimal risk to ongoing operations

.... whilst maintaining sufficient momentum to ensure

completion

Restructuring Process (Cont..)Restructuring Process (Cont..)

2323





Maps of REDs






Key Milestones



Risks

Conclusion


2424

REDs will be owned by asset contributors transferred to the RED through a share scheme and are subsidiaries of the Holdings Company

Eskom assets contributed to the REDs would be held by National Government provided this has no effect on Eskom’s credit rating

For the businesses transferred into a RED, the RED will

be service providers of electricity and Municipalities are service Authorities

have its own Board appointed by shareholders

be registered under the Companies Act

hold distribution licenses

comprise employees working for Municipal distributors and Eskom distribution transferred to the REDs

On day one REDs will be similar but will subsequently diversify

Municipalities not yet transferred will

be customers of the REDs


Business as usual

REDS Characteristics [transition]REDS Characteristics [transition]

2525

REDs will be owned by asset contributors through a share scheme

Eskom assets contributed to the REDs would be held by National Government provided this has no effect on Eskom’s credit rating

REDS will :

be service providers of electricity and Municipalities are service Authorities

have its own Board appointed by shareholders

be registered under the Companies Act


comprise all employees working for Municipal distributors and Eskom distribution

REDs Characteristics [post transition]REDs Characteristics [post transition]

2626

REDs Characteristics [shareholding]REDs Characteristics [shareholding]

National Government

Golden Share

Reducing

EDI Holdings

Municipalities

Voting Share

Dividend Shares

Reducing

Increasing

5 Year-period

2727





Maps of REDs






Key Milestones



Risks

Conclusion


2828

MUNICIPALITIES

current surplus earned from the provision of electricity to be assured through the levy and dividends

required to ring-fence electricity business

assets contributed will represent value of shareholding in the REDS

govern the provision of electricity through the service delivery agreement

SALGA will have representation on EDI Holdings Board

ESKOM

separate and ring-fence distribution business into six regions

assets contributed to REDS will be compensated

may choose to be a contestable market retailer

ESKOM will have representation on EDI Holdings Board

Effects on StakeholdersEffects on Stakeholders

2929

EMPLOYEES

employees involved in electricity distribution businesses of municipalities and ESKOM will be transferred to REDS in terms of section 197 of the Labour Relations Act

no change to their conditions of service unless collectively negotiated

Conditions for redeployment will be collectively negotiated

a national bargaining council will be established

focus on skills development and utilisation

a social plan will minimise negative effects to employees as a result of the restructuring

CUSTOMERS

standardised tariff structures will apply

rationalised tariffs

initially those consuming more than 100 GWh per annum will be entitled to select retailer of choice

improved reliability of supply

continued roll-out of electrification schemes

Poor residential customers will be subsidized

Effects on Stakeholders (Cont…)Effects on Stakeholders (Cont…)

3030

Restructuring of the Financial Operations

In the process of RED establishment, the objective is to maintain smooth financial operations. This will be done through:

Maintaining internal financial controls

Maintaining financial reporting capabilities

Planned and structured transfer of financial accountabilities and responsibilities

Maintaining compliance with corporate governance principles

Avoidance of the loss of essential financial skills and experience

3131

Role of EDI Holdings Financial Operations

In the process of RED establishment the role of EDI Holdings Financial Operations will be:

To develop asset evaluation methodologies and principles

To develop financial ringfencing tools and project manage this process

To model the financial viability of REDS

To prepare RED financial plans and business plans

To develop RED financial reporting systems

3232

Role of EDI Holdings Financial Operations cont…

In the process of RED establishment the role of EDI Holdings Financial Operations will be to cont…:

To develop RED financial policies and procedures

To develop RED commercial polices and procedures

To develop EDI funding strategies and to obtain funding

To plan the structured transfer of financial operations to REDS

To manage EDI Holdings financial operations

3333

Impact on Municipal Financial Operations

In the process of RED establishment the role of Municipal Financial Operations will be:

To provide financial services until the REDS have taken over financial operational accountabilities and responsibilities

To ringfence the electricity distribution business

To undertake data clean-up of the electricity distribution business’s customer base, financials and asset register

To provide shared services to the RED as agreed upon in a negotiated SLA

To revise commercial processes

To revise commercial contracts

To transfer customer base, financials and asset register data to the RED

3434

Impact on Municipal Finances

Loss of Revenue

Surplus will be ensured through dividend and levy

Levy currently inherent in municipal tariffs, to be made transparent

Discussions with National Treasury underway on how to deal with this matter

Challenge

Impact on cashflow

3535


The loss of surpluses generated from electricity distributing activities

The loss of cash flow

Reduced effectiveness of credit control

Effect on municipal borrowing; and

The costs of restructuring

3636


The effects of corporate taxation

The differentiation between fair return on capital and monopoly rent

Entitlement to surpluses

The impact on municipal cashflows of in the short to medium term; and

Municipalities ability to borrow

3737





Maps of REDs






Key Milestones



Risks

Conclusion


3838

100% owned by national government through the Department of

Minerals and Energy Ministry

Board representation - SALGA , ESKOM & GOVERNMENT- 3 non-

executive directors each and 3 independent non-executive

directors

CEO, COO and CFO

Led by a competency based board

Essentially operating as a project management company to be

phased-out in five years

EDI Holdings CompanyEDI Holdings Company

3939

Plan, control and manage the process of the establishment and

implementation of 6 independent and financially viable regional

electricity distribution (REDS) companies

Will retain effective control over the REDs through special

voting shares

Manage the provision of short-term support by strong and

capable electricity providers

Prepare and implement an electricity distribution industry-wide

social plan

Role of EDI Holdings CompanyRole of EDI Holdings Company

4040

Advocate Sandile Nogxina-DG, DME (Chairperson)

Ms Nelisiwe Magubane-DDG (Electricity & Nuclear), DME

Ms Thoko Mashiane-Municipal Manager Ehlanzeni District

Council (SALGA)

Mr Thabo Mokoena-CEO, SALGA

Dr Stephen Lennon-ESKOM

Mr Jacob Maroga-ESKOM

Ms Dolly Mokgatle-ESKOM

EDI Holdings Board MembersEDI Holdings Board Members

4141

Dr Zavareh Rustomjee-IUG

Mr Clive Dunstan-IMATU/FEDUSA

Mr Oupa Komane-COSATU

Ms Judy Parfitt-Resolve Group (Independent)

Mr Ashley Ally-LAETOLI (Independent)

Ms Annalise Jacobs-ABSA (Independent)

Ms Phindile Nzimande-CEO

EDI Holdings Board Members (cont..)EDI Holdings Board Members (cont..)

4242





Maps of REDs






Key Milestones



Risks

Conclusion


4343

To legislation the parties have agreed that they

shall enter into a co-operative agreement that will

enable the Holdings company to achieve its

mandate of restructuring the electricity

distribution industry facilitate the restructuring in

the absence of enabling

Rationale Rationale

4444

To bind the signatories to the process of restructuring

To enable the Holdings company to interact with the

signatories as autonomous entities in the industry

To facilitate the material assistance to EDI Holdings by

industry

PurposePurpose

4545

Consent of the parties to the restructuring process

Definition of how Eskom and Municipalities must ring-

fence their distribution activities to advance the

restructuring of the industry

Framework for provision of resources to Holdings

company

Contents Contents

4646

the co-operative agreement has been entered into and

signed by the following parties: DME, SALGA, Eskom, NER,

EDI Holdings

individual municipalities are required to accede to the

agreement once their councils have agreed to signing the

co-operative agreement

StatusStatus

4747





Maps of REDs






Key Milestones



Risks

Conclusion


4848

Blueprint approved by Cabinet [April 2001]

Co-operative Agreement Signed [May 2002]

Registration of EDI Holdings Company [March 2003]

EDI Holdings operational [July 2003]

Business plan and budget to be approved [October

2003]

Key MilestonesKey Milestones

4949





Maps of REDs






Key Milestones



Risks

Conclusion


5050

A consolidated industry capitalising on economies of

scales

Financially viable distributors

Competitive electricity distribution utilities

Rationalised and competitive tariffs

Efficient provision of service

Improved reliability of supply

Continued roll-out of new electrification schemes.

Cross pollination of best practices between utilities

Benefits of RestructuringBenefits of Restructuring

5151





Maps of REDs






Key Milestones



Risks

Conclusion


5252

Boundaries

Valuation method

Compensation methodology

Ring-fencing toolkit for Municipalities

Restructuring Bill

Short-term ObjectivesShort-term Objectives

5353





Maps of REDs






Key Milestones



Risks

Conclusion


5454

Timeline

Outstanding Issues

Complexity

Thought processes, biases, skills and passion

Handover

RisksRisks

5555





Maps of REDs






Key Milestones



Risks

Conclusion


5656

WE need the SUPPORT of all KEY STAKEHOLDERS to

make this electricity distribution industry restructuring

exercise an unqualified success, especially the political

leaders at local government level- we need buy in from

Mayors

We will approach your individual councils to formulate

council resolutions to accede to the Co-operative

Agreement

Contact Phindile Nzimande

011 800 2259

082 464 9617

ConclusionConclusion

5757

THANK YOUTHANK YOU

Documents

Presented by: P Nzimande CEO - EDI Holdings 19 November 2003