AMEU PresentationPRESENTED BY :

Willie de BeerChief Operations Officer

EDI HOLDINGS

11 October 2004Richards Bay

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Presentation Outline

The technical reality of the current industry

The approach to restructuring

An update on a number of focus areas

Conclusion

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A view of the Technical Reality of the current industry

The estimated replacement cost of national distribution infrastructure is in the order of R84 billionMost 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 yearUnder funding of maintenance within the municipal sector is estimated at being in the order of R500 million per yearThe under funded refurbishment backlog is in the order of R 6.2 billionCustomer satisfaction is on a constant decline. Based on a recent representative customer survey,

53% were unhappy with frequency and duration of power interruptions48% were unhappy with response times to repair faults28% believed that they are not adequately consulted when outages are planned47% 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 performanceBasic maintenance is generally not doneMany 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

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To Consolidate the South African

Electricity Distribution Industry

Into

Six Financially Viable

Regional Electricity Distributors

Industry Vision for Restructuring

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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

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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

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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

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Business Entity Model

The proposed direction will include elements that result in:An accelerated transition where the timing and structure of the transition is predictableAn industry that presents incentives:

Attractive to investorsPromotes sound business practices and behaviourHas clear legal accountability

The ability to operate within a governance framework which, inter alia, allows for:

Effective financial decision making and budgetingUnrestricted borrowing powers within the context of sound business practiceSound investment decisionsNetwork maintenance, refurbishment and expansion planningCustomer service and satisfactionEffective execution of its responsibilities as a service provider

The ability to provide the market with clear tariff signals

Wires Business model

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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

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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 customersCharacteristics

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 REDSelf sustaining

StrategiesHolistic approach to the management of the Retail businessUtilisation 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 ServicesDevelop and Market Products and ServicesAcquire Customer Manage Revenue CycleOptimise Customer Interaction

Valuation Methodology

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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

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There are approximately 30 000 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

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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

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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

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CONCLUSION

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365 – 103 =262

Countdown

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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

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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.

THANK YOUTHANK YOUTHANK YOUTHANK YOU