A U A D Pipelines 2018
2 Highlights Revenue of R4,1 billion, excluding clawback and levy A 1,43% increase in petroleum allowable revenue EBITDA margin of 71% Operationalisation of the Coastal Terminal (TM1) tightlining solution that enabled multi-product operation of the 24 Multi Product Pipeline (MPP) Operationalisation of the Inland Terminal (TM2) which provides for an inland accumulation facility of 180 million litres Achieved a disabling injury frequency rate DIFR of 0,09 (target: 0,68) Maintenance of service delivery levels to customers Business overview Transnet Pipelines (Pipelines) is the largest multi-product operator in southern Africa, transporting hydrocarbons and methane-rich gas through a network of 3 800 km of pipeline infrastructure. Pipelines offers fully integrated supply chain solutions from source to destination while ensuring the best safety practices and optimum service reliability, and exceeding customer expectations through the division s proficient human capital. To this effect, Pipelines currently transports: More than 65% of all refined products to the inland market; More than 70% of all jet fuel required at OR Tambo International Airport; 100% of the crude requirements for the Natref Refinery; 100% of the methane-rich gas requirements to KwaZulu-Natal for Sasol Energy and its gas clients; and 100% of Tarlton s volumes, of which 60% is distributed cross-border. The initiative to secure a direct import terminal in the port of Durban and a Terminal Operating Licence has become a key strategic objective for Pipelines, in alignment with the Transnet Liquid Fuels Master Plan to enable: New market participants in line with the charter expectations, which emphasises the promotion of broad-based black economic empowerment and overall sector transformation; and The Department of Energy s Clean Fuels II Programme, which will necessitate increased import terminals due to changes in fuel specifications in the short to medium term. The MPP 24 trunkline is in full multi-product operation, transporting two diesel grades and two unleaded petrol grades as well as jet fuel. The inland accumulation facility was operationalised in December 2017 and will further facilitate security of supply to the market. A seamless integrated rail and pipeline service offering is currently in operation to OR Tambo International Airport, and other routes are being considered and optimised in this regard. The Regional Integration Strategy s primary objective is to grow beyond South Africa s borders, thereby repositioning Pipelines to be a liquid and gas operator of choice across Africa. The business diversification ambition also places emphasis on revenue streams that are non-regulated. Opportunities to diversify into the liquefied natural gas (LNG) market are also being pursued.
3 Transnet Corporate Centre Johannesburg Pipeline LIMPOPO Key GAUTENG Waltloo Pretoria West Rustenburg Airport Kendal Tarlton Langlaagte Alrode Klerksdorp Sasolburg Coalbrook Park MPUMALANGA Witbank Secunda Standerton Volksrust Refined products Crude oil Gas Avtur NMPP pipelines Kroonstad Newcastle Vryheid FREE STATE Bethlehem Van Reenen Ladysmith KWAZULU- NATAL Empangeni Richards Bay NORTH GAUTENG WEST Sishen FREE STATE LIMPOPO MPUMALANGA KWAZULU- NATAL LESOTHO NORTHERN CAPE LESOTHO Durban EASTERN CAPE INDIAN OCEAN WESTERN CAPE Figure 1: Petroleum and gas pipeline network Regulatory environment Pipelines is regulated by the National Energy Regulator of South Africa (Nersa) and governed by the Petroleum Pipelines Act, No 60 of 2003 and the Gas Act, No 48 of 2001. On 31 October 2017, Pipelines filed its 2019 and 2020 Petroleum Pipelines System multi-year tariff applications requesting R5,7 billion and R6,2 billion allowable revenue respectively, which translated into a 36% and 10% increase in allowable revenue respectively. This increase is attributed to: Transnet bringing its tightlining assets at Island View Terminal in Durban (TM1) and its assets at the Inland Terminal (TM2) into operation; and The anticipated clawback adjustment due to the timing or date at which these assets were admitted into the regulatory asset base. On 15 March 2018, Nersa set the tariffs for the 2019 financial year only, i.e. a single-year application. Nersa set the Petroleum Pipelines System tariffs that will allow Transnet to realise a 26% increase in allowable revenue compared to the 2018 tariff period. Performance context Pipelines creates value by fulfilling a strategic role in the South African logistical fuel supply chain by making pipeline capacity available ahead of demand, thereby facilitating the supply of product to the inland market. In the 2018 financial year Pipelines operationalised the inland accumulation facility (TM2) located in Heidelberg and the Coastal Terminal (TM1) tightlining solution. The operationalisation of the tightlining solution enabled the introduction of multi products into the 24 MPP. TM2 has provided Pipelines with about 180 million litres of accumulation facility, creating a necessary buffer in the pipeline system to ensure that the division will be able to continue to operate and supply product into the market even if there are product supply interruptions at the coast. The commissioning of the 24 MPP to multi product allowed Pipelines to retire the Durban to Kroonstad section of the Durban to Johannesburg Pipeline (DJP), thus eliminating the risk of failure of this pipeline.
4 Operational performance Core initiatives for 2018 Execute capital expenditure of R1,5 billion, inclusive of NMPP. Ensure financial performance targets are achieved in a challenging economic environment. Achieve the petroleum volume of 17,345 billion litres. Maintain and improve key operational efficiencies. Achieved a gas volume throughput of 489 million m 3. Overview of key performance indicators 2017 2018 2018 2019 Key performance area and indicator Unit of measure Actual Target Actual Target Financial sustainability EBITDA margin % 77,5 71,5 71,1 78,3 Operating profit margin % 57,3 50,9 48,3 57,7 Gearing % 41,0 41,1 38,3 32,3 Net debt to EBITDA times 3,8 4,9 3,9 2,2 Return on average total assets excluding CWIP % 10,7 6,3 7,0 8,8 Asset turnover excluding CWIP times 0,2 0,1 0,1 0,15 Cash interest cover times 2,6 1,9 2,7 4,0 Capacity creation and maintenance Infrastructure and maintenance Capital expenditure R million 1 706 2 216 1 544 1 338 Actual vs planned maintenance % 95 n/a n/a n/a Production interruptions hours 249 438 371 438 Operational excellence Capacity utilisation (actual usage: capacity) DJP and MPP Ml/week 116:152 118:148 115:148 128:148 Crude Ml/week 98:134 94:134 87:134 94:134 Avtur Ml/week 22:24 20:24 20:24 20:24 Gas (actual usage: capacity) million m 3 /month 50:57 51:57 40:57 42:57 Operating cost per Ml.km (a) R/Ml.km 119 151 135 168 Electricity efficiency Ml.km/MWh (year-on-year percentage improvement) (0,4) n/a n/a n/a Service delivery Off spec volumes litres per billion litres delivered 253 022 97 330 162 519 228 271 Number off spec delivery events per thousand dockets number 0,3 0,3 0,4 0,3 Ordered vs delivered volume % 96 95 93 95 Planned vs actual delivery time % 86 88 86 88 Market segment competitiveness Volume and revenue growth Total petroleum products Ml 16 978 17 564 16 345 17 516 Refined Ml 10 563 11 617 10 678 11 476 Crude Ml 5 254 4 910 4 534 4 970 Avtur Ml 1 161 1 037 1 133 1 130 Gas million m 3 595 574 489 506 Storage Ml 415 511 315 338 Sustainable developmental outcomes Human capital Training spend % of personnel cost 3,3 3,5 3,0 Employee headcount number 642 701 639 684 Employment equity % of black employees 88 n/a n/a n/a Female employees % of headcount 33 n/a n/a n/a People with disabilities % of headcount 3,0 n/a n/a n/a Employee turnover % 4,8 n/a n/a n/a Absenteeism index % 1,7 n/a n/a n/a Risk, safety and health DIFR rate 0,37 0,68 0,09 0,65
5 Financial performance review Year ended Year ended 31 March 31 March 2018 2017 % Salient features R million R million change Revenue 4 488 4 355 3,1 Refined 2 502 2 411 3,8 Aviation fuel 66 50 32,0 Crude 1 445 1 660 (13,0) Gas 96 120 (20,0) Handling 19 27 (29,6) Other (31) 16 (293,8) Clawback and Levy 391 71 450,7 Operating expenses (1 296) (978) (32,5) Energy costs (264) (255) (3,5) Maintenance (98) (100) 2,0 Materials (305) (8) (3 712,5) Personnel costs (427) (394) (8,4) Other costs (202) (221) 8,6 Profit from operations before depreciation, derecognition, amortisation and items listed below (EBITDA) 3 192 3 377 (5,5) Depreciation, derecognition and amortisation (1 026) (883) (16,2) Profit from operations before items listed below 2 166 2 494 (13,2) Impairments and fair value adjustments (20) (63) 68,3 Net finance costs (233) 373 (37,5) Profit before taxation 1 913 2 804 (31,8) Total assets (excluding CWIP) 38 000 23 174 64,0 Profitability measures EBITDA margin 1 % 71,1 77,5 (6,4) Operating margin 2 % 48,3 57,3 (9,0) Return on average total assets (excluding CWIP) 3 % 7,04 10,6 (3,6) Asset turnover (excluding CWIP) 4 times 0,15 0,19 (21,1) Capital investments 5 R million 1 544 1 706 (9,5) Employees Number of employees (permanent) number 639 642 (0,5) Revenue per employee Rand million 7,02 6,78 3,5 1 EBITDA expressed as a percentage of revenue. 2 Profit from operations before impairment of assets, fair value adjustments, net finance costs and taxation expressed as a percentage of revenue. 3 Profit from operations before impairment of assets, fair value adjustments, net finance costs and taxation expressed as a percentage of average total assets, excluding capital work-in-progress (CWIP). 4 Revenue divided by average total assets, excluding CWIP. 5 Actual capital expenditure (replacement plus expansion), excluding borrowing costs and including capitalised finance leases. Performance commentary Financial sustainability Revenue, including clawback and levy, increased by 3,1% to R4,5 billion (2017: R4,4 billion). This is mainly due to the 1,43% increase in petroleum allowable revenue granted by Nersa in its 2018 Tariff Determination, the favourable distribution pattern from the coast and the unwinding of clawback raised in the previous financial year. Net operating expenses increased by 32,5% to R1,3 billion (2017: R978 million). The increase is mainly attributable to a write off of inventory of approximately R297 million. The increase in net operating costs (excluding the inventory write off) is 3,3%. EBITDA, including clawback and levy, of R3,2 billion is 5,5% lower compared to the previous year (2017: R3.4 billion). EBITDA (excluding the inventory write off) is R3,5 billion, a 3% increase from the prior year. Return on total average assets (ROTA) decreased to 7,0% (2017: 10,6%). This is mainly due to the capitalisation of the TM1 tightlining solution and TM2 terminal. Revenue per employee increased by 3,5% to R7,0 million (2017: R6,8 million). Looking ahead Pipelines intends to minimise the impact of the 2019 petroleum determination on EBITDA and other key financial ratios. Pipelines plans to engage with Nersa on the prudency assessment criteria to be applied on the MPP project. The division will persist with the Total and Sasol litigation resolution. Pipelines new business focus is on gas and terminal operations.
6 Capacity creation and maintenance The Operating Division s spend on capital for the year was R1,5 billion compared to a target of R2,2 billion. This is mainly due to the revision of certain project activities. TM1 tightlining and TM2 were commissioned in mid-july and mid-december 2017 respectively. The commissioning of the tightlining enabled the 24 MPP trunkline to be used to transport multi products. On 28 March 2018, the southern section of the DJP was shut down, marking the commencement of the DJP decommissioning plan. The prefeasibility exercise for the PL5 (Sasolburg to Kroonstad pipeline) and PL6 (Jameson Park to OR Tambo International Airport pipeline) commenced in the 2017/18 financial year and will continue in the 2018/19 financial year. Looking ahead Transnet Pipelines will execute the following major projects in the next financial year: Construction of the Sapref replacement tanks; Upgrade of the Fire Protection System at its various sites; and Control System Development and Crude Deployment. Pipelines will finalise the business case for the Coastal Terminal (TM1) accumulator tanks. Market segment competitiveness Market conditions in the oil and gas industry are cyclical and subject to global economic and political events as well as new and changing government regulations. The South African economy, as well as the country s level of development, is heavily dependent on the availability of affordable liquid fuels. South Africa is a net importer of oil with at least 70% of the market demand being met through either imported crude or imported refined products. Fuels produced from indigenous sources satisfy the balance of the demand. The major demand for fuels lies within the Durban Gauteng corridor that consumes about 68% of the country s fuel. Although South Africa has traditionally met most of its fuel demand through locally manufactured products (i.e. Sasol (Secunda), Natref, Enref, Sapref, Chevref and PetroSA), it is now a net importer of fuel and this will continue into the future until existing refineries are upgraded or new refineries are built. The four key levers that impact fuel consumption are: Rand/Dollar exchange rate as the Rand is under pressure, this negatively affects consumption; Price of crude oil currently low, hence a decrease in fuel price and hopefully increased demand; GDP growth rate negative outlook and hence depressed demand; and Disposable income erosion of disposable income and a negative impact on demand. The petroleum volumes transported for the period have decreased 3,7% to 16,345 billion litres (2017: 16,978 billion litres). This relates predominantly to the lower market demand for refined volumes due to depressed commodity prices and the economic slowdown. Another factor that contributed to the lower volumes was the impact of the Natref Refinery shutdown. Gas volumes compared to the preceding year have decreased by 17,7% due to lower gas utilisation by clients, as a result of the economic downturn. Looking ahead Achieve the set petroleum volume target of 17,516 billion litres. Implement initiatives to increase volumes at Tarlton, including influencing Botswana supply mix and route alternatives. Continue with Transnet Value Chain Coordinator initiative to ensure volumes are maximised for Transnet. Exploring opportunities in Richards Bay to diversify into the LNG market. Implement demand-planning for future NMPP expansion phases. Terminal operations in Island View and Ambrose Park. Operational excellence Capacity utilisation Combined capacity utilisation for the 24 MPP and DJP (actual usage: capacity) of 115:148 Ml per week (2017: 116:152 Ml per week) is lower than target as a result of lower volume performance. The Natref Refinery shutdown negatively impacted capacity utilisation of the crude line, while the utilisation of the avtur line is in line with the target. The economic downturn impacted the utilisation of the gas line. Plans are in place to create capacity and ensure that current capacity is maintained. These include construction of the Terminal 2 to Airport dedicated Jet Line, replacement of the Sasolburg to Kroonstad DJP section of the line and completion of the Terminal 1 accumulation tanks. Service delivery Pipelines has maintained the highest level of service delivery to its clients. Service delivery measures relating to ordered versus delivered volumes and planned versus actual delivery times were 93% and 85,8% respectively. Pipelines operational cost per megalitre kilometre (Ml.km) of R135 per Ml.km is lower than the target of R151 per Ml.km due to cost management initiatives implemented during the year. Looking ahead Safely manage the decommissioning of the Durban to Kroonstad leg of the DJP. With the availability of Terminal 2 ensure that service delivery performance is further improved. Develop skills to handle the new assets and new energy opportunities such as gas. Human capital Pipelines achieved a permanent employee headcount of 639 (target: 701). The filling of vacancies was curtailed during the year due to the current economic environment. Black employees represented 89% of the total employee base against a target of 80%. Female employees represented 33% of the total employee base against a target of 40%. People with disabilities represented 2,4% of the total employee base against a target of 3%. The employee turnover rate is 7,4% compared to a target of 5%. The Absenteeism Index of 1,6% is lower than the target of 2,5%.
7 Organisational readiness Skills development Pipelines achieved a training spend of 3% compared to a target of 3,2%. The division will focus on: Building a Gas Skills Framework in preparation for the new business initiatives; Designing mandatory customer centricity training for all employees; Mandatory Transnet 4.0 (Internet of Things) training for all employees; and A People in Pipeline training programme. Health and safety A DIFR of 0,09 was achieved for the year compared to a target of 0,68. Pipelines continues to implement the Transnet Integrated Management Approach and is aiming for certification on the safety system in the next financial year. Stakeholder engagement Stakeholder engagement sessions were conducted on a regular basis, with the commissioning of the MPP into multi-product mode and the inland terminal (TM2) being highlights of the year. Servitude awareness was conducted along the entire pipeline network. Corporate social investment projects focused on schools adjacent to the pipelines. Governance and ethics Environmental stewardship Pipelines continued to implement a comprehensive Environmental Management System (EMS) based on the ISO 14001 standard. Re-certification and transition to ISO 14001:2015 standards were successful. As part of sustainable initiatives, a green initiative at head office s main entrance wall, the 8th floor roof top, and the 9th floor balcony has been completed successfully. Thus the Pipelines head office building is among the few green buildings in the Johannesburg CDB. The 8th floor roof garden has created little micro climates for an unusual diversity of plant species and for supporting other living organisms such as bees, dragonflies and butterflies. This ecosystem in the roof of the building is viewed as a life support system for human beings and fauna directly or indirectly. Social accountability Enterprise Development (ED) initiatives amounted to R19,2 million for the year, including the following highlights: Pipelines entered into partnerships with third-party/conduit ED companies to implement enterprise and supplier development initiatives for the purpose of developing and sustaining small, medium and micro enterprises (SMMEs) that have the potential to become suppliers. The grant included funding for mentorship or skills development programmes for approximately 100 black-owned qualifying small enterprises (QSEs), exempted micro enterprises, as well as businesses owned by black youth and people with disabilities. Enterprise and supplier development resources continued to focus on the needs of SMMEs within Transnet s supply chain and provide them with support and early payment terms (approximately 30 black-owned QSEs were supported). Market Penetration Programme Pipelines utilised its ED partnerships (such as the Durban Chamber of Commerce and Bosch Ulwazi) to sponsor SMMEs with paid advertising space in their local and international publications (and publications of their partner affiliates) as well as a 12-month membership with the Durban Chamber of Commerce or sector-specific institutes; marketing material; and sponsorship of stands for local and international trade shows held during the reporting period. The division partnered with the Durban Chamber of Commerce for a tender readiness programme aimed at empowering 50 SMMEs in highly specialised sectors such as engineering, health and safety, construction, waste management and professional services. The following table details Pipeline s top risks and key mitigating activities: Key risks Material pay-out in terms of Natref s neutrality principle Delay in the completion of the Sapref tanks as part of the NMPP project DJP Pipeline Integrity (Note) Negative financial impact of Nersa s NMPP prudency review Non-completion of the deferred NMPP scope by June 2019 Financial constraints resulting in the unaffordability of planned capex DJP Pipeline Failure (Note) Non-completion of the TM1 accumulator tanks in time to meet demand Mitigating activities Quantification of the amount potentially payable Review of arguments against the validity of the letter agreement Proactive management and monitoring of key milestone dates and activities as per the execution schedule. Decommissioning plan in place Prudency operating model in place which includes a Prudency Subcommittee and an integrated Prudency Assurance Team Proactive monitoring of critical milestones and activities to expedite the execution of the deferred scope Expedite any interventions required to address slippage in terms of cost and schedule to minimise the impact Diversification of revenue to ensure non-reliance on commodity-related revenue Cost management initiatives Pipeline s funding framework aligned to Group s initiatives Decommissioning plan in place Review the demand forecast to determine when the tanks are due Timeous compilation and approval of business case for the tanks
8 Opportunities Gas Exploring opportunities to diversify into the LNG market Terminal Creating import capability for new users at Island View, Durban Terminal operations at Island View and Ambrose Park, Durban Pipelines Feasibility study new jet pipeline from Chevref or from Port to Cape Town International Airport Feasibility study new pipeline from South Africa to Botswana Investigating alternative uses of the DJP after its decommissioning from petroleum product use Africa Via Transnet International Holdings (TIH), Pipelines will focus on the success of the Africa strategy. The division intends to grow the non-regulated business by sharing skills, knowledge, pipeline training, and operational services with other African pipeline companies in the Southern African Development Community (SADC), including Kenya. Review potential gas and fuel pipelines in the SADC region and, when projects realised, submit Expression of Interest to gain first mover advantage. Focus on efficient supply chain to Botswana. Integration of Transnet business units Intermodal integration of Freight Rail and Pipelines service offering for liquid fuel.
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