AMEU Presentation PRESENTED BY : Willie de Beer Chief Operations Officer EDI HOLDINGS 11 October 2004 Richards Bay

01 November 2015ConfidentialSlide 2 Presentation Outline The technical reality of the current industry The approach to restructuring An update on a number of focus areas Conclusion

01 November 2015ConfidentialSlide 3 A view of the Technical Reality of the current industry The estimated replacement cost of national distribution infrastructure is in the order of R84 billion Most of the national networks are between 20 and 40 years old Based on the cost of unserved electricity, the national cost of power interruptions could be between R2.8 and R8.6 billion per year Under funding of maintenance within the municipal sector is estimated at being in the order of R500 million per year The under funded refurbishment backlog is in the order of R 6.2 billion Customer satisfaction is on a constant decline. Based on a recent representative customer survey, 53% were unhappy with frequency and duration of power interruptions 48% were unhappy with response times to repair faults 28% believed that they are not adequately consulted when outages are planned 47% indicated that power quality in the form of low voltage or dips is inadequate An NER survey found that: There is little active management of network performance Basic maintenance is generally not done Many networks are overloaded due to load growth … and more statistics could be quoted to demonstrate that the industry is not in a healthy state and that long term sustainability of the current state is questionable. Source: Africon,April 2004

A reminder of the objective of restructuring the Electricity Distribution Industry

01 November 2015ConfidentialSlide 5 To Consolidate the South African Electricity Distribution Industry Into Six Financially Viable Regional Electricity Distributors Industry Vision for Restructuring

01 November 2015ConfidentialSlide 6 Approach to Restructuring Restructuring process will take place in a controlled manner with minimal risk to ongoing operations.... whilst maintaining sufficient momentum to ensure completion Two non negotiable deadlines as announced by President Mbeki to Parliament on 21 May 2004: First Regional Electricity Distributor will be ready to operate by June 2005 … the whole process of the establishment of these structures will be completed by January 2007

01 November 2015ConfidentialSlide 7 Role of EDI Holdings Company EDI Holdings core role is to plan, control and manage the process of the establishment and implementation of 6 financially viable regional electricity distribution (REDS) companies EDI Holdings will retain effective control over the REDs during the transformation phase through special voting shares As an interim measure, EDI Holdings will manage and facilitate the provision of short-term support in areas where ongoing reliable electricity supply is at risk by utilising existing industry capability and capacity EDI Holdings will prepare and implement an electricity distribution industry-wide social plan to ensure equitable treatment of all employees

01 November 2015ConfidentialSlide 8 What informs our approach There is a government decision on restructuring There is government agreement on six REDs There is government agreement on the spirit and the letter of the co- operative Agreement There is industry enrolment on the broad objectives of the restructuring process The current legislative framework is not an impediment to restructuring, but there are challenges of alignment Government is committed to creating enabling legislative mechanisms for the restructuring process

01 November 2015ConfidentialSlide 9 Business Entity Model The proposed direction will include elements that result in: An accelerated transition where the timing and structure of the transition is predictable An industry that presents incentives: Attractive to investors Promotes sound business practices and behaviour Has clear legal accountability The ability to operate within a governance framework which, inter alia, allows for: Effective financial decision making and budgeting Unrestricted borrowing powers within the context of sound business practice Sound investment decisions Network maintenance, refurbishment and expansion planning Customer service and satisfaction Effective execution of its responsibilities as a service provider The ability to provide the market with clear tariff signals

Wires Business model

01 November 2015ConfidentialSlide 11 The proposed Wires Business Model Purpose of the Wires business: to drive customer satisfaction through safe, efficient and effective distribution of reliable electricity to end customers Characteristics Asset intensive Capital intensive Geographical monopoly Regulated Service provider Strategies Customer focus achieved through availability and reliability of supply and effective communication Adopt an asset management approach to ensure optimisation of the lifecycle value contribution of the asset Process driven through core value chains

Retail Business model

01 November 2015ConfidentialSlide 13 The proposed Retail Business Model Purpose of the Retail business: to provide an end to end customer support and interaction business model that enables effective interaction and service delivery to all customers Characteristics Geographical monopoly for the medium term future (excluding potential contestable customers) Service provider with a range of service offerings to meet the service requirements and expectations of all customer segments within the RED Self sustaining Strategies Holistic approach to the management of the Retail business Utilisation of shared services to obtain economies of scale in a number of generic function e.g. Contact Centres and Account Operations Process driven through core value chains Procure Energy and Network Services Develop and Market Products and Services Acquire Customer Manage Revenue Cycle Optimise Customer Interaction

Valuation Methodology

01 November 2015ConfidentialSlide 15 The transfer of electricity distribution entities to the REDs will take the form of a sale of business. That Depreciated Replacement Cost (DRC) methodology will be applied for the valuation of assets, including the assessment of age and condition of assets for the purpose of take on values for the balance sheet. The Discounted Cash Flow (DCF) be used to value the entire businesses/enterprises in terms of its contribution to the RED, for the purposes of compensation and assessment of viability. That a delicate balance between the needs of the customers (tariffs), the industry (viability) and the shareholders (compensation) be reached to minimise the negative impacts on any one of these stakeholders. That no significant change to the position of any of these stakeholders should occur, e.g. windfall gains/losses to the existing owners. EDI Holdings Position on the Valuation Methodology

Human Capital developments

01 November 2015ConfidentialSlide 17 There are approximately staff in the Electricity Distribution Industry currently, who will be impacted by the creation of REDs A Transitional Labour Relations Committee Establishment Agreement has been agreed to and signed by the following parties: Employer Organisations EDI Holdings Eskom SALGA Organised Labour National Union of Mineworkers National Union of Mineworkers of South Africa Solidarity Trade Union Independent Municipal and Allied Trade Union South African Municipal Workers Union Labour Relations Progress

01 November 2015ConfidentialSlide 18 Purpose of the Agreement: To regulate the way parties deal with one another and take decisions. To promote a sound relationship between the parties. To endeavour to maintain and enhance industrial peace during the period of restructuring. To deal with any other relevant issues that may arise out of the restructuring process Labour Relations Progress (cont.)

Legal and Constitutional Matters

01 November 2015ConfidentialSlide 20 Legal and Constitutional Matters: Plans and Projections Cabinet Memo proposals leading to a redraft of the EDI Restructuring Bill: 20 October 2004 Parliamentary Portfolio Committee meeting Legal status; ownership and governance model: 31 October 2004 Section 78 toolkit is complete and is ready for roll-out to Municipalities MFMA exemption to be published in the Government Gazette by 31 October 2004 Resolve by-laws applicability by 31 December 2004

01 November 2015ConfidentialSlide 21 DME is busy working on the EDI Restructuring Bill. The content of the Bill has to be aligned with the legal strategy for the creation of REDs. The legal strategy for RED creation also considers a mandatory approach to current electricity distribution participation. Progress on EDI Restructuring Bill

01 November 2015ConfidentialSlide 22 CONCLUSION

01 November 2015ConfidentialSlide – 103 =262 Countdown

01 November 2015ConfidentialSlide 24 Our Approach moving forward EDI Holdings does not underestimate the complexity of moving the industry forward to a point of RED establishment and longer term industry viability. International research and experience points to a number of common reasons for the failure of large scale industry restructuring, including: Failure to maintain focus on the customer Overestimation of synergies Poor cultural fit Inability to transfer skills Lack of vision and strong leadership Loss of momentum or focus Flight of talent/knowledge capital Organisational confusion and division Inadequate emphasis on pace of change Inadequate attention paid to sound governance

01 November 2015ConfidentialSlide 25 Our Approach moving forward Given the challenges facing the industry and the enormity of the task of restructuring an industry of this magnitude, it must be stated that EDI Holdings is committed to the fulfilment of its mandate to create a sustainable electricity distribution industry serving the best interests of all the people of South Africa, and in particular, the electricity customers. To this end a vigorous Programme Management approach has been adopted to ensure delivery. We look forward to the continued support of the AMEU in the pursuit of the achievement of a viable and sustainable electricity distribution industry in South Africa.

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