OPERATING MANUAL: NERSA s STORAGE TARIFF MODEL

OPERATING MANUAL: NERSA s STORAGE TARIFF MODEL According to Section 28 (1) of the Petroleum Pipelines Act, 2003 (Act No. 60 of 2003): The Authority must set as a condition of license the tariffs to be charged by a licensee in the operation of a petroleum pipeline and approve the tariffs or storage facilities and loading facilities. This implies that the Energy Regulator has to test the reasonableness of storage and loading facilities against a benchmark or formula to enable the approval thereof. The purpose of this document, together with the attached Excel worksheets is to communicate to licensees such basis and to give guidance on how evaluation will be performed. The calculations below are therefore not a prescribed methodology, but a methodology which the Energy Regulator is going to use to evaluate the application for storage and loading facility tariffs. 1 Definitions Allowable Revenue = (RAB x WACC) + E + T + D + C Where: RAB = Regulatory Asset Base WACC = effective weighted average cost of capital (real Ke and real Kd) E = Expenses: maintenance and operating expenses for the tariff period under review T = Tax: notional tax expense in the for the tariff period under review D = Depreciation: the charge for the tariff period under review C = Claw back adjustment (to correct for differences between actual and forecasts in formula elements as well as efficiency gains) from the immediately preceding tariff period Storage tariff manual Page 1 of 21

2 Information required 2.1 Value of Asset base (V-d) + w The value of the Regulatory Asset Base is the inflation adjusted historical cost or trended original cost (TOC) of plant, property and equipment less the accumulated depreciation for the period under consideration plus the net working capital. The following formula must be used to determine the value of the Regulatory Asset Base - Where: RAB = (V d) + w V = trended original cost (TOC) of used and usable property, plant, vehicles and equipment up to the commencement of the tariff period under review and a pro rata portion of the plant placed into operation during the tariff period under review (R14.82 in TOC work sheet) d = depreciation accumulated up to the commencement of the tariff period under review (See TOC worksheet R10.37 at end year 7, the year before the year of application year 8) w = net working capital The RAB in the example on the Website would be calculated as follows: INPUT data R' million Input source Information from Applicant Regulated Asset base (V-d) 4.45 Projected forward (TOC adjusted) Working Capital (w) 2.00 Projected forward Regulatory Asset base (RAB) 6.45 (V-d)+w See detail and workings below: Storage tariff manual Page 2 of 21

2.1.1 Value of Property, Plant, Vehicles and Equipment (V-d) = R4.45 million The value of used and usable property, plant, vehicles and equipment comprises only non-current assets. Non-current assets are to be valued on the trended original cost (TOC) basis 100% of the asset is to be revalued on a TOC basis as WACC is real. Inflation adjustments must be based on appropriate inflation indices. Noncurrent assets are calculated for each asset category and summed to arrive at the value for V. Plant, property and equipment under construction are excluded from the Regulatory Asset Base. Non-current assets must be used and usable, of a long term economic lifespan and in a condition that makes it possible to be used in the tariff period under review. Capital expenditure is admitted to the Regulatory Asset Base when the asset concerned becomes used and usable. Non-current assets expected to become used and usable during the forthcoming tariff period are admitted to the Regulatory Asset Base in proportion to the share of the tariff period under review during which they will be used and usable. If the period for which an asset is admitted to the Regulatory Asset Base is different to the period estimated when the tariff was set then a claw back adjustment is made in the following tariff period. (See Claw back adjustment). Other costs of an unusual/infrequent nature, for example major storm damage repairs not insurable and recoverable from insurance may be included in the Regulatory Asset Base if the licensee decides to capitalise these costs in accordance with IFRS (International Financial Reporting Standards). Other costs of an unusual/infrequent nature such as abandoned construction are excluded from the Regulatory Asset Base. Funds deposited by customers with the licensee or Government grants are excluded from the Regulatory Asset Base. Storage tariff manual Page 3 of 21

Contributions received in lieu of connection charges representing nonrefundable funds contributed by customers are excluded from the Regulatory Asset Base. Leasehold improvement costs borne by the licensee means an investment in a right to use property and is admitted to the Regulatory Asset Base. Operating reserves such as cost-free funds used to support the regulatory asset-base investment, are excluded from the Regulatory Asset Base. 2.1.2 Depreciation Accumulated (d) = R10.37 million Accumulated depreciation is the cumulative depreciation against plant property, vehicles and equipment in service. 2.1.3 Calculation of Tended original Cost (TOC) = R14.82 million The model proposed is the Trended original Cost (TOC) in which case the Depreciation is calculated by trending the Original Cost upwards by an CPI factor as described under (V-d), calculating the expired useful life of the Assets,which in turn is used to calculate the Accumulated depreciation based on the TOC. The movement of accumulated depreciation from year to year then represents the annual depreciation. This will be an increasing Rand value over time as the base (TOC) is inflated by the relevant inflation factor assuming the physical assets remain constant. See relevant example: Thus assuming that the Asset is now 7 years old and the tariff application is for year 8, the TOC value would be R14.82 (V). Note that the relevant CPI index changes from year to year. As most of the capital cost of such a storage facility would probably involve steel, the RSA steel index would be an appropriate index to use. If the applicant has more appropriate CPI assumptions, these assumptions and combinations must be forwarded and explained to NERSA as part of the application. See also the Excel model included on the website for this calculation. Storage tariff manual Page 4 of 21

Full TOC calculations TOC Col no C D E F G H I J K L M N Row no Year 0 1 2 3 4 5 6 7 8 9 10 4 Total Trended original Cost (gross) 10.00 10.50 11.16 11.88 12.71 13.62 14.30 14.82 15.17 15.48 15.62 5 Original cost 10.00 10.00 C18 10.00 10.00 10.00 10.00 10.00 10.00 10.00 10.00 10.00 6 Write up 0.50 C8*C19 +C6 1.16 1.88 2.71 3.62 4.30 4.82 5.17 5.48 5.62 7 Expired life, straight line over 10 years 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 8 Depreciated Trended Original cost (Net) 10.00 9.45 8.93 8.31 7.62 6.81 5.72 4.45 3.03 1.55 0.00 9 Original cost 10.00 9.00 D5*(1-D7) 8.00 7.00 6.00 5.00 4.00 3.00 2.00 1.00 0.00 10 Write up - 0.45 D6*(1-D7) 0.93 1.31 1.62 1.81 1.72 1.45 1.03 0.55 0.00 11 Accumulated depreciation (d) - 1.05 2.23 3.56 5.08 6.81 8.58 10.37 12.14 13.93 15.62 12 Original cost - 1.00 D5-D9 2.00 3.00 4.00 5.00 6.00 7.00 8.00 9.00 10.00 13 Write up - 0.05 D6-D10 0.23 0.56 1.08 1.81 2.58 3.37 4.14 4.93 5.62 Annual 14 depreciation (D) - 1.05 1.18 1.33 1.52 1.73 1.77 1.79 1.77 1.79 1.69 15 Original cost 1.00 D15-C15 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 16 Write up 0.05 D16-C16 0.18 0.33 0.52 0.73 0.77 0.79 0.77 0.79 0.69 Original Cost of 18 Asset 10 19 CPI (example not actual) 5.00% 7.00% 8.00% 10.00 % 12.00 % 10.00 % 9.00% 8.00% 10.00 % 9.00% 12.00 % Storage tariff manual Page 5 of 21

2.1.4 Working Capital (w) = R2 million Net working capital refers to various regulated activity or 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. The following formula must be used to determine net working capital- Net working capital = inventory + receivables + operating cash + minimum cash balance trade payables. Operating cash refers to the amount of investor-supplied funds needed to finance day to day operations. This is finance to bridge the gap between the time expenditures are 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. Measurement of required operating cash must be based on the licensee s standard practice subject to a maximum 45 days operating expenses, excluding depreciation and deferred taxes. If an applicant has carried out an adequate lead-lag study to determine the net difference, in terms of days, between the point at which service is rendered and revenues are collected from customers, and the point at which costs are incurred until they are paid, then the Energy Regulator may use this determination rather than the approach set out above. Minimum cash balance refers to a requirement by a lending institution for a licensee to hold a minimum cash balance. Proof of such requirement will be required and, if provided, such amount will be included in the net working capital determination less interest earned thereon. Trade payables refers current liabilities for which the amount to be settled is usually known rather than uncertain (as for provisions). 2.2 Depreciation (D) = R1.77 million The depreciation amount is calculated on a straight line basis over the service life of each of the assets or class of assets in the Regulatory Asset Base for the tariff period under review is included in the Allowable Revenue. The only form of accelerated or decelerated depreciation that is allowed is when there is a change approved by the Energy Regulator in the service life of the asset. Storage tariff manual Page 6 of 21

An appropriate depreciation rate must be used in computing depreciation charges to reflect the different estimated service lives of the respective assets in each class of plant accounts, or each plant account, or each class of assets within a plant account. The depreciation rate must be based on the estimated service life of plant, as developed by a study of the company's history and experience (taking into account all relevant factors including variations in use, increasing obsolescence or inadequacy) and such engineering, economic or other depreciation studies and other information as may be available with respect to future operating conditions. When a licensee makes a tariff application, it must include information on depreciation rates for each group of plant accounts, each plant account or each group of assets within a plant account, and be accompanied by a statement on their basis and the methods employed in their computation. See also the Excel model included on the website for this calculation. Depreciation is to be calculated by using the method given in the TOC example in paragraph 2.1.3, reading off year 8, row 14. 2.3 Operational Expenditure (E) = R2.5 million Expenses are operating and maintenance expenses. These expenses are to be categorised in accordance with the Regulatory Reporting Manual (Volume 4). The fully allocated cost attribution approach for the allocation of costs is used. Principles regarding expenses Expenses are those planned for the efficient operation and maintenance of the core business. Procurement practices must meet the criteria of being competitive, at arm s length and prudent. Internal expenses must meet the criteria of being competitive in comparison to appropriate benchmarks. Research and development expenses are permitted, subject to adequate justification. Storage tariff manual Page 7 of 21

Reasonable joint costs, may be permitted, subject to adequate justification and in accordance with the Regulatory Reporting Manual. Land rehabilitation costs are permitted, subject to adequate justification. These funds must be kept in accordance with the Petroleum Pipelines Act 2003 (Act No. 60 of 2003) Regulations, Regulation 9. Operating costs which are not related to the operations of the regulated assets are not allowed. Costs relating to corporate social responsibility are not allowed, unless it can be shown that these costs benefit tariff paying customers. The costs of litigation arising from transgression of laws are not allowed. The costs of advertising are not allowed. The costs of donations are not allowed. 2.4 Taxation (T) Tax refers to a licensees estimated accounting (corporate) tax expense with respect to the regulated activity for the tariff period under review. An estimate of the tax expense during the tariff period under review must be used. At the end of the tariff period the estimate will be reconciled with the actual amount due and an adjustment made to the allowable revenue in the subsequent tariff period for the difference, if any. See claw back adjustments. Any deferred tax retained in the business, is treated as an equity contribution by the investors and is eligible to earn a return. Tax penalties are not allowed. To calculate T South African corporate tax rate (tr) for 2008/09 is 28%. Notional taxation is calculated by using the following formula: (Taxable income (TI))/ (1-tax rate (tr))*(tr) Example TI = R1000 (1000/(1-0.28))*0.28 Storage tariff manual Page 8 of 21

Notional tax calculation Example Taxable income before tax allowance 1,000.00 TI Tax allowance 388.89 (TI/(1-tr))*tr Total allowable revenue 1,388.89 NPBT Tax thereon (388.89) NPBT*tr Net after tax 1,000.00 2.5 Claw back (C) The following formula must be used to determine the Claw back adjustment: Claw back adjustment = VA + OEA + DCA + GA Where: VA = volume adjustment OEA = Operational Expenditure adjustment DCA = debt cost adjustment GA = general adjustment for any remaining differences between projected Allowable Revenue and actual Allowable Revenue not resulting from efficiency gains; according to the following formulas. 2.5.1 Volume adjustment (VA) The volume adjustment compensates licensees and customers for differences between volume projections made when the tariff is set and the actual volumes stored during the tariff period. Any adjustment in Allowable Revenue due to volume will be applicable in the tariff period subsequent to the tariff period under review. Projected volumes used in performing the calculation must be supplied by the applicant. Any unexpected deviations from projected volumes and the factors that have led to such deviations must be explained by the licensee. Storage tariff manual Page 9 of 21

2.5.2 Operational Expenditure Adjustment (OEA) The Operating Expenditure adjustment is determined as the difference between operating expenditure projections made when the tariff is set and the actual operating expenditure achieved during the tariff period. 2.5.3 Debt Cost Adjustment If there is a difference between the estimated cost of debt in the Allowable Revenue and the actual cost of debt for that tariff period then the Allowable Revenue must be recalculated using the actual cost of debt and the difference added to or subtracted from the claw back adjustment. The following formula must be used to determine the Debt cost adjustment - Debt cost adjustment = Allowable Revenue recalculated with actual cost of debt - Allowable Revenue projected. 2.6 Expected return on Equity (Ke) -12.55% Ke = the cost of equity in terms of the Capital Asset Pricing Model (CAPM) The cost of equity must be determined using the capital asset pricing model and the following formula - Where: K e = Rf 1 + (MRP +CRA)* β K e = After tax allowable real cost of equity. Rf 1 = The real risk-free rate of interest. This is the mark to market risk-free rate for the preceding 5 years for all government bonds with at least 10 years maturity as at two months before the commencement of the forthcoming tariff period and calculated by using the following formula: 5 { y= 1 1 + [( Rf nom) * ( 1 t) ] 1 1} 1 + CPI 5 y Storage tariff manual Page 10 of 21

t = current corporate tax rate for the licensee Rm = the real market return. The proxy used for the market is the JSE ALL Share Index (total return = Capital and dividend) for the preceding 25 years, converted from a nominal to real value by using the following formula: 1 + Rm 1 + CPI 1 MRP = the market risk premium. This is the real Market risk premium calculated by using the following formula: 1 + Rm 1 2 + Rf 1 Rf 2 = the real risk-free rate for the corresponding period to the market returns for the previous 25 years. This is the mark to market risk-free rate for the preceding 25 years for all government bonds with at least 10 years maturity, as at two months before the commencement of the forthcoming tariff period and calculated using the following formula: 25 { y= 1 1+ [( Rf nom) *( 1 t) ] 2 1} 1+ CPI 25 y CRA = country risk adjustment for assets outside South Africa and for the country concerned. CPI = Consumer Price Index β = beta, the systematic risk parameter for regulated entities providing pipeline, storage and loading facility services. The beta must be determined by proxy. As a proxy the average of six (6) pipeline companies chosen by the Energy Regulator and listed on stock exchanges must be used. Storage tariff manual Page 11 of 21

2.7.1 Market Risk Premium (MRP) From the calculation, the average real Market Risk Premium (MRP) over 25 years is 11.08%. MR =post tax, convert Rf to post tax, convert both MR and Rf to real, calculate MRP post tax Date Equity return (post tax) Rm CPI Real MR Rf2 (historic) Pre tax Rf 2 (historic) post tax Rf 2 (historic) real post tax MRP Real Post tax Pre- or post tax Post Post Post Pre Post Post Post Nominal or Real Nominal Nominal Real Nominal Nominal Real Real a b c=(1+a)/(1+b)- 1 d e=d*(1- tax) f=(1+e)/(1+b)-1 g=(1+c)/(1+f)- 1 31 Mar 1984 32.71% 12.30% 18.17% 13.29% 9.57% -2.44% 21.12% 31 Mar 1985 3.76% 11.53% -6.96% 16.05% 11.56% 0.03% -6.99% 31 Mar 1986 49.05% 16.29% 28.17% 16.83% 12.12% -3.59% 32.94% 31 Mar 1987 53.95% 18.65% 29.75% 15.82% 11.39% -6.13% 38.21% 31 Mar 1988-19.18% 16.16% -30.43% 15.61% 11.24% -4.23% -27.35% 31 Mar 1989 57.89% 12.78% 40.00% 16.45% 11.84% -0.83% 41.17% 31 Mar 1990 33.49% 14.73% 16.35% 16.61% 11.96% -2.41% 19.22% 31 Mar 1991-8.17% 14.32% -19.68% 16.19% 11.66% -2.33% -17.76% 31 Mar 1992 27.53% 15.33% 10.57% 16.57% 11.93% -2.95% 13.94% 31 Mar 1993 3.79% 13.87% -8.86% 14.92% 10.75% -2.75% -6.28% 31 Mar 1994 42.67% 9.72% 30.03% 13.59% 9.79% 0.06% 29.95% 31 Mar 1995 9.40% 8.94% 0.43% 15.88% 11.43% 2.29% -1.82% 31 Mar 1996 30.85% 8.68% 20.40% 15.47% 11.14% 2.26% 17.74% 31 Mar 1997 7.59% 7.35% 0.22% 15.74% 11.33% 3.71% -3.36% 31 Mar 1998 9.49% 8.60% 0.82% 14.23% 10.25% 1.52% -0.69% 31 Mar 1999-13.38% 6.88% -18.95% 15.53% 11.18% 4.02% -22.09% 31 Mar 2000 27.66% 5.18% 21.37% 14.54% 10.47% 5.02% 15.56% 31 Mar 2001 5.20% 5.34% -0.13% 13.41% 9.65% 4.10% -4.06% 31 Mar 2002 39.05% 5.70% 31.55% 11.39% 8.20% 2.36% 28.51% 31 Mar 2003-27.74% 9.16% -33.81% 11.00% 7.92% -1.14% -33.05% 31 Mar 2004 43.75% 5.86% 35.79% 9.46% 6.81% 0.90% 34.58% 31 Mar 2005 28.19% 3.39% 23.99% 9.19% 6.62% 3.13% 20.23% 31 Mar 2006 57.40% 3.40% 52.23% 7.88% 5.67% 2.20% 48.95% 31 Mar 2007 37.65% 4.64% 31.54% 8.00% 5.76% 1.07% 30.15% 25 Mar 2008 14.62% 7.10% 7.02% 8.27% 5.96% -1.07% 8.18% Average 21.89% 9.84% 11.18% 13.68% 9.85% 0.11% 11.08% Storage tariff manual Page 12 of 21

When converting nominal rates to real rates it is very important to ensure that like is compared with like: CPI is always a post tax nominal rate. Market return (MR) is mostly nominal post tax (except for capital gains tax) and is assumed to be set at post tax as the intention for the investor is assumed to hold the investment to maturity. Risk free (Rf) is a nominal pre tax rate and has to be converted to a nominal post tax rate. Used the current tax rate,28%, in all years The Calculation for March 1984/87 is performed and proven as follows: Year ending 31 March 1984 Year ending 31 March 1987 Equity return (post tax) a 32.71% Equity return (post tax) a 53.95% CPI b 12.30% CPI b 18.65% Real MR Post tax c=(1+a)/(1+b)-1 18.17% Real MR Post tax c=(1+a)/(1+b)-1 29.75% Rf (historic) nominal Pre tax d 13.29% Rf (historic) nominal Pre tax c 15.82% Rf (historic) nominal After tax e=d*(1-tax) 9.57% Rf (historic) nominal After tax d=c*(1-tax) 11.39% Rf 2(historic) real After tax f=(1+e)/(1+b)-1-2.43% Rf 2(historic) real After tax f=(1+d)/(1+b)-1-6.13% MRP Real Post tax g=(1+c)/(1+f)-1 21.12% MRP Real Post tax e=(1+a)/(1+d)-1 38.21% 2.7.2 Real risk-free rate (Rf 1 ) From the same table as the MRP the 5 year data to calculate Rf 1, is taken. Rf1 Calculation Equity return (post tax) CPI Real MR Rf2 (historic) nominal Pre tax Rf 2(historic) nom After tax Rf 2(historic) real After tax a b c=(1+a)/(1+b)- 1 d e=d*(1-tax) f=(1+e)/(1+b)-1 31 Mar 2004 43.75% 5.86% 35.79% 9.46% 6.81% 0.90% 31 Mar 2005 28.19% 3.39% 23.99% 9.19% 6.62% 3.13% 31 Mar 2006 57.40% 3.40% 52.23% 7.88% 5.67% 2.20% 31 Mar 2007 37.65% 4.64% 31.54% 8.00% 5.76% 1.07% 25 Mar 2008 14.62% 7.10% 7.02% 8.27% 5.96% -1.07% Average 36.32% 4.88% 30.12% 8.56% 6.16% 1.25% Storage tariff manual Page 13 of 21

2.7.3 Beta ( β ) The beta calculation commences with establishing the Industry beta" and adding factors which are relevant and specific to this asset and the applicant as set below. Beta Calculation Industry beta. (Calculation of a proxy beta for the industry as per the methodology) 1.00 Green fields project Start-up business Instruments available for obtaining capital 0.02 Debt: Equity ratio - Size of the company - Private / Government company - Construction risks - Total beta 1.02 Applicants should submit reasons and supporting documentation why factors should be considered for them specifically to increase the beta. 2.7.4 Calculating cost of equity (Ke) Using the factors as established and calculated in 2.7.1 to 2.7.3 above calculate Ke as follows: Beta Beta 1.02 MRP as above MRP 11.08% RSA country risk premium CRA 0.00% MRP(Real) after country risk premium Beta*MRP (MRP+CRA) 11.08% Beta*(MRP+CRA) 11.30% Risk free (real) (Rf1) Rf1 1.25% Ke (Real) before country risk premium Rf1+beta*(MRP+CRA) 12.55% 2.8 Real cost of debt (Kd) The real cost of debt is calculated using the following formula: 1+ Kdnom 1+ CPI 1 Storage tariff manual Page 14 of 21

The actual estimated real cost of debt percentage incurred by the licensee must be allowed subject to the Energy Regulator finding it reasonable through the application of reasonableness tests. Expected cost of debt (Kd) = 4.55% The Actual Debt funding the RAB * the real interest rate = the Cost of Debt The Asset (V-d), as calculated in paragraph 2.1, has been adjusted upwards for inflation by adjusting the original Capital cost to trended original cost (TOC). The Asset is therefore compensated for inflation in the Regulatory Asset base (RAB) and not in the Cost of Debt (Kd). Storage tariff manual Page 15 of 21

3 Calculate Allowable Revenue (AR) The following is all the relevant information needed to calculate the allowable revenue. The information is obtained as set out in paragraph 1 above. Now calculate the AR by using the following formula as per the Tariff Methodology: Allowable Revenue (AR)= (RAB * Equity funding* Ke)+( RAB * Debt funding* Kd) + E + T + D + C The website contains Excel worksheets to assist applicants to perform tariff calculations. These are: Input sheet- this contains the basic information required regarding the specific asset and applicant funding model. MRP Ke This worksheet represents NERSA s view of the Market Risk Premium (MRP) Risk free yield (Rf 1 & Rf 2) as well as CPI for the past 25 years. This information will form the basis of NERSA s cost of Equity (Ke) in the model. This information will be updated on an annual basis in April each year. TOC This worksheet is a basic simplistic model on how NERSA calculated trended original cost (TOC) using an inflation index, accumulated depreciation and annual depreciation. Model single This is the single year model to calculate the Allowable revenue (AR) by using information from other worksheets and converting AR to a daily tariff per litre(cents). Following is a discussion and guidelines on how to use the model Storage tariff manual Page 16 of 21

3.1. Input worksheet The input worksheet is copied below with notes and directions of the source of the information. Note that certain fields are copied from TOC and MRP Ke worksheets. The model pulls information from this sheet to perform calculations. INPUT data Information from Applicant Regulated Asset base (V-d) Working Capital (w) Regulated Asset base (RAB) Expenditure Depreciation Actual Financing costs projected Debt ratio Equity Ratio Original cost of Asset Lifespan of asset Loan term (Years) Cost of Debt (Kd) nominal CPI (Starting) Cost of Debt (Kd) real Information Assumed /Calculated MRP (Nominal) MRP (Real) Industry beta Beta adjustments Adjusted for Beta Cost of Equity (Ke) Nominal Cost of Equity (Ke) Real Risk free 1 (Rf1) - Nominal Pretax Risk free 1 (Rf1) - Real Risk free 2 (Rf2) - Nominal Risk free 2 (Rf2) - Real (avg) WACC real Corporate Taxation Rate Volume Assumptions Storage capacity (Liter) % capacity usage Total Liter to be stored (Calculated on a daily basis) Number of operating days Total Liter days NERSA Storage model R' million 4.45 From TOC model 2.00 Average projected for application year 6.45 (V-d)+w 2.50 Projected forward 1.77 From TOC model Year 8 row 14 Input source 0.39 Projected forward. Actual debt * interest rate. 40% Current Actual 60% Current Actual 10.00 Original cost price-transfer to TOC Worksheet. 10 Projected 10 Actual 15.00% Projected forward Current / Actual. TRF to TOC table year 8.Previous years to be input in TOC 10.00% worksheet. 4.55% (1+Kd nom)/(1+cpi)-1 21.89% Calculated by NERSA.MRP Ke worksheet 11.08% Calculated by NERSA.MRP Ke worksheet 1.00 Calculated by NERSA.MRP Ke worksheet 0.02 Submitted by applicant and approved by NERSA 1.02 Sum 22.33% Calculated by NERSA.MRP Ke worksheet 12.55% Calculated by NERSA.MRP Ke worksheet 8.56% Calculated by NERSA.MRP Ke worksheet 1.25% Calculated by NERSA.MRP Ke worksheet 9.85% Calculated by NERSA.MRP Ke worksheet 0.11% Calculated by NERSA.MRP Ke worksheet 9.35% (Ke * equity Ratio)+(Kd*debt ratio) 28.00% Actual 300,000 Maximum Capacity 70% % expected capacity usage 210,000 NB : this needs to be the sum of the expected daily liter 365 Total days in operating period 76,650,000 Total liter * days Storage tariff manual Page 17 of 21

3.2. MRP Ke worksheet This has already been discussed. Sufficient to state that information regarding cost of Equity (Ke) is derived from this sheet and is linked into the input sheet. 3.3. TOC worksheet This worksheet has already been discussed and demonstrated. The RAB is not a historic or accounting asset base but should represent the economic value of the asset at the time of the tariff application. This is a crucial calculation as it represents the nominal regulated asset base. The relevant inflation index for the past years is important information and assumptions and should be investigated and applied correctly. The index number will also change from asset to asset as the various assets have different commencement dates. 3.4. NERSA Model The first part of the model restates or links information to other worksheets and performs calculations as set out in the fourth column. The conclusion is to arrive at an Allowable Revenue (AR) calculation R5.06 million rand. Storage tariff manual Page 18 of 21

NERSA Storage model R million Single year V-d 4.45 End year 7 /beginning year 8 a from TOC table w 2.00 b RAB 6.45 c=a+b Equity Financed 3.87 60% d=equity ratio*c Debt Financed 2.58 40% e=debt ratio*c Asset Useful Life 10 f Term of loan 10 g Ke 12.55% h Kd (real) 4.55% i Kd(nom) 15.00% Corporate Taxation Rate 28.00% j Operating year 8 k Remaining life at beginning 3 l=f-k+1 Depreciated Original Cost 3.00 m= from TOC table Depreciation 1.77 n= from TOC table Cum Expired life at end of year 80.00% o=k/f Value of RAB 6.45 c Less: Debt funding 2.58 e Equity funding 3.87 d Allowable revenue Real Return on Rate Base-Equity 0.49 p=d*h Interest (real) 0.12 q=e*i Depreciation & Amortization 1.77 n Operational Expenditure 2.50 As per submission r Claw back - In subsequent years t Taxation 0.19 Notional tax u={[(p+q+n+r+t)-(q+r+n)]/(1-j)}*j Total Allowable revenue 5.06 AR=p+q+n+r+t+u Storage tariff manual Page 19 of 21

3.5 Checking function The next portion of the model represents a checking function with Income statement, Cash flow statement and Balance sheet to ensure that the assumed assets, funding, cash flow and tax calculation are in balance. Income statement Return on Rate Base-Real 0.49 Interest 0.12 Depreciation and amortization of write up balance 1.77 Operational Expenditure 2.50 Taxation allowance 0.19 Total Allowable Revenue 5.06 Operational Expenditure (2.50) EBIT 2.56 Interest paid (0.39) Depreciation & Amortization (1.77) NPBT 0.40 Taxation (0.11) NPAT 0.29 Dividend paid Retained Income 0.29 Loan Repayment Schedule Opening Balance 2.58 New loan 0 Balance before interest 2.58 Interest 0.39 Repayment (0.51) Balance at end of year 2.45 Cash flow EBIT 2.56 Loan repayment (0.51) Taxation (0.11) Cash flow for the year 1.93 Dividend paid 0 Opening balance 0 Closing balance 1.93 Balance sheet Equity 3.87 Retained Earnings 0.29 Debt 2.45 Total funding 6.61 Asset base 2.68 Working Capital 2.00 Cash 1.93 6.61 Test 0 Storage tariff manual Page 20 of 21

4 Tariff Calculation (Allowable revenue into Tariff per litre) The tariff calculation is performed by : Allowable Revenue/ Total expected Annual volume = cents per litre per day Where: Total expected Annual volume = (expected daily storage) * [number of days in year (365)] Tariff Calculation Cents per liter per day Total Allowable Revenue (Rand) 5,057,451 A Total liter per day (Liter) 210,000 B Total operating days 365 C Total Liter days(liter for full year) 76,650,000 D=(B*C) Tariff per liter per day (cents) 6.60 (A*100)/D ********************************************************************************* Storage tariff manual Page 21 of 21