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

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

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”

Background

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

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

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

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

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

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

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

Tariff Structure

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

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)

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

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

Input Assumptions

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

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 2014-2026 (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. 2013-2016 AMD long-term works R 11.8 billion 2016-2020 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

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

Input Assumptions: General Demand Forecast DWS Low demand Scenario I forecast used for tariff determination Base volume 1 606 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%

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

Brief overview of Vaal River Tariff set for 2016/17

Projected debt curve – at 2016/17 tariff review

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 0.133 / 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

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

Projected Debt Curve - 2017/18 Tariff Review

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

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%

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%

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

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

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 email: akeyser@tcta.co.za

Senior Project Finance Manager Questions……… Contacts: Alicia Keyser Senior Project Finance Manager akeyser@tcta.co.za Telephone: (012) 683 1200 Thank you!

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

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

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 0.6364 R 0.079 R 0.5503 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 3.4284 R 3.1893 7,50% b) Water Pricing: i) Total development and use of waterworks

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