1. Vaal River System Raw Water Tariff Setting for Augmentation Schemes 2017/18
Rand Water
Annual Tariff Consultation
October 2016
Unyielding commitment to
REJUVENATION REVIVAL RENAISSANCE TRANSFORMATION

2. Contents Purpose of the presentation Input Assumptions
Brief overview on 2016/17 tariff
Vaal River tariff 2017/18

3. Purpose of the Presentation
To assist Rand Water to consult with its stakeholders on input assumptions applied to calculating the Augmentation Schemes tariffs for 2017/18
Although tariffs are expressed, they are in no way binding as it serves as a platform for discussion only and may be subject to revision
Stakeholder consultations held:
NT & DWS
SALGA
TCTA Board
Major Vaal Users
SARB
Augmentation Schemes tariff submitted to Minister 31 August.
References to “TCTA portion of the tariff” should be correctly phrased as “Augmentation Schemes component”

4. Background

5. Treat raw water to potable level
Water Supply Chain
DWS
National Raw Water Resource Infrastructure
Water Board
Treat raw water to potable level
Distribute water
Municipality
End Users
Treat raw water to potable level 5 5

6. Tariff Setting Balancing Effect
End User
Affordability
Debt
Outstanding
Considerations to support end user affordability:
Under recovering in early years
End-user pays on actual use
Constant tariff in real terms approach: CPI targeting
Phasing-in of large tariff adjustments over 2-3 years
Take account of future augmentation – future affordability
No reserves built into tariffs
Only cost recovery of project costs in full – TCTA is non-profit making
Considerations to support debt management:
+20 year repayment period
Peak of debt in relation to value of asset (limit interest capitalisation)
Risk transfer to end-user – trigger adjustments if input assumptions change
Water sector debt profile – debt overlap
Interest rates mostly fixed
Fiscal constraints - utilisation of Government guarantees 6

7. Tariff Objectives TCTA Banks and Investors SARB National Treasury DWS
Secured income stream
Contractual right to pass tariffs through to DWA
Sustainable projects
Banks and Investors
Timeous repayment of loan
SARB
Administered prices for inflation targeting
National Treasury
Government’s risk protected - Bankable project
Affordable services to the people
Sustainable debt levels in the water sector - debt overlap
Responsible utilisation of state guarantees
DWS
Water security balanced with tariff affordability
Inflationary increases in raw water as start of water chain input cost
Affordability and predictability to end-users
Uncomplicated annual tariff consultations – inflationary increases targeted
Water demand management incentive (pay on actual use)
No cross subsidisation between projects – transparency of costs
Compliance with Water Pricing Strategy

8. Tariff Objectives (cont.)
SALGA
Inflationary increases targeted
Fair tariff structures
Water sector and end users
Tariff stability and predictability
Affordable water
Inflationary increases acceptable
No cross subsidisation between projects – transparency of costs
Annual tariff consultation to consider tariff adjustments
DWS
SARB
National Treasury
Stakeholders (Rand Water, Major off-takers, SALGA)
Banks informed

9. TCTA Income Agreement with DWS
Inflationary adjustment
CPI annually (May index)
CPI Cap and floor levels
Tariff review triggers
Variances between budget and actual for previous year
Changes in capital cost
Changes in water demand
Changes in funding cost
Changes in timing and cost of future augmentation schemes (dependant on system yield)
Changes in regulatory or legislative environment
Changes to operations and maintenance costs (TCTA and LHDA O&M)
Changes in any input assumptions that increase/decrease final repayment date
Floor
Cap
4.5%
Negotiated adjustment
7.5%
Automatic adjustment

10. Other considerations in Tariff Determination
Regulatory environment
Compliance with TCTA’s guarantee and borrowing limits
Timeframes to set tariffs
National Water Pricing Strategy
Administered prices
Inflation targeting
Stakeholder consultation outcomes
Affordability to end-users
Integrated tariff structure
Phasing-in of large adjustments
Allowance for capitalisation of interest in early years

11. Tariff Setting Process – May to August
Planning process
Sensitivity Analysis
& Stress Testing
Consultation
Participation
Input data
Demand, system yield, economic fundamentals, cost and timing of future augmentation schemes etc.
Long-term projections
DWS compiles long-term demand projections based on coordinated approach with DWS – various departments involved, Water Boards’ Planning and Budgeting departments, Large industrial users, Muni’s etc.
Sensitivity Analysis
Inflation, real interest rate, timing of future augmentation schemes and repayment periods etc.
Stress Testing
Lower inflation, changes in yield of system, higher real interest rate, zero growth in demand etc.
Stakeholder validation
Demand projections, system yield, economic fundamentals, cost and timing of future augmentation schemes
Consultation with National Treasury and SARB
On administered prices
Consultation with DWS management structure
Rand Water Services Forum
Other Major stakeholder forums

12. Tariff Structure

13. Tariff Categories Tariff categories for off-budget schemes:
Capital Unit Charges (to repay debt)
Bulk Operating and Royalties Charge (to repay royalties and bulk O&M)
Water Use Charges (statutory charges as per Pricing Strategy)
Operations and Maintenance Charges (State schemes portion)
Betterment and Refurbishment Charges (if applicable) 13

14. Augmentation Schemes Tariff Principles
No provision for reserves
users prefer to carry risk of change in input assumptions rather than provision for reserves through tariffs
No provision for bad debts
fully covered by DWS
Costs separately managed and accounted for
transparency and cost control
Augmentation schemes tariff – two components
Capital Unit Charge (CUC)
Bulk Operations and Royalties Charge (BO&RC)

15. CUC Tariff Details Capital unit charge (CUC)
unified systems tariff – all users pay the same
single integrated tariff combining capital expenditure in the Vaal River System
constant tariff in real terms approach
automatic inflationary increase
additional tariff triggers if other input assumptions change
covers capex, funding costs and admin costs (no O&M)
maximum debt repayment period of 20-years post completion of construction
allows for interest capitalisation in early years – enhance affordability
combined funding programme and borrowing limit for various augmentation projects
funding is explicitly government guaranteed – lower funding costs
tariff set within approved borrowing limit parameters – regulated
smoothed tariff profile – enhance tariff predictability and affordability
based on projected long-term use from the Vaal River System incl future augmentation schemes
takes account of future augmentation cost and additional yield within 20-years window
annual over and under recoveries spread over debt repayment period – decrease tariff fluctuations
charged by DWS as part of raw water tariff, paid to TCTA to repay debt

16. BO&RC Tariff Details Bulk Operating and Royalties charge (BO&RC)
covering royalties and O&M relating to all the bulk water infrastructure
set to recover annual expenditure on an annual break-even tariff determination
over and under recoveries carried over
continues after debt repayment
charged by DWS as part of raw water tariff, paid to TCTA

17. Input Assumptions

18. Source of Input and Integrity of Calculations
BER forecasts used for:
long-term economic forecasts (inflation, real interest rates)
DWS forecasts used for:
water demand forecasts (high and low scenarios)
system yields
future schemes timing and projected costs
AMD cost projections
provision to third party users e.g. Bloem Water (demand and revenue)
National Treasury/DWS used for:
fiscal cost allocation projections (AMD)
Lesotho Highlands Water Commission (LHWC) forecasts used for:
LHWP-1 annual O&M in Lesotho
Administration costs of LHWC and LHDA
LHWP-2 capex projections
Royalty forecasts
External audit of financial model:
Deloitte’s audit model annually for technical accuracy and alignment with legal agreements

19. Input Assumption: Capital Components
Sub-Phase
Capital cost
(cost at completion)
Contribution from fiscus
Contribution by mines
Implementation Period
LHWP-1
R 19 billion
current outstanding debt -
N/A
Historical
LHWP-2
R 25.1 billion
(water delivery 2024)
AMD short-term works
R 2.5 billion
R 568 million
to date +
R 9 billion
Proposed 67% of capex
R 650 million
Land, pumps, use of infrastructure etc.
AMD long-term works
R 11.8 billion
Total
R 58.4 billion
R 9.6 billion
The projections for LHWP-2 is based on a project budget prepared by LHWC at an advanced stage and level of confidence is fairly high
The project budget for AMD LTI is still based on feasibility scope and the level of confidence is lower

20. Input Assumption: AMD overview
Assumed completion of long-term solution by 2019/20
Assumed cost allocation of 33% to Vaal River users and fiscal contribution of 67%
Cost allocation includes all costs from inception of AMD:
Project costs (STI and LTI)
O&M (STI and LTI)
Funding cost on the debt carried by the LHWP/VRS funding programme
TCTA debt administration cost beyond construction phase relating to the funding allocation amount
Fiscal contribution to date – R 568 million taken into account
AMD STI cost net of mines’ contribution
Fiscal allocation to cover 67% assumed from 2016/17 via MTEF/DWS and to continue over 20-years
Funded as part of integrated VRS funding programme under combined borrowing limit and explicit government guarantee

21. Input Assumptions: General
Demand Forecast
DWS Low demand Scenario I forecast used for tariff determination
Base volume million m3/a for 2017/18
Provision has been made for potential water restrictions in future in demand and yield projections
Should the Vaal River System potential deficit realise and water restrictions be introduced, it will result in a tariff trigger to take the lower yield into account
Timing of next schemes
Timing of LHWP-2 water delivery as 2024/25
Timing of TWP (proxy for next schemes) outside 20-year debt repayment period for low demand
AMD long-term completion by 2019/20
Economic forecast
New 30-year BER economic forecast incorporated
Average real interest rates forecast increased from 3.4% to 3.52%
Average CPI forecast increased from 5.22% to 5.33%
Average electricity for opex increased from 8.0% to 9.4%

22. Impact of Input Assumptions
Variance from
2016/17 tariff
Impact on tariff for
2017/18
Inflation forecast
Marginally higher
Supports lower tariff
Real interest rate forecast
Supports higher tariff
Demand/Yield
Lower
Project budget
Higher
Admin cost
Slightly Lower
Actual to budget variances
Higher volumes
Regulatory limits
Unchanged
Supports higher tariff to manage regulatory limits

23. Brief overview of Vaal River Tariff set for 2016/17

24. Projected debt curve – at 2016/17 tariff review

25. Notes to the 2016/17 Tariff Review
CUC was increased with 8.6%
BO&RC was increased with 11.83% taking account of previous under recovery
Augmentation schemes weighted average increase of 9.43%
AMD O&M was introduced at R / m3 including AMD O&M during previous year
AMD contribution by fiscus was included at 67%
Projected debt curve exceeded approved borrowing limits and guarantee in future years
Risk of uncertainty in costs relating to LHWP-2 and AMD was highlighted
Costs still uncertain as both projects still needs to go out on tender
Risk of water restrictions due to delay in implementation of LHWP-2 and AMD was highlighted
Demand/supply balance still indicates a potential water deficit – risk on future revenues

26. Vaal River Raw Water Tariff
2017/18
Vaal River Raw Water Tariff

27. Projected Debt Curve - 2017/18 Tariff Review

28. Debt Curve Analysis The debt curve is net of financial assets
Borrowing limit exposure exclude financial assets resulting in peaks in the years where TCTA has large bond maturities and has a redemption strategy in place
TCTA needs to request new borrowing limits as the current borrowing limit (R 42,5 billion) and government guarantee (R 43 billion)
The debt peaks around R 45 billion and the current borrowing limit is exceeded, however new limits will be requested and a redemption strategy will be managed to limit the new borrowing limit requirements
The margin over CPI for the CUC is required to take cognisance of TCTA’s borrowing limit and government guarantee limitations
The peak of the debt is sensitive to change in capex
Peak will be R 51 billion if capex is 20% higher on both LHWP-2 and AMD

29. Notes to Augmentation Schemes Tariffs 2017/18
Capital Unit Charge (CUC)
Proposed increase of 18.37% as a result of the following uncertainties:
the implementation and funding costs of LHWP-II and AMD
future demand as a result of potential water restrictions
TCTA’s borrowing limit and government guarantee limitations
Government’s limited ability to increase/issue additional government guarantees
May 2016 CPI falls within the cap and floor level of 4.5% and 7.5% at 6.1% y-o-y
Future increases after the peak of the debt curbed to stretch the repayment period to 20- years – assuming no further augmentation required in this period
Bulk Operating and Royalties Charge (BO&RC)
Proposed decrease of 19.37% is a result of the following:
Water sales in 2015/16 were substantially higher than expected due to the 2015 drought
Resulting over recoveries have been effected into the BO&RC calculation
Augmentation schemes total increase
Weighted average increase of 8.26%

30. Vaal River Raw Water Tariff 2017/18
2017/18
Tariff R/m3
2016/17
Weighted Average Increase %
Total capital charge for raw water augmentation schemes
R 2.713
R 2.506
8,26 %
CUC
BO&RC
R 2.172
R 0.541
R 1.835
R 0.671
18,37%
-19,37%
Marginal Tariff
R 4.473
R 4.220
6,00%

31. Future Tariff Projections and Notes
2017/18
Proposed
2018/19
2019/20
2020/21
Capital Tariff R/m3
Total Augmentation Schemes Capital Tariff
2.713
2.963
3.292
3.494
CUC
2.172
2.367
2.581
2.735
BO&RC
0.541
0.596
0.711
0.759
Capital Tariff %
% Increment – Weighted average
8.26%
9.21%
11.10%
6.1%
% Increment - CUC
18.3%
9.0% 3
6.0%
% Increment – BO&RC
-19.3%
10.1% 1
19.3% 2
6.8%
Inflation
CPI projections
Note 1: Over recovery projected during 2016/17, carried over in 2018/19 tariff
Note 2: No over/under recoveries projected, returns to base tariff level
Note 3: CPI + 3% projected for CUC until 2019/20, thereafter CPI projections

32. Notes to Future Tariff Projections
CUC
CUC is projected at CPI + 3% until 2019/20, thereafter CPI projections are applied
Potential additional triggered adjustment are possible relating to final project costs, water restrictions and/or regulatory parameters within which TCTA needs to operate (borrowing limit and guarantee)
Currently no project is foreseen after LHWP-2 in the 20-year debt repayment window, however, should water demand management and water conservation initiatives in the current resource plan not proof to be successful, potential for inclusion of further augmentation schemes into the tariff is possible
BO&RC
An over recovery on BO&RC is projected for 2016/17 which is carried over in 2018/19 tariff
The projected over recovery for 2016/17 is less than the 2015/16 over recovery
No over/under recoveries projected for 2019/20 when BO&RC returns to base tariff level at an projected increase of 19.3% - the effect of the “temporary discount” in tariff as a result of more volumes than budgeted, will be nullified

33. Way Forward Tariffs published by DWS once approved by Minister
Comments on today’s consultation meeting to be sent by COB 25 October 2016 to both:
Alicia Keyser - TCTA

34. Senior Project Finance Manager
Questions………
Contacts:
Alicia Keyser
Senior Project Finance Manager
Telephone: (012)
Thank you!

35. Input Assumption: AMD O&M
O&M projections are as follows:
O&M is calculated on an annual breakeven methodology – volume provided by DWS: Central Operations i.e. O&M not capitalised after commissioning
Provision for O&M on AMD is included in the O&M tariff charged by DWS on state schemes
Up to March 2016: Actual of R 189 000 000
2016/17: Forecast of R 314 847 369 (from Dec 2015 STI projections)
2017/18: Forecast of R 382 811 967 (from Dec 2015 STI projections)
2018/19: Forecast of R 403 866 625 (take forecast from 2017/18 and inflate with 5.5%)
2019/20: Forecast of R 508 000 000 (LTI kicking in partly and includes STI)
2020/21: Forecast of R 2 144 000 000 (LTI fully operational and includes STI)
2021/22: Forecast of R 2 261 874 700 (take forecast from 2020/21 in inflate with CPI going forward for all future years)
O&M tariff to users in 2016/17 include recoupment of 33% of R 189 000 000 paid by DWS

36. Input Assumption: AMD Fiscal Contribution
Treatment of 67% loan under LHWP funding programme/borrowing limit
Annual repayments are projected as MTEF allocations in the next 3-year window and thereafter on a fixed amortisation profile for budget purposes
Treated as a loan under the LHWP/VRS funding programme
Repaid via MTEF allocations annually through DWS
Interest calculated at TCTA’s average cost of funding for the VRS
Fiscal allocations received firstly allocated to O&M and the balance against the loan o.b.o the fiscus
Provision for the loan is made in the LHWP/VRS borrowing limit and explicit government guarantees
The VRS tariff and debt curve is indicated on an integrated basis and does not distinguish between LHWP and AMD

37. Vaal River Raw Water Tariff 2017/18
2017/18
Tariff R/m3
2016/17
Weighted Average Increase %
a) Costs:
i) State Schemes
Existing Vaal O&M
AMD O&M R
R 0.079 R
R 0.133
15,6%
-40,60%
R0.7154
R0.6833
4,70%
ii) Augmentation schemes
CUC
BO&R
R 2.172
R 0.541
R 1.835
R 0.671
18,37%
-19,20%
R 2.713
R 2.506
8,26 %
Total State and Augmentation Schemes R R
7,50%
b) Water Pricing:
i) Total development and use of waterworks

38. Historical Tariff Adjustments
2013/14
Tariff % Increase
2014/15
2015/16
2016/17
2017/18
Actual CPI
5.7%
5.6%
6.1%
6.0%
Combined CUC
(LHWP-1 and LHWP-2)
5.9%
CPI
No further LHWP-2 phase-in
-18.3%
CUC decreased
BO&RC tariff introduced separately
-6.1%
Integrated tariff structure implemented
8.6%
CUC increase
CPI + 4% for higher LHWP-2 cost
18.37%
CPI + 8.4%
BO&R
N/A
New charge
Split out from CUC
15.4%
Once-off LHWP-1 O&M activities – increased cost
Higher royalty increases
11.83%
Increased LHWP-2 activities
Under recovery in 2014/15
-19.20%
Higher water sales volumes during 2015/16 due to drought
Over recovery in 2015/16
Total Augmentation Schemes
8.8%
CPI +2.2%
BO&RC higher than CPI
9.43%
CUC higher LHWP-2
8.26%
CUC higher than CPI
BO&RC Lower than CPI
Total impact to end user
6.15%
CPI + 0.4% 0%
CPI less 6.6%
AMD O&M not passed on
13.18%
CPI + 8.6%
Includes introduction of AMD O&M – starting from zero base and recovering from previous year as well
Higher LHWP-2 capex
7.50%
Below CPI increase due to decrease in BO&RC
Higher capex
Higher state schemes due to more pumping
AMD O&M decrease (only 1 year in calc. LTI delayed)
Increase c/m3