EASIGAS PTY (LTD) NIGEL S STORAGE FACILITY TARIFF APPLICATION FOR THE YEARS Nigel Storage Facility

Transcription

1 EASIGAS PTY (LTD) NIGEL S STORAGE FACILITY TARIFF APPLICATION FOR THE YEARS 2015 Nigel Storage Facility 2015 Page 1

2 Table of Contents 1. Introduction 5 2. Executive Summary 6/7 3. Approach 7/8 4. Regulatory Asset Base ( RAB ) Property Plant & Equipment (V) Net working capital (w) Deferred Tax (dtax) 9/10 5. Weighted Average Cost of Capital (WACC) 10/ Cost of Equity Market risk premium Beta Definition of debt The calculation of beta Real cost of equity calculation WACC Expenses Labour Corporate Costs Income Taxation Depreciation 14/15 9. Clawback Allowable Revenue Calculation 15/ Volumes Tariffs 16/ Conclusion Appendices Page 2

3 List of Tables Table 1: Allowable Revenue 6 Table 2: Assumption Variables 7 Table 3: Working Capital 9 Table 4: Deferred Tax 10 Table 5: WACC Variables 11 Table 6: Beta 12 Table 7: Real cost of equity 12 Table 8: WACC 13 Table 9: Nigel Facility Expense Summary 13 Table 10: Tax Calculation Summary 14 Table 11: Depreciation 15 Table 12: Allowable Revenue 16 Table 13: Volume data 16 Table 14: Tariff Table 16 Table 15: Penalty Tariffs Page 3

4 LIST OF ACRONYMS 1. HSSE Health, Safety, Security and Environmental 2. AFS Audited Financial Statements 3. T&R Budget figures 4. RAB Regulatory Asset Base 5. WACC Weighted Average Cost of Capital 6. CAPM Capital Asset Pricing Model 7. TOC Trended Original Cost 8. NBV - Net Book Value 2015 Page 4

5 1. Introduction The Nigel Storage Facility is utilised for the sole purpose of storing product for re-distribution to Easigas Customers Countrywide. The Nigel Storage Facility consists of 2 x 365m3 Mounded Tanks with associated piping, 4 x 200m3 with associated piping, with 1 x pump and 3 x Compressors, 2 x Road Gantries and 6 x Rail Gantries for offloading and loading purposes. The Nigel Storage Facility operates on a 24 Hour basis as and when required. 2. Executive Summary EASIGAS PTY (LTD) Limited ( EASIGAS PTY (LTD) ) hereby submits an application for storage tariffs for the EASIGAS NIGEL STORAGE FACILITY licensed by the Energy Regulator on 09 th December 2013 under licence number PPL.sf.F3/154/2013. The application is submitted in terms of section 4(f) and 28(1) of the Petroleum Pipelines Act, 2003 (Act No.60 of 2003), ( the PPA ). This Tariff application is for the 2015 year. In our application we have submitted the following Tariff information: The calculation made is based on August 2014 actuals and forecasts for the remaining months. Allowable Revenue is reflected in the table below: Table 1: Allowable Revenue RAB(V-d)+w±dtax STORAGE FACILITY 2015 TRENDED Where V = Where -d = (15,937,929.00) Where w = Where dtax = Nil RAB = WACC= 10.% E= T= 1,129,758 D= 1,945,468 C= 0 ALLOWABLE REVENUE 7,447,953 wable Revenue Summary VOLUMES STORAGE 2015 T&R VOLUMES LITRES (M) 8.61 TARIFF (CENTS PER LITRE) c/litre 2015 Page 5

6 The above AR translates into a tariff of cents per litre ( c/l ) for the 2015 Tariff period. This tariff application has been guided by the National Energy Regulator of South Africa s ( NERSA ) Tariff Methodology for Petroleum Loading Facilities and Storage Facilities dated 25 March 2010 ( the storage methodology ). EASIGAS PTY (LTD) has aimed to meet NERSA s draft Minimum Information Required for Tariff Applications. The application is based on the following variables: A Table 2: Assumption Variables2 ASSUMPTION VARIABLES Indicator 2015 App Pp Inflation CPI (%) 5.70% Nominal Cost of Debt Kd 16,618 Real Cost of Equity Ke 1,837,628 Real WACC % 10.% Average Gearing % 0 Volume Litres (m) 8.61 Volume Growth % 2% 2012/13The determination of the above variables and economic parameters will be discussed in more detail under the relevant sections of the application. 3. Approach The building blocks of the storage methodology are reflected in the following formula1: Allowable Revenue = (RAB x WACC) +E +T + D ± C Where: RAB = Regulatory Asset Base WACC = Weighted average cost of capital E = Expenses: maintenance and operating expenses for the tariff period under review T = Tax: estimated tax expense for the tariff period under review D = Depreciation and amortisation of inflation write-up: the charge for the tariff period under review. C = Easigas has claimed no Claw back for 2015 Tariff period, since this is the 1 st Tariff Application, which still need approval by NERSA. The formula allows for the calculation of an AR for Nigel Page 6

7 4. Regulatory Asset Base ( RAB ) In terms of the storage 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 is: RAB = V d + w ± dtax Where: V = Value of property, plant, vehicles and equipment d = depreciation amortisation of inflation write-up accumulated up to the commencement of the tariff period under review w = net working capital dtax = deferred tax No are no capital expenditure projects in progress at present, and nothing is planned for the Storage Facility in the 2015 Tariff year. 4.1 Property Plant & Equipment (V) Nigel has adopted the net historical cost of the storage and handling asset base of R19, 380 million, as per the accounting records. The assets value adopted were as at July 2014 and trended until 2015 financial year. See Annexure B. Assets have been trended on annual average CPI projections and in terms of NERSA s demonstration model. Fixed Asset Add The cost of an item of property, plant and equipment is recognised as an asset when: it is probable that future economic benefits associated with the item will flow to the Company; and the cost of the item can be measured reliably. Property, plant and equipment are initially measured at cost. Costs include costs incurred initially to acquire or construct an item of property, plant and equipment and costs incurred subsequently to add to, replace part of, or service it. If a replacement cost is recognised in the carrying amount of an item of property, plant and equipment, the carrying amount of the replaced part is derecognised. Property, plant and equipment are depreciated on the straight line basis over their expected useful lives to their estimated residual value. Property, plant and equipment are carried at cost less accumulated depreciation and any impairment losses. The useful lives of items of property, plant and equipment have been assessed as follows: Item Buildings Plant and machinery Furniture and fixtures Motor vehicles IT equipment Tanks and pipelines Average useful life years 5-25 years 5-7 years 5-10 years 3-5 years years 2015 Page 7

8 The residual value, useful life and depreciation method of each asset are reviewed at the end of each reporting period. If the expectations differ from previous estimates, the change is accounted for as a change in accounting estimate. The depreciation charge for each period is recognised in profit or loss unless it is included in the carrying amount of another asset. Io No assets were added, replaced or retired.st) 2009/ Net working capital (w) The August 2014 Financial Reports for 2014 Easigas (Pty) Ltd were used to determine the networking capital elements. Net working capital is included in the RAB and is calculated according to the formula provided in the storage methodology which is as follows: Net working capital = inventory + receivables + operating cash + minimum cash balance trade payables Please note that Trade receivables are not income stemming from the actual storage facility, but from the sales of mixed LPH/air distributed through the underground pipeline. The components are recognised as follows: Inventory is stated at the lower of cost NRV where NRV equates to selling price less all estimated cost of completion and selling; Trade receivables are based on 55 days collection terms. Provision for doubtful debt is recognised in the income statement when there is sufficient supporting evidence to conclude that impairment is required. Trade payables represent 45 days of operating expenditure; The allowance for operating cash is taken as a standardised factor of 45 days operating expenditure, excluding depreciation and income tax. Table 3: Working Capital1//13 NET WORKING CAPITAL 2015 APP INVENTORY RECEIVABLES 1,130,000 OPERATING CASH LESS: TRADE PAYABLES ( ) NET WORKING CAPITAL Page 8

9 4.3 Deferred Tax (dtax) EASIGAS PTY (LTD) has not adopted the notional tax approach as discussed in section 7 of the storage methodology. Consequently no deferred taxation has been added to the RAB. 5. Weighted Average Cost of Capital (WACC) The NERSA tariff methodology guidelines has been applied in full in determination of the WACC. Equity has been calculated as the accumulated profit for the Nigel facility up to and including the estimated profits for the tariff period under review (2015). The interest bearing debt component has been calculated as a derivative of the total company The NERSA tariff methodology guidelines has been applied in full in determination of the WACC. WACC = (Eq/Dt+Eq)*Ke + (Dt/Dt+Eq)*Kd Where: Eq = Ke = Cost of equity in terms of the Capital Asset Pricing Model (CAPM) Where: Ke = (Rf +CRA) +(MRP)*Beta Rf = Risk Free Rate Kd = Cost of Debt MRP = Market Risk Premium CRA = Country risk adjustments for risks outside RSA CPI = Consumer Price Index Beta = Systematic parameter for regulated entities providing storage & Loading facilities The results of such calculations are as follows: See Annexure A WACC for actual calculations Page 9

10 Table 5: WACC Variables0 WACC 2015 APP Eq 18,338,252 Dt Ke 11.93% Kd 0.25% Ke 2015 APP Rf 4.11% CRA 0% MRP 7.04% Beta 0.70 SSP 2.25% LP 0.64% WACC 10.% 1Regulation 4(5) which also apply to storage and loading facilities 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 EASIGAS PTY (LTD) in this application is fully compliant with Regulation 4(5). The average cost of debt is calculated in the same way that NERSA calculates this parameter5. Also, in line with NERSA, EASIGAS PTY (LTD) has applied the capital asset pricing model ( CAPM ) to estimate the cost of equity. 5.1 Equity Equity has been calculated as the accumulated profit for the Nigel facility up to and including the estimated profits for the tariff period under review (2015) 2015 Page 10

11 5.1.1 Market risk premium Beta The market risk premium is the return investors can expect to earn, over and above the risk-free rate, by investing in the market. The storage methodology states that The licensee will propose a beta, along with details of proxies used and its calculation of the proposed beta Definition of debt The calculation of beta The interest bearing debt component has been calculated as a derivative of the total company (Easigas (Pty) Ltd) debt to equity ratio based on the August2014 Financial Reports, using the Equity calculated for the PE Nigel facility as a base. NERSA has defined debt to mean interest bearing debt as reflected in section 5.1 of the methodology. The beta estimated by EASIGAS PTY (LTD) for EASIGAS PTY (LTD) Nigel s storage facility is 0.70 for the 2015 Tariff period. 10/11 Table 6: Beta20 BETA 2015 APP Beta 0.70 Add. Risk Adjustment 0 TOTAL BETA 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 based August2014 Financial Reports Page 11

12 Table 7: Real cost of equity REAL COST OF EQUITY 2015 APP Risk Free Rate 4.11 Market Risk Premium 7.04 Beta / / / WACC The WACC is the weighted average of the cost of equity and the cost of debt. The WACC for Nigel is Table 8: WACC WACC 2015 APP WACC See See attached Addendum B for detailed calculations.0/ / /13 6. Expenses Nigel facility/storage expenses are to a large degree fixed. The company accounts for expenses in line with IFRS requirements. Other expenses are made up of telecom fixed/mobile, Data communication, Professional fees, public utility, office consumables, rates & taxes for Nigel storage. The base of the calculation for the tariff period (2014) has been on an actual for Jan2014 August2014 and forecast Sep2014 Dec2014. A summary of Nigel operating expenses are revealed in the table below Page 12

13 Table 9: Total Nigel s Expense Summary Pens DESCRIPTION OF COST 2015 T&R OPERATING COSTS SALARIES RENTAL TRAINING COST VEHICLE COST TRAVEL EXPENSES MAINT & REPAIRS: MAINS CONTRACTORS OTHER: EXPENSES GRAND TOTAL Labour Labour costs consist of Salaries, Provident Fund, Medical Aid, and Workman s Compensation Insurance See detailed costs breakdown as per attached Addendum A. 6.2 Corporate Costs Corporate Co 7. Income Taxation No corporate cost has been allocated to Nigel Storage Facility. Notional taxation has been calculated as per the defined NERSA methodology as per attached addendum B. EASIGAS PTY (LTD) 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. 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 + D (of total TOC asset base) + F ± C} {E +D(historic)} tr = prevailing corporate tax rate The trended income tax allowance for the storage facility using the above formula amounts to R 1, 129, 758 in 2015 tariff year. See table below for tax calculation summary. Actual calculations attached in Annexure B Page 13

14 Table 10: Tax Calculation Tax Formula (Taxable Income(TI))/(1-Tax Rate(tr)-(rt) 2015 TRENDED TAX CALCULATED Depreciation Depreciation is calculated on a straight line bases over the useful life of the assets base on the Easigas (Pty) Ltd depreciation policy rates, if required has been adjusted to the realistic life of assets. The write up is based on the CPI See detailed calculations attached in Addendum B. Below find table of Depreciation costs of Nigel Storage. Table 11: Depreciation DEPRECIATION Depreciation Trended Original Cost(Net) TRENDED Cost of Assets Write up Tion 9. Clawback Easigas has claimed no Clawback for 2015 Tariff period, since this is the 1st Tariff Application, which still needs approval by NERSA Page 14

15 10. Allowable Revenue Calculation The financial results for both profitability and balance sheet are reported in consolidation with all other facilities of the company. Hence, an extraction from the financial records of the company has been used to prepare the Allowable Revenue calculation for the 2014 tariff period, using 2015 actual financial results as a base. Allowable Revenue was calculated according to NERSA s Storage Methodology. Allowable Revenue = (RAB x WACC) +E +T + D ± C Where: RAB = Regulatory Asset Base WACC = Weighted average cost of capital E = Expenses: maintenance and operating expenses for the tariff period under review T = Tax: estimated tax expense for the tariff period under review D = Depreciation and amortisation of inflation write-up: the charge for the tariff period under review C = Easigas has claimed no Claw back for 2015 Tariff period, since this is the 1st Tariff Application, which still need approval by NERSA. Table 17 summarises the AR for the 2015 Storage Tariff application. See detailed calculations attached in Addendum B. Table 12: Allowable Revenue Revenue A RAB(V-d)+w±dtax STORAGE FACILITY 2015 TRENDED Where V = Where -d = (15,937,929.00) Where w = Where dtax = Nil RAB = WACC= 10.% E= T= 1,129,758 D= 1,945,468 C= 0 ALLOWABLE REVENUE 7,447, Page 15

16 11. Volumes Volumes are based on the 2014 forecast for the full year based on YTD August actuals. Table 13: Volume data V VOLUMES IN LITRES (MILLION) PEM 2015 T&R l Total Storage Volumes Tariffs The tariffs below would enable the Storage Facility to obtain its Allowable Revenue and are market competitive. Table 14: Tariff Table VOLUME IN LITRES (M) STORAGE 2015 T&R VOLUMES LITRES (M) 8.61 TARIFF (CENTS PER LITRE) c/litre 2009/10 10p EASIGAS PTY (LTD) proposes the following penalty tariffs be imposed, which we believe is appropriate to influence market behaviour: Table 15: Penalty Tariffs2 PENALTY TARIFFS STORAGE FACILITY 8-14 DAYS 86.52x1.5= c/litre DAYS 86.52x2= c/litre DAYS 86.52x2.5= c/litre 012/13 App 2015 Page 16

17 13. Conclusion EASIGAS PTY (LTD) has aimed to meet the minimum MIRTA requirements in the 2015 Tariff year application. EASIGAS PTY (LTD) has applied the storage methodology in arriving at its AR requirement. Thus a revenue requirement of R 7,447 Million is hereby requested by Easigas, for its Nigel storage Facility for the 2015 Tariff Period. 14. Appendices Addendum A Detailed calculations on separate Excel spreadsheet attachment 2015 Page 17