TARIFF DECISION FOR SASOL OIL (PTY) LTD S SECUNDA TO NATREF INTEGRATED (SNI) PIPELINE

TARIFF DECISION FOR SASOL OIL (PTY) LTD S SECUNDA TO NATREF INTEGRATED (SNI) PIPELINE 10 MAY 2018 Page 1 of 19

TABLE OF CONTENTS Introduction... 6 Applicable Law... 6 The Methodology... 6 Decision-Making Process... 7 Assessment of the Tariff Application... 7 Allowable Revenue (AR)... 7 Regulatory Asset Base (RAB)... 8 Property, Plant and Equipment (PPE)... 8 Net Working Capital... 9 Weighted Average Cost of Capital (WACC)... 11 Cost of Equity... 11 Cost of Debt... 12 Debt-to-Equity Ratio... 12 Operation Expenditure (OPEX)... 13 Land Rehabilitation... 15 Depreciation... 15 Clawback... 15 Tax Expense... 16 Allowable Revenue (AR)... 17 Volumes... 18 Tariff Design... 18 Conclusion... 19 Page 2 of 19

LIST OF TABLES Table 1: Tariff set for the SNI pipeline... 5 Table 2: Comparison of the PPE values... 9 Table 3: Comparison of the Net Working Capital...10 Table 4: Comparison of the RAB...10 Table 5: WACC Calculation...13 Table 6: Operating Expenses...13 Table 7: Detailed Breakdown of the OPEX costs...14 Table 8: Clawback Calculation...16 Table 9: Tax Expense Calculation...17 Table 10: Comparison of the AR values...17 Table 11: Volumes Details...18 Table 12: Comparison in tariffs...19 Page 3 of 19

ABBREVIATIONS AND ACRONYMS AR BER BFP CAM CAPM CPI CPIf Cpl MRP NERSA NRBTA PPE RAB REC RFR Rf RRM SNI SRAB TOC VAT WACC Allowable Revenue Bureau of Economic Research Basic Fuel Price Cost Allocation Manual Capital Asset Pricing Model Consumer Price Index Consumer Price Index Forecast Cents per litre Market Risk Premium National Energy Regulator of South Africa Net Revenue Before Tax Allowance Property, Plant, Vehicles and Equipment Regulatory Asset Base Regulator Executive Committee Regulatory Financial Reporting Risk Free Rate Regulatory Reporting Manuals Secunda to Natref Integrated Pipeline Starting Regulatory Asset Base Trended Original Cost Value Added Tax Weighted Average Cost of Capital Page 4 of 19

THE NATIONAL ENERGY REGULATOR OF SOUTH AFRICA In the matter regarding THE APPLICATION FOR SETTING A TARIFF FOR THE SECUNDA TO NATREF INTEGRATED (SNI) PIPELINE FOR THE 2018/19 TARIFF YEAR By SASOL OIL (PTY) LTD THE DECISION 1. On 10 May 2018, the National Energy Regulator of South Africa (NERSA or the Energy Regulator ) set a tariff as a condition of Sasol Oil (Pty) Ltd s ( Sasol Oil s ) licence for the Secunda to Natref Integrated (SNI) pipeline (licence number: PPL.p.F3/32/2/2017). 2. The tariff set by NERSA for the SNI pipeline is a maximum tariff and is exclusive of Value Added Tax (VAT). The tariff set for the SNI pipeline is shown in Table 1. Table 1: Tariff set for the SNI pipeline Details 1 July 2018 to 30 June 2019 Tariff (cents per litre) 41.79 3. The tariff set will remain in force until NERSA takes a decision to set a new tariff for the SNI pipeline. 4. Furthermore, Sasol Oil is required to submit a plan for the rehabilitation of land in accordance with Regulation 9 of the Regulations made in terms of the Petroleum Pipelines Act, 2003 (Act No. 60 of 2003) ( the Act ). Page 5 of 19

REASONS FOR DECISION Introduction 1. On 27 January 2011, the National Energy Regulator of South Africa (NERSA or the Energy Regulator ) issued a licence with conditions to Sasol Oil (Pty) Ltd ( Sasol Oil ) for the operation of a pipeline from the Sasol Oil (Pty) Ltd coal-to-liquids refinery at Secunda to the Natref crude oil refinery at Sasolburg. 2. On 30 November 2017, Sasol Oil submitted a tariff application for the Secunda to Natref Integrated (SNI) pipeline. The tariff application is for the period 1 July 2018 to 30 June 2019. 3. Sasol Oil applied for a tariff of 40.93 cents per litre (cpl) for the period 1 July 2018 to 30 June 2019. The tariff applied for is a maximum tariff and is exclusive of Value Added Tax (VAT). 4. The tariff applied for by Sasol Oil is based on the total Allowable Revenue (AR) divided by the total volume in litres. 5. A detailed analysis of the tariff application is provided in the following paragraphs. Applicable Law 6. The legal basis for NERSA to set tariffs for petroleum pipelines is derived from the National Energy Regulator Act, 2004 (Act No. 40 of 2004) ( the NERSA Act ), read with the Petroleum Pipelines Act, 2003 (Act No. 60 of 2003) ( the Act ) 1. The Methodology 7. NERSA is required by section 28(2)(a)(i) of the Act to set tariffs based on a systematic methodology applicable on a consistent and comparable basis. Sasol Oil used the Tariff 1 Available at www.nersa.org.za Page 6 of 19

Methodology for the Setting of Pipeline Tariffs in the Petroleum Industry, 7th Edition of 29 October 2015 ( the Pipeline Tariff Methodology ). 8. The Pipeline Tariff Methodology prescribes the use of the Trended Original Cost (TOC) method for asset valuation. Decision-Making Process 9. As part of the consultation process, NERSA published the non-confidential version of the tariff application on its website for comments. Notices inviting the public to comment and attend the public hearing were published in the Independent and the Beeld newspapers on 19 March 2018. The closing date for submission of written comments was 17 April 2018. 10. The public hearing to consider the tariff application was scheduled for 19 April 2018, but did not take place as no members of the public or affected stakeholders registered to make presentations at the public hearing. Assessment of the Tariff Application 11. In assessing the application, NERSA used the Pipeline Tariff Methodology to assess the outcome of the tariff applied for by Sasol Oil for its SNI pipeline. 12. Data supplied by Sasol Oil was used for most of the calculations performed in this evaluation. Where this is not the case, the reasons for not using Sasol Oil s supplied data are provided. Allowable Revenue (AR) 13. In accordance with the Pipeline Tariff Methodology, the following formula was used to determine the AR: AR = (RAB x WACC) + D + E + F ± C +T Where: RAB = Regulatory Asset Base WACC = Weighted Average Cost of Capital E = Expenses: Operating and Maintenance Expenses for the tariff period under review Page 7 of 19

D F C T = Depreciation Expense for the tariff period under review = Approved Revenue addition to meet debt obligations for the tariff period under review = Clawback Adjustment: to correct for differences between actual and forecasts in formula elements from a preceding tariff period in relation to the actual estimates for that tariff period = Tax: estimated Tax Expense for the tariff period under review. 14. The elements of the AR are discussed in more detail in the paragraphs below. Regulatory Asset Base (RAB) 15. According to the Pipeline Tariff Methodology, the RAB is to be determined by applying the following formula: RAB = (PPE - d) + w Where: PPE d w = Original cost and inflation write-up of operating assets (Property, Plant, Vehicles and Equipment) = Accumulated Depreciation and Accumulated Amortisation of inflation write-up for the period up to the commencement of the tariff period under review = Net Working Capital Property, Plant and Equipment (PPE) 16. Sasol Oil calculated the Property, Plant and Equipment (PPE) value using the TOC method. The TOC method requires that the original cost of assets be adjusted annually using the Consumer Price Index (CPI) over the economic useful life of the assets. Sasol Oil applied the TOC method correctly when calculating the PPE value and arrived at the PPE value of R880.18 million. 17. NERSA accepted the use of the TOC method to calculate the PPE value on which a return is to be earned. The original cost of the assets were trended using the CPI from the year in which the assets were brought into use, until the tariff period under review. NERSA calculated the PPE value to be R858.88 million. Page 8 of 19

18. The comparison of the PPE value is depicted in Table 2. Table 2: Comparison of the PPE values Details Sasol Oil NERSA 2018/19 FY 2018/19 FY PPE (R million) 880.18 858.88 Total PPE 880.18 858.88 19. There is a difference between the PPE value calculated by Sasol Oil and that calculated by NERSA due to the effect of different CPI values used when trending the assets. Sasol Oil used the CPI value of 5.50% sourced from the Bureau of Economic Research (BER), while NERSA used the CPI value of 5.10% sourced from Statistics of South Africa (StatsSA) and published on the NERSA website. Net Working Capital 20. The Net Working Capital refers to the various regulated activities or business operation funding requirements other than the operating PPE in service. These funding requirements include Inventories, Trade Receivables, Operating Cash and Trade Payables. 21. The following formula from the Pipeline Tariff Methodology was used to determine the Net Working Capital. Net Working Capital = Inventory + Linefill + Trade Receivables + Operating Cash - Trade Payables 22. Sasol Oil states in its application, that Linefill is valued at the lower of cost or net realisable value and that the net realised value is at the lower of the Basic Fuel Price (BFP) at purchase date. NERSA accepted the approach used by Sasol Oil in determining the value of the Linefill as the Pipeline Tariff Methodology prescribes that Linefill be valued at the lower of cost or net realisable value. 23. Sasol Oil calculated its Trade Receivables based on 30 days of AR, Operating Cash based on 45 days of Operating Expenditure (OPEX) and Trade Payables based on 45 days of OPEX. Sasol Oil calculated the Net Working Capital to be R61.23 million. Page 9 of 19

24. Similarly, NERSA applied its Pipeline Tariff Methodology, which prescribes that Trade Receivables be calculated on 30 days of AR, Operating Cash on 45 days of OPEX and Trade Payables on 45 days of OPEX. 25. NERSA calculated the Net Working Capital to be R61.48 million. 26. The calculation of Net Working Capital as determined by Sasol Oil and NERSA is presented in Table 3. Table 3: Comparison of the Net Working Capital 2018/19 Details Sasol Oil NERSA R million R million Linefill 49.55 49.55 Receivables 11.68 11.93 Operating Cash 2.24 2.24 Trade Payables (2.24) (2.24) Total Net Working Capital 61.23 61.48 27. There is a difference between the Net Working Capital calculated by Sasol Oil and that calculated by NERSA due to the different Receivables values determined by Sasol Oil and NERSA as a result of the different AR values. 28. The Net Working Capital was added to the PPE value to calculate the RAB value on which a return is earned. The RAB values are depicted in Table 4. Table 4: Comparison of the RAB Details Sasol Oil NERSA R million R million PPE 880.18 858.88 Net Working Capital 61.23 61.48 Total RAB 941.41 920.36 29. The difference between Sasol Oil s and NERSA s asset values (PPE-d) is mainly due to the different CPI values used in indexing the historical value of the assets. Different Net Working Capital (w) values were also calculated due to the different AR values determined. This has resulted in the difference in the RAB calculated by Sasol Oil and NERSA. Page 10 of 19

Weighted Average Cost of Capital (WACC) 30. Section 5 of the Pipeline Tariff Methodology stipulates that the Weighted Average Cost of Capital (WACC) must be calculated using the following formula: WACC Eq Dt * Ke * Kd Dt Eq Dt Eq Where: Eq = Shareholders Equity Dt = Interest Bearing Debt Ke = Post-tax, real Cost of Equity derived from the Capital Asset Pricing Model (CAPM) Kd = Post-tax, real 2 Cost of Debt 31. Sasol Oil used the Pipeline Tariff Methodology to calculate the WACC and the components of WACC such as the Cost of Equity and Cost of Debt. In calculating the WACC, the following components of WACC were analysed: a) Cost of Equity; b) Cost of Debt; and c) Debt-to-Equity Ratio. Cost of Equity 32. Sasol Oil calculated the Cost of Equity in terms of the requirements of the Pipeline Tariff Methodology. The Pipeline Tariff Methodology prescribes that the Cost of Equity be calculated using the CAPM 3. 33. The Pipeline Tariff Methodology further prescribes that the economic data used to calculate the Cost of Equity be that of 12 months prior to the commencement of the tariff period under review. In this regard, Sasol Oil used the economic data of May 2017 (13 months prior to the commencement of the tariff period) instead of the economic date of June 2017 (12 months prior to the commencement of the period). This therefore results in different WACC values between Sasol Oil and NERSA. 2 First convert from pre- to post-tax and then from nominal to real. 3 The cost of equity can also be determined by applying any other appropriate model as per the provisions of Regulation 4(5) of the Regulations in terms of the Petroleum Pipelines Act, 2003 (Act No. 60 of 2003). Page 11 of 19

34. The Cost of Equity applied for by Sasol Oil is 8.27% and NERSA calculated a Cost of Equity of 8.03%. The difference in the Cost of Equity is due to different economic data used by Sasol Oil and NERSA. Cost of Debt 35. The Pipeline Tariff Methodology prescribes that a nominal pre-tax Cost of Debt be converted into the real post-tax Cost of Debt by using the CPI value and Corporate Tax Rate. In order to determine the real post-tax Cost of Debt, Sasol Oil used the CPI of 5.50% (sourced from BER) and the Corporate Tax Rate of 28%. Sasol Oil applied for the real post-tax Cost of Debt of 1.09%. 36. Similarly, NERSA used the Pipeline Tariff Methodology to calculate the real post-tax Cost of Debt. NERSA used the CPI of 5.50% (sourced from StatsSA and published by NERSA on its website) and the Corporate Tax Rate of 28% to calculate the real post-tax Cost of Debt. NERSA calculated the real post-tax Cost of Debt to be 1.42%. 37. There is a slight difference between the real post-tax Cost of Debt applied for by Sasol Oil and that calculated by NERSA due to the different CPI values used by both parties. Debt-to-Equity Ratio 38. The Pipeline Tariff Methodology prescribes a minimum Debt of 30% for funding petroleum infrastructure. Sasol Oil followed the requirements of the Pipeline Tariff Methodology and applied for a Debt-to-Equity ratio of 30:70. 39. NERSA accepts the use of the minimum Debt-to-Equity ratio of 30:70 in determining the WACC value, as it is considered reasonable for the efficient operation of petroleum infrastructure. 40. When using the weighted average of the Cost of Equity (Equity Ratio multiply by Cost of Equity) and the Cost of Debt (Debt Ratio multiply by Cost of Debt), Sasol Oil arrived at a real WACC of 6.12%. Page 12 of 19

41. NERSA also used the Pipeline Tariff Methodology and calculated a WACC of 6.05%. The comparison of the WACC values calculated by Sasol Oil and NERSA is shown in Table 5. Table 5: WACC Calculation Details Sasol Oil NERSA Risk Free Rate (before-tax real) 4.68% 4.70% Market Risk Premium (real) 4.55% 4.21% Beta 0.79 0.79 Cost of Equity (post-tax real) 8.27% 8.03% Cost of Debt (pre-tax) 9.15% 9.15% Corporate Tax Rate 28% 28% Nominal Cost of Debt 6.59% 6.59% CPI forecast 5.50% 5.10% Cost of Debt (post-tax real) 1.09% 1.42% Capital Structure: Debt Ratio 30% 30% Equity Ratio 70% 70% WACC 6.12% 6.05% Operation Expenditure (OPEX) 42. Regulation 5(2) read with regulation 4(2) (a) of the Regulations provides that the tariffs approved by NERSA must enable an efficient licensee to recover the reasonable operational and maintenance expenses of the storage facility in the year in which they are incurred. 43. Sasol Oil has an approved Cost Allocation Manual (CAM). Corporate costs and group services costs are allocated in accordance with the approved CAM. 44. Table 6 provides a comparison between the operating expenses approved for the 2017/18 tariff period and that applied for in the 2018/19 tariff period. Table 6: Operating Expenses Details 2017/18 RfD 2018/19 FY % Difference R million R million Direct Cost Centre 11 657 026 12 712 333 9,05% Shared services cost 1 130 400 1 074 605-4,94% General Managers Cost 1 071 987 1 097 281 2,36% Corporate division expenses 1 131 811 1 152 758 1,85% Depot management cost 3 203 523 3 731 172 16,47% Total OPEX 18 194 747 19 768 149 8,65% Page 13 of 19

45. A detailed breakdown of the OPEX costs is depicted in Table 7. Table 7: Detailed Breakdown of the OPEX costs Details Direct Costs 2018/19 FY R Electricity 6 214 242 Maintenance Services 4 160 331 Insurance 671 145 Salary Related cost 1 666 615 Total Direct Costs 12 712 333 Operational Costs Salary related cost 2 528 797 Sasol General Services (SGS) 496 148 Synfuels services 216 496 Cleaning contractors 174 551 Others 315 180 Total Operational Costs (allocated as per CAM) 3 731 172 Corporate Costs Finance 728 261 HR 187 403 Strategy 132 461 Commercial projects 4 261 IM 19076 Corporate Affairs 61582 MD 19714 Total Corporate Costs (allocated as per CAM) 1 152 758 Other Expenses Sasol General Services (SGS) 1 074 605 General Managers 1 097 281 Total Other Expenses 2 171 886 Total OPEX 19 768 149 46. The SNI pipeline operating expenses for the tariff period under review are projected to be R19.77 million. There is an average increase of 8.65% in operating expenses when compared to the operating expenses approved in the 2017/18 tariff period. The average increase of 8.65% is due to the increase in the operating expenses related to the Direct Costs such as electricity, maintenance, insurance costs and the depot management costs. 47. NERSA accepts the forecast operating expenses and any difference between the expenses provided in this tariff application and actual expenses incurred will be subject to a clawback in the next tariff period. Page 14 of 19

Land Rehabilitation 48. No provision for Land Rehabilitation costs has been submitted by Sasol Oil in this tariff application. Additional information was requested from Sasol Oil to ensure compliance with Regulation 9 of the Regulations, made in terms of the Act. At a meeting held on 20 April 2018, Sasol Oil indicated that it cannot include the Land Rehabilitation cost in the AR, as Sasol Oil will not be able to recover the cost through tariffs since Sasol Oil does not have third-party access at its SNI pipeline. Sasol Oil further stated that it makes provision in its financial statements in case there is a need to rehabilitate its facility. Depreciation 49. Sasol Oil depreciated its assets (excluding land) on a straight-line basis and the Depreciation calculated by Sasol Oil is R31.39 million. NERSA in its evaluation also depreciated the assets (including land) on a straight-line basis and calculated the Depreciation to be R34.32 million. There is a difference between the Depreciation values calculated by Sasol Oil and that calculated by NERSA due to NERSA accounting for the Depreciation on land in order to allow Sasol Oil to earn a Return on Investment (ROI). Clawback 50. Sasol Oil calculated a clawback value of R4.73 million. The clawback determined consists of the volume adjustment, where the difference between the forecast volumes and actual audited volumes for the 2016/17 tariff period was taken into consideration, as well as an AR adjustment between the set AR and the actual audited costs in the 2016/17 tariff period (refer to Table 8). Page 15 of 19

Table 8: Clawback Calculation Details Sasol Oil NERSA Projected 2016/17 Volumes (litres) a 376 582 000 a 376 582 000 Actual 2016/17 Volumes b 386 926 000 b 386 926 000 Difference (litres) c = a - b -10 344 000 c = a - b -10 344 000 Tariff Set by ER (c/l) d 42.13 d 42.13 Volumes Adjustment Giveback e = c x d 4 357 927 e = c x d 4 357 927 2016/17 RFD 2016/17 Actual 2016/17 RfD 2016/17 Actual Details Clawback Clawback AR Calculation RAB 927.33 914.35-12.98 927.33 914.35-12.98 WACC 5.74% 5.79% 0.05% 5.74% 5.79% 0.05% RAB X WACC 53.23 52.93-0.29 53.23 52.93-0.29 Depreciation 31.58 31.39-0.19 31.58 31.39-0.19 Operating expense 17.08 15.89-1.19 17.08 15.89-1.19 Amortisation 7.01 8.03 1.02 7.01 8.03 1.02 AR before Tax Expense 108.90 108.25-0.65 108.90 108.25-0.65 Tax Expense 23.43 23.71 0.28 23.43 23.71 0.28 Clawback 26.32 26.32 26.32 26.32 Total AR adjustment 158.64 158.28-0.36 158.64 158.28-0.36 Total Clawback in favour of Sasol Oil (R million) -4 726 483-4 726 483 Tax Expense 51. The Tax Expense has been calculated according to the notional taxation method as prescribed by the Pipeline Tariff Methodology. The Pipeline Tariff Methodology allows the use of the notional tax method when calculating the Tax Expense to be included in the AR. 52. Sasol Oil calculated the Tax Expense to be R25.47 million. 53. Similarly, NERSA used the notional tax method to calculate the Tax Expense. NERSA calculated the Tax Expense to be R25.49 million. 54. There is a slight difference between the Tax Expense applied for by Sasol Oil and that calculated by NERSA due to the different AR values (refer to Table 9). Page 16 of 19

Table 9: Tax Expense Calculation Details Sasol Oil NERSA R million R million RAB * WACC 57.61 55.66 Operating Expenses 19.77 19.77 Depreciation 31.39 34.32 Amortisation 12.62 14.61 Clawback -4.72-4.73 AR before tax allowance 116.66 119.63 Less: Operating Expenses 19.77 19.77 Less: Depreciation (historic) 31.39 34.32 Taxable Income before Gross up 65.50 66.54 Taxable Income after (i.e. taxable income/1-t) 90.98 91.03 Total Tax Expense (@ 28%) 25.47 25.49 Allowable Revenue (AR) 55. Sasol Oil calculated its AR based on the Rate of Return (ROR) approach. This is in accordance with the requirements of the Pipeline Tariff Methodology. Sasol Oil applied for an AR of R142.14 million for the 2018/19 tariff period. 56. NERSA also calculated the AR based on the ROR approach and arrived at an AR of R145.12 million. The comparison of the AR applied for by Sasol Oil and that calculated by NERSA is shown in Table 10. Table 10: Comparison of the AR values Details Sasol Oil 2018/19 FY NERSA 2018/19 FY R million R million PPE 880.18 858.88 Net Working Capital 61.23 61.48 Total RAB 941.41 920.36 WACC 6.12% 6.05% Return on RAB 57.61 55.66 Operating Expenses 19.77 19.77 Tax Expense 25.47 25.49 Depreciation 31.39 34.32 Amortisation 12.62 14.61 Clawback -4.73-4.73 Total AR 142.14 145.12 57. Table 10 shows that there is a difference in the AR values due to the different RAB, Net Working Capital and Amortisation values calculated by both parties. Page 17 of 19

Volumes 58. Sasol Oil s projected volumes for the SNI pipeline are 347 281 376 litres for the 2018/19 tariff period. Sasol Oil s volume projections are based on the projected retail service stations and other various sectors of sales. 59. There is a decrease of 17.88% in the volumes approved by NERSA in the 2017/18 tariff period compared to the volumes forecast by Sasol Oil in the 2018/19 tariff period (refer to Table 7). The decrease is due to the planned shutdown of the Secunda refinery in the 2019 Financial Year (FY). Table 11: Volumes Details 2017/18 FY - RfD 2018/19 FY % Difference in volumes Volumes (litres) 422 900 000 347 281 376-17.88 60. NERSA accepts the volumes forecast by Sasol Oil in this tariff application. NERSA will continuously monitor the volumes and any difference between the forecast volumes used in this tariff application and actual volumes achieved by Sasol Oil will be subject to a clawback adjustment in future tariff periods. Tariff Design 61. In calculating the tariffs, Sasol Oil used the total AR divided by the total throughput volume in litres. Sasol Oil applied for a tariff of 40.93 cpl for the 2018/19 tariff period. The tariff applied for is expressed in cpl and is exclusive of VAT. 62. NERSA calculated a tariff of 41.79 cpl for the tariff period under review and it is recommended that this tariff be set for the SNI pipeline. 63. The tariff applied for by Sasol Oil and that calculated by NERSA is shown in Table 12. Page 18 of 19

Table 12: Comparison in tariffs Details 2018/19 FY 2018/19 FY Sasol Oil NERSA AR (R million) 142.14 145.12 Volume (litres) 347 281 376 347 281 376 Tariff (cpl) 40.93 41.79 % difference in tariffs 2.10% 64. Table 12 shows that there is a difference of 2.10% in the tariffs due to the different PPE values, Amortisation values (as a result of the compounded effect of the different CPI values used when trending the assets) and the Depreciation on land in order to allow Sasol Oil to earn a Return on Investment. Conclusion 65. On the conspectus of the facts and evidence, it is appropriate and in compliance with the requirements of the National Energy Regulator Act, 2004 (Act No. 40 of 2004) to make the decision set out above. The decision finds a reasonable balance between the interests of customers on the one hand and the interests of investors on the other. Page 19 of 19