STORAGE APPLICATION FOR TARIFF– FOR THE

3 YEAR TARIFF PERIOD

STARTING 2020 - 2022

VOPAK SOUTH AFRICA DEVELOPMENTS PTY

(LTD)

Jameson Park (Portion 7 of the Farm Maraisdrift 190IR)

Lesedi Local Municipality

Gauteng Province

FOR

THE STORAGE & AUXILIARY FACILITIES ONLY OF

LIQUID BULK PETROLEUM PRODUCTS

Refer to additional tariff application for Pipelines.

ANNEXURE A

REQUEST FOR CONFIDENTIAL TREATMENT OF INFORMATION

SUBMITTED TO THE ENERGY REGULATOR

Instructions:

1. This form must be used for all requests for confidential treatment of information

submitted to the Energy Regulator.

2. All requests must be based on and substantiated in terms of the relevant provisions

of:

the Petroleum Pipelines Act, 2003 (Act No. 60 of 2003); and/or

the Promotion of Access to Information Act, 2000 (Act No. 2 of 2000).

3. All requests must be accompanied by a detailed motivation supporting the request.

4. You must clearly indicate and highlight which information in your submission(s) is

confidential as the Energy Regulator will not accept general claims of confidentiality

of entire documents.

5. All information submitted to the Energy Regulator without this request shall be treated

as non-confidential and will be made available to the public.

6. The completed form with supporting documentation must be delivered to the Energy

Regulator:

by registered mail to: P O Box 40343, Arcadia 0007;

OR

by hand at: Kulawula House, 526 Madiba Street, Arcadia, Pretoria.

7. An electronic version of the completed form may also be e-mailed to

pipelines@nersa.org.za.

ENQUIRIES:

Contact: Executive Manager: Petroleum Pipelines Regulation

Contact no.: (012) 401 4600

Fax no.: (012) 401 4700

--------------------------------------------------------------------------------------------------------

Official Use Only

Date received ______________________________

Reference number ______________________________

SECTION A: PARTICULARS OF THE PARTY MAKING THE REQUEST FOR CONFIDENTIAL TREATMENT OF INFORMATION

Name: VOPAK SOUTH AFRICA DEVELOPMENTS (PTY) LTD

Telephone number: 032 466 9210

Fax number:

Email address: michel.van.mosselaar@vopak.com

Web: http://www.vopak.com

Details of mandated representative, including:

Designation: Director Finance & Procurement

Family name: van Mosselaar

First name: Michel

Telephone number: (031) 466-9210

Fax number: (031) 466-9272

Email address: michel.van.mosselaar@vopak.com

SECTION B: PARTICULARS REGARDING THE TYPE OF SUBMISSION

The request for confidential treatment of information is with regards to (tick the appropriate box

below):

A licence application

An application for an amendment of a licence

An application for the revocation of a licence

An objection to a licence application

A complaint in terms of section 31 of the Act

A tariff application

SECTION C: DETAILS OF THE CONFIDENTIALITY REQUEST

Please see following pages for the information requested to be treated as confidential in this

application

SECTION D: ORAL REPRESENTATIONS TO THE ENERGY REGULATOR

Oral presentation to the Energy Regulator:

Section E: Solemn Declaration by Applicant or Mandated Representative

I, Michel van Mosselaar, NNPKB64B5 hereby declare that:

I am authorised by the directors of Vopak South Africa Developments (Pty) Ltd (“Vopak”)

(a) to make this declaration (authorisation attached); and

(b) All information provided herein is within my personal knowledge and is both true and

correct.

Signed at Durban, on this ___ day of February 2020.

……………………………….

Signature

I certify that the deponent:

(a) has acknowledged that she/he knows and understands the contents of this application

form and its annexures, that she/he has no objection to taking the prescribed oath and

that she/he considers the oath binding on her/his conscience; and

(b) has in the prescribed manner sworn that the contents of this application form and its

annexures are true and signed same before me in Durban, on this ___ day of February

2020

_____________________________

COMMISSIONER OF OATHS

Name ________________________________

Address ________________________________

Capacity ________________________________

SECTION B

APPLICATION FOR A TARIFF:

FOR THE 3 YEAR PERIOD FROM 2020 (01 JANUARY 2020 TO 31 DECEMBER 2022) –

BASED ON CURRENT INFORMATION AVAILABLE AS AT THE DATE OF THIS SUBMISSION

Table of Contents

ANNEXURE A .................................................................................................... 2

1 Executive Summary ........................................................................................ 8

2 Approach and base of assumptions used ............................................................. 11

2.1 Property, Plant & Equipment (PPE) ........................................................... 12

2.2 Net working capital (w) ......................................................................... 13

3 Weighted Average Cost of Capital (WACC) ........................................................... 15

3.1 Cost of Equity .................................................................................. 15

3.1.1 Risk free rate .......................................................................... 16

3.1.2 Market risk premium (“MRP”) .................................................... 16

3.1.3 Beta ...................................................................................... 16

3.1.4 Adjustment to the Ke for the total facility: .................................. 16

3.1.5 Real cost of equity calculation ................................................... 19

3.2 Cost of Debt ..................................................................................... 20

3.3 WACC ............................................................................................. 21

4 Expenses ................................................................................................... 22

5 Income Taxation .......................................................................................... 23

6 Allowable Revenue Calculation .......................................................................... 23

7 Conclusion .................................................................................................. 24

List of Tables

Table 1: Licensed products ................................................................................ 8

Table 2: Logistics Access .................................................................................. 10

Table 3: Property, Plant & Equipment for the total facility ..................................... 12

Table 4: Working Capital (R ‘000) included in the application for the total facility ..... 14

Table 5: Components of the risk adjustment factor .............................................. 17

Table 6: Real Cost of Equity .............................................................................. 20

Table 7: Key Funding Terms – Senior facilities..................................................... 20

Table 8: Real Post Tax Cost of Debt ................................................................... 21

Table 9: Post Tax Real WACC ............................................................................ 22

Table 10: Project Expense Summary .................................................................. 23

Table 11: Allowable Annual Revenue calculation .................................................. 24

Table 12: Revenue Allocation (R/m3 / month) by Product – Storage only ................ 24

8

1 Executive Summary

Application

Storage tariff:

Vopak (“VOPAK”) hereby submits a Storage facilities tariff application for a tariff for the period 1

January 2020 to 31st December 2022 in terms of section [4(f)] of the Petroleum Pipelines Act,

2003 (Act No. 60 of 2003) (“PPA”). This application is based on the best available information to

the VOPAK team as at the date of this tariff submission.

Licensed Products and Sizes:

This application is for one licensed product:

Table 1: Licensed products

Item Capacity (cbm '000) %

Clean Products 100 100.0%

VOPAK has capacity available only for Clean Petroleum Products. No other petroleum products are

handled at the Lesedi Vopak facilities.

Guidance:

This tariff application has been guided by the National Energy Regulator of South Africa’s (“NERSA”)

“Tariff Methodology for Petroleum Loading Facilities and Petroleum Storage facilities” as approved

on August 24th, 2017 (“the methodology”). Furthermore, VOPAK has endeavoured to meet

NERSA’s draft Minimum Information Required for Tariff Applications (“draft MIRTA”) as is available.

Operating license:

This tariff specific application should be considered in conjunction with the operating license

application made [dated insert date] for the above facility.

9

NERSA Storage tariff status

The facility is currently in construction with a construction licences that was approved on 20 August

2010 and is scheduled to commence operations 1 April March 2020, construction reference no

PPL.SF.F1/89/2009. Vopak has signed up 3 to 5 years term agreements with its customers and

uses the NERSA approved tariffs as some of the inputs into this process. The Customer contracts

do not differentiate between storage activities and pipeline activities and customers receive one

rate per cbm per month.

The contracts with the customers have an inflationary indexation link and not to be negotiated

annually along with retrospective NERSA approval.

NERSA tariff split between Storage and Pipeline

This tariff application for the Lesedi terminal should be considered in conjunction with the

associated pipeline application (done at the same time).

Based on Vopak meetings and email correspondence with the NERSA team during November 2019

the NERSA team requested Vopak to split the current tariff application into 2 respective

components:

Storage: A storage tariff application (this tariff application) done a Rands per cbm per month

Pipeline A pipeline tariff application done a throughput – cents per litre (2nd tariff application)

Refer to Annexure E for the reconciliation of the total capex for the facility and costs and split

between the Storage and pipeline tariffs as applicable

VOPAK specific business considerations:

VOPAK specific issues compared to Loading Facilities and Petroleum Storage facilities owned by

the Oil majors:

Vopak has been in the South African energy sector for >20 years. Currently in the process

of expanding operations to over 300 000 cbm by 2022.

10

Vopak Terminal Durban is 70% owned by Vopak International B.V and the remaining

30% by Reatile Chemicals (RF) (Pty) Ltd.

VOPAK operates a petroleum product storage facility in two locations and handles

chemical/unlicensed product. Other independent storage operators also tend to store

licensed and unlicensed product with recovery of some overheads through non licensed

product revenue.

Independent Operator specifics (similar for other operators)

VOPAK is an independent storage operator and does not own any of the product

stored within the tanks / facilities.

VOPAK provides open access to any customer dependant on capacity availability and

the customer’s requirements meeting the current available capacity per product.

VOPAK’s clients transfer product into the VOPAK facilities where it will be co-mingled

if it is of the same grade. (Same as other facilities in which if same grade of product

is provided different product can be retrieved – example Tarlton Transnet facility).

VOPAK charges a tariff (based on a capacity basis) for product stored / capacity

utilised by the customer (i.e. If a client purchases 10 m3 of storage but only used

50% of this capacity the full 100% capacity usage will be charged for).

VOPAK will recover other costs relating to handling through this capacity tariff but

will charge a separate fee for additives.

VOPAK provides services dependant on the client’s needs but can be generally

described as 24 hours/7 days services (including many tanks turn in a year).

VOPAK may charge differing monthly capacity charges per m3 dependant on the

logistics access within the facilities and inputs / withdrawn status (for the purposes

of this submission).

Primarily the split is as follows:

Table 2: Logistics Access

In Out Service

Pipe Pipe 24 /7

Truck Truck 24 /7

11

Given that the facility is a greenfield construction no historical data on operating costs

are available. The anticipated costs are based on current Durban operating costs

(aligned with the Gauteng salaries).

Supporting information:

Annexures D for the supporting calculations for BETA & Equity return comparisons.

Annexure B provides the financial model (to calculate Annual Cash flows & Regulatory financial

statements) supporting many of the calculations per site supporting this application.

2 Approach and base of assumptions used

VOPAK has complied with the NERSA methodology relating to the calculation of Allowable Revenue

and the use of the CAPM model to calculate Ke (within the WACC calculation – refer to Annexure

B for additional information).

Please note that Annexure B1 and Annexure B2 are excel spreadsheets. Annexure B1 is the NERSA

completed excel spreadsheet with the final tariffs for Storage. Annexure B2 is the Vopak model

along with supporting schedules (for information purposes)

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

Allowable Revenue = (RAB x WACC) +E +T

Where:

RAB = Regulatory Asset Base

WACC = Weighted average cost of capital

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

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

The formula allows for the calculation of an AR for the Storage assets. A detailed spread sheet (as

per the NERSA format) is included in this application – refer to Annexure B NERSA worksheet, RAB

– CP.

12

In terms of the methodology, the value of the RAB is the value of prudently acquired operating

property, plant, and equipment that are used or will be used in the tariff period under review and

comprises only non-current assets in accordance with the categories given in the Regulatory

Reporting Manual (RRM).

The formula for the RAB is as follows:

RAB =PPE + w

Where:

PPE = Indexed Original Cost (IOC) of operating assets operating assets (Property, Plant and

Equipment)

w = Net working capital

2.1 Property, Plant & Equipment (PPE)

Property, plant, vehicles and equipment are valued on the actual construction costs incurred in the

building and the construction of the facility

Table 3: Property, Plant & Equipment for the total facility (relating to storage only)

Source: VOPAK financial model – tariff inserts sheet January 2020

Pipeline assets have been excluded from the above – refer to Annexure E for a reconciliation of

the total assets to the respective applications

13

The other components of the RAB are considered in the following sections below.

2.2 Net working capital (w)

Net working capital refers to various regulated business operations’ funding requirements other

than utility plant in service. These funding requirements include inventories, prepayments,

minimum bank balances, cash working capital and other non-plant operating requirements.

Working capital funding requirements funded by investors are legitimate Regulatory Asset Base

allowances on which a return may be granted.

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 payables1

The components are recognised as follows:

Inventory: no Inventory has been considered, as VOPAK does not own any product and

non-pumpable losses are borne by the client. Spare parts required for normal operation

are considered as initially part of the capex and then normal operating expenditure, as

these amounts are not significant.

Receivables: Guidance on the receivables is taken from the “NERSA LOADING AND

STORAGE FACILITIES TARIFF APPLICATIONS MODEL’’ hand-out which states that the

receivables can be calculated on 30 days. This was proportioned for a 30-day period.

Operating cash: Guidance for the operating cash value has been taken from the NERSA

publication: “TARIFF METHODOLOGY FOR THE APPROVAL OF VOPAK FOR PETROLEUM

LOADING FACILITIES AND PETROLEUM STORAGE FACILITES.” Paragraph 4.3.2(iv) states

that the operating cash refers to the amount of investor-supplied funds needed to finance

day-to-day operations. Also, that this is financed to bridge the gap between the time

expenditures is made to provide service, and the time collections are received for that

service. It is the cash supplied by investors to finance operating costs during the time lag

before revenues are collected.

1 Refer to section 4.3.2 of tariff methodology

14

Minimum cash balance: The minimum cash balance has been determined with the

guidance of paragraph 4.3.3(iv) of the “TARIFF METHODOLOGY FOR THE APPROVAL OF

TARRIF FOR PETROLEUM LOADING FACILITIES AND PETROLEUM STORAGE FACILITES”

Which states: “…the minimum cash balance to be kept as required by lending institutions.

A licensee will have to provide proof of such a requirement and if provided, the amount will

be included in the net working capital.”

Trade payables: The VOPAK financial model which have been apportioned to a 30-day

period.

Set out below is the working capital split used in this application:

Table 4: Working Capital (R ‘000) included in the application for the total facility

Item Unit 2020 2021 2022

Debtors Balance C/f ZAR '000 34 509 34 863 35 317

Creditors Balance C/f ZAR '000 4 329 4 620 4 933

Allowable Cash Balance ZAR '000 4 329 4 620 4 933

Source: VOPAK financial model – tariff inserts January 2020

2.3 Deferred Tax

The deferred tax refers to the difference between the accounting treatment and the income tax

treatment of the assets. The breakdown of the calculation has been included in the Cresco Model,

Tax and Depreciation Calcs Tab; Row 719.

Table 5: Deferred Tax ( Related to Storage only)

Item Unit 2020 2021 2022

Deferred Tax Liability ZAR'000 (26 655) (53 311) (79 966)

15

3 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

The approach taken by VOPAK in this application is fully compliant with Regulation 4(5). Also, in

line with NERSA guidelines, VOPAK has applied the capital asset pricing model (“CAPM”) to estimate

the cost of equity.

3.1 Cost of Equity

Section 5.6.2 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. As per the previous application, both the risk-free rate and the

market risk premium have been fixed for the application period. Furthermore, the amounts are

derived from the Bidvest Nersa Approval, which is of a facility of the same risk profile.

The Duff & Phelps 2018 Risk Premium Report (specifically page 16 – adjusting risk premium report)

has created the expectation that the cost of equity calculation needs to be linked to a specific

period as recent turbulent changes over the past 15 years has changed the fundamental approach

of the calculation of the cost of Equity as well as the specific inputs.

16

3.1.1 Risk free rate

In common with the methodology, VOPAK has derived the risk-free rate element of the cost of

equity from monthly observations, as published by NERSA in line with section 5.6.3 of the

methodology.

As the methodology does not specify how to calculate the average, VOPAK has used the

compounded annualized real risk-free return as published by NERSA – [dated October 2019], which

indicates a risk-free rate of 5.31% for a 25-year period based on current available information.

3.1.2 Market risk premium (“MRP”)

VOPAK has derived the MRP element of the cost of equity from monthly observations, as published

by NERSA in line with section 5.6.3 of the methodology. As the methodology does not specify how

to calculate the average, VOPAK has used the real MRP as published by NERSA in October 2019,

which indicates a Market risk premium of 4.75% for a 25-year period based on current available

information. (Refer to funding + Revenue G422)

3.1.3 Beta

VOPAK has adopted the NERSA proposed beta of 1.08 (unlevered) in December 2018 as published

by NERSA in October 2019.

3.1.4 Adjustment to the Ke for the total facility:

On-going interaction with NERSA has identified the adjustment to the Ke as the key area for VOPAK

to provide key supporting information to indicate the differences in the equity hurdle rates in

nominal terms and the NERSA calculation based on the key inputs.

VOPAK does not have the benefit of a full research function as well as detailed reports considering

all the key components specifically for this facility are in three locations within South Africa, each

with its own Geographical and infrastructure related nuances.

The VOPAK team has provided support for the adjustments as detailed below based on the portfolio

approach.

VOPAK is also cognisant of the limited precedent for this calculation in South Africa. The Duff &

Phelps 2012 Risk Premium Report (specifically page 18 – adjusting risk premium report) notes the

17

following: “there is no single universally accepted methodology for estimating equity risk

premiums”.

Refer to Annexure D for the list of sources reviewed in considering the adjustments included

below. Not all the information reviewed in supporting these adjustments are listed in the section

below.

The components of the above equation have been determined as follows

Table 5: Components of the risk adjustment factor

No Risk Ke Adj Support

1. CRA 0.00% Country Risk premium

The current political environment and risk of a downgrade present significant

uncertainty to the business; with the potential of a depreciating rand depleting

returns to the majority shareholder of Vopak.

The risk premium is 50% of the current Political risk coverage cost for RSA of 5%

This results in 1% however it has been agreed with NERSA to include CRA as a

component of alpha (project risk). See below.

2. LP: 0.00% Liquidity premium

Given the illiquid nature of the assets a liquidity premium is appropriate. VOPAK

has applied the value compatible with its corporate practices. VOPAK notes that

the range applied by it is below the range data surveyed in 2012, applying a 4%

premium while the survey showed the average and second quartiles as 8%.

It has been agreed with NERSA to include the LP of 4% as a component of alpha

(project risk). See below.

3. α: 16

risks

10%

Project

risk

adjust

ment

Project Specific risk premium (alpha)

Specific Project Risk

Previous tariff application for existing facilities have been approved by NERSA

with a 9% risk adjustment

An additional 1% risk adjustment being included in this application due to the

Greenfields nature of the project

The following circumstances have been considered in the motivation for a

project specific risk factor.

18

No Risk Ke Adj Support

1. Feasibility cost / development risk for brand new facility 1% risk adjustment :

This is an extremely large project with large associated capital and human

resource requirements. All these inputs being required before terminal

operation and thereby recoupment of outlays can commence. This represents

significant down-side risk to the applicant.

2. Lack of long-term offtakes for Lesedi – relative short-term nature of customer

offtakes (1% risk adjustment)

3. VOPAK’s storage facilities are situated in an area with significant risk of IR

related issues (1% risk adjustment)

4. Commercial risk exists as revenue depends on customers honouring their

precedent agreements. Especially since a significant part of the customers will

be new entrants (as compared to the oil majors) the commercial risks increase.

Vopak will have significant financial losses if litigation procedures are required

against delinquent customers. (1% relating to credit risk)

Benchmarks applied

VOPAK has relied on several information sources in deriving the appropriate company risk

premium and the way it should be applied. Annexure E lists the various Sources supporting

the Risk Premium Adjustments:

Some selected outputs are detailed below:

1. PwC published a report in 2018, titled “Closing the valuation gap: Valuation

Methodology Survey” in which most respondents treated this factor as an addition

to the cost of capital, i.e. Ke+ α%, as opposed to Ke*(1+α%).

i. The survey suggests an average range of between 5% and 8% as being

appropriate compensation for some of above specific risks to which the

applicant is exposed. VOPAK considers its operations to be at the high end

of this range – 8%.

2. The Duff & Phelps 2018 Risk Premium Report was specifically used in this

analysis. This considered small stock premiums and other calculations.

i. Annexure E1 is an extract of the report which states certain risk premiums

for differing margin businesses.

19

ii. Annexure E2 quantifies high level risk premiums for the service industries –

which indicate higher risk adjustments in line with those requested by

VOPAK.

3. VOPAK has reviewed other sources used seem to indicate similar approaches being

taken globally. Selected information includes:

i. March 1997 issue of Business Valuation Review. This paper explores

the ability of CAPM and Fama-French to adequately reflect size in cost of

equity on a stable basis across time.

ii. Liquidity and stock returns: Evidence from Denmark. This master's

thesis examines the relationship between liquidity and stock returns

theoretically and empirically.

iii. Risk Management Framework for the Petroleum Supply Chain in

Europe: This paper introduces the relevance of a systematic approach for

the identification, quantification and mitigation of risk and presents a

practical framework for risk management with associated impact on

Company Risk.

Summary of Ke adjustments:

Thus, the calculation of the Weighted Average Cost of Capital utilises a Ke with the following

components:

Project risks: 10% (As detailed above)

β – 1.38 as per NERSA guidelines.

3.1.5 Real cost of equity calculation

Using the results of the calculation of the annualized real risk-free rate, the market risk premium

and beta, the real cost of equity can be calculated.

20

Table 6: Real Cost of Equity

3.2 Cost of Debt

VOPAK’s facilities are currently geared at 75%, which is expected to decrease after start-up of

operations.

The gearing for the Lesedi facility, is 75/25 , With all the debt being sourced from the international

holding company Vopak international and the equity being provided by the local entity. Due to the

offtake agreements, only being for a period of 3- 5 years it is challenging for storage operators, to

source debt locally. And as such Vopak has had to rely on its international holding company for

funding. Even though the funding is from internal sources, there is an expectation that Vopak

would need to repay the funding

With that in mind, Vopak has adopted the gearing ratio of 50/50 which reflects the capital structure

of the facility and is in line previous applications submitted for other facilities.

VOPAK secured funding from Vopak Finance B.V at an interest rate of prime. A summary of these

terms is presented below.

Table 7: Key Funding Terms – Senior facilities

Item Senior Facility Comment

Tenor 10 years post construction

All in Rate 10.51% construction & operations

margin of 0%

% of Total Funding Requirement 50%

Repayment Equal Principal, three

Quarterly

Item Unit Value

Risk Free Rate % p.a 5,31%MRP % p.a 4,75%Beta (Relevered) % p.a 1,16 Small Stock Premium % p.a 0,00%Liquidity Premium % p.a 0,00%Alpha/Project risk % p.a 10,00%Cost of Equity % p.a 20,80%

21

Recent experience has shown that the fixed interest rates & corresponding liquidity premiums are

increasing over time.

The methodology requires a post-tax real cost of debt according to the formula:

𝐾𝑑,𝑟𝑒𝑎𝑙,𝑝𝑜𝑠𝑡 𝑡𝑎𝑥 =1 + (𝐾𝑑,𝑛𝑜𝑚𝑖𝑛𝑎𝑙,𝑝𝑟𝑒 𝑡𝑎𝑥 × (1 − 𝑡))

1 + 𝐶𝑃𝐼𝑓− 1

It is noted that for the purpose of this application the base rate (JIBAR) has been assumed fixed,

although it is not fully hedged in the post construction period. VOPAK has assumed a tax rate of

28%, and a CPI forecast of 5.10% (as obtained from NERSA) to calculate the post-tax cost of debt.

VOPAK has used the NERSA cost of debt not the actual corporate finance cost as indicated above.

Set out below is the VOPAK real cost of debt as per NERSA methodology:

Table 8: Real Post Tax Cost of Debt

Item Unit Value

Cost of Debt % p. a 10.00% Tax % p. a 28% Nominal Post Tax Cost of Debt % p. a 7.20% CPIF % p. a 5.10%

Real Post Tax Cost of Debt % p. a 2.00%

Source: VOPAK financial model – tariff inserts February 2020

As detailed previously VOPAK has complied with the current NERSA treatment based

on the tariff application guidelines.

The Cost of Equity components, sourced from December 2018, Market Risk Premium 4.75% and

Risk-Free rate 5.31% . And the Beta is based on the debt and equity gearing.

3.3 WACC

The Weighted Average Cost of Capital is the weighted average of the cost of equity and the cost

of debt, and is given by

𝑊𝐴𝐶𝐶 = [(𝐸𝑞

𝐷𝑡 + 𝐸𝑞) ∗ 𝐾𝑒] + [(

𝐷𝑡

𝐷𝑡 + 𝐸𝑞) ∗ 𝐾𝑑]

22

Below are the components used by VOPAK to arrive at the post tax real WACC of 11.4%.

Table 9: Post Tax Real WACC

Source: VOPAK financial model – tariff inserts February 2020

4 Expenses

Expenses are those planned for the efficient operation and maintenance of the core business.

VOPAK’s operating expenses are recognized and reported in terms of the International Financial

Reporting Standards (“IFRS”). Approximately 85% of the operating expenses are projected to be

fixed and consequently are not driven by the volume of petroleum products stored.

The following are the guidelines in relation to defining Expenses:

• The budgeted operating expenses for the tariff period under review are required.

• Only allocated expenses linked to the licensed activity (e.g. the service of storing

petroleum products) and NOT TRADING OF PRODUCT should be included.

• Depreciation and tax are to be excluded.

• If a facility is used for both chemical product storage and petroleum product

storage, then the cost drivers to allocate expenses between chemicals and

petroleum should be clearly stated.

• It is also important to list the major components that make-up the value of

operating expenses.

VOPAK’s operating expenses presented in the table below conform to the above guidelines and

reflect the expected expenses based. These figures are based on the latest and most accurate

information available.

Expense forecasts 2020 are based on estimates from the existing Durban facility adjusted for

Gauteng related cost adjustments, as this is a brand-new facility.

Item Unit Value

Cost of Equity % p.a 20,80%Equity Proportion % p.a 50%Cost of Debt % p.a 2,00%Debt proportion % p.a 50%Post Tax Real WACC % p.a 11,40%

23

A summary of VOPAK’s expenses is shown in the table below.

Table 10: Project Expense Summary

Source: VOPAK financial model – tariff inserts February 2020

5 Income Taxation

An election between the use of either (a) flow through (actual tax) payment or (b) notional tax

payment needs to be made. Once the election has been made; the selected option will be used in

future for all the licensee’s assets.

VOPAK elects 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 = (NPBT (excluding tax allowance) / (1-tr)) x tr

Where:

NPBT (excl. tax allowance) = {(RAB x WACC) +E} – {E}

tr = prevailing corporate tax rate

This formula has been applied in the tax allowance calculation for the different sites.2

6 Allowable Revenue Calculation

Set out below are the Allowable revenue projections for utilised capacity as per the NERSA

methodology for the entire facility:

2 Refer to annexure B for details of the calculation.

Item Unit 2020 2021 2022

Fixed ZAR '000 (52 811) (56 216) (60 019)

Variable ZAR '000 - - -

Site Rental ZAR '000 - - -

Agency Fees ZAR '000 - - -

Total ZAR '000 (52 811) (56 216) (60 019)

24

Table 11: Allowable Annual Revenue calculation

Source: VOPAK financial model based on NERSA calculations– tariff inserts February 2020

7 Conclusion

Current Application:

VOPAK has endeavoured to meet the draft MIRTA requirements in this application. In arriving at

its AR requirement, VOPAK has applied the methodology in all respects.

It must be emphasized that this is a tariff application for the 3-year period starting 1 April 2020,

when the Lesedi facility will reach commercial operation.

Set out below are the respective monthly tariffs to be applied for the projected capacity

for the 3 years of operations.

Table 12: Revenue Allocation (R / cbm / month) by Product – Storage only

Item Unit 2020 2021 2022

Clean Product ZAR/cbm/Month 347 349 349

Source: VOPAK financial model based on NERSA calculations – tariff inserts February 2020

Item 2020 2021 2022

ke 164 969 158 385 150 994

kd 15 776 15 147 14 440

Required Return 180 745 173 532 165 434

Depreciation 106 467 106 467 106 467

Amortization of writeup 4 791 10 465 16 429

OPEX 52 811 56 216 60 019

Allowable revenue(net) 344 814 346 680 348 349

Tax allowance 72 153 71 554 70 724

Allowable revenue after tax 416 967 418 235 419 073