11.1 Assumptions

The financial plan is based on the following key assumptions:

11.1.1 All forecasts are based on June 2001 base line
11.1.2 Sales growth of 2% per annum
11.1.3 Tariff increase of 5.5% per annum
11.1.4 Energy purchase price increase of 5.5% per annum
11.1.5 Technical losses of 6% per annum
11.1.6 Non-technical losses reduce by 3% per annum (Base 18%= June 2001)
11.1.7 Free electricity will not be implemented in this planning cycle
11.2 Sales Projections

The sales projection for the company is given below:

The increase in sales is attributed to the following:

• Base growth in consumption of 2%
• Improved management of non-technical losses (5% in 2002 and 8% in 2003)

11.3 Revenue Model

11.3.1 Tariff Increases

• National Electricity Regulator (NER) has indicated that the overall increase in revenue, from the sale of electricity, should not exceed 5,5% for the 2001/2002 financial year.

• In accordance with the decision by the Demarcation Board certain areas of Midrand and Modderfontein will be incorporated into the City of Johannesburg's municipal area as of July 2001. Midrand has, as a former independent municipal authority, applied its own schedule of tariffs to consumers falling within its defined boundaries. Similarly, Modderfontein, which formed part of the Edenvale / Modderfontein municipal authority, also promulgated its own tariff schedule.

  Both these schedules of tariffs are different in the rates charged, the categories of consumers and the tariff structures, when compared to each other and to those now applicable to City of Johannesburg consumers. If the consumers of these two areas were to be immediately subjected to the same proposed tariffs and structures, as those of existing City Power consumers, the increases would be punitive, particularly for non-domestic consumer and this would place undue financial burden on certain category of consumers.

  In addition, the NER has indicated that gradualism should be applied when adjusting tariffs following the incorporation of new areas into the existing service territory. It is, therefore, proposed to phase the new tariffs amendments in over a period of several years, thereby lessening the financial impact on consumers, with a view to developing a single set of tariff schedules, applicable to all consumers, within five years.

11.3.2 Tariff Cost Reflectivity
The table below demonstratives the gap between cost reflective tariffs and current tariff structure. (Difference between revenue and direct costs plus operating expenditure)

11.3.3 Revenue
The projected income for City Power over the planning period is given below:

Revenue Forecast

The above figures are based on a 2% per annum sales increase, a 5.5% per annum increase in tariffs and a reduction of non-technical losses

11.4 Capital Expenditure

The capital expenditure for City Power over the planning period is given in table below:

Capital expenditure decreases in real terms over the six-year forecast term. The capital forecast as alluded to is a reflection of the capital requirements for the short to medium term as to ensure continuing and improved service delivery standards.

The main headings of capital expenditure are as follows:

11.5 Operating Expenditure

The operating expenditure for City Power is given in the table below

Operating Expenditure

The increase of approximately 39% on labour cost in the year 2002 is a reflection of the cost of corporatisation the former electricity department. Being a separate operationally independent entity the company has to provide for the entire spectrum of financial services, customer services, internal audit, secretarial and legal services as well as payroll functions. These functions are currently provided for by the shareholder.

The main components of the increase in labour expense are:

• Capacitation of new functions R 28 m
• Staff incentive scheme R 10 m
• Inflation R 9 m
• Salary parity R 16 m
• Total R 64 m

The addressing of parity issues and incentivisation of staff that we believe to be a key component in maximizing output from our staff in achieving our goals. The labour cost projections reflect a declining trend in real terms after year 2003 and will be sped even further with planned right-sizing exercises.

The increase in general expenses are attributable to the following:

• Fleet outsourcing R 30 m
• Systems implementation R 18 m
• Training and development R 11 m
• Staff reduction costs R 15 m
• Inflation R 11 m
• Reduction Council Charge R (9) m
• Total R 76 m

The benefit of the once-off expenses such as systems implementation and staff reduction costs can be seen in the reduction to R 229m year 2004 in this particular category of expenditure.

11.6 Profit and Loss Account

The profit and Loss Account for City power is given in table 14 below:

Table 14: Profit and Loss Account

• Profit after tax reflects a growing margin which is in with the strategic objective of achieving sustainable profit at the end June 2003. The effect on retained earnings of the cash payment to the shareholder is reflected clearly. The situation is however expected to turn itself around in 2007 when the total dividend will be paid out of profit and not cash based as is the situation for the first five years of operation.

• Bad debts provision is calculated on 6.5 % p.a. on the value of turnover.

• Taxation in the projections is based on normal Corporate Tax Rates; as per the Income Tax Act. The current standard tax rate is 30%. Deferred taxation has also been calculated. The tax structuring of the projected transfer payment or "dividend" is to be investigated. Tax benefits may arise in terms of such structuring but cannot be quantified at this stage.

• Interest on shareholder loans except for the R 800m loan (see Risk Analysis) is charged at an effective rate of 15 % per annum.

• Interest on the bank overdraft is calculated at 15% per annum nominal.

11.7 Balance Sheet

The balance sheet for City Power is given below.

• Return on assets project steady growth. Debtor's balances are reduced with the increased emphasis on debt collection. The initial increase in debtors from the opening position as at 1 July 2000 to 30 June 2001 is due to the fact that the issue around the finalisation of the "Accounting Date" has not yet been resolved.

  No efficiency improvement in terms of the reduction of collection of debt has been assumed for this period. Subsequent to year 2001 a substantial reduction in debtors balance is noted due to such improvements taking effect. Liabilities due in more than one year reflects the increased borrowings for capital expenditure, which is necessitated due to the unavailability of "surplus cash" to fund such.

• Debtors days is projected to reduce from 156 days in year 2001 to 90 days in 2002, 60 days in year 2003 and 45 days thereafter.

• Internal borrowings of some R 800 m on the opening balance sheet has been reclassified as an interest free shareholders loan.

11.8 Cash Flow Requirements and Funding Requirements

Despite the quite stringent shareholders' expectations as reflected in the statement, net cash increases steadily over the forecast period. Gearing rises considerably but it must be borne in mind that virtually all take-over long-term liabilities are owed to the shareholder.

11.9 Sensitivity Analysis

• It is imperative that revenue targets be achieved due to the sensitivity of the business largely being cash based. Achieving revenue targets should be a combined effort between ourselves in terms of the Top 20000 customers as well as the City which will administer and collect debt on our behalf of some 30% of our revenue base. Service Level Agreements therefore will need to reflect these inter dependencies in achieving our objectives and goals.

• Sensitivity is also not restricted to revenue but also expenditure although to a lesser extent. A one percent increase in our energy bill relates approximately to an R 14m increase in expenditure. We therefore need to monitor and anticipate expenditure trends very carefully and establish their impact fully, should the underlying assumptions change during the year(s) of forecast.