TRANSNET PETROLEUM PIPELINES’ SYSTEM TARIFF APPLICATION ... · PDF filetransnet petroleum pipelines’ system tariff application for the 2015/16 tariff year licence number: ppl.p.f3/20/1/2006

TRANSNET PETROLEUM PIPELINES’ SYSTEM TARIFF APPLICATION

FOR THE 2015/16 TARIFF YEAR

Licence number: PPL.p.F3/20/1/2006

Table of Contents

Abbreviations and Acronyms ................................................................................... 6

1 Executive Summary ........................................................................................ 9

2 Background ................................................................................................ 13

3 NERSA Specific Requests ................................................................................ 14

3.1 A schedule of scope, cost and schedule of R23.4 billion estimated project cost and the R2.3 billion increase approved by the Transnet Board. ................................... 14

3.2 An analysis of the R2.3 billion increase in project cost between efficient and inefficient Processes/Decisions. ............................................................................ 14

3.3 The detail relating to the NMPP deferred scope. ............................................ 14

3.4 An explanation why the Tightlining and client costs will not be a sunk cost. .......... 14

3.5 A schedule of legal claims against NMPP and NMPP claims against service Provider. 14

3.6 The assets at TM1 that will be operationalised with tightlining, including costs. ...... 15

4 Approach ................................................................................................... 15

5 Regulatory Asset Base (“RAB”) ......................................................................... 16

5.1 Property, Plant, Vehicles & Equipment (V) ................................................... 17

5.1.1 Indexation ................................................................................ 20

5.1.2 Useful Lives .............................................................................. 20

5.1.3 Assets to be decommissioned ......................................................... 20

5.2 The Levy ........................................................................................... 21

5.3 AFUDC ............................................................................................. 21

5.4 F–Factor ........................................................................................... 23

5.5 Net working capital (w) ......................................................................... 23

5.6 Deferred Tax (dtax) .............................................................................. 24

6 Weighted Average Cost of Capital (WACC) ........................................................... 25

6.1 Capital Structure ................................................................................. 26

6.2 Cost of Equity ..................................................................................... 28

6.2.1 Risk free rate ............................................................................ 29

6.2.2 Market risk premium ................................................................... 29

6.2.3 Beta ....................................................................................... 29

6.2.4 Real cost of equity calculation ........................................................ 30

6.3 Cost of Debt ....................................................................................... 30

6.4 WACC .............................................................................................. 30

7 Expenses ................................................................................................... 31

7.8.9 Transnet Corporate Overheads ....................................................... 37

8 Income Taxation .......................................................................................... 41

9 Depreciation ................................................................................................ 42

10 F-Factor ..................................................................................................... 45

11 Clawback ................................................................................................... 45

11.1 Clawbacks relating to the 2013/14 tariff period ............................................. 47

11.1.1 Allowable Revenue adjustment ....................................................... 47

11.1.2 Expense adjustment – Operating and Maintenance Expense adjustment (EA) 48

11.1.3 Operating efficiency adjustment (OeA) .............................................. 48

11.1.4 Value of new operating property, plant, vehicles and equipment Adjustment (PPE-d)A .................................................................................. 50

11.1.5 Depreciation and amortisation of inflation write-up adjustment (DA) .......... 51

11.1.6 Total WACC and Debt ratio adjustment for 2013/14 .............................. 52

11.2 Clawbacks relating to the 2014/15 tariff period ............................................. 52

11.2.1 Value of new operating property, plant, vehicles and equipment Adjustment (PPE-d)A ................................................................................. 52

11.2.2 Depreciation and amortisation of inflation write-up adjustment (DA) .......... 53

12 Allowable Revenue (AR) Calculation ................................................................... 54

13 Volumes..................................................................................................... 55

14 Tariffs ....................................................................................................... 56

15 Conclusion .................................................................................................. 58

16 Regulatory Financial Statements........................................................................ 59

17 Annexures .................................................................................................. 63

List of Tables

Table 1: Allowable Revenue Summary ...................................................................... 11

Table 2: Assumption Variables ............................................................................... 12

Table 3: Calculation of total 2015/16 RAB .................................................................. 17

Table 4: NMPP Phase 1 operational dates and capitalisation values .................................... 19

Table 5: 2015/16 Asset Additions and Trended Original Cost ........................................... 19

Table 6: Levy Schedule......................................................................................... 21

Table 7: Calculation of AFUDC ................................................................................ 22

Table 8: Working Capital ....................................................................................... 24

Table 9: Deferred Tax .......................................................................................... 24

Table 10: WACC Calculation ................................................................................... 25

Table 11: Debt ratio calculation for the 2013/14 tariff period ........................................... 26



Table 14: Beta calculation ..................................................................................... 29

Table 15: Real cost of equity .................................................................................. 30

Table 16: Summary of TPL Regulated Petroleum Expenses.............................................. 31

Table 17: Salary and Wages Analysis ........................................................................ 32

Table 18: 2015/16 Decommissioning Provision ............................................................ 37

Table 19: Transnet Corporate Overhead Allocated to TPL ............................................... 39

Table 20: Transnet Corporate Overhead Allocated to TPL Petroleum Pipeline Business ............ 40

Table 21: Miscellaneous Expenses ........................................................................... 41

Table 22: Tax .................................................................................................... 42

Table 23: Depreciation ......................................................................................... 43

Table 24: Summary of depreciation and amortisation of inflation write up for tariff years 2013/14 to

2018/19 ........................................................................................................... 44

Table 25: Summary of clawback .............................................................................. 46

Table 26: Sources of clawback ................................................................................ 47

Table 27: Expense adjustment ................................................................................ 48

Table 28: Decommissioning provision adjustment ......................................................... 48

Table 29: Operational efficiency adjustment ............................................................... 49

Table 30: (PPE-d)A for 2013/14 .............................................................................. 51

Table 31: 2013/14 WACC and debt ratio adjustment ..................................................... 52

Table 32: (PPE-d)A for 2014/15 .............................................................................. 53

Table 33: Allowable Revenue ................................................................................. 54

Table 34: Volume data ......................................................................................... 55

Table 35: 2015/16 Distance for various destinations based on the simple average basis .......... 56

Table 36: Rolled-in Tariff Factor .............................................................................. 57

Table 37: 2015/16 Petroleum Pipeline Tariffs .............................................................. 57

Abbreviations and Acronyms

AaOC Actual average operating cost

AFUDC Allowance for funds used during construction

AR Allowable revenue

BER Bureau for Economic Research

CAM Cost Allocation Manual

CPI Consumer price index

CPIf Consumer price index forecast

CWIP Capital work in progress

D Depreciation and amortisation of inflation write-up

d Accumulated depreciation and accumulated amortisation of inflation write-up

DJP Durban to Johannesburg Pipeline

DoE Department of Energy

DSCR Debt service cover ratio

dtax Deferred tax

Dt Debt

DTD Draft Tariff Determination

E Expenses: maintenance and operating for the tariff period under review

EaOC Estimated average operating costs

EBIT Earnings before interest and taxes

Eq Equity

F Projected revenue addition to meet debt obligations for the tariff period under review

GA General adjustment

GDP Gross Domestic Product

Kd Cost of debt

KdA Cost of debt adjustment

Ke Cost of equity

LE Latest Estimate

MAC Main automation contract

MIRTA Minimum information required for tariff application

MR Market return

MRP Market risk premium

NERSA National Energy Regulator of South Africa

NMPP New Multi-Product Pipeline

NRBTA Net revenue before tax allowance

OEA Operating efficiency adjustment

Opex Operating and maintenance expense

OpexE Operating efficiency

PPE Property, plant, vehicles and equipment

PPI Producer Price Index

RAB Regulatory asset base

Rf Risk-free rate of interest

RfD Reasons for Decision

Rft The average monthly marked-to-market real risk-free rate of interest for the

preceding period indicated

RFR Regulatory Financial Reports

RRM Regulatory Reporting Manuals

RRS Regulatory Reporting System

SRAB Starting regulatory asset base

T Tax expense

t Prevailing corporate tax rate of the licensee

TCP Transnet Capital Projects

Tff(s) Tariff(s)

TOC Trended original cost

TPL Transnet Pipelines

V Value of operating property, plant, vehicles and equipment

w Net working capital

WACC Weighted average cost of capital

WA β Weighted average β of the proxy firms’ asset betas

beta: The systematic risk parameter for regulated entities providing pipeline, storage

and loading facility services

9

1 Executive Summary

Transnet SOC Limited (“Transnet”) submits its 2015/16 Petroleum Pipeline System Tariff

Application (the Application) in terms of section 28 (3) of the Petroleum Pipelines Act, 2003 (Act

No. 60 of 2003) (“PPA”). This Application has been guided by the National Energy Regulator of

South Africa’s (“NERSA”) “Tariff Methodology for the Setting of Tariffs in the Petroleum Pipelines

Industry, 6th Edition” approved 29 July 2013 (“Methodology”) and “Frequently Asked Questions

(FAQ): Tariff Methodology for the Setting and Approval of Tariffs in the Petroleum Pipelines

Industry, Version 4, approved on 29 July 2013” (“FAQ”). Furthermore, Transnet has

endeavoured to meet NERSA’s Minimum Information Required for Tariff Applications (“MIRTA”),

based on the level of detail of information available and the flexibility of the MIRTA templates,

which is filed with this application. Projected financial statements for the ring-fenced Petroleum

Pipelines business for the periods 2014/15 to 2018/19 have been provided. Refer to Section

16 for the income statement, balance sheet and cash flow statements.

Transnet have decided not to file a multi-year tariff application at this stage due to the project

schedule already being impacted by excessive inclement weather, strikes, vandalism, additional

scope, design engineering, accumulator tank failure and continued poor productivity of the

contractor.

The Application has been prepared on the basis of:

Both the Durban to Johannesburg Pipeline (“DJP”) and the 24 inch trunk line being in

operation for the full 12 months of the 2015/16 tariff period.

Coastal terminal (“TM1”) excluding tanks (hereafter referred to as “Tightlining”) at

Island View Durban) being put into operation on 31 March 2016 i.e. the 2016/17 tariff

year.

TM1 (including all five tanks as per licence conditions para 1.1(d)) being put into

operation on 31 March 2018 i.e. 2018/19 tariff year.

Inland terminal (“TM2”) at Jameson Park being put into operation on 30 September

2015 i.e. the 2015/16 tariff year.

Cost relating to the Close Out of the NMPP pipelines and pumpstations completed on

30 September 2015 i.e. 2015/16 tariff year.

Deferred scope of the project (refer to Annexure 3 for detailed breakdown)

completed by 30 September 2017 i.e. 2017/18 tariff year.

10

In arriving at the 2015/16 Allowable Revenue (“AR”), Transnet has adhered to the PPA, the

Regulations made thereunder and the methodology.

Transnet has used as its base the 2006 Starting Regulatory Asset Base (“SRAB”) as set by NERSA

in calculating property, plant, vehicles and equipment for the Application. This SRAB, was

trended for the years 2008/09 and 2009/10 in line with the PricewaterhouseCoopers (“PwC”)

Report and consequently the 2009/10 RAB as determined by Transnet and approved by NERSA

has been loaded into the Regulatory Reporting System (“RRS”). Transnet has further adjusted

the 2012/13 closing values of property, plant, vehicles and equipment for clawbacks relating to

that year as calculated by NERSA in the Transnet SOC Limited Petroleum Pipelines System

2014/15 Tariff Determination (“2014/15 Tariff Determination”). This amount has subsequently

been trended to arrive at the 2015/16 property, plant, vehicles and equipment revalued net

book value.

As indicated above, TM2 will be brought into operation in the 2015/16 tariff period (30

September 2015) and Tightlining will brought into operation in the 2016/17 tariff period (31

March 2016). Phase one of the NMPP is scheduled to be completed in the 2018/19 tariff period,

including all five tanks at TM1 as per licence conditions para 1.1(d), being placed in operation

on 31 March 2018.

Clawback for the 2015/16 tariff period includes:

TM2 (time and value); and

Other pipeline and non-pipeline assets (time and value).

Transnet has dealt with the accounting treatment of the proceeds from the levy according to

the Grant Funding Agreement between the Government of the Republic of South Africa and

Transnet SOC Limited and further in accordance with the Draft National Energy Regulator

Decision on the Accounting treatment for Construction Works in Progress (CWIP) of

Property, Plant and Equipment (Plant) with specific reference to Transnet’s New Multi-

Product Pipeline (NMPP) and the proposed financial assistance by government to be

used by Transnet Pipelines to partially fund the NMPP, dated 27 November 2009.

The proceeds from the levy for which the final tranche was received at the end of March 2013,

have been recorded in a deferral account and used to offset the Allowance for Funds Used

11

During Construction (“AFUDC”) related to the NMPP project costs. As the final costs for the

NMPP project is planned for the 2018/19 tariff period, the balance in this deferral account (net

between AFUDC and the Grant Funding) is transferred to the Regulated Asset Base (“RAB”) in

this tariff period.

Transnet does not qualify for an F- factor at 2 times the debt service cover ratio (“DSCR”) due

to the lower gearing attributable to the phased-in capitalisation of assets over a period of time

(Refer to Section 6.1). The requirements for the F-Factor are dealt with in Section 10 of the

Application.

Transnet requests that NERSA reviews the application of its Methodology with regards to the

corporate overhead costs. Transnet places important emphasis on this, as based on the 2013/14

actual results, there has been significant under recovery of corporate overhead costs allocated

to Transnet’s petroleum pipelines business. Refer to Section 7.8.9 for more detail.

Given the above, Transnet files for a revenue requirement of R3,395.43 million for the 2015/16

tariff period, a 15.58% increase in revenue from the 2014/15 AR of R2,937.74 million as was

set by NERSA.

The AR calculation based on the above detail is reflected in the table below.

Table 1: Allowable Revenue Summary

2014/15 RfD 2015/16 2016/17 2017/18 2018/19

R million

WACC Return on RAB 1,306.67 1,379.09 1,896.65 2,055.08 2,416.44

Expenses 948.95 1,220.24 1,355.26 1,465.67 1,564.54

Depreciation 476.08 530.88 727.29 780.92 918.77

Clawback (333.53) (312.01) 0.00 0.00 0.00

F-Factor 0.00 0.00 0.00 0.00 0.00

Profit before Tax 2,398.19 2,818.20 3,979.20 4,301.67 4,899.75

Notional tax 539.57 577.23 794.86 872.25 1,032.23

Allowable Revenue 2,937.74 3,395.43 4,774.06 5,173.92 5,931.98

Where:

RfD = Reasons for decision

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The application further includes a section relating to specific questions raised by NERSA

regarding the NMPP project, which can be found in Section 3.

The application is derived from the following variables:

Table 2: Assumption Variables

2014/15

RfD 2015/16 2016/17 2017/18 2018/19

Weighted Consumer Price

Index (%) 5.80% 6.00% 6.00% 6.00% 6.00%

Nominal Cost of Debt (%) 9.61% 9.96% 9.96% 9.96% 9.96%

Post tax Real Cost of Debt (%) 1.06% 1.11% 1.11% 1.11% 1.11%

Real Cost of Equity (%) 9.38% 8.38% 8.85% 8.48% 8.55%

Real WACC (%) 6.88% 6.20% 5.99% 6.14% 6.11%

Debt ratio (%) 30.00% 30.00% 36.90% 31.70% 32.81%

Volume (billion litres)

16.354

17.134

16.867

17.593

17.703

The determination of the above variables and economic parameters will be discussed in more

detail under the relevant sections of the application.

13

2 Background

Transnet Pipelines (“TPL”) is the pipeline operating division of Transnet SOC Ltd. TPL owns,

maintains and operates a pipeline system of approximately 3 800 km of high pressure petroleum

and gas pipelines. These pipelines convey bulk liquid petroleum and methane-rich gas that

traverses the provinces of Kwazulu-Natal, Free State, North–West, Mpumalanga and Gauteng.

TPL at present transports approximately 16.7 billion litres of petroleum annually.

TPL currently fulfils a strategic role in the South African logistical fuel supply chain by ensuring

security of supply to the Inland Market. This is achieved through the optimal utilisation of its

pipeline system.

Long term projected demand for pipeline capacity necessitated the construction of the NMPP

Project. TPL applied and received a licence from NERSA to construct the NMPP project on 20

December 2007.

The following NMPP project assets have been completed and have been brought into operation

as per notification to NERSA at the time:

A 16 inch pipeline from Jameson Park to Alrode (25 May 2011);

A 16 inch pipeline from Alrode to Langlaagte (25 May 2011);

A 16 inch pipeline from Kendal to Waltloo (30 April 2011); and

A 24 inch trunkline from Durban to Jameson Park and its related pump and metering

stations (9 January 2012).

The infrastructure that is presently under construction as part of the NMPP project comprises

of:

TM1, a coastal accumulation terminal in Durban (Island View); and

TM2, an inland accumulation terminal at Jameson Park.

Close Out on NMPP pipelines and pumpstations.

Transnet has formally communicated to NERSA the impact of the excessive inclement weather,

strikes, vandalism, additional scope, design engineering, accumulator tank failure and continued

poor productivity of the contractor on the project completion date.

Transnet had most recently submitted to NERSA an application (dated 29 September 2014) for

amendment to its petroleum pipeline construction licence (PPL.p.F1/74/2007) wherein it was

stated that:

TM2 will be in operation by 30 September 2015;

TM1 (excluding the tanks) will be in operation by 31 March 2016 (Tightlining);

14

The accumulation facility at TM1 with all five tanks as per licence conditions para 1.1(d)

will be completed by 31 March 2018; and

The construction of the licenced activities will be completed and ready for operation by

the end of March 2018.

In the aforementioned application for amendment, Transnet stated that the residual risks of

strikes, excessive inclement weather, vandalism and unforeseen environmental risks impacted

on the delay and continued poor productivity of the contractor has contributed to the delay.

The inland market is currently supplied via the 24 inch trunkline and the DJP. Presently the 24

inch trunkline transports diesel only and will continue in this mode until the completion of TM2

and Tightlining. Both these lines are used optimally to ensure that the inland market’s

requirements are met.

3 NERSA Specific Requests

At a meeting held between NERSA and Transnet on 25 September 2014, NERSA requested

specific clarifications on certain issues related to the NMPP project cost and schedule. These

issues are detailed below:

3.1 A schedule of scope, cost and schedule of R23.4 billion estimated project cost and the

R2.3 billion increase approved by the Transnet Board.

Refer to Annexure 1 “NMPP Capex Spend Phase 1”.

3.2 An analysis of the R2.3 billion increase in project cost between efficient and inefficient

Processes/Decisions.

Refer to Annexure 2 “Efficient versus Inefficient Processes/Decisions

3.3 The detail relating to the NMPP deferred scope.

Refer to Annexure 3 “Breakdown of Deferred Scope”.

3.4 An explanation why the Tightlining and client costs will not be a sunk cost.

The Transnet estimated cost of Tightlining of R31 million and the client cost of

approximately R40 million is not a sunk cost as the equipment will be utilised as

a contingency in the event of the tanks at TM1 and client infrastructure not

being available due to maintenance, etc. This will ensure that security of

supply is maintained.

3.5 A schedule of legal claims against NMPP and NMPP claims against service Provider.

Refer to Annexure 4 “Summary of priority legal issues”.

15

3.6 The assets at TM1 that will be operationalised with tightlining, including costs.

The construction costs of R2.485 billion have been detailed in Annexure 5.

The total cost of Tightlining including Systems and Automation (S&A), Project

Support Services (PSS) and Operational Readiness amounts to R3.702 billion

(Refer to Annexure 1).

4 Approach

The building blocks of the methodology are reflected in the following formula1:

AR = (RAB x WACC) +E + D + F ± C + T

Where:

AR = Allowable revenue

RAB = Regulatory asset base

WACC = Weighted average cost of capital

E = Expenses: operating and maintenance expenses for the tariff period under review

D = Depreciation and amortisation of inflation write up: the charge for the tariff period

under review

F = Approved revenue addition to meet debt obligations for the tariff period under review

C = Clawback adjustment: to correct for differences between actuals and forecasts in

formula elements from a preceding tariff period in relation to the actuals for that tariff

period

T = Tax: estimated tax expense for the tariff period under review

The formula allows for the calculation of an AR for the ring-fenced petroleum pipeline business

in TPL. As a result, TPL’s storage facility, gas transmission pipelines and non-regulated business

1 Refer section 3.2 of the Methodology.

16

areas have been excluded. Shared non-pipeline assets (“NPAs”) have been allocated to

petroleum pipelines on the basis of the latest approved Cost Allocation Manual (“CAM”).

5 Regulatory Asset Base (“RAB”)

In terms of the methodology, the value of the RAB is the inflation-adjusted historical cost or

“trended original cost” (“TOC”) of property, plant, vehicles and equipment less the accumulated

depreciation for the period under consideration plus net working capital and adjusted for

deferred tax.

The formula for the RAB is as follows:

RAB = (V – d) + w ± dtax2

Where:

V = Value of operating property, plant, vehicles and equipment

d = Accumulated depreciation and accumulated amortisation of inflation write-up for the

period up to the commencement of the tariff period under review

w = Net working capital

dtax = Deferred tax

Regulations 4(6) and 4(7) of the Regulations deal with the determination of the RAB.

The qualifying RAB submitted in this Application is R22,247 million for the tariff period under

review. Refer to Table 3 for the RAB calculation.

2 In accordance with the NERSA demonstration worksheet made available on 3 November 2009, the RAB

values are based on the opening values, plus the write-up for the year and any pro-rata additions, adjusted

by the opening value of the deferred tax balance.

17

Table 3: Calculation of total 2015/16 RAB

R million

Total PPE on which WACC is Earned

Working capital

(calculated per formula

and allocated prorata)

Deferred tax Total RAB value

on which WACC is earned

Network Component

Formula A B C D=A+B+C

Northern Network 3,101.67 55.88 (4.33) 3,153.21 Southern Network/ DJP 274.86 4.95 14.03 293.85

Total old Refined assets

3,376.53

60.83

9.70

3,447.06 New NMPP Pipelines and Close Out of Pipelines 15,821.68 285.04 (1,090.98) 15,015.75 TM2 2,703.37 48.70 - 2,752.07

Total refined 21,901.58

394.58

(1,081.27)

21,214.88 Avtur 166.42 3.00 6.22 175.65 Crude Oil Pipeline 1,249.62 22.51 25.48 1,297.62

F Factor recovery (441.13)

(441.13)

Total 22,876.50

420.09

(1,049.57)

22,247.02

5.1 Property, Plant, Vehicles & Equipment (V)

Property, plant, vehicles and equipment are valued on the TOC basis using the actual annual

consumer price index (i.e. the value as at 12 months prior to the commencement of the current

tariff period under review) as published by NERSA for the 2015/16 tariff year. Property, plant,

vehicles and equipment expected to come into use during the forthcoming tariff period have

been admitted to the RAB in proportion to the share of the tariff period under review in which

they will be used. Pipeline assets have been allocated directly to the pipelines business and a

portion of the NPAs has been allocated in terms of the latest approved CAM.

All assets have also been restated to reflect the values in the PricewaterhouseCoopers (“PWC”)

calculation i.e. the SRAB, 2008/09 and 2009/10 (corrected for inflation and depreciation) RABs.

The 2015/16 RAB was calculated using the NERSA Demonstration Model, utilising the approved

2010 RAB. In arriving at the Property, plant, vehicles and equipment for the application,

Transnet has used as its base, the 2006 Starting RAB (“SRAB”) as set by NERSA. This SRAB,

was trended for the years 2008/09 and 2009/10 in line with the PWC Report and consequently

the 2009/10 RAB as determined by Transnet and approved by NERSA (per letter Starting

Regulatory Asset Base (SRAB) and Clawback dated 04 November 2010) has been loaded

18

into the Regulatory Reporting System. Transnet has further adjusted the 2012/13 closing values

of property, plant, vehicles and equipment for clawbacks relating to that year as calculated by

NERSA in the 2014/15 Tariff Determination. This amount has subsequently been trended to

arrive at the 2015/16 property, plant, vehicles and equipment revalued net book values.

TM2 has been brought into operation in the 2015/16 tariff period (30 September 2015) and

Tightlining has been brought into operation in the 2016/17 tariff period (31 March 2016). Phase

one of the NMPP is scheduled to be completed in the 2018/19 tariff period, in line with TM1

(including all five tanks as per licence conditions para 1.1(d)), being put into final operation on

31 March 2018.

The NMPP 16 inch Kendal to Waltloo pipeline was brought into operation at the end of April

2011 and the Jameson Park to Alrode and Alrode to Langlaagte pipelines were operationalised

by the end of May 2011. The 24 inch trunkline was operationalized in January 2012.

It should be noted that the cost at which the 16-inch and 24-inch pipelines were capitalised

represents the costs that had been incurred as at the capitalisation dates of the assets. Further

expenditure that is incurred on the assets will be capitalised at the date the expenditure is

“operationalised” which is 30 September 2015 (2015/16 tariff period) to the value of R3,285

million (including S&A, PSS and front end design costs).

As per the 2014/15 Tariff Determination, TM1 and TM2 were scheduled to be in operation from

31 March 2015 and 30 September 2014 respectively. Therefore TM2 was included in the RAB of

the 2014/15 tariff period for 6 months only, at a total cost of R3,800 million. The

operationalisation date and value of TM2 has been revised to 30 September 2015 and R5,101

million respectively.

The change in values is mainly attributable to a revision of the estimation, allocation of Systems

and Automation and allocation of Project Support Services costs (i.e. commissioning costs) as

well as the impact of delays referred to in Section 2 above. It must be noted that in previous

Tariff Applications, costs relating to Systems and Automation were separately disclosed whereas

it has now been allocated to the underlying assets in the current Application namely, pipelines,

TM1 and TM2.

Clawbacks have been calculated against TM2 for 6 months of the 2014/15 tariff period. Refer

to Section 11.1.4 on Clawbacks for more detail.

A summary of the operationalisation dates and capitalisation values for Phase 1 of the NMPP

project is detailed in Table 4 below:

19

Table 4: NMPP Phase 1 operational dates and capitalisation values

Description Operationalisation date

Capitalisation Value

R million

16 Inch Pipeline 31 May 2011 2,143 24 Inch Pipeline 01 January 2012 9,510 Tightlining 31 March 2016 3,702 TM2 30 September 2015 5,101 Remaining scope of TM1 (including tanks) 31 March 2018 2,017 Close out on Pipelines 30 September 2015 3,285

Total excluding Deferred Scope 25,757

Deferred Scope (Refer to Annexure 3) 30 September 2017 454

Total 26,211

The PPE amounts include the pro-rata values of new assets brought into service during the tariff

period under review. Table 5 details the pro-rata asset values provided in the Application.

Table 5: 2015/16 Asset Additions and Trended Original Cost

Total NBV at 31

Mar 2015 (closing

balance) R million

Write up of PPE (pre 2015/16

additions) to opening

NBV 2015/16

CPI of 6.00%

R million

2015/16 new additions, plus TOC at prorata time Total PPE value

on which WACC is earned

R million

Network Component

2015/16 additions R million

Useful Life of

Additions (years)

Prorata time of

new additions

in 2015/16

TOC additions to new

additions at 2015/16 CPI

of 6.00% R million

Trended value of 2015/16

new additions R million

Formula a b c d e f=c*e*6.00%

CPI g=c*e+f h=a+b+g

Northern Network 2,831.55 170.17 176.88 50 50% 5.31 93.75 3,101.67 Southern Network/ DJP 168.66 10.22 176.88 50 50% 5.31 93.75 274.86

Total old refined assets 3,000.21 180.39 353.77 100% 10.61 187.50 3,376.53 Close out on pipelines 13,283.58 797.01 3,285.08 75.00 50% 98.55 1,741.09 15,821.68

Terminals - - 5,100.70 50.00 50% 153.02 2,703.37 2,703.37

Total refined 16,283.78 977.40 8,739.54 262.19 4,631.96 21,901.58

Avtur 156.61 9.41 - 75 50% - - 166.42 Crude Oil Pipeline 1,171.00 70.47 7.96 75 50% 0.24 4.22 1,249.62 F Factor recovery (416.16) (24.97) - 75 100% - - (441.13)

17,195.24 1,032.31 8,747.50 262.43 4,636.18 22,876.50

20

5.1.1 Indexation

The actual annual CPI as at 12 months prior to the commencement of the current tariff period

under review has been used to trend property, plant, vehicles and equipment. The actual annual

CPI for the tariff application has been obtained from NERSA. A CPI of 6.00% has been applied

to the net book value of all assets included in property, plant vehicles and equipment for the

tariff period. Assets with zero book value have not been indexed.

5.1.2 Useful Lives

The useful lives of pipeline assets in the RAB are aligned with the report of the last full valuation

conducted by Arthur D. Little (“ADL”) in March 2012 (see Annexure 6). Transnet wishes to

advise that future assets that reach the end of their useful lives and that are revalued in terms

of the statutory accounts will be restated to their new useful lives and values from a regulatory

perspective with a corresponding clawback on the depreciation previously recovered.

5.1.3 Assets to be decommissioned

In line with section 27 of the PPA and Regulation 9.4, Transnet has to provide security in respect

of its rehabilitation obligations. Transnet has therefore included a proportionate value of its

obligation to be recovered in this application. The amount included in the Application is equal to

R44.2 million for petroleum pipelines (refer to Section 7.8.8 for a detailed calculation).

Consequently the assets to be decommissioned have not been included in the RAB.

At the time of filing of this Application, Transnet is in the final processes of obtaining approval

from National Treasury (NT) and the Department of Public Enterprises (DPE) in terms of section

51(1)(g) and sections 54(2)(b) of the Public Finance Management Act (PFMA) with regard to

setting up a Trust which will maintain the invested cash collected via tariffs, for the future

decommissioning of assets.

21

5.2 The Levy

The cumulative levy received at the end of the 2012/13 period has been netted off against the

AFUDC. Any excess of the levy over the AFUDC is to be permitted into the RAB on completion

of the NMPP project. The total amounts received by the end of the 2012/13 year (end of the

levy period) are as follows:

Table 6: Levy Schedule

2010/11 2011/12 2012/13 Total

R million

Cash 1 500 1 500 1 500 4 500

Less: Output vat 184.21 184.21 184.21 552.63

Less: Income tax 368.41 368.41 368.41 1 105.23

Net levy recognised in the RAB 947.38 947.38 947.38 2 842.14

As Phase One of the NMPP project is scheduled for completion on 31 March 2018, any excess

of the levy over the AFUDC (or the AFUDC over the levy) on the project will be permitted in the

RAB in the 2018/19 tariff period. Please refer to Table 7 below for the detailed calculation.

5.3 AFUDC

AFUDC has been calculated as being the product of average capital expenditure and the nominal

weighted average cost of capital (“WACC”). This is in accordance with the Regulatory Reporting

Manual (“RRM”). All re-gearing adjustments have been allocated to the regulatory balance sheet

for assets in operation. Consequently AFUDC has been calculated on 100% debt funded. The

excess of the levy over the AFUDC (or the AFUDC over the levy), is to be permitted into the

asset base on the completion of the NMPP project. As the project is scheduled for completion

on 31 March 2018, this will be factored into the RAB in 2018/19 tariff period.

22

Table 7: Calculation of AFUDC

Calculated on Annual Average basis

2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 Total

Opening Balance a=h 5,975.95 11,480.65 3,792.10 5,756.80 9,582.83 13,435.73 7,573.59 4,460.66 4,606.74 -

Net movement b=c-d-e 4,664.74 (8,417.22) 1,544.77 3,146.83 2,797.56 (6,858.96) (3,683.92) (284.15) (1,732.47) (8,822.81)

Capex c 5,612.11 4,181.80 2,492.65 3,146.83 2,797.56 1,526.82 18.54 170.15 284.15 20,230.60

Levy d (947.37) (947.37) (947.37) - - - - - - (2,842.11) Capitalization e - (11,651.64) (0.50) - - (8,385.78) (3,702.46) (454.30) (2,016.62) (26,211.30)

Balance before AFUDC f=a+b 10,640.68 3,063.44 5,336.87 8,903.63 12,380.39 6,576.76 3,889.68 4,176.51 2,874.27 (8,822.81)

AFUDC g 839.97 728.66 419.93 679.20 1,055.33 996.83 570.99 430.22 372.63 4,015.01 Closing Balance h=f+g 11,480.65 3,792.10 5,756.80 9,582.83 13,435.73 7,573.59 4,460.66 4,606.74 3,246.90 (4,807.80)

Annual Average CWIP

Opening a 5,975.95 11,480.65 3,792.10 5,756.80 9,582.83 13,435.73 7,573.59 4,460.66 4,606.74 -

Closing f 10,640.68 3,063.44 5,336.87 8,903.63 12,380.39 6,576.76 3,889.68 4,176.51 2,874.27 -

Average

i=(a+f)/

2 8,308.32 7,272.05 4,564.48 7,330.22 10,981.61 10,006.24 5,731.63 4,318.59 3,740.50 -

WACC rate j=WACC 10.11% 10.02% 9.20% 9.27% 9.61% 9.96% 9.96% 9.96% 9.96%

AFUDC g=i*j 839.97 728.66 419.93 679.20 1,055.33 996.83 570.99 430.22 372.63

Pro rata allocation to

assets taken into

operation

Cap.

Values

(R

million)

16-inch pipeline 2,143 154.45 7.38 - - - - - - - 161.83

24-inch pipeline 9,510 685.52 147.44 - - - - - - - 832.97

Tightlining 3,702 - 76.54 137.91 223.05 268.38 253.50 - - - 959.38

Terminal 2 5,101 - 105.45 189.99 307.29 369.73 174.62 - - - 1,147.07

Remaining Scope of TM1 2,017 - 41.69 75.11 121.49 146.18 138.07 125.80 125.27 - 773.62

Deferred Scope 454 - 9.39 16.92 27.37 32.93 31.10 28.34 14.11 - 160.17

Close out of pipelines 3,285 - - - - 238.12 112.46 - - - 350.58

NMPP Phase 1 Total AFUDC l 26,211 839.97 387.90 419.93 679.20 1,055.33 709.75 154.15 139.38 - 4,385.61

NMPP Phase 2 (pipeline &

pumpstations) m 7,202 - - - - - - 449.30 447.40 770.79 1,667.48

Total n=l+m 33,413 839.97 387.90 419.93 679.20 1,055.33 709.75 603.44 586.78 770.79 6,053.10

AFUDC Grant Funding Deferral account

Opening Balance k - (107.40) (666.87) (1,194.31) (515.11) 540.22 1,249.97 1,853.42 2,440.20 -

AFUDC (prorata allocation

based on NMPP capitalisation

dates) l 839.97 387.90 419.93 679.20 1,055.33 709.75 603.44 586.78 770.79 6,053.10

Grant Funding d (947.37) (947.37) (947.37) - - - - - - (2,842.11)

Transfer of excess of AFUDC

over Grant Funding into RAB

upon completion of NMPP

Phase 1 o=(l - d) (1,543.50) (1,543.50)

Closing Balance

p=k+g-

d (107.40) (666.87) (1,194.31) (515.11) 540.22 1,249.97 1,853.42 2,440.20 1,667.48 1,667.48

R million / %

23

5.4 F–Factor

The 2012/13 F-factor (R205.78 million) and the 2013/14 F-factor (R165.77 million) awarded to

Transnet, has been deducted from the RAB as this was an early return of capital and therefore

no return on capital can be earned thereon. The F-factor is treated as a ‘negative’ asset value,

trended and amortised over the expected useful life of the NMPP assets (75 years) arriving at a

value of R441.13 million for the 2015/16 tariff period.

Transnet has performed a calculation for an F-Factor equating to 2 times the debt service cover

ratio for the 2015/16 tariff period, in line with the NERSA’s prior Tariff Determination. However,

Transnet does not qualify for an F factor at this level due to the lower gearing attributable to

the phased-in capitalisation of assets over a period of time (Refer to Section 6.1).

5.5 Net working capital (w)

Net working capital is included in the RAB and is calculated according to the formula provided

in the methodology which is as follows:

Net working capital = inventory + receivables + operating cash + minimum cash

balance – trade payables3

The components detailed in Table 8 are recognised as follows:

Inventory is stated at the lower of cost and estimated net realisable value. Net realisable

value represents the estimated selling price less all estimated costs of completion and

selling. Inventory balances includes maintenance stock.

Trade receivables are based on 30 days of turnover. Allowances for irrecoverable

amounts are recognised in the income statement when there is objective evidence that

the asset is impaired. Other receivables include prepayments;

Trade payables are settled within 45 days; and

The allowance for operating cash is taken as a standardised factor of 45 days operating

expenditure, excluding depreciation and income tax.

3 Refer to section 4.3.2 of tariff methodology

24

Table 8: Working Capital

2014/15

RFD 2015/16 2016/17 2017/18 2018/19

Inventory 87.46 137.13 179.77 204.7 248.0

Receivables 244.81 282.95 397.84 431.2 494.3

Operating Cash 119.61 145.04 161.68 175.3 187.5

less: payables (119.61) (145.04) (161.68) (175.3) (187.5)

Net Working Capital 332.27 420.09 577.61 635.8 742.3

The increase in working capital for the tariff period is primarily as a result of the increase in

receivables due to the higher AR and an increase in inventory driven mainly by the procurement

of spares that would be required for the equipment at the terminals.

5.6 Deferred Tax (dtax)

Transnet has adopted the notional tax approach as discussed in Section 7 of the methodology.

Consequently, the deferred taxation liability has been deducted from the RAB. The annual and

cumulative deferred tax amounts are as follows:

Table 9: Deferred Tax

Actual Estimated

PPE taken into operation 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19

Close out on pipelines 3,285 Terminals 5,101 3,702 Deferred Scope and Completion of remaining scope for TM1 454 2,017 Other PPE 369 201 362 676 1,009 1,033 Net AFUDC/LEVY & TCP costs Capitalised 1,773

Total 369 201 8,748 4,378 1,463 4,822

Deferred tax on timing differences New NMPP 24 inch and Close out on

pipelines (769.00) (1,038.97) (1,394.79) (1,744.51) (2,094.50) (2,444.50) New NMPP 16 inch (52.00) (52.00) (52.00) (52.00) (52.00) (52.00) Terminals (128.54) (325.73) (522.92) (720.11) Deferred Scope and Completion of remaining scope for TM1 (11.45) (66.80) Other PPE 35.80 41.40 35.18 11.89 (38.60) (116.91) Net AFUDC/LEVY & TCP costs Capitalised (41.70)

Cumulative Total (785.20) (1,049.57) (1,540.16) (2,110.35) (2,719.47) (3,442.02)

The deferred tax balance for the purpose of the RAB adjustment relates strictly to the statutory

timing differences between depreciation deducted for the purposes of calculating the notional

tax allowance and wear and tear allowances at the beginning of the financial year. Deferred

tax liabilities deducted from the RAB are cumulative and stated at opening balances.

25

6 Weighted Average Cost of Capital (WACC)

Regulation 4(5) states:

The allowable rate of return for licensees must be determined by using the expected efficient

weighted average cost of capital (WACC). WACC must be calculated using the weighted average

of the licensee’s-

a. Average cost of debt that can realistically be obtained during the period under review;

and

b. Cost of equity capital calculated by means of the capital asset pricing model or any other

appropriate model

Section 5.1 of the methodology prescribes the formula to determine the WACC.

Applying the methodology, Transnet’s calculations yielded a post-tax real WACC of 6.20% as

presented in Table 10.

Table 10: WACC Calculation

2015/16

Application %

Risk free rate (Real) 4.08%

Beta 0.676

Market Risk Premium (Real) 6.36%

Cost of equity (Ke, post-tax real) 8.38%

Nominal cost of debt 9.96%

CPI forecast 6.00%

Tax rate 28%

Nominal post-tax cost of debt 7.17%

Real cost of debt (Kd, post-tax real) 1.11%

Capital Structure:

Equity % 70.00%

Debt % 30.00%

WACC 6.20%

26

6.1 Capital Structure

The debt ratio used to calculate the WACC is a function of the RAB. CWIP is specifically excluded

from the RAB in accordance with the Regulations. Transnet has determined the 2013/14 debt

ratio (refer to Table 11) based on its actual results. Accordingly, a giveback has been

recalculated based on the aforesaid debt ratio and the actual RAB for the 2013/14 tariff period.

Refer to Section 11.1.6. Thereafter Transnet recalculated the debt ratio for the 2014/15 (Refer

to Table 12) and 2015/16 (Refer to Table 13) tariff periods.

Table 11: Debt ratio calculation for the 2013/14 tariff period

R million / %

Qualifying interest bearing Debt and Debt ratio 2013/14 2013 Q2 2013 Q3 2013 Q4 2014 Q1

Weighted Quarterly Average Formula

Opening Balance of Qualifying Debt

4,756

4,756

4,753

4,294

3,902

4,756 a

New additions

369

-

-

-

348 b

Movement in 2012/13 2013/14

Working Capital 269.86

302.40

33

8

8

8

8

20 c

Deferred tax (303.62)

(539.33)

(236)

-

2013/14 EBITDA as retained earnings [as per Cash Flow Statement submitted by TPL in the Application]

(1,955)

-488.83

-488.83

-488.83

-488.83

(1,222) d

Taxation Paid [as per Cash Flow Statement submitted by TPL in the Application]

(98)

(49)

(49)

(49) e

New Equity [as per Cash Flow Statement submitted by TPL in the Application]

(26)

(26)

(19) f

Balance before interest

4,645

4,197

3,814

3,372

3,835 g=sum(a:f)

Interest payable 9.27%

371

108

97

88

78

244 h=g/4* int

rate

Closing Balance

4,753

4,294

3,902

3,450

4,079 i=g+h

Closing TOC as per Asset Register 2013/14

16,912 s

Working Capital as per 2014 Workings

302 t

Deferred tax as per 2014 Workings

(539) u

Total RAB

16,675 v=sum(r:u)

Debt % 28.5% 27.2% 24.7% 21.9% 24.46% w=i/v %

Limited to 30%

27


R million / %

Qualifying interest bearing Debt and Debt ratio 2014/15 2014 Q2 2014 Q3 2014 Q4 2015 Q1



3,450

3,450

3,041

2,562

2,337

3,450 a

New additions

-

-

201

-

101 b

Movement in 2013/14 2014/15


332.27

30

7

7

7

7

19 c


(785.20)

(246)

-

2014/15 EBITDA as retained earnings[as per Cash Flow Statement submitted by TPL in the Application]

(1,952)

-487.97

-487.97

-487.97

-487.97

(1,220) d


(117)

(59)

(59)

(59) e


- f


2,970

2,502

2,283

1,798

2,291 g=sum(a:f)


229

71

60

55

43

155 h=g/4* int

rate

Closing Balance

3,041

2,562

2,337

1,841

2,445 i=g+h


17,532 s


332 t


(785) u

Total RAB

17,079 v=sum(r:u)

Debt % 17.9% 15.6% 14.0% 11.2% 14.32% w=i/v %

Limited to 30%

28


R million / %

Test for interest bearing Debt and Debt ratio 2015/16

Opening 1 April 2015 2015 Q2 2015 Q3 2015 Q4 2016 Q1



1,841

1,841

1,347

747

9,191

1,841 a

New additions

-

-

8,748

-

4,374 b

Movement in 2014/15 2015/16


420.09

88

22

22

22

22

55 c


(1,049.57)

(264)

-

2015/16 EBITDA as retained earnings [as per Cash Flow Statement submitted by TPL in the Application]

(2,198)

-549.49

-549.49

-549.49

-549.49

(1,374) d


(180)

(90)

(90)

(90) e


- f


1,314

729

8,967

8,573

4,806 g=sum(a:f)


488

33

18

223

214

211 h=g/4* int

rate

Closing Balance

1,347

747

9,191

8,787

5,018 i=g+h


22,877 s


420 t


(1,050) u

Total RAB

22,247 v=sum(r:u)

Debt % 7.7% 4.3% 34.7% 51.1% 22.55% w=i/v %

Limited to 30%

6.2 Cost of Equity

Section 5.2 of the Methodology sets out the formula for calculating the real cost of equity. In

this section of the Application, we deal in turn with the individual components of the cost of

equity calculation embodied in the Capital Asset Pricing Model (CAPM), namely the risk free rate,

the market risk premium and beta.

29

6.2.1 Risk free rate

As stated in NERSA’s approach of Section 5.2.2 of the methodology, applied to the South African

Reserve Bank (SARB) bond yield - with at least a 10 year maturity as at 12 months before the

commencement of the tariff period under review. Transnet used the risk free rate of 4.08% as

published on the NERSA website.

6.2.2 Market risk premium

The market risk premium (MRP) is the return investors can expect to earn, over and above the

risk-free rate, by investing in the market. This premium includes market returns to investors in

the form of dividends and capital appreciation, measured by the All Share Index (ALSI).

Using NERSA’s approach, as applied to the ALSI data for the 300 months from April 1989 to

March 2014, Transnet estimated an average MRP over the specified 25 year period of 6.36%.

6.2.3 Beta

Section 5.2.2 of the Methodology requires the beta to be calculated based on betas for at least

six pipeline companies listed on the stock exchange. Transnet used the weighted average beta

of 0.47 as published on the NERSA website. This weighted average beta was calculated using

18 proxy companies and NERSA unlevered the betas using the Harris Pringle formula.

The weighted average asset beta was converted to an equity beta for TPL. Using a debt ratio of

30.00% (as per Section 5.1.4 of the methodology) for 2015/16 (refer to Table 13); a TPL equity

beta of 0.676 was calculated based on the asset beta calculated per Table 14 below.

Table 14: Beta calculation

Ticker Country Security Short NameMarket Cap

(USD)

Debt/Common

Equity (LFY)Equity % Debt %

Raw

Beta

Unlevered

Beta

Weighted

Average

Beta

IPL CN Equity INTER PIPELINE LTD 9,056,511,991 42.77% 70.04% 29.96% 0.79 0.55 0.04

BKEP US Equity BLUEKNIGHT ENERGY PARTNERS L 206,325,821 132.39% 43.03% 56.97% 0.15 0.06 0.00

NS US Equity NUSTAR ENERGY LP 4,521,286,621 59.64% 62.64% 37.36% 0.91 0.57 0.02

NSH US Equity NUSTAR GP HOLDINGS LLC 1,517,735,099 1.71% 98.32% 1.68% 0.79 0.77 0.01

MPLX US Equity MPLX LP 4,269,851,563 0.55% 99.46% 0.54% 0.56 0.55 0.02

SEMG US Equity SEMGROUP CORP-CLASS A 2,772,316,162 24.26% 80.48% 19.52% 0.83 0.67 0.02

JNAFRA CZ Equity JADRANSKI NAFTOVOD D.D. 311,665,339 5.62% 94.68% 5.32% 1.08 1.02 0.00

EEP US Equity ENBRIDGE ENERGY PARTNERS LP 9,611,822,266 55.08% 64.48% 35.52% 0.67 0.43 0.04

TLP US Equity TRANSMONTAIGNE PARTNERS LP 765,433,167 27.04% 78.71% 21.29% 0.56 0.44 0.00

BPL US Equity BUCKEYE PARTNERS LP 9,571,896,484 37.42% 72.77% 27.23% 0.61 0.44 0.04

RIIL IN Equity RELIANCE INDUS INFRASTRUCT 107,454,995 0.00% 100.00% 0.00% 1.55 1.55 0.00

STPIL TU Equity SOC DE TRANSPORT HYDROCARBUR 21,268,073 0.00% 100.00% 0.00% -0.15 -0.15 0.00

SXL US Equity SUNOCO LOGISTICS PARTNERS LP 9,590,630,859 32.04% 75.73% 24.27% 0.46 0.35 0.03

PAA US Equity PLAINS ALL AMER PIPELINE LP 20,646,193,359 37.28% 72.84% 27.16% 0.59 0.43 0.08

HEP US Equity HOLLY ENERGY PARTNERS LP 2,009,003,906 41.50% 70.67% 29.33% 0.53 0.37 0.01

ETP US Equity ENERGY TRANSFER PARTNERS LP 20,807,198,112 84.49% 54.20% 45.80% 0.92 0.50 0.09

TRNFP RM Equity AK TRANSNEFT OAO-PREF 3,607,016,082 489.30% 16.97% 83.03% 1.89 0.32 0.01

MMP US Equity MAGELLAN MIDSTREAM PARTNERS 17,827,128,906 16.50% 85.84% 14.16% 0.57 0.49 0.07

TOTAL 117,220,738,806

Average Gearing 60.42%

Average Debt 25.51%

Weighted Average Beta 0.47

Average Raw Beta 0.74

30.00%

70.00%

42.9%

0.676

Debt Ratio Of Applicant

Equity Ratio of Applicant

Gearing of Applicant =1/(1+D/E)

Applicants Final Beta for tariff period under review

NERSA Source of Raw Beta: Bloomberg, based on monthly 5 year data. NERSA un-levering using Harris Pringle formula

30

6.2.4 Real cost of equity calculation

Using the results of the calculation of the risk free rate, the market risk premium and beta,

together with the size of company adjustment specified in the methodology yields a cost of

equity of 8.38% as reflected in Table 15 below:

Table 15: Real cost of equity

2015/16

Application %

Risk free rate (Real) 4.08%

Beta 0.676

Market Risk Premium (Real) 6.36%

Cost of equity (Ke, post-tax real)

8.38%

6.3 Cost of Debt

Transnet’s estimated weighted average cost of debt (WACD) for 2014/15 is 9.96%. The actual

annual consumer price index (i.e. the value as at 12 months prior to the commencement of the

current tariff period under review) as published by NERSA for the 2015/16 tariff year is 6.00%,

resulting in a real post-tax cost of debt of 1.11%.

6.4 WACC

The WACC is the weighted average of the cost of equity and the cost of debt. The cost of equity

and the cost of debt amounted to 8.38% and 1.11% respectively. This results in a real WACC

of 6.20% for the 2015/16 tariff period (after taking into account a debt ratio of 30.00%).

31

7 Expenses

TPL’s operating expenses are recognised and reported in terms of the International Financial

Reporting Standards (“IFRS”).

Note that the expenses reflected in the Application are representative of expenses to be incurred

for the running of both the DJP and the NMPP trunkline.

In this section, the TPL annual expenses which form a significant component of the total

operating expenditure in the AR calculation and/or those that have shown significant increases

compared to 2014/15 latest estimate are analysed in detail. Significant movements from the

2013/14 actual to the 2014/15 LE have also been explained.

Expense forecasts (2014/15 LE and 2015/16) are based on the latest actual information

available. The 2015/16 expenses have been adjusted for inflation in accordance with data

provided by the BER, except for electricity (ESKOM tariff increase) and fuel (brent crude), where

specific indices to indicate expected increases where utilised. Further, labour costs are a function

of anticipated training, salary increases and increases in headcount.

A summary of TPL’s expenses is shown in the table below. The significant variances between

2014/15 LE and 2015/16 forecasts as well as 2013/14 actual and 2014/15 LE are analysed in

detail thereafter:

Table 16: Summary of TPL Regulated Petroleum Expenses

2013/14

Act 2014/15

LE 2015/16

App LE vs

2015/16

2016/17 2017/18

R million R million R million R million R million

Salaries & Wages 245.98 260.66 311.35 19% 345.01 376.06

Materials & Supplies 10.42 11.47 16.89 47% 18.56 12.50

Professional Fees & Survey Costs 53.63 65.43 59.64 -9% 65.02 70.53

Operating Fuel 25.88 32.02 32.41 1% 32.05 31.72

Legal Expenses 0.84 2.53 2.70 7% 2.85 3.00

Rent - External Operating Leases 16.90 18.30 26.53 45% 28.11 29.63

Injuries & damages 0.84 0.79 0.02 -97% 0.00 0.00

Employee Benefits 19.90 29.20 39.28 35% 43.27 47.16

Insurance 12.48 12.90 15.54 20% 15.37 16.21

Other Expenses 465.69 580.65 715.89 23% 805.02 878.86

Electricity 171.40 188.34 232.19 23% 261.24 303.61

Maintenance 59.88 81.14 114.15 41% 125.72 132.75

Security 16.10 22.93 31.75 38% 34.81 36.69

Telephone & Data 16.95 33.37 50.56 52% 61.73 65.06

Training 13.31 20.94 23.17 11% 25.41 27.70

Travel & Accommodation 10.39 14.35 19.72 37% 20.87 21.99

Decommissioning Provision 24.22 43.82 43.82 0% 43.82 43.82

Transnet Corporate Overhead 138.79 140.96 150.99 7% 166.03 177.70

Other Miscellaneous 14.65 34.79 49.53 42% 65.38 69.53

852.56 1,013.95 1,220.24 20% 1,355.26 1,465.67

32

7.1 Salaries and Wages

Table 17: Salary and Wages Analysis

2014/15 LE versus 2013/14 actual

The increase of approximately 19% includes an annual salary adjustment of 9% (as

negotiated with Unions for bargaining unit employees) and an estimated 5% increase in

headcount (phased employment during the year).

The increase in senior and middle management is due to approved vacancies to be filled

by March 2015.

2014/15 LE versus 2015/16 forecast

Includes annual salary adjustment of 8% (as per Transnet guideline), compared to 9%

in 2014/15 latest estimate.

The headcount is expected to increase by 14% in 2015/16 due to operational and

compliance requirements.

The increase in senior management, middle management and bargaining staff is due to

approved vacancies to be filled by March 2016.

2014 vs 2015 2015 vs 2016

Number of

employees

Average

salary Total

Number of

employees

Average

salary Total

Percentage

change in No.

of employees

Number of

employees

Average

salary Total

Percentage

change in

No. of

employees

Executive 7 1,639,914 11,479,396 7 1,689,111.10 11,823,778 0% 7 1,802,282 12,615,971 0%

Senior Management 23 900,544 20,712,518 31 945,571.46 29,312,715 35% 34 1,008,925 34,303,442 10%

Middle Management 96 541,332 51,967,831 111 573,811.47 63,693,073 16% 121 612,257 74,083,077 9%

Bargaining Staff 514 307,247 157,924,782 524 328,586 172,179,013 2% 620 371,929 230,596,025 18%

TOTAL 640 378,257 242,084,527 673 411,603 277,008,579 5% 782 449,614 351,598,514 16%

Cost not included in the above 76,002,448 61,876,588 56,405,746

Training 15,645,902 21,480,707 26,109,394

Overtime 12,545,852 14,784,569 18,385,546

Leave 7,496,442 12,482,256 11,910,806

Incentive and Gainshare 40,314,252 13,129,056

Other

Total Employee Costs 318,086,975 338,885,167 408,004,260

Petroleum allocation (%) 88% 92% 90%

Salaries and Wages 245,984,659 260,657,104 311,349,724

Employee Benefits 19,895,824 29,197,623 39,279,048

Training 13,313,505 20,941,793 23,173,543

Total Petroleum Pipeline related costs 279,193,988 310,796,519 373,802,315

19%

35%

11%

11% 20%

% movement

Staff level/category

2013/14 2014/15 2015/16

% movement

6%

47%

57%

33

7.2 Materials and Supplies


The increase is mainly due to the exchange rate fluctuations for Drag Reducing Agents (DRA).


The increase relates to additional foam requirements to ensure compliance of the fire

systems at certain Depots.

7.3 Professional Fees and Survey Costs


The increase relates to the feasibility study for a Jet Fuel solution in the NMPP post Clean

Fuels 2 that commenced in the 2014/15 financial year.

7.4 Operating Fuel


Diesel costs for the standby generators at TM1 and TM2 are anticipated to be incurred

from 2014/15 financial year due to the envisaged power outages.

7.5 Operating Leases


The increase is mainly attributable to an increase in the vehicle rental costs as a result

of short term contracts entered into to meet operational requirements while the long

term contracts were being finalised at Transnet Group.


The fleet of vehicles used by TPL has come to the end of its lease term thereby

necessitating the replacement of the fleet. The cost of the new fleet is influenced by the

cumulative escalation in car prices of approximately 20%.

With the reorganisation of maintenance activities to streamline the maintenance

programme and improve the performance against the maintenance plan, an additional

57 vehicles are required for revised maintenance clusters, cathodic protection monitoring

and servitude management.

34

7.6 Employee Benefits

The increase in employee benefits is attributable to the increase in salaries (due to annual increment).

7.7 Insurance


The increase is attributable to the insurance relating to TM2 (being brought into

operation for 6 months).

7.8 Other Expenses

Other expenses include the following significant items:

7.8.1 Electricity


Increase is mainly due to annual Eskom tariff increase.


The 2015/16 forecast includes a 12.7% Eskom tariff adjustment as well as an increase

in megalitre kilometres (i.e. Volume distance).

Electricity costs relating to TM2 operationalisation. Electricity consumption is anticipated

to decrease once TM1 is fully operational and the DJP is decommissioned.

7.8.2 Maintenance


This increase is attributable to the maintenance of a 30 metre servitude on the 24 inch

trunkline (as per environmental ROD requirements) as opposed to a 6 metre servitude

on the DJP (in 2013/14 the costs was incurred for half of the financial year).

The maintenance of the 24 core fibre optic cable which commenced in April 2014.

Maintenance of the NMPP security system with effect from September 2014.


R20m relates to Cathodic protection monitoring.

R10m relates CCTV maintenance for existing and NMPP depots.

35

7.8.3 Security


Average standard increase of 10% Private Security Industry Regulatory Authority

(PSIRA) rates per annum.

Due to security concerns in certain areas, escorted security is required for maintenance

personnel working along servitudes.


Average standard increase of 10% PSIRA rates per annum

Due to security concerns in certain areas, escorted security is required for maintenance

personnel working along the servitudes and employees conducting cathodic protection

monitoring.

Security costs relating to TM2 which will be commissioned on 30 September 2015.

7.8.4 Telephone and Data Costs


An accrual of R8m for telecommunications costs raised in 2012/13 was reversed in

2013/14 as it was paid by Transnet Group resulting in lower cost for 2013/14.

2014/15 includes R3.2m IBM software licensing costs


The increase in costs is attributable to :

CCTV WAN costs of R8m.

6 months data costs for TM2.

Costs relating to disaster recovery requirements.

7.8.5 Training


The moratorium on prior year spending resulted in a deferment of non-critical training.


Training costs have increased due to the higher headcount.

36

7.8.6 Transport and Accommodation


The moratorium on prior year spending resulted in a deferment of non-critical travelling

and accommodation.


• Higher cost is attributable to an increased headcount and travel costs associated with

maintenance activities (including increased maintenance on the DJP).

7.8.7 Other Miscellaneous


During 2013/14 there was a reversal of an accrual amounting to R7.6m relating to Kendal

standing time and product loss.


• Increase in enterprise development costs of R5m.

Environmental compliance costs relating to water, air pollution and waste removal.

7.8.8 Decommissioning Provision

In terms of legislative requirements, Transnet has an obligation to rehabilitate the land on

decommissioning of the pipeline network. Further, per section 27 of the PPA and Regulation

9.4, Transnet has to provide security in respect of its rehabilitation obligations. Transnet has

included a proportionate value of its obligation to be recovered in the 2015/16 application to the

value of R44.2 million.

This has been informed by the latest audited independent study conducted in the 2010/11

financial year the results of which were communicated to NERSA on 7 June 2011.

The future value of the provision has been calculated using the long term inflation rate (5 year)

and has been discounted at the current interest rates being earned on the ABSA fixed deposit

account into which the funds that have been collected to date have been invested.

37

As at September 2014, Transnet has deposited a total sum of R95.2 million into the fixed deposit

account, inclusive of interest earned. Prior to the Application, Transnet had communicated to

NERSA the progress made in terms of the establishment of the Trust to facilitate the ring fencing

of the fund for rehabilitation recovered via tariffs. NERSA had indicated its satisfaction regarding

the progress thereof.

Transnet is currently awaiting approval from National Treasury (NT) and the Department of

Public Enterprises (DPE) in terms of section 51(1)(g) and sections 54(2)(b) of the Public Finance

Management Act (PFMA) with regard to setting up a Trust which will maintain the invested cash

collected via tariffs, for the future decommissioning of assets.

Table 18: 2015/16 Decommissioning Provision

7.8.9 Transnet Corporate Overheads

TPL as one of Transnet’s operating divisions receives support and services from the Transnet

Corporate Head office that includes financial, treasury, planning, commercial, project

management, legal and human resources. The corporate overhead costs are allocated to

operating divisions based on various defined cost drivers (e.g. headcount, external revenue etc).

The costs allocated to TPL Petroleum Pipelines Business for the 2015/16 year is R162.9 million

which is 3.5% of Transnet’s total corporate overhead costs. Based on the direct proportional

cost allocation, 89.23% of TPL’s allocated cost is assigned to the petroleum pipelines business.

The major cost elements of the corporate overhead costs include:

Transnet Pipelines -

Provision for Land

and rehabilitation

reqired

Contribution for

2011/12 tariff

period

Contribution

for 2012/13

tariff period

Contribution

for 2013/14

tariff period

Contribution

for 2014/15

tariff period

Interest

earned on

contribution

s

Cumulative

contribution

(excl

interest) Plus interest

Total value

of fund

Present

value of

future

commitment

[Pv 2]

Shortage if

total

required

balance is to

be allowed

immediately Rem. period

Present

value /

remaining

life

a b c d e f=sum(a:e) -e g=f+e h i=h-g j k=i/j

AVTUR 89,465 8,264 30,202 53,910 (19,478) 162,363 19,478 181,841 1,573,756 1,391,915 30 46,423

DWP 559,950 118,672 193,448 383,700 (134,512) 1,121,258 134,512 1,255,771 13,494,065 12,238,295 37 330,863

DJP 29,373,521 10,690,190 (2,631,597) (1,754,696) (3,821,594) 31,855,824 3,821,594 35,677,418 27,808,515 (7,868,903) 5 (1,577,238)

CRUDE 469,942 41,391 596,834 1,141,763 (241,002) 2,008,929 241,002 2,249,930 38,688,734 36,438,804 37 985,124

KDC 144,460 179,995 377,104 499,388 (128,640) 1,072,308 128,640 1,200,948 6,311,461 5,110,513 12 426,071

Depots without

Tanks 0 3,417,318 7,271,865 12,855,961 (2,522,043) 21,023,101 2,522,043 23,545,144 378,183,819 354,638,676 32 11,084,357

Depots with Tanks 0 2,105,534 9,101,302 16,029,586 (2,917,435) 24,318,987 2,917,435 27,236,422 469,452,214 442,215,792 32 13,821,610

Refractionator 52,675 1,696,187 310,009 592,728 (284,027) 2,367,572 284,027 2,651,599 18,980,890 16,329,291 32 510,334

Feeder lines 0 85,098 7,675,228 9,979,898 (1,900,248) 15,839,977 1,900,248 17,740,224 119,794,787 102,054,563 12 8,522,058

JMP TO ALR 0 2,169 28,743 89,090 (12,854) 107,148 12,854 120,002 5,521,431 5,401,429 70 77,061

ALR TO LLA 0 2,173 28,970 89,909 (12,967) 108,085 12,967 121,052 5,578,738 5,457,686 70 77,769

KDL TO WAO 0 4,650 61,922 192,177 (27,716) 231,033 27,716 258,749 11,924,356 11,665,607 70 166,229

24 INCH LINE 0 28,577 400,850 1,254,916 (180,419) 1,503,925 180,419 1,684,344 78,498,679 76,814,335 71 1,085,494

PUMPSTATIONS 0 54,936 770,577 2,412,399 (346,830) 2,891,082 346,830 3,237,912 150,902,597 147,664,685 71 2,086,709

TM1 323,595,055 323,595,055 50 6,530,587

Total 30,690,013 18,435,154 24,215,457 43,820,730 (12,549,762) 104,611,591 12,549,762 117,161,354 1,650,309,098 1,533,147,744 44,173,450

38

Personnel costs including post-retirement benefits,

Professional fees;

Electronic data and telecommunication costs;

Internal audit costs;

Depreciation and amortization and

Miscellaneous costs.

Miscellaneous costs of R39.9 million are made up of cost line items which are below R12 million,

a significant portion of the cost line items that make up the R39.9 million are below R5 million

however a supporting schedule that makes up these costs is readily available (Refer to Table

21).

It should be noted that TCP costs, corporate social responsibility costs and the incentive bonus

provision have been excluded.

Transnet notes NERSA’s comments in paragraph 124 of the 2014/15 Tariff Determination

namely, “The Energy Regulator has therefore decided to use the corporate overhead cost values

determined in the 2013/14 decision as a base and add CPI of 5.8%. This will represent the basis

on which the Energy Regulator will allow these items in future unless there are exceptional

events or circumstances. Clawbacks to actual costs allocated will not be allowed on these items

and this 2013/14 base plus CPI will be the "assumed" actual expense…”

Based on the above, Transnet has not calculated an operating cost clawback specific to the

2013/14 actual corporate overhead costs incurred. However, it must be noted that the actual

corporate overhead costs allocation for 2013/14 to TPL is R155m after excluding TCP costs and

social responsibility costs (amounting to 3,6% of the Transnet corporate overhead costs) which

is already above the R101.7 million corporate overhead costs approved by NERSA in the 2014/15

Tariff Determination and the R93.19 million approved in the 2013/14 Tariff Determination.

Effectively the allocation of Transnet corporate overhead costs to Transnet Freight Rail (TFR) is

above 50% whilst TPL is allocated less than 4% of Transnet corporate overhead costs.

At the Public Hearing held at NERSA’s offices on 6 February 2014 and subsequent

correspondence to NERSA, Transnet had indicated its concerns with NERSA’s approach of

calculating TPL allocated corporate overhead costs.

The services provided by each Transnet corporate cost centre to the respective Operating

Divisions (ODs) of Transnet vary in accordance with OD requirements and the nature of its

activities. Transnet allocates these shared costs based on a top down costs centre allocation

approach as opposed to a top down expenditure line item allocation approach.

This effectively means that total costs relating to a particular cost centre are allocated to the

ODs using a cost driver predetermined by and agreed with the cost centre managers for that

39

particular cost centre and this consequently informs the allocation of the expenditure line items

such as personnel costs, fuel costs etc. within that cost centre.

The predetermined cost drivers as well as the amounts budgeted for each cost centre are set

out in the “Transnet Corporate Overhead Costs Policy”. The manner in which the allocation of

Transnet corporate overhead costs is done is consistent with the Transnet Corporate Overhead

Costs Policy.

To further enhance reliance on the allocation of Transnet corporate overhead costs, these costs

allocations are audited.

Table 19: Transnet Corporate Overhead Allocated to TPL

2014/15 Budget 2015/16 Forecast

ZAR

Net operating expenses excluding depreciation and amortisation

179,182,770

173,476,615

Personnel costs

82,287,271

68,821,587

Fuel costs

46,610

58,107

Electricity costs

412,312

590,627

Material costs

96,734

119,709

Other operating costs

96,339,844

103,886,585

Accommodation and Refreshments

1,459,898

1,398,515

Professional Fees

27,979,181

24,985,113

Electronic Data Costs

10,059,379

9,779,170

Internal Audit

9,156,855

10,117,435

Social Investment a

11,980,419

17,755,539

Miscellaneous Costs

35,704,111

39,850,813

Profit from operations before depreciation,

179,182,770

173,476,615

amortisation and items listed below

Depreciation and amortisation

15,482,113

21,605,120

Profit from operations before the items listed below

194,664,882

195,081,735

Profit on sale of interest in businesses - -

Impairment of assets - -

Dividends received - -

Post-retirement benefit obligation costs

8,524,304

12,633,416

Fair value adjustments

17,997

27,254

Income from associates - -

Profit from operations before net finance costs

203,207,183

207,742,405

Transnet Capital Projects b

1,556,793

207,574

Transnet Foundation c -

73,951 -

45,552

Total Overhead Costs d

204,690,025

207,904,427

% Increase 1.6%

40

Table 20: Transnet Corporate Overhead Allocated to TPL Petroleum Pipeline Business

2014/15 Budget 2015/16 Forecast

ZAR

TCC Total Overhead Costs Allocation d

204,690,025

207,904,427

Incentive Provision (TPL, TCC, TCP) e -33,264,617

-20,776,634

Transnet Foundation -c

73,951

45,552

Social Investment -a -11,980,419

-17,755,539

TCP Costs -b -

1,556,793 -

207,574

Transnet Corporate Overhead Costs Allocated costs to TPL

f = sum(d;e;-c;-a;-b)

157,962,147

169,210,232

% allocation to Transnet Petroleum Pipelines Business g 89.23% 89.23%

Transnet Corporate Overhead allocated to TPL Petroleum Pipelines Business h=f*g

140,956,732

150,993,904

The increase in allocated corporate overhead costs of 4.89% (from R158 million to R169 million)

between 2014/15 budget to 2015/16 is aligned with inflationary parameters. Allocation of costs

to TPL is dependent on the amounts budgeted for at Transnet corporate as well as the costs

drivers used as mentioned above. The amounts budgeted for at Transnet corporate between

2014/15 and 2015/16 in a format similar to Table 18 above are also within inflationary

parameters with costs increasing by no more than 10%. The cost drivers used are in line with

the Transnet Corporate Overheads Costs Policy. Should NERSA’s approach of calculating TPL’s

share of Transnet corporate overhead costs be followed, the 2015/16 Corporate overhead costs

for TPL would amount to R107.8 million [R101.7 million (2014/15 Tariff Determination) * 1.06%

(2015/16 CPI)] resulting in a potential financial loss of R43.2 million (R151 million less R107.8

million).

After taking all of the above factors into account, TPL considered it appropriate to use corporate

overhead costs of R151 million in its determination of allowable revenue to ensure full economic

costs recovery.

Further, Transnet requests that NERSA reviews the application of the Methodology with regards

corporate overhead costs. Consequently, the impact of the on the operating expense adjustment

calculation should be reconsidered. Refer to Section 11.1.2.

41

Table 21: Miscellaneous Expenses

Description TCC TPL

% of TCC costs

ZAR

Administration fees paid 52,539,944 3,378,958 6% Advertising 95,010,857 - 0% Note 1 Audit fees 51,418,802 3,121,611 6% Catering equipment 63,727 738 1% Membership fees 16,977,347 1,567,654 9% Bank Charges 49,239,761 1,658,911 3% Agency Fees 26,320,408 761,138 3% Printing and stationery 27,169,735 2,082,349 8% Security 9,055,688 569,354 6% Telecommunications 22,146,920 1,043,991 5% Travel - local 27,895,921 1,504,655 5% Travel - overseas - deductible 19,021,034 1,131,694 6% Enterprise Development 100,000,000 - 0% Note 2 Sponsorships 40,533,525 4,481,625 11% Depreciation 116,788,179 7,615,787 7% Claims Paid 19,850,001 1,559,152 8% Buildings 40,696,965 2,080,034 5% Other services 226,630,226 7,293,162 3%

Total Other Operating Expenses 941,359,040 39,850,813 4%

Note 1

Disallowed in terms of Section 7.4.10 of Methodology: The justifiable costs of marketing are

allowed but only those relating to the marketing of regulated activities.

Note 2

Disallowed in terms of Section 7.4.8 of Methodology - Costs relating to corporate social

responsibility and donations are not allowed, unless it can be shown that these costs benefit

tariff paying customers.

8 Income Taxation

Transnet has elected to use the normalised (notional) tax approach in its tariff application.

Normalised tax refers to an estimated normalised tax expense with respect to the regulated

activity for the tariff period under review. In accordance with the methodology it is calculated

based on the following formula:

Tax = {(NRBTA / (1-t)} x t

Where:

NRBTA = Net revenue before tax allowance

= {(RAB x WACC) +E + D (historic & write up) + F ± C} – {E

+D(historic)}

42

t = prevailing corporate tax rate of the licensee

The income tax allowance using the above formula amounts to R534.77 million in 2015/16.

Table 22: Tax

Tax={(NRBTA)/(1-t)}*t 2015/16

R million/%

Ke*RAB*Equity ratio a 1,305.01

Kd*RAB*Debt Ratio b 74.08

WACC*RAB c=a+b 1,379.09

E (Operational Expenditure) d 1,025.43

E (Land Rehabilitation provision) d 43.82

E (Corporate Overhead Costs) d 150.99

D (historic) e 425.66

D (write-up) ee 111.31

D (F-factor) eee -6.09

F-factor f 0.00

C [Clawback Including Tax clawback] g -312.01

Allowable revenue before tax allowance h=c+d+e+ee+f+g 2,818.20

Tax rate [Tr] j 28%

Add back Clawback as the notional tax thereon is already calculated

gg -312.01

NPBT excl tax allowance [Note:interest not deducted to allow Tax shield]

k=h-d-e-gg 1,484.31

Allowable Revenue pre tax 2,818.20

Tax={(NRBTA)/(1-t)}*t l={k/(1-j)}*j 577.23

Total Allowable Revenue m=h+l 3,395.43

9 Depreciation

Depreciation is calculated on a straight line basis over the useful lives of the assets as per the

methodology. Depreciation has been calculated by using the method given in the Table 1 in the

answer to question 1 of the FAQ.

The useful lives currently reflected in the regulatory asset register are aligned to the report

issued by ADL it the last full valuation conducted in March 2012. See Annexure 6 for useful

lives.

43

Table 23: Depreciation

2013/14 Act 2014/15 LE 2015/16 App 2016/17 2017/18 2018/19

R million

Historic Depreciation 398.29 353.06 420.71 575.07 588.12 675.95

PPE 403.24 358.02 425.66 580.03 593.08 652.54

AFUDC/Levy 0.00 0.00 0.00 0.00 0.00 24.70

TCP costs capitalised 0.00 0.00 0.00 0.00 0.00 3.67

F-factor (4.95) (4.95) (4.95) (4.95) (4.95) (4.95)

Amortisation of write up 70.31 88.42 114.07 156.11 196.69 242.82

PPE 66.89 85.32 111.31 153.72 194.69 243.42

AFUDC/Levy 0.00 0.00 0.00 0.00 0.00 1.48


F-factor (0.48) (0.79) (1.14) (1.50) (1.89) (2.30)

Total Depreciation and Amortisation 468.60 441.49 534.78 731.18 784.82 918.77

PPE 470.13 443.34 536.97 733.75 787.76 895.96

AFUDC/Levy 0.00 0.00 0.00 0.00 0.00 26.18


F-factor (5.43) (5.75) (6.09) (6.46) (6.84) (7.25)

The estimated regulatory depreciation charge for 2015/16 is R530.88 million. Depreciation

relating to new assets has been pro-rated in the year of capitalisation based on the period in

which they are in operation.

Table 24 reflects the total depreciation and amortisation of inflation write-up less the amounts

previously allowed and clawed back. These balances are incorporated in the clawback

calculations of the respective years – the detailed clawback calculations are reflected in the

Clawback section.

44

Table 24: Summary of depreciation and amortisation of inflation write up for tariff years

2013/14 to 2018/19

Comparison of Depreciation in the Regulated Asset Register and Net depreciation and amortisation allowed.

2013/14 2014/15 2015/16 2016/17 2017/18 2018/19

R million

Northern Network

(155.60)

(124.14)

(134.28)

(144.29)

(154.38)

(169.44)

Southern Network/ DJP

(22.73)

(18.79)

(9.63)

(15.25)

(23.30)

(34.37)

Total old Refined assets

(178.33)

(142.93)

(143.91)

(159.54)

(177.69)

(203.80)

NMPP Pipelines and Close Out of Pipelines

(235.26)

(243.69)

(280.87)

(321.44)

(339.35)

(359.71)

Deferred Scope and remaining scope of TM1

-

-

-

-

(4.68)

(52.67)

Terminals

-

-

(52.54)

(189.87)

(201.26)

(213.34)

Total refined

(413.60)

(386.61)

(477.31)

(670.85)

(722.98)

(829.53)

Avtur

(9.23)

(8.53)

(8.83)

(9.22)

(9.35)

(9.81)

Crude Oil Pipeline

(47.31)

(48.19)

(50.84)

(53.67)

(55.43)

(56.61)

Net (AFUDC/Levy)

-

-

-

-

-

(26.18)

TCP costs capitalised

-

-

-

-

(3.89)

F Factor recovery

5.43

5.75

6.09

6.46

6.84

7.25

Total

(464.70)

(437.59)

(530.88)

(727.29)

(780.92)

(918.77)

Should have received depreciation

464.70

437.59

530.88

727.29

780.92

918.77

As allowed in Rfd

417.34

476.09

530.88

727.29

780.92

918.77

Depreciation as per RFD

483.97

476.09

530.88

727.29

780.92

918.77

Claw back as per 2014/15 RFD

(66.63)

-

Total Depreciation to be given /(clawed) back

47.36

(38.50)

-

-

-

-

45

10 F-Factor

In accordance with Section 8.2 of the Methodology, the licencee is allowed to request that

NERSA considers for this application an F-Factor allowance for assets in operation during the

2015/16 financial year.

Section 8.3 of the Methodology states that “if the allowable revenue excluding the F-Factor does

not enable the applicant‘s regulated activity to operate with a debt service cover ratio (DSCR)

acceptable to the Energy Regulator, then additional revenue may be allowed”.

Transnet understands that the cash interest cover/debt service cover range that NERSA

considers for purposes of awarding an F-Factor allowance is defined in NERSA’s guidance

document titled “Interest Cover Ratio Range for the Petroleum Pipeline Industry” (“Cash Interest

Cover Guidance document”) which specifies a range of 1.5 – 4 times utilising the NERSA ratio.

Base on the above, Transnet calculated an F-Factor that equates to 2 times the debt service

cover ratio (based on pervious NERSA Decisions). However, Transnet does not qualify for an F

factor at this level due to the lower gearing attributable to the phased-in capitalisation of assets

over a period of time (Refer to Section 6.1).

11 Clawback

The following formula has been used to determine the Clawback adjustment as per Answer 30.1 to question 30 of the FAQ:

Clawback adjustments = ARA +(PPE-d)A + DA + KdA + EA + OeA + GA

Where:

ARA = Allowable revenue adjustment

(PPE-d)A = Allowable revenue adjustment on (PPE-d)updates

DA = Depreciation and amortisation of inflation write-up adjustment

KdA = Cost of debt adjustment

EA = Expenses adjustment

GA = General adjustment for any remaining differences between projected allowable revenue

and actual allowable revenue not resulting from efficiency gains, for example:

46

i. debt ratio and the effect thereof on beta, cost of equity, WACC and the taxation effect of these

adjustments

ii. taxation adjustments

iii. other

OeA = Operating efficiency adjustment (Only if more efficient) Note: Operating efficiency could

result in clawbacks to or from a licensee.

Refer to Table 25 and for a summary of the clawback and the sources of clawback respectively.

A detailed analysis on the clawback has been performed thereafter.

A total clawback of R312.01 million has been included in the allowable revenue (“AR”)

calculation.

Table 25: Summary of clawback

Clawback

(CLAWBACK)/

GIVEBACK

Taxation

effect

(CLAWBACK)/ GIVEBACK

INCLUSIVE OF Taxation

effect

28%

R million R million R million

AR adjustment 97.54 37.93 135.48

Operating Cost (201.55) 0.00 (201.55)

Decommisioning adjustment (1.43) 0.00 (1.43)

Operating efficiency adjustment 0.00 0.00 0.00

Clawback on 16-inch and 24 inch pipelines (0.02) (0.01) (0.02)

Clawback on Other Assets 13.20 5.13 18.33

Depreciation due to change in useful life 43.95 0.00 43.95

Amortisation of inflation write-up due to change

in useful life 3.41 0.00 3.41

Total WACC and debt ratio adjustment 32.06 12.47 44.53

Total Giveback for 2013/14 tariff year (12.82) 55.53 42.71

Clawback deferment from 2014/15 Rfd (106.78) 0.00 (106.78)

Clawback on Terminals (127.72) (49.67) (177.39)

Clawback on Other Assets (2.17) (0.84) (3.01)

Depreciation due to change in useful life (37.28) 0.00 (37.28)

Amortisation if inflation write-up due to change in

useful life (1.22) (0.47) (1.70)

Total Clawback for 2014/15 tariff year (275.17) (50.99) (326.15)

Total Clawback before Time value of money (287.99) 4.54 (283.44)

Time value of money 2013/14 (5.79%) (1.53) (0.60) (2.13)

Time value of money 2014/15 (6.88%) (19.04) (7.40) (26.44)

Total Clawback (308.56) (3.46) (312.01)

Carry over from 2014/15 RfD

106.78

- 106.78

Clawback for this year (201.78) (3.46) (205.23)

47

Table 26: Sources of clawback

(CLAWBACK)/

GIVEBACK

R million

Sources of Clawback

RAB (116.71)

Depreciation 8.86

Operational Costs and operating efficiency (202.97)

WACC and debt ratio adjustment 32.06

Taxation allowance (3.46)

Allowable Revenue adjustment 97.54

Clawback deferment from 2014/15 Rfd (106.78)

Time value of money (20.57)

Total (312.01)

11.1 Clawbacks relating to the 2013/14 tariff period

11.1.1 Allowable Revenue adjustment

Answer 30.2.1 of the FAQ states that “the allowable revenue adjustment compensates the

licensee and customers for differences between allowable revenue planned and allowable

revenue realised in a specific tariff period”.

The following formula applies:

ARA = ARa - ARr

Where ARA = Allowable revenue adjustment

ARa = Allowable revenue approved

ARr = Allowable revenue realised

The difference between the actual 2013/14 revenue (R2,698.08 million) and the revenue per

the 2013/14 tariff decision (R2,795.62 million) amounts to a give back of R97.54 million

(exclusive of tax effect).

48

11.1.2 Expense adjustment – Operating and Maintenance Expense adjustment

(EA)

Answer 30.2.5 of the FAQ states that adjustments on operating and maintenance expenditure

provides for differences between expenditure projected at the time of setting the tariffs and the

actual expenditure for the tariff period and is calculated by applying the following formula:

EA = Ep – Ea

Where: EA = Operating and maintenance expense adjustment

Ep = Operating and maintenance expense projected

Ea = Operating and maintenance expense actual

Refer to Table 27 and

Table 28 for the calculation of the expense adjustment and decommissioning provision

adjustment.

Table 27: Expense adjustment

Opex as per RFD 2013/14

R

million

Opex 891.10

Corporate Costs 93.19

Ep 976.60

Adjusted Opex costs excluding TCP 976.60

Opex as per actual

Opex 689.55

Corporate Costs 93.19

Ea 775.05

EA=Ep-Ea (201.55)

Table 28: Decommissioning provision adjustment

2013/14

RFD Actual Clawback

Decommissioning provision (R million) 22.60 21.17 (1.43)

Volumes (billion litres) 17.70 16.58

Rand per litre recovered in tariff 1.28

11.1.3 Operating efficiency adjustment (OeA)

Section 9.5 of the Methodology states the “Operating efficiency is achieved when the actual

average operating and maintenance expenses per unit in a specific period is less than the

49

previous period’s actual average expenses per unit after taking into account the effects of

inflation”.

Further Section 9.7 provides the formula for determining the operating efficiency adjustment:

OeA = [(OpexA – OpexB) x actual volumes] x 50%.

Where:

P0 = The tariff period under review (the tariff period for which a tariff is being set)

P-1 = One year prior to the tariff period under review (audited financial results not yet available)

P-2 = Two years prior to the tariff period under review (audited financial results should be

available)

P-3 = Three years prior to the tariff period under review

OeA = Operating efficiency adjustment

OpexA = Operating and maintenance expenses (Opex) per unit for period P-2, which is: actual

Opex for period P-2 / actual sales volumes in period P-2

OpexB = Operating and maintenance expenses (Opex) per unit for period P-2, adjusted for

inflation in P-2, which is: Actual inflation adjusted Opex for period P-3 /actual sales volumes in

period P-2

actual volumes = actual sales volumes in period P-2

Refer to Table 29 for operational efficiency calculation

Table 29: Operational efficiency adjustment

2013/14

ZAR/litre

2013/14 Operational Expenditure [Actual Excluding TCP] a 775,054,746.92

2013/14 Volume [actual] b 16,583,000.00

Opex A c=a/b 46.74

2012/13 Operational Expenditure [Actual Excluding TCP] d 708,220,504.75

2013/14 CPI e 6.15%

f=d*(1+e) 751,776,065.79

Opex B g=f/b 45.33

h=(c-g)*b 23,278,681.13 i 50%

Inefficient/(efficient) j=h*i 11,639,340.56

Efficiency value if j>0 then 0 0

50

11.1.4 Value of new operating property, plant, vehicles and equipment

Adjustment (PPE-d)A

Answer 30.2.2 of the FAQ states that “The net value adjustment for operating property, plant

and equipment (PPE-d)A compensates licensees and customers for differences in operating

assets estimated to be in use and operating assets actually in use in the tariff period under

review. This pertains to changes arising from additions, decommissioning and disposals of

operating assets – as well as to the timing of implementing these changes. Timing refers to the

difference between the projected date and the actual date when the changes were

implemented”.

The following formula is used to determine the (PPE-d)A:

(PPE-d)A = Allowable revenue adjustment on (PPE-d)updates

= [(PPE-d)updates x (Dya – Dyp)/365] x WACC

Where:

(PPE-d)updates = Net value of the operating assets that will be commissioned, decommissioned

or disposed of during the tariff period under review.

Dya = Actual number of days from the date when the operating asset(s) was commissioned,

decommissioned or disposed of to the end of the tariff period.

Dyp = Projected number of days from the date when the operating asset(s) was planned to be

put into use, decommissioned or disposed of to the end of the tariff period.

(PPE-d)A for 2013/14 (Refer to Table 30) relate predominantly to a giveback on other regulated

assets (R13.2 million).

51

Table 30: (PPE-d)A for 2013/14

As per RFD Actual

March 2014 Capital ratio % Capital ratio %

Ke 59.48% 9.01% 59.48% 9.01%

Kd 40.52% 1.07% 40.52% 1.07%

WACC 100.00% 5.79% 100.00% 5.79%

Difference in Cost March 2014 Total TOC

value WACC Ke Kd

R million

Value of PPE as per 2014/15 RFD 16,684.75 966.50 894.16 72.34

Final TOC as per asset register 16,912.27 979.68 906.35 73.33

Difference in Cost 227.52 13.18 12.19 0.99

Made up as follow:

16 inch & 24 inch (0.30) (0.02) (0.02) (0.00)

Terminals 0.00 0.00 0.00

Completion of MAC and final accounts on

Petroleum 0.00 0.00 0.00

AFUDC/Levy 0.00 0.00 0.00

TCP Capitalised costs 0.00 0.00 0.00

Other Assets (North,South, Avtur, Crude) 227.82 13.20 12.21 0.99

Total 227.52 13.18 12.19 0.99

11.1.5 Depreciation and amortisation of inflation write-up adjustment (DA)

Section 30.2.3 of the FAQ states that “The depreciation and amortisation of inflation write-up

adjustment provides for the differences between the projected depreciation made at the time

the allowable revenue was determined and the actual depreciation for the specific tariff period”.

The following formula is used to determine DA:

DA = Da – Dp

Where:

DA = Depreciation and amortisation of inflation write-up adjustment

Da = Depreciation and amortisation of inflation write-up actual

Dp = Depreciation and amortisation of inflation write-up approved

A giveback on depreciation (R43.95 million) and amortisation of inflation write-up (R3.41 million)

as a result of forecasted assets being lower than actual assets capitalised in 2013/14. Refer to

Table 24 and Table 25.

52

11.1.6 Total WACC and Debt ratio adjustment for 2013/14

The 2013/14 debt ratio was revised by Transnet from the 40.52% originally allowed by the

Energy Regulator in the 2013/14 Tariff decision to 30% as a consequence of the postponement

of completion of the terminals which reduced the qualifying debt.

Transnet calculated this giveback value to be R32.06 million (refer to Table 31) after taking

into account:

the effect of the lower debt ratio on the beta and consequently the cost of equity (Ke)

which reduces from 9.01% to 8.34%.

the effect of the actual real after tax cost of debt (1.07%) compared to the forecasted

value (0.49%) reflected in the 2013/14 Tariff decision.

Therefore Transnet has complied with Answer 30.2.4 and 30.2.6 of the FAQ insofar as:

an adjustment has been determined for cost of debt,

a general adjustment has been determined for debt ratio and the effect thereof on

beta, cost of equity, WACC and the taxation effect of these adjustments.

Table 31: 2013/14 WACC and debt ratio adjustment

NERSA RFD

gearing

Actual

gearing

R million/%

RAB 16,675.34 16,675.34

Gearing 40.52% 30.00%

WACC (%) 5.79% 5.99%

WACC return 965.95 998.02

Giveback resulting

from 2013/14 gearing adjustment 32.06

11.2 Clawbacks relating to the 2014/15 tariff period

Total clawback deferred of R106.78 million total clawback deferred as per the 2014/15 Tariff

Determination has been included in the 2015/16 clawback.

11.2.1 Value of new operating property, plant, vehicles and equipment

Adjustment (PPE-d)A

Clawbacks for 2014/15 (Refer Table 32) to include:

53

A clawback (R121.82 million) on the terminals resulting from a change in TM2

operational date from 30 September 2014 (as per the 2014/15 Tariff Determination)

to 30 September 2015.

A clawback on other regulated assets (R2.17 million).

Table 32: (PPE-d)A for 2014/15

As per RFD Actual

March 2015

Capital

ratio %

Capital

ratio %

Ke 70.00% 9.38% 70.00% 9.38%

Kd 30.00% 1.06% 30.00% 1.06%

WACC 100.00% 6.88% 100.00% 6.88%

Difference in Cost March 2015

Total TOC

value WACC Ke Kd

R million

Value of PPE as per 2014/15 RFD 19,419.12

1,336.81

1,275.06

61.75

Final TOC as per asset register 17,532.30

1,206.92

1,151.17

55.75

Difference in Cost (1,886.82) (129.89) (123.89) (6.00)

Made up as follow:

Terminals (1,855.35) (127.72) (121.82) (5.90)

Other Assets (North,South, Avtur, Crude) (31.48) (2.17) (2.07) (0.10)

Total (1,886.82) (129.89) (123.89) (6.00)

11.2.2 Depreciation and amortisation of inflation write-up adjustment (DA)

A clawback on depreciation (R37.28 million) and amortisation of inflation write-up (R1.22

million) has been determined as a result of the postponement of the capitalisation of TM2.

Refer to Table 24 and Table 25.

54

12 Allowable Revenue (AR) Calculation

Table 33 summarises the AR for the 2015/16 tariff application.

Table 33: Allowable Revenue

2014/15 RFD 2015/16 App 2016/17 2017/18 2018/19

R million

PPE 19,841.02 23,317.63 33,066.53 35,406.70 40,157.16

Net AFUDC/Levy 0.00 0.00 0.00 0.00 1,636.11

TCP Capitalised Costs 0.00 0.00 0.00 0.00 243.33

F-factor (421.90) (441.13) (461.14) (481.96) (503.63)

Deferred tax (794.13) (1,049.57) (1,540.16) (2,110.35) (2,719.47)

Net Working capital 356.35 420.09 577.61 635.83 742.34

RAB 18,981.34 22,247.02 31,642.84 33,450.22 39,555.84

Equity Return on Assets 1,246.31 1,305.01 1,767.05 1,937.38 2,272.38

Debt Return on Assets 60.36 74.08 129.61 117.70 144.06

Return on Assets 1,306.67 1,379.09 1,896.65 2,055.08 2,416.44

Expenses 948.95 1,220.24 1,355.26 1,465.67 1,564.54

Depreciation 476.08 530.88 727.29 780.92 918.77

Clawback (333.53) (312.01) 0.00 0.00 0.00

F-Factor 0.00 0.00 0.00 0.00 0.00

Profit Before Tax 2,398.17 2,818.20 3,979.20 4,301.67 4,899.75

Notional Tax 539.57 577.23 794.86 872.25 1,032.23

Total Allowable Revenue 2,937.74 3,395.43 4,774.06 5,173.92 5,931.98

55

13 Volumes

Latest volume estimates for 2014/15 period are based on the actual results thus far and

assumptions on product movement for the remainder of the year.

Overall volumes in the 2015/16 year (17,134.22 million litres) are expected to show an overall

increase on the previous year latest year estimate (16,665.38 million litres) of 2.81%. Refer to

Table 34 for volume data.

Factors influencing volumes

• Higher crude volumes as a result of the biennial Natref shut down scheduled for the

2016/17 year (note that there was a shutdown in the 2014/15 year).

Table 34: Volume data

Volumes (Million litres) Vols (2013/14 Actual) Vols (2014/15 LE) Vols (2015/16 App)

Megalitre

Sasolburg 2,518.07 2,689.53 2,833.24

Alrode 466.92 791.08 807.86 Airport (Avtur) 1,034.28 1,086.68 1,037.06 Klerksdorp 180.38 369.81 387.57 Kroonstad - - - Langlaagte 51.20 59.88 64.93 Pretoria West - - - Rustenburg 99.12 34.49 70.00 Tarlton 48.67 44.08 63.29 Waltloo 436.16 271.73 402.54 Witbank 201.35 31.78 -

Secunda 3,496.55 3,564.31 3,564.79

Alrode 1,635.30 1,097.82 1,078.70 Coalbrook - - - Langlaagte 662.89 474.18 479.18 Pretoria West - - - Rustenburg 41.23 90.64 81.25 Tarlton 141.39 199.78 201.39 Waltloo 732.98 940.30 949.54 Witbank 282.77 761.60 774.74

DJP (Durban) 7,912.65 7,515.26 5,225.25

Airport (Avtur) 81.84 - - Alrode 893.69 1,088.47 - Bethlehem 120.15 116.70 34.19 Coalbrook (Crude) 4,807.22 4,591.91 4,910.40 Coalbrook (DIC) - - - Klerksdorp 342.01 7.23 - Kroonstad 607.50 645.55 - Ladysmith 261.81 280.66 280.66 Langlaagte 100.05 289.33 - Rustenburg 24.99 33.16 - Tarlton 99.71 48.22 - Waltloo 573.69 414.01 -

NMPP (Durban) 2,655.35 2,896.28 5,510.94

Airport (Avtur) - - - Alrode 632.41 917.67 2,091.09 Kroonstad - - 663.61 Klerksdorp 2.55 147.21 143.35 Langlaagte 254.39 308.57 619.52 Rustenburg 96.11 118.05 132.83 Tarlton 481.36 372.78 418.77 Waltloo 642.69 793.67 1,155.95 Witbank 537.82 238.32 285.82 Coalbrook 8.02 - -

Total 16,582.63 16,665.38 17,134.22

Year on year movement 0.50% 2.81%

56

14 Tariffs

For the tariff period under review, Transnet has decided to include the calculation of tariffs for

NERSA’s information. Transnet has used in its calculation NERSA’s rolled-in approach that it

adopted for the first time when setting Transnet’s tariffs in the 2011/12 tariff period.

Further, Transnet has adopted NERSA’s simple average basis of determining tariffs as reflected

in paragraph 188 of NERSA’s 2014/15 Tariff Determination, namely, “Where parallel routes

(multiple routes on the Transnet pipelines system from one point of origin to the same

destination, but with different distances) exist, a second calculation is performed – a simple

average distance is calculated to take into account the distance for the relative pipelines/routes

to a specific destination point. These simple average distances are then used to calculate the

rolled-in tariff expressed in cents per 1000 litre per kilometre. This was changed from previous

years where volume weighted average distance was used.”

The Northern Network distribution destination distances have been calculated on a simple

average basis as set out in Table 35.

The simple average distance for Durban to Jameson Park is reflected in Table 35.

The calculation of the Rolled-in tariff factor and the 2015/16 Petroleum Pipeline Tariffs are

reflected in Table 36 and Table 37 respectively.

Table 35: 2015/16 Distance for various destinations based on the simple average basis

Simple Average Distance for distribution lines

From Coalbrook /Natref (DJP and Natref)

From Jameson Park (existing

infrastructure)

From Jameson Park (NMPP)

Simple mathematical

average

Actual Distance

km

Actual Distance km

Actual Distance km

Delivery depot a b c d=average [a;b;c]

Alrode 67.80 45.50 41.30 51.5 Langlaagte 90.60 68.30 72.10 77.0 Tarlton 132.00 109.70 113.50 118.4 Rustenburg 194.40 172.10 175.90 180.8 Waltloo 154.90 170.20 128.30 151.1 Witbank 181.00 108.00 144.5 Airport 93.40 67.30 80.4 Klerksdorp 133.35 212.70 173.0

Simple average distance for pipelines DJP 634.6 - NMPP 556.1 COP 588.0 -

Average DJP Trunkline,COP & NMPP 24 inch 592.9

57

Table 36: Rolled-in Tariff Factor

2015/16 Application

Tariff factor = AR / MlKm 45.678

Allowable Revenue [AR] 3,395.43

Total Volume [mega litre] 17,134

Ml Km[vol x distance] 7,433,459

Table 37: 2015/16 Petroleum Pipeline Tariffs

Volumes (Million

litres)

Distance (km)

NERSA Fixed

Amendment 3

Trunkline

distance Total Distance

Vols (2014/15

App) Mega litre

Ml Km (vol x

Dist) Tariff (c/l) AR (R million)

a b c=a+b d e=c*d f = tariff factor

* c/1000 g=f*d

Sasolburg to: 2,833.2 278,003.4 127.0

Alrode 51.5 - 51.5 807.9 41,631.7 2.354 19.02

Airport (Avtur) 80.4 - 80.4 1037.1 83,327.5 3.670 38.06

Klerksdorp 173.0 - 173.0 387.6 67,059.1 7.903 30.63

Langlaagte 77.0 - 77.0 64.9 4,999.6 3.517 2.28

Rustenburg 180.8 - 180.8 70.0 12,655.3 8.259 5.78

Tarlton 118.4 - 118.4 63.3 7,493.3 5.408 3.42

Waltloo 151.1 - 151.1 402.5 60,836.9 6.903 27.79

Witbank 144.5 - 144.5 0.0 - 6.600 -

Secunda to: 3,564.8 486,661.5 222.3

Alrode 120.3 - 120.3 1078.7 129,767.2 5.495 59.27

Coalbrook 144.8 - 144.8 0.0 - 6.614 -

Langlaagte 143.1 - 143.1 479.2 68,570.9 6.536 31.32

Rustenburg 246.9 - 246.9 81.2 20,059.6 11.278 9.16

Tarlton 184.5 - 184.5 201.4 37,157.2 8.428 16.97

Waltloo 160.9 - 160.9 949.5 152,780.6 7.350 69.79

Witbank 101.1 - 101.1 774.7 78,325.9 4.618 35.78

DJP (Durban) to: 5,225.3 2,987,963.9 1,364.8

Airport (Avtur) 80.4 592.9 673.3 - - 30.753 -

Alrode 51.5 592.9 644.4 - - 29.436 -

Klerksdorp 173.0 592.9 765.9 - - 34.986 -

Langlaagte 77.0 592.9 669.9 - - 30.599 -

Rustenburg 180.8 592.9 773.7 - - 35.341 -

Tarlton 118.4 592.9 711.3 - - 32.491 -

Waltloo 151.1 592.9 744.0 - - 33.986 -

Witbank 144.5 592.9 737.4 - - 33.683 -

Bethlehem 383.2 383.2 34.2 13,101.9 17.504 5.98

Kroonstad 507.8 507.8 - - 23.195 -

Ladysmith 226.2 226.2 280.7 63,485.9 10.332 29.00

Coalbrook (Crude) 592.9 592.9 4,910.4 2,911,376.2 27.082 1,329.85

Coalbrook (DIC) 592.9 592.9 - - 27.082 -

NMPP (Durban) to: 5,510.9 3,680,830.1 1,681.3

Airport (Avtur) 80.4 592.9 673.3 - - 30.753 -

Alrode 51.5 592.9 644.4 2,091.1 1,347,565.3 29.436 615.54

Kroonstad 507.8 507.8 663.6 336,982.5 23.195 153.93

Klerksdorp 173.0 592.9 765.9 143.3 109,793.3 34.986 50.15

Langlaagte 77.0 592.9 669.9 619.5 415,013.5 30.599 189.57

Rustenburg 180.8 592.9 773.7 132.8 102,773.7 35.341 46.94

Tarlton 118.4 592.9 711.3 418.8 297,874.3 32.491 136.06

Waltloo 151.1 592.9 744.0 1,155.9 860,063.7 33.986 392.86

Witbank 144.5 592.9 737.4 285.8 210,763.8 33.683 96.27

Coalbrook 592.9 592.9 - - 27.082 -

Total 17,134.2 7,433,458.9 3,395.4

58

15 Conclusion

Transnet has endeavoured to meet the MIRTA requirements in this application. In arriving at

its AR requirement, Transnet has applied the methodology in all respects.

Transnet requests a revenue requirement for the 2015/16 year of R3,395.43 million which

represents a 15.58% increase from the 2014/15 Tariff Determination of R2,937.74 million.

59

16 Regulatory Financial Statements

Year Ended Year Ended Year Ended Year Ended Year Ended Year Ended Year Ended

Mar 2013 Mar 2014 Mar 2015 Mar 2016 Mar 2017 Mar 2018 Mar 2019

( R millions ) ( R millions ) ( R millions ) ( R millions ) ( R millions ) ( R millions ) ( R millions )

Total Revenue 2,493.2 2,795.6 2,937.7 3,395.4 4,774.1 5,177.0 5,936.1

Operating Revenue - Petroleum 2,575.9 2,795.6 2,937.7 3,395.4 4,774.1 5,177.0 5,936.1

Direct Operating Revenue 2,575.9 2,795.6 2,937.7 3,395.4 4,774.1 5,177.0 5,936.1

Regulatory Debits (82.8) 0.0 0.0 0.0 0.0 0.0 0.0

Petroleum Clawback (82.8)

Operating Costs (1,170.2) (1,317.3) (1,451.5) (1,751.1) (2,082.6) (2,246.6) (2,483.3)

Operating & Maintenance Costs (726.7) (852.6) (1,014.0) (1,220.2) (1,355.3) (1,465.7) (1,564.5)

Salaries & Wages (190.7) (246.0) (260.7) (311.3) (345.0) (376.1) (409.9)

Materials & Supplies (9.7) (10.4) (11.5) (16.9) (18.6) (12.5) (12.7)

Outside Services - Ext Professional Fees & Survey Costs (4.7) (9.2) (19.1) (18.7) (21.2) (24.4) (23.6)

Operating Fuel (23.9) (25.9) (32.0) (32.4) (32.1) (31.7) (31.6)

Legal Expenses (0.3) (0.8) (2.5) (2.7) (2.8) (3.0) (3.2)

Rent - External Operating Leases (13.8) (16.9) (18.3) (26.5) (28.1) (29.6) (31.2)

Injuries & damages (4.4) (0.8) (0.8) (0.0) 0.0 0.0 0.0

Employee Benefits (17.0) (19.9) (29.2) (39.3) (43.3) (47.2) (51.4)

Insurance (6.6) (12.5) (12.9) (15.5) (15.4) (16.2) (17.1)

Bad Debt (0.0) 0.0 0.0 0.0 0.0 0.0 0.0

Other Expenses (455.5) (510.1) (626.9) (756.9) (848.8) (925.0) (983.8)

Electricity (157.0) (171.4) (188.3) (232.2) (261.2) (303.6) (347.8)

Maintenance (38.6) (59.9) (81.1) (114.1) (125.7) (132.7) (120.9)

Security (16.7) (16.1) (22.9) (31.7) (34.8) (36.7) (38.6)

Telephone & Data (18.7) (16.9) (33.4) (50.6) (61.7) (65.1) (68.5)

Training (23.9) (13.3) (20.9) (23.2) (25.4) (27.7) (30.2)

Travel & Accomodation (10.9) (10.4) (14.4) (19.7) (20.9) (22.0) (23.2)

Prof Fees (Internal) (37.4) (44.4) (46.3) (41.0) (43.8) (46.1) (48.6)

Other Miscellaneous (9.4) (14.7) (34.8) (49.5) (65.4) (69.5) (73.7)

Decomissioning Provision (18.4) (24.2) (43.8) (43.8) (43.8) (43.8) (43.8)

Transnet Corporate Overhead (124.5) (138.8) (141.0) (151.0) (166.0) (177.7) (188.4)

Depreciation & Amortization (443.5) (464.7) (437.6) (530.9) (727.3) (780.9) (918.8)

Depreciation (443.5) (464.7) (437.6) (530.9) (727.3) (780.9) (918.8)

PPE - Pipelines (413.1) (449.9) (427.0) (517.1) (714.4) (770.6) (880.2)

IFRS Asset Imp & Dep 0.0 0.0 0.0 0.0 0.0 0.0 0.0

PPE - NPAs (33.3) (20.2) (16.3) (19.8) (19.3) (17.2) (15.7)

Capitalised Borrowing Costs 0.0 0.0 0.0 0.0 0.0 0.0 (74.4)

Levy Income 0.0 0.0 0.0 0.0 0.0 0.0 48.2

TCP costs 0.0 0.0 0.0 0.0 0.0 0.0 (3.9)

F-Factor 2.9 5.4 5.7 6.1 6.5 6.8 7.3

Amortization 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Intangible Software 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Finance Leased Assets 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Regulatory Operating Profit1,323.0 1,478.4 1,486.2 1,644.3 2,691.5 2,930.4 3,452.8

Non-Regulatory Adjustments (0.8) (13.1) (16.3) (21.7) (21.4) (22.1) (22.4)

Income 1.9 2.0 2.1 2.2 2.3 2.5 2.6

Rev from Other Plant (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0)

Inc from Investments 1.9 2.0 2.1 2.2 2.3 2.5 2.6

Share of Earnings from Affiliates 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Extra-ord Income / Deduc (Non-Regulatory) 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Expenses (2.7) (15.1) (18.4) (23.9) (23.8) (24.6) (25.0)

Exp from Other Plant 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Gain / Loss on Forex (2.7) 0.0 0.0 0.0 0.0 0.0 0.0

Other Deductions (0.0) (15.1) (18.4) (23.9) (23.8) (24.6) (25.0)

Donations & Social Investment 0.0 (15.1) (18.4) (23.9) (23.8) (24.6) (25.0)

Impairment (0.0) 0.0 0.0 0.0 0.0 0.0 0.0

Operating Profit before Finance Costs1,322.2 1,465.3 1,469.8 1,622.6 2,670.1 2,908.3 3,430.4

Finance Costs (556.9) (425.9) (234.3) (815.6) (1,112.1) (1,063.1) (956.9)

Interest on LT Debt (804.5) (911.2) (1,133.1) (1,434.5) (1,510.4) (1,483.6) (1,609.3)

Borrowing Costs (to be capitalised) 419.9 679.2 1,055.3 709.8 603.4 586.8 770.8

Amort of Debt Discount 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Intergroup Interest: R1.9bn Loan (156.9) (156.9) (156.9) (156.9) (156.9) (156.9) (156.9)

ST Interest & Bank Charges (15.4) (37.0) 0.3 66.1 (48.2) (9.4) 38.5

Profit before Taxation765.2 1,039.4 1,235.5 807.1 1,558.0 1,845.3 2,473.5

Taxation (243.4) (297.8) (358.2) (238.2) (448.5) (528.9) (704.8)

Taxes - Income & Regulatory Operating Income 98.3 117.4 175.5 417.0 243.1 182.9 104.3

Provision for Future Income taxes (341.6) (415.2) (533.7) (655.3) (691.6) (711.9) (809.1)

Net Profit / (Loss) for the Year 521.9 741.6 877.3 568.8 1,109.5 1,316.3 1,768.6

Regulatory Net Profit / (Loss) for the year -

transferred to retained earnings605.5 754.7 893.6 590.5 1,130.9 1,338.4 1,791.0

Summary Regulatory Income Statement - (Prior, Current,

Budget and Forecast)

60




Owners' Equity: 8,595.9 10,077.8 11,662.2 13,184.5 15,625.0 18,382.6 21,728.8

Equity Issued 4,098.0 4,123.6 4,123.6 4,123.6 4,123.6 4,123.6 4,123.6

Non Distributable Reserves 1,711.4 2,413.0 3,103.8 4,035.6 5,345.2 6,764.4 8,319.6

Revaluation Reserve 1,711.4 2,413.0 3,103.8 4,035.6 5,345.2 6,764.4 8,319.6

Revaluation Reserve (IFRS) 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Retained Earnings 2,786.5 3,541.2 4,434.8 5,025.3 6,156.2 7,494.6 9,285.6

Accumulated Earnings 2,181.0 2,786.5 3,541.2 4,434.8 5,025.3 6,156.2 7,494.6

Dividends Paid 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Retained Earnings - Current Year 605.5 754.7 893.6 590.5 1,130.9 1,338.4 1,791.0

Non-Current Liabilities: 10,645.0 12,277.7 14,636.3 17,574.1 16,250.7 17,142.0 18,894.4

Provision (pension) 7.1 8.3 8.9 9.5 10.3 11.0 11.9

Long Term Debt: Intergroup 10,586.7 12,179.7 14,499.2 17,397.9 16,023.1 16,858.5 18,547.8

Loan at R1.9bn 1,548.8 1,548.8 1,548.8 1,548.8 1,548.8 1,548.8 1,548.8

NMPP (Current Acc) 9,037.9 10,630.9 12,950.4 15,849.1 14,474.3 15,309.7 16,999.0

Other LT Liabilities 51.2 89.7 128.2 166.7 217.3 272.5 334.8

Decom Provision 51.2 89.7 128.2 166.7 217.3 272.5 334.8

Other NCLDerivative Liability 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Deferred Credits 1,424.8 2,112.8 2,917.0 3,935.9 5,144.2 6,409.5 7,873.1

Unamortised Debt Premium & Exp 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Contri & Grants for Constr (Levy) 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Regulatory Liabilities (Clawback) 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Other Deferred Credits 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Product Adj 0.0 0.0 0.0 0.0 0.0 0.0 0.0

0.0 0.0 0.0 0.0 0.0 0.0 0.0

Accum Future Income Taxes (dtax) 1,424.8 2,112.8 2,917.0 3,935.9 5,144.2 6,409.5 7,873.1

Current liabilities: 1,043.8 1,249.6 1,168.0 669.5 859.3 1,093.4 1,234.6

Accounts Payable 913.8 783.9 449.4 396.4 378.9 553.2 564.7

Trade Creditors 87.3 102.1 119.6 145.0 161.7 175.3 187.5

Other Payables 826.5 681.8 329.8 251.4 217.2 377.9 377.2

Intergroup Creditors 91.6 100.4 106.6 112.8 119.5 126.7 134.3

Debt due within 1 year 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Provision - capital lease 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Interest payable 52.9 52.6 377.7 478.2 503.5 494.5 536.4

Dividends Payable 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Income Tax Payable (98.3) (117.4) (175.5) (417.0) (243.1) (182.9) (104.3)

Other Current Liabilities 83.8 430.0 409.8 99.1 100.5 101.9 103.4

Clawback (Short Term Portion) 0.0 333.5 312.0 0.0 0.0 0.0 0.0

Short Term Provision 22.0 34.7 36.0 37.3 38.7 40.2 41.7

Short Term Derivative Liability 0.1 0.1 0.1 0.1 0.1 0.1 0.1

Other 61.6 61.6 61.6 61.6 61.6 61.6 61.6

Total Capital & Reserves 21,709 25,718 30,384 35,364 37,879 43,028 49,731

Balance Sheet - (Prior, Current,


61




Non-Current Assets (Regulated Plant) 21,034.5 25,285.1 29,919.0 34,814.5 37,172.0 42,257.4 48,850.9

NET PPE in Service 15,777.4 16,480.5 17,202.2 26,726.3 32,223.0 34,882.4 44,102.0

Plant in Service 18,841.5 19,984.9 21,141.3 31,216.3 37,440.7 40,881.8 51,069.3

PPE - Pipelines 18,731.7 20,073.9 21,249.9 31,307.9 37,549.4 41,009.3 46,325.4

PPE - Pipelines (IFRS)

Capitalised Borrowing Costs 0.0 0.0 0.0 0.0 0.0 0.0 4,648.7

Capitalised TCP costs 0.0 0.0 0.0 0.0 0.0 243.3

F-Factor (217.9) (407.1) (430.2) (455.2) (481.3) (508.6) (537.1)

PPE - NPAs 327.7 318.1 321.7 363.6 372.6 381.0 388.9


Accumulated Depreciation (3,064.1) (3,504.4) (3,939.1) (4,490.0) (5,217.7) (5,999.4) (6,967.3)

PPE - Pipelines (2,908.0) (3,357.1) (3,784.3) (4,301.7) (5,016.6) (5,787.9) (6,669.1)

PPE - Pipelines (IFRS)

Capitalised Borrowing Costs 0.0 0.0 0.0 0.0 0.0 0.0 (74.4)

Capitalised TCP costs 0.0 0.0 0.0 0.0 0.0 (3.9)

F-Factor 2.9 8.3 14.1 20.2 26.6 33.5 40.7

PPE - NPAs (159.0) (155.6) (168.9) (208.4) (227.8) (245.0) (260.7)


Net Plant under Capital Lease 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Plant under Capital Lease 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Accum Dep - Plant under Capital Lease 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Net Plant Leased to Others 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Plant LEASED TO Others

Acc Dep - Plant LEASED TO Others

Line Fill

Net Contributions & Grants (Levy) 0.0 0.0 0.0 0.0 0.0 0.0 (2,964.4)

Contributions & Grants (Levy) 0.0 0.0 0.0 0.0 0.0 0.0 (3,012.6)

Accumulated Depreciation 0.0 0.0 0.0 0.0 0.0 0.0 48.2

Plant Under Construction (CWIP) 5,257.1 8,804.6 12,716.8 8,088.1 4,949.1 7,375.0 7,713.3

Other Non-Current Assets & Investments 49.1 49.1 49.1 49.1 49.1 49.1 49.1

Net Other Plant 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Other Plant (Non-regulated)Other Plant: Accumulated Depreciation

Other Plant Under Construction (CWIP)

Other Investments 49.1 49.1 49.1 49.1 49.1 49.1 49.1

Deferred Debits 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Unamortised Debt Premium & Exp 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Regulatory Assets (Clawback) 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Other Deferred Debits 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Sasol Gas Contract (Refrac) 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Product Adjustment 0.0 0.0 0.0 0.0 0.0 0.0

Accum Future Income Taxes (dtax) 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Current Assets 475.5 383.7 415.5 500.3 658.0 721.0 831.0

Cash & Cash Equivalents 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Accounts Receivable 278.3 328.0 345.7 389.7 511.0 551.4 621.8

Trade Debtors 214.7 233.0 244.8 283.0 397.8 431.4 494.7

Intergroup Debtors 17.1 65.9 69.9 74.0 78.4 83.1 88.1

Other Receivables 46.6 29.2 31.0 32.8 34.8 36.9 39.1

Bade Debt Provision 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Inventory 197.2 55.6 69.7 110.6 147.0 169.6 209.1

Prepayments 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Other Current Assets 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Clawback - Current Asset 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Derivative Current Asset 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Total Assets 21,559 25,718 30,384 35,364 37,879 43,028 49,731

Balance Sheet - (Prior, Current,

Budget and Forecast) Continued

62




Operating Activities 537.0 931.6 745.8 818.3 2,001.7 2,438.0 2,801.7

Cash Revenue 2,575.9 2,795.6 2,937.7 3,395.4 4,774.1 5,177.0 5,936.1

Cash Operating Expenses (706.7) (827.2) (969.5) (1,175.8) (1,310.7) (1,421.1) (1,519.9)

NonReg Cash Adjustments (0.8) (13.1) (16.3) (21.7) (21.4) (22.1) (22.4)

Cash from Operating Activities 1,868.4 1,955.3 1,951.9 2,198.0 3,441.9 3,733.9 4,393.8

Changes in Working Capital (178.7) (16.9) (33.7) (29.9) (141.7) 110.9 (47.4)

Cash Generated from Operations 1,689.7 1,938.4 1,918.2 2,168.1 3,300.2 3,844.8 4,346.4

Net Finance Costs (976.9) (1,105.1) (1,289.7) (1,525.3) (1,715.5) (1,649.9) (1,727.7)

Forex & Derivative Gain / (Loss) 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Tax Paid (175.8) 98.3 117.4 175.5 417.0 243.1 182.9

Inflow/(Outflow) from Investment Activities (2,592.0) (3,348.0) (3,057.9) (2,064.6) (1,595.1) (3,462.5) (3,390.5)

Plant in Service - Pipelines (2,563.9) (3,326.2) (3,020.3) (2,027.5) (1,521.0) (3,395.5) (3,350.0)

Plant in Service - NPAs (28.0) (21.8) (37.6) (37.1) (74.1) (67.0) (40.5)

Intangible Software & Fin Lease Assets 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Other Investments 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Net Cash Inflow/(Outflow) from Financing Activities 1,694.5 1,618.7 2,319.5 2,898.7 (1,374.8) 835.4 1,689.3

Net Increase/ (Decrease) in Long Term Borrowings 585.8 1,593.0 2,319.5 2,898.7 (1,374.8) 835.4 1,689.3

LTL: NMPP Levy 947.4 0.0 0.0 0.0 0.0 0.0 0.0

Net Increase/ (Decrease) in Equity 161.3 25.6 0.0 0.0 0.0 0.0 0.0

Dividend Expropriation 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Net Increase/(Decrease) in Cash (360.4) (797.6) 7.4 1,652.3 (968.2) (189.2) 1,100.4

Cash at Beginning of Year 24.8 0.0 0.0 0.0 0.0 0.0 0.0

Cash at End of Year (335.7) (797.6) 7.4 1,652.3 (968.2) (189.2) 1,100.4

Cash Flow Statement - (Prior, Current,


63

17 Annexures

1. Annexure 1 – NMPP Phase 1 Capex Spend And Capitalisations

2. Annexure 2 - Efficient Versus Inefficient Processes/Decisions

3. Annexure 3 - Breakdown Of Deferred Scope

4. Annexure 4 - Summary Of Priority Legal Issues

5. Annexure 5 – Tightlining Assets and Costs

6. Annexure 6 – Arthur D Little Useful Lives For TPL

Documents

TRANSNET PETROLEUM PIPELINES’ SYSTEM TARIFF APPLICATION ... · PDF filetransnet petroleum pipelines’ system tariff application for the 2015/16 tariff year licence number: ppl.p.f3/20/1/2006