tariff decision for sasol oil (pty) ltd’s · 30. there is a slight difference between the net...

Sasol Oil RfD for Secunda Storage facility of 19

TARIFF DECISION FOR SASOL OIL (PTY) LTD’S

PETROLEUM STORAGE FACILITY IN SECUNDA

10 MAY 2018


TABLE OF CONTENTS

DECISION…………………………………………………………………………………………………………...….4

REASONS FOR DECISION ............................................................................................................................ 5

INTRODUCTION ............................................................................................................................................. 5

BACKGROUND .............................................................................................................................................. 5

THE APPLICATION ........................................................................................................................................ 6

ASSESSMENT OF THE APPLICATION ........................................................................................................ 6

CALCULATION OF THE ALLOWABLE REVENUE (AR) ............................................................................. 7

Regulatory Asset Base (RAB) .................................................................................................................. 7 Property, Plant and Equipment (PPE) 8

COST OF EQUITY ........................................................................................................................................ 11

COST OF DEBT ............................................................................................................................................ 11

Debt-to-Equity Ratio 12 WACC 12

OPERATIONAL EXPENDITURE .................................................................................................................. 13

DEPRECIATION ............................................................................................................................................ 14

CLAWBACKS ............................................................................................................................................... 15

TAX EXPENSE .............................................................................................................................................. 15

ALLOWABLE REVENUE (AR) ..................................................................................................................... 17

VOLUMES ..................................................................................................................................................... 17

TARIFF DESIGN ........................................................................................................................................... 18

CONCLUSION ............................................................................................................................................... 19


LIST OF TABLES

Table 1: Tariff approved for the storage facility .................................................................. 4

Table 2: Comparison of Net Working Capital values .......................................................... 9

Table 3: Comparison of the Deferred tax ......................................................................... 10

Table 4: Calculation of the RAB ....................................................................................... 10

Table 5: WACC Calculation ............................................................................................. 12

Table 6: Comparison of Opex costs ................................................................................. 13

Table 7: Clawback Calculation ......................................................................................... 15

Table 8: Tax Calculation .................................................................................................. 16

Table 9: Comparison of AR values .................................................................................. 17

Table 10: Forecast throughput Volumes .......................................................................... 18

Table 11: Comparison in tariffs ........................................................................................ 18


THE NATIONAL ENERGY REGULATOR OF SOUTH AFRICA

In the matter regarding

THE APPLICATION FOR APPROVAL OF A TARIFF FOR A LICENCED PETROLEUM

STORAGE FACILITY IN SECUNDA

By

SASOL OIL (PTY) LTD

THE DECISION

1. On 10 May 2018, the National Energy Regulator of South Africa (NERSA) approved,

as a condition of Sasol Oil (Pty) Ltd’s operation licence (licence number:

PPL.sf.F3/17/2006), the tariff for its petroleum storage facility located at Synfuels,

Secunda in the Mpumalanga Province.

2. The tariff approved by NERSA for the petroleum storage facility is a maximum tariff and

is exclusive of VAT. The tariff for the petroleum storage facility is shown in Table 1.

Table 1: Tariff approved for the storage facility

3. The approved tariff will remain in force until NERSA takes a decision to approve a new

tariff for this facility.

4. Furthermore, Sasol Oil is required to submit a plan for the rehabilitation of land in

accordance with Regulation 9 of the Regulations made in terms of the Petroleum

Pipelines Act, 2003 (Act No. 60 of 2003) (‘the Act’).

1 July 2018 to 30 June 2019

Tariff (cents per litre) 120.40


REASONS FOR DECISION

INTRODUCTION

5. On 29 March 2007, the National Energy Regulator of South Africa (NERSA) issued a

licence with conditions to Sasol Oil (Pty) Ltd (‘Sasol Oil’) for the operation of a

petroleum storage facility located at Synfuels Road, Secunda in Mpumalanga (licence

number: PPL.sf.F3/17/3/2006).

6. On 30 November 2017, Sasol Oil, submitted a tariff application to NERSA. The tariff

application is for the period 1 July 2018 to 30 June 2019 and is based on Tariff

Methodology Version 4.

7. This is not Sasol Oil’s first tariff application. In the 2017/18 tariff period, NERSA

approved a tariff of 736.20 cents per litre (cpl), which was based on a Standard

Option 2 Tariff Methodology.

8. Sasol Oil applied for a tariff of 120.40 cpl for the period 1 July 2018 to 30 June 2019.

BACKGROUND

9. Sasol Oil is a private company registered in terms of the company laws of South Africa,

with company registration no. 1981/007622/07.

10. The tariff application was submitted based on the Tariff Methodology Version 4 for

approval of tariffs for the Petroleum Loading and Storage facilities, adopted on

24 August 2017 [‘the Tariff Methodology Version 4’ or ‘the Trended Original Cost (TOC)

Tariff Methodology’]. The Tariff Methodology Version 4 requires that assets be valued

using the TOC method. The tariff applied for is a maximum tariff and is exclusive of

Value Added Tax (VAT).


Applicable Law

11. The legal basis for NERSA to approve tariffs for petroleum loading and storage facilities

is derived from the National Energy Regulator Act, 2004 (Act No. 40 of 2004) (‘NERSA

Act’), read with the Petroleum Pipelines Act, 2003 (Act No. 60 of 2003) (‘the Act’)1.

The Methodology

12. NERSA is required in terms of section 28(2) (a) (i) of the Act to set/approve tariffs based

on a systematic methodology applicable on a consistent and comparable basis.

13. The tariff application by Sasol Oil was prepared in accordance with the Tariff

Methodology Version 4 for the approval of tariffs for the Petroleum Loading facilities

and Petroleum Storage facilities.

14. The Tariff Methodology Version 4 prescribes the use of the TOC Method for asset

valuation.

Decision-Making Process

15. As part of the consultation process, NERSA published the non-confidential version of

the tariff application on its website for comments on 19 March 2018. Notices inviting

the public to attend the Public Hearing were published in the Independent Newspapers

and the Beeld newspaper on 19 March 2018. The closing date for submission of written

comments was 17 April 2018.

16. The Public Hearing to consider the tariff application was scheduled for 19 April 2018

but did not take place as no members of the public or affected stakeholders registered

to make presentations.

THE APPLICATION

Assessment of the application

17. In assessing this tariff application, NERSA used the Tariff Methodology Version 4 to

assess the outcome of the tariff applied for by Sasol Oil for its storage facility.

1 Available at www.nersa.org.za


18. Data supplied by Sasol Oil was used for most of the calculations performed in this

evaluation. Where this is not the case, the reasons for not using Sasol Oil’s supplied

data are provided.

Calculation of the Allowable Revenue (AR)

19. In accordance with the Tariff Methodology Version 4, the following formula was used

to determine Sasol Oil’s AR:

AR = (RAB x WACC) + E + D ± C +T

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 expense 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.

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

Regulatory Asset Base (RAB)

21. According to the Tariff Methodology Version 4, the RAB is to be determined by applying

the following formula:

RAB = (V - d) + w ± dtax

Where:

V = Value of Operating Property, Plant 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


Property, Plant and Equipment (PPE)

22. Sasol Oil states that the PPE value is calculated by using the TOC method as

prescribed by the Tariff Methodology Version 4. The Tariff Methodology Version 4

requires that the original cost of the assets be indexed annually with the Consumer

Price Index (CPI) over the economic useful life of the assets. Sasol Oil calculated its

PPE value to be R923 052

23. NERSA accepted the use of the TOC method to calculate the PPE on which a return

is to be earned. The original cost of the assets were trended by the CPI from the year

in which the assets were brought into use, until the tariff period under review. NERSA

has arrived at a PPE value of R952 393.

24. Sasol Oil applied the TOC method correctly when calculating the PPE value from

which a return should be earned. However there is a difference between the PPE

values calculated by Sasol Oil and NERSA due to the different CPI values used

when trending the assets.

Net Working Capital (w)

25. The Net Working Capital refers to the various regulated activities or business

operation funding requirements other than operating property, plant, vehicles and

equipment in service. These funding requirements include Inventories, Trade

Receivables, Operating Cash and Trade payables.

26. The Net Working Capital is included in the calculation of the RAB and is calculated

using the following formula provided in the Tariff Methodology Version 4:

Net Working Capital = Inventory + Trade Receivables + Operating Cash +

Minimum Cash balance – Trade Payables

27. In its application, Sasol Oil states that the Inventory is valued at the lower of cost or net

realisable value. The net realised value is calculated by using the lowest Basic Fuel

Price (BFP) at the purchase date. NERSA accepted the approach used by Sasol Oil in


determining the value of Inventory, as the Tariff Methodology prescribes that inventory

be valued at the lower of cost or net realisable value.

28. Sasol Oil calculated its Trade Receivables based on 30 days of AR, Operating Cash

based on 45 days of Operating Expenditure (OPEX) and Trade Payables based on 45

days of OPEX. Sasol Oil calculated its Net Working Capital to be R78 274.

29. NERSA applied its Tariff Methodology Version 4, which prescribes that Trade

Receivables be calculated on 30 days of AR, Operating Cash on 45 days of OPEX and

Trade Payables on 45 days of OPEX. NERSA calculated the Net Working Capital to

be R78 748.

30. There is a slight difference between the Net Working Capital calculated by Sasol Oil

and that calculated by NERSA due to the difference in values used to calculate the

components of the Net Working Capital, i.e. Trade Receivables and AR.

31. A comparison of the Net Working Capital values of Sasol Oil and NERSA is presented

in Table 2.

Table 2: Comparison of the Net Working Capital values

2018/19

Sasol Oil NERSA

R R

Inventory 24 549 24 549

Trade Receivables 53 725 54 199

Operating Cash 51 886 51 886

Trade Payables (51 886) (51 886)

Net Working Capital 78 274 78 748

Deferred Tax

32. Sasol Oil calculated a Deferred Tax liability of R2 028. NERSA also computed the

deferred tax of R2 028. The calculation of the Deferred Tax is depicted in Table 3.


Table 3: Comparison of the Deferred Tax

2018/19

Sasol Oil NERSA

R R

Wear and Tear 24 652 24652

Less Historical depreciation 17 409 17 409

Timing difference (7 243) (7 243)

Deferred tax liability (timing

difference x company tax of 28%) (2 028) (2 028)

33. The Net Working Capital and the Deferred Tax were added to the PPE value to

calculate the RAB value from which a return is earned. The RAB values are depicted

in Table 4.

Table 4: Calculation of the RAB

2018/19

Sasol Oil NERSA

R R

PPE-d 923 052 952 393


Deferred tax (2 028) (2 028)

RAB 999 298 1 029 113

34. Table 4 shows that there is a difference in RAB values calculated by Sasol Oil and

NERSA due to the different PPE and Net Working Capital values calculated by both

parties.

WEIGHTED AVERAGE COST OF CAPITAL (WACC)

35. Section 5 of the Tariff Methodology Version 4 stipulates that the following formula is

used to determine the Weighted Average Cost of Capital (WACC):

Kd*

EqDt

DtKe*

EqDt

Eq 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, real2 cost of debt

36. In determining the WACC, the following components of WACC were analysed:

Cost of Equity

37. The Tariff Methodology prescribes that the Cost of Equity be determined according to

the CAPM3. Sasol Oil states in its tariff application that the WACC calculation is in line

with the Tariff Methodology Version 4.

38. The Tariff Methodology Version 4 requires that the economic data used to calculate

the Cost of Equity be that of 12 months prior to the commencement of the tariff period

under review. In this regard, Sasol Oil used the May 2017 (13 months prior to the

commencement of the tariff period) economic data instead of the economic data of

June 2017 (12 months prior to the commencement of the period). The use of different

economic data resulted in different WACC values being computed by Sasol Oil and

NERSA. The economic data is updated quarterly and published by NERSA on its

website.

39. Sasol Oil applied a Risk Free Rate (Rf) of 4.68%, a Market Risk Premium (MRP) of

4.55% and Beta of 0.79 which resulted in a Cost of Equity of 8.27%.

40. NERSA applied a Rf of 4.70%, MRP of 4.21% and a Beta of 0.79 which resulted in a

Cost of Equity of 8.03%.

Cost of Debt

41. Sasol Oil used the Prime Rate of 9.15% at the time of submitting this tariff application

to calculate its nominal Cost of Debt of 6.59% (Post-tax).

2 First convert from pre- to post-tax and then from nominal to real.

3 The cost of equity can also be determined by applying any other appropriate model as per the provisions of Regulation 4(5) of the Regulations made under the Petroleum Pipelines Act, 2003 (Act No. 60 of 2003).


42. Sasol Oil calculated the real Cost of Debt of 1.09% by converting the nominal Pre-tax

Cost of Debt of 9.15% with a CPI of 5.50%.

43. NERSA calculated the real Cost of Debt of 1.42% by converting the nominal Pre-tax

Cost of Debt of 9.15% with a CPI of 5.10%.

44. There is a difference between the real Cost of Debt applied for by Sasol Oil and that

calculated by NERSA due to the different CPI used by both parties.

Debt-to-Equity Ratio

45. Sasol Oil used the minimum Debt-to-Equity ratio of 30:70 as prescribed in the Tariff

Methodology Version 4. NERSA accepts the use of the minimum Debt-to-Equity ratio

of 30:70 in determining the WACC value as it is considered to be reasonable for the

efficient operation of petroleum infrastructure.

WACC

46. Sasol Oil calculated its real WACC to be 6.12% and NERSA calculated its real WACC

to be 6.04%. The WACC calculated by Sasol Oil and NERSA is depicted in Table 5.

Table 5: WACC Calculation

Detail Sasol Oil NERSA

Risk Free Rate (before-tax real) 4.68% 4.70%

Market Risk Premium (real) 4.55% 4.21%

Beta 0.79 0.79

Cost of Equity (post-tax real) 8.27% 8.03%

Cost of Debt (Pre-tax) 9.15% 9.15%

Corporate Tax rate 28%

28%

Norminal Cost of Debt 6.59% 6.59%

CPI forecast 5.50% 5.10%

Cost of Debt (post-tax real) 1.09% 1.42%

Capital Structure: Debt 30% 30%

Equity 70% 70%

Weighted Average Cost of Capital

(WACC) 6.12% 6.04%


47. Table 5 shows that there is a difference in WACC values due to the different MRP and

CPIf resulting in a different Cost of Equity and Cost of Debt, which ultimately result in

different WACC values.

Operational Expenditure

48. Regulation 5(2) read with Regulation 4(2)(a) made under the Act provides that the

tariffs approved by NERSA must enable an efficient licensee to recover the reasonable

Operational and Maintenance expenses in the year in which they are incurred.

49. Sasol Oil has an approved Cost Allocation Manual (CAM). Operational costs and

corporate overheads are allocated in accordance with the approved CAM.

50. Sasol Oil’s operating expenses for the tariff period under review are forecast to be

R420 849 as illustrated in Table 6 below. The projections show an increase of 235.23%

when compared to the OPEX costs approved in the 2017/18 tariff period. The reasons

for the increase is due to the change in Tariff Methodology. The 2017/18 tariffs were

based on the Standard Costing Option which allowed the use of notional values in the

calculation of standard variables such as RAB, OPEX and WACC.

Table 6: Comparison of the Opex costs

Details Audited actuals

2016/17

Approved

2017/18

2018/19 %

Difference

R R R

Storage depot and divisional cost 292 377 289 760 -0.90%

Corporate cost 153 724 131 080 -14.73%

Total 446 101 125 541 420 849

% difference -71.86% 235.23%

51. The Standard Costing Option Tariff Methodology used an average of 102 cents of the

total design capacity of the facilities to calculate the OPEX costs. This resulted in a

decrease of 71.86% in the OPEX costs allowed in the 2017/18 tariff period.

52. However, the change from the Standard Option 2 Tariff Methodology to TOC allows

the licensee to recover the costs incurred for the purpose of operating and maintaining

the facility. This therefore resulted in OPEX costs increasing by 235.32% when

compared to the OPEX cost allowed in the 2017/18 tariff period. Furthermore, it is worth

noting that the OPEX costs for the 2018/19 decreased by 6% (from R446 101 to


R420 849) when compared to the actual audited costs incurred in the 2016/17 tariff

period.

53. Based on the actual audited cost of R446 101 for the 2016/17 tariff period, the forecast

costs of R420 849 for the 2018/19 tariff period are deemed reasonable. Therefore,

NERSA accepted the forecast OPEX costs submitted by Sasol Oil for this tariff

application.

54. NERSA reserves the right to verify the OPEX values submitted by Sasol Oil. Any

difference between the expenses provided in this tariff application and actual expenses

incurred will be subject to a clawback adjustment.

Land Rehabilitation

55. No provision for land rehabilitation costs has been submitted by Sasol Oil.

56. Additional information was requested from Sasol Oil to ensure compliance with

Regulation 9 of the Regulations, made under the Act. At the meeting held on 20 April

2018, Sasol Oil indicated that it cannot include the Land Rehabilitation cost in the AR

as it will not be able to recover the cost through tariffs since it does not have third-party

access in its facilities. Sasol Oil further stated that there is a provision made in its

financial statements in case there is a need to rehabilitate its facility.

Depreciation

57. Section 8.1 of the Tariff Methodology Version 4 prescribes that Depreciation be

calculated on a straight line basis over the service life of each of the assets or classes

of assets.

58. Sasol Oil’s assets are depreciated on a straight-line basis and the Depreciation

calculated by the Sasol Oil is R18 256 for the tariff period under review.

59. NERSA in its calculation depreciated the assets on a straight-line basis and calculated

the Depreciation to be R18 255 for the tariff period under review.


Clawbacks

60. Table 7 shows a clawback adjustment amount of R71 563 in favour of Sasol Oil in

respect of the 2016/17 tariff period. The clawback adjustment consists of the volume

adjustment between projected volumes and actual volumes achieved in the 2016/17

tariff period as well as the AR and the clawback adjustment.

Table 7: Clawback Calculation

Clawback Calculation Sasol Oil NERSA

Volumes Adjustment Formula R Formula R

Projected 2016/17 Volumes a 523 104 a 523 104

Actual 2016/17 Volumes b 534 895 b 534 895

Difference c = a - b -11 791 c = a - b -11 791

Tariff Set by ER (c/l) d 15.37 d 15.37

Volumes Adjustment Clawback e = c x d -1 812 e = c x d -1 812

AR Adjustment (R)

2016/17 RfD

2016/17 Actual

Clawback Calculation

2016/17 RfD

2016/17 Actual

Clawback Calculation

R R R R R R

RAB 927 290 967 139 39 849 927 290 967 139 39 849

WACC 5.54% 5.53% -0.01% 5.54% 5.53% -0.01%

Allowable revenue

RAB X WACC 51 372 53 486 2 114 51 372 53 486 2 114

D 18 910 18 520 -390 18 910 18 520 -390

E 375 150 446 101 70 951 375 150 446 101 70 951

Amortisation 17 790 17 705 -85 17 790 17 705 -85

AR before Tax 463 222 535 812 72 590 463 222 535 812 72 590

Tax 26 900 27 685 785 26 900 27 685 785

Clawback -409 690 -409 690

Total AR adjustment 80 432 563 497 73 375 80 432 563 497 73 375

Total Clawback 71 563 71 563

Tax Expense

61. Sasol Oil has used the notional tax approach in determining its Tax Expense. The

notional tax refers to a licensee’s estimated notional Tax Expense with respect to the

regulated activity for the tariff period under review. The Tax Expense has been

calculated using the following formula:


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

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

62. NERSA accepted the use of the notional tax approach. The Tax Expense and

components of the Tax Expense are analysed in Table 8.

Table 8: Tax Calculation

(R)

2018/19

Sasol Oil NERSA

R R

Corporate tax 28% 28%

RAB 999 298 1 029 113

WACC 6.12% 6.04%

Return on WACC 61 152 62 158

Operating Expenses 420 849 420 489

Depreciation 18 256 18 255

Amortisation 21 766 23 352

Clawback 71 563 71 563

AR before Tax Expense 593 586 595 817

Less: Operating Expenses 420 849 420 489

Depreciation (historic) 18 256 18 255

Taxable Income before Gross up 154 481 157 073

Taxable Income after Gross up (i.e.

taxable income/1-t) 214 557 218 156

Tax Expense 60 076 61 083

63. Table 8 shows that there is a difference in Tax Expense due to the different RAB values,

Amortisation and ultimately different AR values determined by Sasol Oil and NERSA.


Allowable Revenue (AR)

64. Sasol Oil calculated its AR based on the Rate of Return (ROR) approach. This is in

accordance with the Tariff Methodology Version 4.

65. NERSA also performed its calculations of AR based on the ROR approach. The

comparison between the AR calculated by Sasol Oil and NERSA are shown in Table 9.

Table 9: Comparison of the AR values

66. Table 9 shows that there is a difference in the AR values due to the different RAB, Tax

Expense and Amortisation values calculated by Sasol Oil and NERSA.

Volumes

67. Sasol Oil submitted its projected volumes for the 2018/19 tariff period to be 542 918

litres. The 2018/19 projected volumes shows a decrease of 2% when compared to the

prior year’s projections. However, the 2018/19 volume projections are deemed to be

reasonable when compared to the actual audited volumes of 534 895 achieved by

Sasol Oil in the 2016/17 tariff period.

Sasol NERSA

R R

Asset value (PPE – d) 923 052 952 393


Deferred Tax (2028) (2028)

Regulatory Asset Base (RAB) 999 298 1 029 113

RAB*WACC 61 152 62 158

Operating Expenses 420 849 420 849

Tax Expense 60 076 61 083

Depreciation 18 256 18 255

Amortisation 21 766 23 352

Clawback 71 563 71 563

Allowable Revenue 653 662 657 260


68. Sasol Oil indicated that there is a decrease in volume projections due to a decline in

the demand for the lubricant products, which also negatively impacts the market growth

of its lubricant product.

69. NERSA therefore accepted the projected volumes submitted by Sasol Oil in this tariff

application. NERSA will continuously monitor the volumes and any difference between

the projected volumes and actual volumes will be subject to a clawback adjustment in

future tariff periods.

70. Table 10 shows the actual volumes for the 2016/17 tariff period and projected volumes

for the 2017/18 and 2018/19 tariff periods.

Table 10: Forecast Volumes

Tariff Design

71. In calculating the tariff, Sasol Oil used the total AR divided by total throughput volume

in litres. The tariff applied for is expressed in cpl and is exclusive of VAT.

72. Sasol Oil applied for a tariff of 120.40 cpl for the tariff period under review.

73. The tariff calculated by Sasol Oil and that calculated by NERSA are shown in Table 11.

Table 11: Comparison in tariffs

74. Table 11 shows that there is a difference in tariff of 0.5% due to the different RAB, Tax

Expense and WACC values, ultimately resulting in the AR values being different. It was

therefore decided to approve the tariff of 120.40 cpl applied for by Sasol Oil for the tariff

period under review.

Audited 2016/17 2017/18 forecasts

2018/19 forecasts

Volumes (litres) 534 895 553 923

542 918

% difference 3.55% -2%

2018/19

Sasol Oil NERSA

AR (Rands) 653 662 657 260

Volume (litres) 542 918 542 918

Tariff (cents per litre) 120.40 121.06

% difference 0.5%


Conclusion

75. On the conspectus of the facts and evidence, it is appropriate and in compliance with

the requirements of the National Energy Regulator Act, 2004 (Act No. 40 of 2004) to

make the decision set out above. The decision finds a reasonable balance between

the interests of customers on the one hand and the interests of investors on the other.

tariff decision for sasol oil (pty) ltd’s · 30. there is a slight difference between the net...

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