5. royale energy (pty) ltd, established in 2004, is a medium-sized, … · 2019-12-13 ·...

CONFIDENTIAL

Chapter 2: Section C

Proof of Ownership (Tittle Deed)

CONFIDENTIAL

CONFIDENTIAL

Chapter 2: Section I

INFO REQUIRED BY REGULATIONS: HDSA

CONFIDENTIAL

KLERKSDORP

ROYALE ENERGY TERMINALS PROPRIETARY LIMITED

TARIFF APPLICATION FOR PETROLEUM STORAGE FACILITY FOR THE PERIOD

01 MARCH 2018 TO 28 FEBRUARY 2019

driven by excellence

Unit 4, Berkley Office Park; 8 Bauhinia Street; Technopark; Centurion | Postnet Suite #38; Private Bag X3; The Reeds; 0061 Royale Energy Terminals (Pty) Ltd Reg no: 2005/000802/07 | T: +27 12 361 0110 | F: +27 12 361 6005 | www.royale-energy.co.za

Member of SAPIA | Level 4 BBBEE Director: S.J. Nothnagel

http://www.royale-energy.co.za/

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TABLE OF CONTENTS

INTRODUCTION .................................................................................................................................. 4

BACKGROUND .................................................................................................................................... 4

LICENCE ............................................................................................................................................... 4

DETAILS OF THE FACILITY ................................................................................................................... 5

TARIFF APPLICATION METHODOLOGY .............................................................................................. 6

REGULATORY ASSET BASE (RAB) ........................................................................................................ 7

Value of Operating Property, Plant, Vehicles and Equipment (V) .................................................... 7

Depreciation and Amortisation of Inflation Write-up (d) ................................................................. 8

Net Working Capital (w) ..................................................................................................................... 8

Deferred Tax ....................................................................................................................................... 9

WEIGHTED AVERAGE COST OF CAPITAL (WACC) ............................................................................ 10

Cost of Equity (Ke) ............................................................................................................................ 10

Cost of Debt (Kd) .............................................................................................................................. 11

Debt to Equity Ratio ......................................................................................................................... 11

OPERATIONAL EXPENSES ................................................................................................................. 13

NOTIONAL TAX ................................................................................................................................. 14

CLAWBACK ........................................................................................................................................ 14

VOLUME ............................................................................................................................................ 14

TARIFF ............................................................................................................................................... 15

CONCLUSION .................................................................................................................................... 15

List of Tables and Annexures

Table 1: Summary of Klerksdorp tankage

Table 2 – Net working capital

Table 3: Cost of Debt

Table 4: WACC

Table 5: Operational expenses

Table 6: Calculation of notional tax

Table 7: Tariff Calculation

Annexure 1: Values of Property Plant and Equipment of regulated assets (TOC)

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LIST OF ACRONYMS AND ABBREVIATIONS USED

AR Allowable revenue C Clawback adjustment CAPM Capital asset pricing model CPI Consumer Price Index CPIf Consumer price index forecast D Depreciation and amortization of inflation write-up Da Depreciation actual Dp Depreciation projected DA Depreciation adjustment d Accumulated depreciation and accumulated amortisation of inflation write-up da Actual accumulated depreciation and amortisation of inflation write-up dp Projected accumulated depreciation and amortisation of inflation write-up Dya Actual number of days from the commencement of the financial year when

the new operating asset became used Dyp Projected number of days from the commencement of the financial year

when the new operating asset was estimated to become used Dtp Debt premium dtax Deferred tax Dt Debt E Expenses: maintenance and operating for the tariff period under review EaOC Estimated average operating costs EBIT Earnings before interest and taxes EBITDA Earnings before interest, taxes, depreciation and amortisation Eq Equity Kd Cost of debt KdA Cost of debt adjustment Ke Cost of equity KeA Cost of equity adjustment MRP Market return premium NRBTA Net revenue before tax allowance Opex Operating and maintenance expense Opexa Operating and maintenance expense actual Opexp Operating and maintenance expense projected RAB Regulatory asset base Rf Risk-free rate of interest

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

the preceding period indicated T Tax expense t Prevailing corporate tax rate of the licensee Tff(s) Tariff(s) TOC Trended original cost Tr Tax rate of relevant country V Value of property, plant, vehicles and equipment (V) Value of operating property, plant, vehicles and equipment (V-d)A Value of operating property, plant, vehicles and equipment adjustment. Volp Volumes projected w Net working capital WACC Weighted average cost of capital WA β Weighted average β of the proxy firms’ asset betas β Beta - The systematic risk parameter for regulated entities providing

pipeline, storage and loading facility services.

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INTRODUCTION

1. Royale Energy Terminals (Pty) Ltd (Royale Terminals) acquired two storage facilities in

Langlaagte and Klerksdorp, from BP Southern Africa (Pty) Ltd with effect from 21 February 2017. Uncommitted capacity, should there be any, may be made available to third parties.

2. The National Energy Regulator is required to approve tariffs for petroleum storage facilities

in terms of the National Energy Regulator Act, 2004 (Act No. 40 of 2004) (‘the NERSA Act’), read with the Petroleum Pipelines Act, 2003 (Act No. 60 of 2003) (‘the Act’).

3. Royale Energy Terminals hereby submits its Petroleum Storage Facility Tariff Application for

Klerksdorp Terminal for the period: 01 March 2018 to 28 February 2019.

4. This is the first tariff application submitted by Royale Terminals for the Klerksdorp storage facility.

BACKGROUND

5. Royale Energy (Pty) Ltd, established in 2004, is a medium-sized, 100% black owned, non- refining South African wholesaler and marketer of petroleum products. Royale Energy is a proud member of the PGC Management Group. It is also a licensed petroleum wholesaler (Licence number: W/2009/0298) that has supply agreements with Sasol, Chevron and BP. Royale Energy is a member of the South African Petroleum Industry Association (SAPIA).

6. Royale Energy acquired two pipeline fed terminals from BP Southern Africa, namely the Langlaagte and Klerksdorp terminals. These terminals are held by the company’s wholly owned subsidiary, Royale Energy Terminals (Pty) Ltd – Registration Number: 2005/000802/07.

LICENCE

7. The Klerksdorp facility is currently licensed under BP. Royale Energy Terminals has applied for the licence to operate this petroleum storage facility.

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DETAILS OF THE FACILITY

8. A technical description of the proposed storage facility to be operated.

8.1 Physical address of the facility: 8.1.1 4 Mahogany Avenue, Industria, Klerksdorp, North West Province

8.2 Planned Operational Capacity: 8,287,584 lt

The recommissioning of the facility with all products; D50ppm and ULP93 and ULP 95, will be completed by 1 November 2017.

9. There are three products that will be stored at the facility, these are: ULP 93; ULP 95; Diesel

50ppm.

10. The details of the storage tanks at the Langlaagte facility are summarised in Table 1:

Table 1: Summary of Klerksdorp tankage

KLERKSDORP TANKAGE

Tank ID Tank Type Height (m) Diameter

(m) Design Capacity

(L) Operational Capacity (L)

Product Capable of Storing

3 Horizontal 79 612 71 651 IP

4 VERTICAL FIXED

ROOF

9.140

6.006

254 541

229 087

DIESEL / PETROL 5 VERTICAL FIXED

ROOF

9.010

6.005

266 620

239 958


ROOF

9.135

6.004

266 699

240 029


ROOF

10.610

7.629

492 113

442 902

DIESEL / PETROL 8 VERTICAL FIXED/

BLANKET

15.085

10.010

1 155 385

1 039 847


ROOF

19.095

17.520

4 734 556

4 261 100


ROOF

9.037

10.007

761 139

685 025

DIESEL / PETROL 11 VERTICAL FIXED/

BLANKET

15.073

10.007

1 197 762

1 077 986

DIESEL / PETROL 12, 13, 14, 15

Decommissioned

Total Capacity 9 208 427 8 287 584

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TARIFF APPLICATION METHODOLOGY

11. The tariff application was prepared on the basis of the Regulations and the Tariff Methodology for Petroleum Loading Facilities and Petroleum Storage Facilities, version 4 dated 24 August 2017.

12. Royale Terminals therefore applied the following formula to calculate the Allowable

Revenue (AR) for its storage facility:

Where:

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 C = Clawback adjustment: to correct for differences between actual and

forecasts in formula elements from a preceding tariff period in relation to the actual estimates for that tariff period

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

13. The elements of the AR are discussed in more detail in the paragraphs below.

Allowable Revenue = (RAB x WACC) + E + D ± C+ T

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REGULATORY ASSET BASE (RAB)

The formula for the RAB is as follows:

V = Values of Property Plant and Equipment of regulated assets D = Accumulated depreciation up to the commencement of the tariff period

under review W = Net working capital Dtax = deferred tax

Value of Operating Property, Plant, Vehicles and Equipment (V)

14. The original cost of acquired property, plant, vehicles and equipment that are used or will be used in the tariff period under review plus any new or additional property, plant, vehicles and equipment that will be used during the tariff period under review.

15. The original cost was then trended using the trended original cost (TOC) basis as prescribed

by the NERSA Tariff Methodology.

16. In determining the value pf property plant and equipment, Royale Terminals used forecast inflation rate of 5.7%.

RAB = (V - d) + w ± dtax

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Depreciation and Amortisation of Inflation Write-up (d)

17. Nersa Regulations stipulate that the value of the regulatory asset base (RAB) is to be on an

inflation-adjusted base. The inflation adjustment is calculated by trending the original (historical) cost on an annual basis with the consumer price index (CPI) to give the trended original cost (TOC).

18. The depreciation amount which is calculated on a straight line basis over the useful life of

each of the assets or classes of assets in the regulatory asset base for the tariff period under review is included in the allowable revenue.

19. The calculated TOC value of the RAB (inclusive of depreciation and amortisation of the write- up) is included in Annexure 1.

Net Working Capital (w)

20. In terms of the tariff methodology, the following formula has been used to determine net working capital:

21. No Inventory has been included in the calculation of net working capital. Trade Receivables have been calculated based on a maximum of 30 days of Allowable Revenue (AR) determined from the AR formula provided in the methodology. Operating cash is based on 45 days’ operating expenses, excluding depreciation and deferred taxes. Trade payables is based 45 days’ operating expenses, excluding depreciation and deferred taxes.

22. The Design Capacity has been used to allocate working capital items between Langlaagte

and Klerksdorp Terminals.

23. Table 2 shows the total Net Working Capital used in the tariff application.

Net working capital = inventory + receivables + operating cash – trade payables

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Table 2: Net working capital

Net Working Capital Klerksdorp Inventory xxxxxxxxxx Trade Receivables xxxxxxxxx Operating cash xxxxxxxxx Trade Payables xxxxxxxxxxx Total xxxxxxxxx

Deferred Tax

24. Royale Terminals elected to use cumulative deferred tax amounts based on the notional tax approach as discussed in Notional Tax below. The deferred tax balances for the purpose of RAB adjustments is as reflected in Table 6: Calculation of notional tax.

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WEIGHTED AVERAGE COST OF CAPITAL (WACC)

25. The Methodology stipulates that the following formula is used to determine the Weighted Average Cost of Capital (WACC):

Where:

Eq = Shareholders equity Dt = Interest bearing debt Ke = Post-tax, real cost of equity derived from the capital asset pricing model (CAPM) Kd = Post-tax, real4 cost of debt

Cost of Equity (Ke)

26. The Methodology prescribes that the cost of equity be determined according to the capital asset pricing model (CAPM). Royale Terminals applied the CAPM to calculate the cost of equity.

27. Royale Terminals applied a risk free rate (Rf) of 4.65%, a market risk premium (MRP) of 5.4%,

and Beta of xxxxxx (based on NERSA’s table) which resulted in a cost of equity of xxxxxxxx

28. In accordance with the Methodology, Royale Terminals applied a risk free rate and market risk premium as at 12 months prior to the commencement of the tariff period.

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Cost of Debt (Kd)

29. Royale Terminals provided its estimated nominal cost of debt as xxxxxxx and a CPI forecast

of 5.7% to calculate its post-tax real cost of debt of xxxxxx for the tariff periods under review.

30. The cost of Debt is reflected in Table 3.

Table 3: Cost of Debt

Calculation of Kd-post tax real Klerksdorp

CPIf 5.70%

Corporate tax rate 28% Cost of Debt (pre-tax nominal) xxxxxxx

Cost of Debt (post-tax nominal) xxxxxxxx

Kd-post-tax real xxxxxx

Debt to Equity Ratio

31. xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx.

WACC

32. The calculated real WACC for Royale Terminals is xxxxxxxx.

33. The WACC calculation is depicted in Table 4.

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Table 4: WACC

WACC Calculation

Klerksdorp CPIf 5.70% Corporate tax rate 28% Debt ratio Xxxxxx Equity Ratio Xxxxxx Risk free rate (Rf) 4.65%

Market risk premium (real) 5.40% Beta Xxxx Small Stock Premium (SSP) Xxxx Project Specific Risk Xxxx

Liquidity Premium (LP) Xxxxx Cost of Equity (post-tax real) Xxxxxxx Cost of Debt (pre-tax nominal) Xxxxxxx

Cost of Debt (post-tax real) Xxxxxx

WACC xxxxxx

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OPERATIONAL EXPENSES

34. Royale Energy Terminals is a ring-fenced company with the core business of operating the

petroleum storage facilities. All Operational Expenses are direct costs related to the operation of the core business of storage facilities.

35. Operational Expenses planned for the efficient operation and maintenance of the core

business of storage facilities have been included in the calculation of Allowable Revenue.

36. Estimates of Operational Expenses have been used as noted in Table 5 below.

37. A provision for rehabilitation of the facilities has been included in the Operational Expenses.

38. The summary of Operational Expenses used in the tariff application is included in Table 5.

Table 5: Operational expenses

Operational Expenses Klerksdorp Staff Costs Xxxxxxxxx Plant & Equipment Repairs & Maintenance Xxxxxxxxxx Rehabilitation costs Xxxxxxxx Other General Expenses Xxxxxxxxxx

Total Xxxxxxxxxxxx

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NOTIONAL TAX

39. Royale Terminals has elected to use the notional tax method.

40. The Tariff Methodology prescribes the following formula for calculating the notional tax

expense:

Where:

NRBTA = Net revenue before tax allowance = {(RAB*WACC) + E + D (historic & write up) ±C} - {E + Depreciation (historic))} t = Prevailing corporate tax rate of the licensee

41. The tax calculation is shown in Table 6.

Table 6: Calculation of notional tax

Notional Tax Calculation Klerksdorp Corporate tax rate 28% Return on Equity funding Xxxxxxxxx Return on Debt funding Xxxxxxxxxx Opex Xxxxxxxxxxx Depreciation historic Xxxxxxxxxxx Depreciation amortisation write-up Xxxxxxxxxx

AR before Tax allowance Xxxxxxxxxxxx

Net taxable before tax allowance Xxxxxxxxxxxx Tax allowance Xxxxxxxxxxxx

Total allowable revenue xxxxxxxxxxxxxxx

CLAWBACK

42. No clawback adjustment has been made as this is the first tariff application by Royale Terminals.

VOLUME

43. The estimated throughput volume of xxxxxxxxxxxxx litres per annum is used in the calculation of the final tariff. This estimate is based on the Throughput Agreements and the monthly volumes which Royale Terminals is forecasting for the tariff period under review.

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

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TARIFF

44. Royale Terminals requests the approval of this maximum tariff for the period 01 March 2018

to 28 February 2019 in terms of this tariff application and as detailed in Table 7.

Table 7: Tariff Calculation

Royale Terminals Klerksdorp

R million

RAB Asset value (V-d) - TOC Xxxxxxxxxx Net Working capital Xxxxxxxxxx

Regulatory Asset Base (Rand) Xxxxxxxxxxxx

Debt ratio Xxxxxxxx Equity Ratio Xxxxxxxx Cost of Equity (post-tax real) Xxxxxxxx Cost of Debt (post-tax real) Xxxxxxxx

WACC -Calculation Xxxxxxxxx

Return on equity funding Xxxxxxxxx Return on debt funding Xxxxxxxxxx

Return on RAB Xxxxxxxxxx

Allowable Revenue-Calculation Return on Equity funding Xxxxxxxxxxx Return on Debt funding Xxxxxxxxxxx Operating Expenses Xxxxxxxxxxx Depreciation (Historic) Xxxxxxxxxxxxx Amortization (Write-up) Xxxxxxxxxxx Taxation Xxxxxxxxxxxx Clawback

Allowable revenue (AR) Xxxxxxxxxx

TARIFF CALCULATION Allowable Revenue (AR) Xxxxxxxxxxxx Volumes xxxxxxxxxxxxx

Tariff (cents per litre) 18

CONCLUSION

45. Royale Terminals hereby requests the approval of its maximum tariff for Klerksdorp of 18 cents per litre for the period commencing on 01 March 2018 to 28 February 2019 in terms of this tariff application and as detailed in Table 7. The tariff is exclusive of Vat.

5. royale energy (pty) ltd, established in 2004, is a medium-sized, … · 2019-12-13 ·...

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