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Portfolio Committee on Public Enterprises Transnet Annual Report 31 March 2013 January 2014

Portfolio Committee on Public Enterprises Transnet Annual Report 31 March 2013 January 2014. Agenda. Executive summary. Financial results. Capital investment. Volumes and operations. Socio economic and sustainability. Reportable PFMA items.

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Portfolio Committee on Public Enterprises Transnet Annual Report 31 March 2013 January 2014

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  1. Portfolio Committee on Public EnterprisesTransnet Annual Report 31 March 2013 January 2014

  2. Agenda Executive summary Financial results Capital investment Volumes and operations Socio economic and sustainability Reportable PFMA items Interim results for 6 months ended September 2013 Conclusion

  3. Transnet’s performance for 2013 shows resilience despite depressed economic conditions Revenueincreased by 9,4% to R50,2 billion. NMPP capacity utilisationincreased by 27,5% to 51 mℓ/week. EBITDAincreased by 11,5% to R21,1 billion, almost 5 times GDP growth. DCT Pier 2 achieved 28 GCH, an improvement of 21,7%. 21,6% growth in containers and automotive on rail. Continued financial stability with gearing at 44,6% andcash interest cover ratio at 3,7 times. Created 28 493 direct and indirect jobs, trained 866 artisans and awarded 122 engineering bursaries. Capital expenditureincreased by 23,4% to R27,5 billion. S&P reaffirmed Transnet’s foreign and local currency credit rating of BBB/- Electricityconsumption declined by 3,4%and 151 139 MWh regenerated by new locomotives.

  4. Financial results

  5. Financial highlights * Excluding capitalised borrowing costs, including capitalised finance leases and decommissioning restoration liabilities. # Including regulator claw back (7,7% excluding claw back).

  6. Revenue and volumes reflective of market conditions Port containers (‘000 TEUs) Revenue (R million) Rail volumes (mt) TPL +10,6% TPT +9,4% 4% 12% 50 194 45 900 37 952 TNPA 35 610 13% 33 592 50% TFR 21% TE 2009 2010 2011 2012 2013 * Excluding specialist units and intercompany eliminations. Revenue contribution by operating division* (%) +3,3% +3,8% 207,7 201,0 +1,2% 10,7 8,8 11,3 Containers and automotive 11,9 16,2 4 403 4 352 15,7 4 081 Agriculture and bulk 20,9 22,0 3 800 3 629 Mineral mining and chrome 64,3 59,9 Steel and cement Iron ore and manganese Coal 84,3 82,7 2012 2013 2009 2010 2011 2012 2013

  7. Operating expense increases kept to minimum with R2,2 billion cost saving initiatives Operating expenses by cost element (%) Operating expenses (R million) +7,9% 21% Personnel costs Energy costs 50% 10% Material and maintenance costs Other operating expenses 19% 21 2009 2010 2011 2012 2013 10 • Operating expenses increased by 7,9% to R29,1 billion mainly due to: • Material costs increased as a result of higher steel prices and increased levels of maintenance to support current and future growth in rail volumes. • Personnel costs increased to R14,5 billion (2012: R14,1 billion) due to an 8,4% average wage increase as well as headcount and training cost increases in line with MDS requirements, partially offset by a decrease in performance related incentive payments. • Energy costs increased due to higher electricity tariffs from Eskom as well as fuel price increases. • The increase in operating expenses was limited by rigorous cost reduction initiatives amounting to R2,2bn.

  8. EBITDA growth in excess of GDP EBITDA contribution by operating division* (%) EBITDA (R million) EBITDA margin (%) TPL 9% +12,4% TPT +11,5% 8% 21 051 18 882 15 763 14 409 13 200 54% TFR 23% TNPA 6% 2009 2010 2011 2012 2013 TE * Excludes specialist units and intercompany adjustments. +0,8 41,9 41,5 41,1 40,5 39,3 2009 2010 2011 2012 2013

  9. Depreciation, derecognition and amortisation, net finance costs, taxation and profit for the year Depreciation, derecognition and amortisation (R million) Profit for the year (R million) Taxation (R million) +11,0% +36,4% 5 140 3 767 2 878 2 436 1 966 2009 2010 2011 2012 2013 2009 2010 2011 2012 2013 The increase of 11,0% is due to the ramp up in capital investment over the last 7 years and depreciation of revalued port facilities and pipelines. Net finance costs increased by 36,4% due to increased borrowings of 25,7% to fund the capital investment programme. Net finance costs (R million) -6,7% +5,4% 2 122 5 226 1 980 1 763 4 340 4 184 4 119 1 492 1 508 3 150 2009 2010 2011 2012 2013 2009 2010 2011 2012 2013 The reduction of 6,7% in the taxation charge primarily relates to non-taxable income on assets previously written off, but re-recorded to reflect continued useful lives. Despite increase in depreciation and net finance costs, profit for the year increased by 5,4% and an increase of 8,3% in headline earnings.

  10. Financial position remains strong

  11. Assets and borrowings Property, plant and equipment (R million) Gearing (%) Return on average total assets (excluding CWIP)(%) +13,4% +25,7% March 2012 Additions Revaluation Depreciation Borrowing costs Other March 2013 2009 2010 2011 2012 2013 Including the 2ndGMTN bond issuance to international investors (largest order book ever achieved by a South African corporate issue) at 10-year US$ bond coupon of 4,0%. Increase in assets mainly due to R11,3 billion invested in the expansions and R16,2 billion invested in maintaining capacity. Total borrowings (R million) Max 9,0 50 7,7 44,6 6,8 6,7 6,6 41,9 41,1 39,8 37,7 2009 2010 2011 2012 2013 2009 2010 2011 2012 2013 Return on average total assets (including the impact of Regulator claw back) in line with expectations due to the intensive capital investment programme. The ratio remains within expectations and below the Group’s target range of 50,0%, with adequate capacity to fund future capital investments.

  12. Strong operating cash flows supporting investment grade credit rating 4,2 4,1 3,9 3,7 3,7 Min 3,0 2009 2010 2011 2012 2013 Cash interest cover (times) Credit rating: Long-term foreign currency * * Excluding R3,5 billion from the African French Development Bank and R1,7 billion short-term financing, which was included in the 2012 financial year funding requirement. A3/- BBB/-

  13. Capital investments

  14. Capital investment over last 6 years totalling R125 billion Capital investment (R billion) Expansion vs. maintain (R billion) Capital investment by operating segment +23,4% Other 27,5 Piped products 22,3 21,5 19,3 18,4 15,8 Port containers GFB Export iron ore 4% 2008 2009 2010 2011 2012 2013 Bulk Export coal Capital investment by commodity (%) Maintain R16,2 billion Expansion R11,3 billion Rail 67% R18,3bn Ports 14% R3,9bn Pipelines 10% R2,8bn Engineering and other 9% R2,5bn

  15. Major capital deliveries during the year * This represent the quantities that are projected for delivery in the next seven years. The projected quantities for export coal wagons is zero for 2014 and 1 300 for the two years thereafter.

  16. Volumes and operations

  17. Volumes and operations Rail - General freight business (GFB) Productivity and efficiency Volumes (mt) GFB volumes increased modestly by 1,6mt to 82,6mt. Further details on key GFB commodities are provided on the next slide. +2,0% 82,6 81,0 78,4 73,7 72,1 2009 2010 2011 2012 2013 On-time arrivals (minutes delayed) On-time departures (minutes delayed) Scheduled railway philosophy is being implemented with no deterioration in key KPIs. Locomotive utilisation declined by 3.8% due to older and less reliable locomotives being utilised while waiting for the roll-out of new locomotives. -0.3% -1.4% 350 434 357 356 284 280 311 265 184 165 2009 2010 2011 2012 2013 2009 2010 2011 2012 2013 GTK/loco/month (‘000) -3.8% 5 239 5 121 5 167 4 973 4 722 2009 2010 2011 2012 2013

  18. GFB volumes (mt) Agriculture and liquid bulk Steel and cement Mineral mining and chrome Containers and automotive Coal Iron ore and manganese +10,5% +21,6% +3,2% 8,4 10,7 16,2 15,7 7,6 8,8 Excluding export iron ore line 2012 2013 2012 2013 2012 2013 Marginal growth is mainly due to the decline in global demand and slowing customer production. Volume growth is attributable to higher than expected demand for manganese exports and capacity being created. Growth in market share arising from the road-to-rail modal shift. +0,7% -5,0% -5,0% 15,0 15,1 22,0 11,9 20,9 11,3 Excluding export coal line 2012 2013 2012 2013 2012 2013 Decline is mainly to the slowdown in economic growth that affected demand from customers. Decline is a result of the migration to NMPP and a slow start to the grain season. Growth was negatively impacted by the economic slowdownand a two month shutdown of the Ressano Garcia line. However, Eskom volumes increased by 22%.

  19. Volumes and operations Rail - Export coal Volumes (mt) Productivity and efficiency Export coal achieved 69,2mt, which could have been higher were it not for the decline in export coal prices and TFR challenges at the Overvaal tunnel. +2,2% 69,2 67,7 62,2 61,9 61,8 2009 2010 2011 2012 2013 On-time arrivals (minutes delayed) On-time departures (minutes delayed) Delays in on-time arrivals improved by 11,5% and on-time departures improved by 1,4% due to improved planning and yard count downs – reconfirming the scheduled railway philosophy. Locomotive utilisation improved by 4,8% due to the deployment of new locomotives and improved scheduled infrastructure maintenance. -11.5% -1.4% 289 468 234 375 209 206 332 309 152 248 2009 2010 2011 2012 2013 2009 2010 2011 2012 2013 GTK/loco/month (‘000) +4,8% 24 998 23 845 14 728 14 173 13 505 2009 2010 2011 2012* 2013 * 2012 onwards excludes GFB locomotives coal line.

  20. Volumes and operations Rail - Export iron ore Volumes (mt) Productivity and efficiency Export iron ore volumes increased by 6,9% to 55,9 mt despite industrial action at the mines, unplanned mine shutdowns and depressed commodity prices resulting in customer cancellations. +6,9% 55,9 52,3 46,2 44,7 36,8 2009 2010 2011 2012 2013 On time departures and arrivals deteriorated by 9,0% and 5,3% respectively compared to prior year due to post commissioning teething problems at a key mine. Locomotive utilisation improved by 10,3% mainly due to the new, more powerful and energy efficient 15E locomotives. On-time arrivals (minutes delayed) On-time departures (minutes delayed) +5,3% +9,0% 2009 2010 2011 2012 2013 2009 2010 2011 2012 2013 GTK/loco/month (‘000) +10,3% 2009 2010 2011 2012 2013

  21. Volumes and operations Ports - Containers Volumes (‘000 TEUs) Productivity and efficiency Container volumes increased by a marginal 1,2% due to subdued economic growth, despite the R1 billion automotive and container export rebate programme to promote economic activity. +1,2% 2009 2010 2011 2012 2013 DCTPier 1 was negatively impacted by unauthorised labour action during the year, resulting in a decrease to 23 GCH for the year. DCTPier 2 achieved a 21,7% increase to 28 GCH due to new equipment. Ngqura Container Terminal achieved a 6,6% increase to 32 GCH and Cape Town Container Terminal achieved a 10,0% increase to 31 GCH through integrated planning and enhanced maintenance. TEUs per STAT hour – Durban (number) TEUs per STAT hour – Ngqura (number) +17,8% +24,4% Not operational for full year 2009 2010 2011 2012 2013 2009 2010 2011 2012 2013 GCH – DCT Pier 2 (number) GCH – DCT Pier 1 (number) -14,8% +21,7% 2009 2010 2011 2012 2013 2009 2010 2011 2012 2013

  22. Volumes and operations Pipelines Volumes (million ℓ) Productivity and efficiency Volumes declined by 5,1% mainly due to the Natref shutdown and subdued domestic demand for petroleum products. -5.1% 2009 2010 2011 2012 2013 The NMPP capacity utilisation improved substantially from 40Mℓ/week towards the end of 2012 to 51Mℓ/week in 2013. The DJP continued to be utilised in support of the relatively new NMPP. Pipelines’ operating costs cost per Mℓ.km increased by 15,3% as a result of operating two pipelines (DJP and NMPP) for the full year. Operating cost per Mℓ.km (Real R/Mℓ.km) NMPP Capacity utilisation (Mℓ/Week) +27,5% +15,3% 51 40 Not operational 2009 2010 2011 2012 2013 2009 2010 2011 2012 2013

  23. Safety 1,09 0,98 0,74 0,72 0,65 13,8% 2009 2010 2011 2012 2013 +2 2009 2010 2011 2012 2013 +25 2009 2010 2011 2012 2013

  24. Socio economic and sustainability

  25. Created 28 493 direct and indirect jobs • Transnet achieved and exceeded its targets for black employees across all occupational levels. • Female representation is growing steadily. However, significant challenges in attracting female employees in an operations heavy environment still exist especially at semi and unskilled levels. 25

  26. BBBEE spend of 88% per DTI codes and local supplier industry supported through CSDP initiatives Target Actual EME QSE BO BWO +8,0 88 85 80 75 +3,0 70 65 2011 2012 2013 2011 2012 2013 Competitive Supplier Development Programme (R million) 2012 2013 +21% +33% +37% 17 065 7 239 4 046 14 066 5 428 2 964 Total contract value Committed CSDP obligation Actual CSDP obligation delivered 26

  27. Reduced energy consumption and carbon emissions Total electricity consumption (million MWh) GHG emissions (mtCO2e) -3,4% -2,0% 3,8 4,4 4,3 3,7 2012 2013  2012 2013  151 139 MWhelectricity regenerated by new 19E & 15E locomotives. Road-to-Rail 2013: Top 10 commodity volume gains on rail reduced the transport sector’s carbon emissions by 206 540 tCO2e.

  28. Audit opinion, Controls and PFMA

  29. Audit Opinion – Internal Audit • Based on the reviews executed by Transnet Internal Audit (TIA), their overall assessment of the effectiveness of the system of internal controls and risk management for the year is as follows: • In the opinion of the Audit Committee, the internal controls of the Company are considered appropriate in terms of: • Meeting the strategic objectives of the Company; • Evaluating and mitigating the key risks facing the company; • Ensuring compliance with applicable laws and regulations; • Ensuring the Company’ s assets are safeguarded; and • Ensuring that transactions undertaken are correctly recorded in the Company’s accounting records. • Audit Opinion – External Audit • External Auditors of Transnet SOC Limited have expressed an unfounded audit opinion on the financial statements for the year ended 31 March 2013. 2013 Internal Control, Audit Opinion and PFMA

  30. PFMA – Reportable items for 2013 andItems reported internally below the materiality threshold • The Shareholder Representative has determined that the materiality limit for reporting in terms of sections 55(2) (b) (i), (ii) and (iii) of the PFMA is R25 million per transaction. In terms of this materiality framework, one item is reported as irregular expenditure. • Irregular Expenditure - Expenditure in excess of the approved budget without the necessary approval. • The total expenditure to a service provider for the procurement of container handling equipment was exceeded by more than 10% without prior approval being obtained as required by the procurement procedures. Three written warnings have been issued and management will determine if further disciplinary actions are required pending the outcome of additional investigations. Value was derived by the Company as a result of the additional cost of R30 million, and R700 000 was refunded by the supplier subsequent to the initial forensic investigation. Refresher procurement training and awareness is also underway to ensure relevant stakeholders are aware of the requirements contained in clause 2.5.1.1 of the Procurement Procedures Manual (PPM). Amounts classified as fruitless and wasteful and irregular expenditure as well as losses through criminal conduct, below the materiality limit are reported internally to the Group Executive Committee and the Board to ensure that control weaknesses are identified and that corrective action is taken. * Represents cumulative reportable items of the same nature, and the numbers in brackets represent prior year. The above table also reflects the disciplinary steps taken against employees for non-compliance to the PFMA. It reflects the number of finalised disciplinary cases instituted against employees. However, it must also be noted that of the 31 disciplinary actions pending at the time of above reporting, 25 (Criminal conduct - 1; Fruitless & wasteful expenditure - 12; and Irregular expenditure – 12) actions have subsequently been finalised to date. The remaining 6 cases are in progress.

  31. PFMA actions to reduce violations Pursuant to the significant increase in and on-going reportable PFMA incidents resulting mainly from non-compliance with Procurement Policies and Procedures, the Company has made a commitment in 2012/13 to prevent/reduce such irregular expenditure by embarking on various initiatives to achieve a sustainable solution. 15 initiatives were undertaken in 2013/14 to decrease fruitless & wasteful and irregular expenditure, and 10 have been completed and 5 carried over to 2014/15.

  32. September 2013 Interim Results

  33. Highlights of the interim results for the 6 months ended September 2013 Revenue increased by 14,3%to R28,5 billion. Capital investment for the period of R11,2 billion. Strong volume growth in automotive and containers on rail of 26,0%. EBITDA increased by 19,3% to R12,0 billion. Gearingat44,7% and cash interest cover at3,4 times. Cash generated from operations after working capital changes increased by 15,2% toR11,3 billion. Profit for the period increased by 71,2% to R2,9 billion. Transnet continues to maintain its investment grade credit rating. Operating profit increased by 39,3% to R7,2 billion. B-BBEE spend of R19,6 billion or 85,0%of total measured procurement spend for the period per DTI codes. TRANSNET INTERIM RESULTS 2013

  34. Financial highlights – September 2013 Interim Results * Excluding capitalised borrowing costs, including capitalised finance leases and decommissioning liabilities. # Excluding Ports Regulator clawback(7,6% including clawback; Sept 2012: 6,0%). TRANSNET INTERIM RESULTS 2013

  35. Conclusion • Despite the economic challenges Transnet reports robust performance, underpinned by: • Growth in volumes despite depressed economic environment. • Financial stability. • Improvement in operational efficiencies and productivity. • The achievement on numerous socio-economic initiatives and supplier development. • Enhanced reputation of the Company both internally and externally. • The 2013 performance has set a solid platform to continue with the execution of the Market Demand Strategy in the years ahead. 35

  36. Thank you and questions

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