transform empower uplift

Report
Proposed CUC and BO&R charges for inclusion in the
Bulk Raw Water Charges for 2015/16
Rand Water Tariff Consultation Meeting
Mining & Industry
22 October 2014
Unyielding commitment to
REJUVENATION REVIVAL RENAISSANCE TRANSFORMATION
 Purpose of the presentation
 Categories of bulk raw water charges
 Purpose of the CUC and BO&R charges
 Stakeholders’ objectives
 Tariff objectives
 Principal assumptions & inputs
 Tariff principles & methodology
 Proposed CUC and BO&R charges for 2015/16
 Debt analysis
2
 Discuss purposes for which the CUC is levied on the VRS
 Discuss the principles and method applied to the setting of the CUC
 Present the assumptions and inputs underlying the proposed charges
 Present the proposed CUC and BO&R charges for 2015/16
 Discuss implications for the debt of the VRS augmentation schemes
3
 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)
 CUC and BO&R recovers:
 Capital expenditure
 Funding costs
 Administration costs (TCTA, LHDA, LHWC)
 Royalties
 Bulk O&M (not included in DWS O&M)
44
 The CUC recovers the cost of off-budget schemes in the VRS as
provided for in the Pricing Strategy
 Costs to be recovered over a period not exceeding 20 years after
implementation of latest augmentation scheme
 Current schemes in the VRS:
 LHWP-1 management of current ongoing debt obligations
 LHWP-2 next Lesotho scheme to augment the yield of the VRS
 AMD
Government waterworks to mitigate the effects of acid
mine drainage in the VRS and augment the yield of the VRS
 Bulk operations (O&M on non-state schemes)
 Royalties – paid to Lesotho in terms of Treaty
5
 TCTA
 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
 Inflationary increases in raw water as start of water chain input cost


Affordability and predictability to end-users
Uncomplicated annual tariff consultations – inflationary increases
 Water demand management incentive (pay on actual use)
 No cross subsidisation between projects – transparency of costs
 Compliance with Water Pricing Strategy
6
 SALGA
 Inflationary increases
 Fair tariff structures
 Municipalities
 Limited to inflationary increases, including raw water components


DWS expects TCTA to support this objective
Municipality and Council pressure to keep increases low
 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 approve tariff adjustments





7
DWS
SARB
National Treasury
Stakeholders (Rand Water, Major off-takers, SALGA)
Banks informed
End
user
affordability
Considerations to support end user
affordability:
Considerations to support debt
management:
• Under recovering in early years
•+20 year repayment period
• End-user pays on actual use
• Peak of debt in relation to value of
asset (limit interest capitalisation)
• 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
8
Debt
outstanding
• Actual cost transfer – TCTA not
profit taking
• Risk transfer to end-user – trigger
adjustments if input assumptions
change
• Water sector debt profile – debt
overlap with future schemes
• Interest rates mostly fixed
• Utilisation of explicit Government
guarantees and impact on National
Treasury
 Inflationary adjustment
 CPI annually (May index)
 CPI Cap and floor levels
Floor
Cap
7.5%
4.5%
Negotiated adjustment
Automatic adjustment
Negotiated adjustment
 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
9
 Previously TCTA accounted for and determined capital tariffs for each subcomponent of the Vaal River System in isolation (e.g L:HWP-1, LHWP-2 etc.)
 This approach resulted in an accumulation of tariffs required to repay the subcomponents simultaneously when there was a debt overlap period – when LHWP-
2 phasing-in was introduced, the debt overlap between LHWP-1 and LHWP-2 was
severe
 To address the tariff affordability, smoothing of the tariff was considered to take
account of the augmentation required in the Vaal River System
 TCTA’s funding programme and borrowing limit for all sub-phases of the Vaal
River System has been combined to accommodate a smoothed tariff approach
 To give effect to the integrated system’s tariff approach, a single system capital
tariff is therefore charged whereby the combined debt of the Vaal River System
will be repaid through a single capital tariff
10
LHWP 1&2 combined debt curve 2013
30.000
27.000
24.000
LHWP-1 debt curve: 2013
Rand Value (Billion)
21.000
18.000
LHWP-2 debt curve: 2013
LHWP 1&2 Combined debt curve: 2013
Debt overlap
15.000
12.000
9.000
6.000
3.000
'12 '13 '14 '15 '16 '17 '18 '19 '20 '21 '22 '23 '24 '25 '26 '27 '28 '29 '30 '31 '32 '33 '34 '35 '36 '37 '38 '39 '40 '41
Financial Year End
11
 Supports end-user affordability

No further phase-in of tariffs for augmentation schemes during construction is required
 Extended debt repayment period

The debt repayment period of LHWP-1 is extended to the debt repayment period of
LHWP-2, supporting end-user affordability
 Smoothed tariff profile

Large fluctuations in water tariffs are reduced as tariffs won’t increase sharply with new
augmentation and won’t drop after repayment of a sub-component
 Current tariff sufficient

The current Vaal River capital tariff can cover current and future debt repayments
(unless input assumptions change substantially)
 TCTA will continue to account and manage costs separately as required
by National Treasury and DWS

12
Project costs will be apportioned proportionally
 Borrowing limit

DWS and National Treasury awarded a higher borrowing limit to TCTA resulting in
lower tariffs to end-users as interest capitalisation will be allowed to assist with enduser affordability
 Peak of debt

Although the debt will peak higher, the revenue stream will be sufficient to repay the
combined debt within 20-years from completion of LHWP-2
 Combined funding programme

By combining the capital market bond programme for LHWP-1 with further
augmentation, TCTA will increase liquidity in its bonds, resulting in lower funding costs
and it will enhance access to funding by having one strong set of bonds in the market
 Security to raise funding

13
Government extended the explicit government guarantee to TCTA to cover the funding
of the Vaal River System augmentation works – resulting in lower tariffs due to good
credit
 Capital unit charge (CUC)
 single integrated tariff combining capital expenditure in the Vaal River System
 covering capex, funding costs and admin costs
 maximum debt repayment period 20-years post completion of construction
 allows for interest capitalisation
 set within approved borrowing limit parameters
 smoothed tariff profile – tariff predictability
 based on forecast long-term use from the Vaal River System
 takes account of future augmentation required within 20-years window
 annual over and under recoveries spread over debt repayment period – decreased tariff
fluctuations
 charged by DWS, paid to TCTA
 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
 continues after debt repayment
 charged by DWS, paid to TCTA
14
Other considerations
 National Water Pricing Strategy
 Administered prices – inflation targeting
 Stakeholder consultation outcomes
 Affordability to end-users
 phasing-in of large adjustments
 allowance for capitalisation of interest in early years
 Input data supplied to TCTA as follows:
 BER:
 long-term economic forecasts (inflation, real interest rates)
 DWS:
 water demand forecasts (high and low scenarios)
 system yields
 future schemes timing and projected costs
15
Tariff setting process
Planning process
• Input data
Demand, system
yield, economic
fundamentals,
cost and timing of
future augmentation
schemes
• 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.
16
Sensitivity Analysis &
Stress Testing
• Sensitivity Analysis
Inflation, real interest
rate, timing of future
augmentation schemes
and repayment periods
• Stress Testing
Lower inflation,
changes in yield of
system, higher real
interest rate, zero
growth in demand etc
Consultation
• 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
Participation
• Rand Water
Services Forum
• Other Major
stakeholder forums
17
Sub-Phase
LHWP-1
Capital cost
(cost at
completion)
R 19 billion
Contribution
from fiscus
Contribution Implementation
by mines
Period
-
Historical
-
2014-2024
(current outstanding
debt)
LHWP-2
R 12.7 billion
(water delivery 2022)
AMD shortterm works
R 2.3 billion
R 456 million
R 400 million
2013-2014
AMD longterm works
R 7.9 billion
Incl O&M up to
March 2015
Land, pumps,
use of
infrastructure etc.
2015-2018
Total Capital
Expenditure
R 42 billion
18

Inter-Ministerial decision indicated that the Vaal River System tariff will be a contributor to the cost
recovery of the AMD project

Fiscal funding is limited and Government considered alternatives to fund AMD and to limit the impact on
the Vaal River Users as follows:

Fiscal funding contribution of R 456 million

Negotiations with existing mines to contribute infrastructure, land etc value R 400 million

Provide an explicit government guarantee to limit funding costs

Allowed an increased borrowing limit to allow for interest capitalisation in early years to smooth the
tariff impact

Extended debt repayment period for LHWP-1 to allow for smoothing of tariff

National Treasury expressed commitment to investigate potential environmental levy on mines to
contribute in future

DWS committed to introduce the Waste Discharge charge on polluters to contribute in the future

Smoothed impact on users between capital charges and increase in O&M on AMD

DWS committed to implement potential other cost recovery mechanisms e.g. selling of water/products
etc
19
2015/16
Tariff
2014/15
Tariff
R/m3
R/m3
Weighted
Average
Increase %
R 0.542
R 0.230
R 0.4951
R 0.00
9.5 %
New tariff
R0.772
R 0.4951
R 1.69
R 0.60
R 1.80
R 0.52
R 2.29
R 2.32
R 3.062
R 2.8151
8.77 %
R 3.062
R 2.8151
8.77 %
a) Costs:
i) State Schemes
Existing Vaal
AMD
ii) Augmentation schemes
CUC
BO&R
Total State and Augmentation Schemes
(6.1 %)
15.9 %
b) Bulk Raw Water Tariff:
i) Total development and use of waterworks
20
Focus is to keep this weighted average
impact as low as possible
 CUC
 Combined systems tariff to repay all capital projects in Vaal River System
 Proposed decrease in the Vaal River System CUC component to balance out the impact of the
increase in O&M due to AMD
 May 2014 CPI falls within the cap and floor level of 4.5% and 7.5% at 6.6% y-o-y
 Should actual tender prices for LHWP-2 and AMD long-term be substantially different which
results in a breach of the Government guarantee limit, an increase in excess of CPI will be
passed on from 2016/17
 Future increases after the peak of the debt could be curbed to stretch the repayment period
should the debt be repaid before further augmentation is required
 Bulk Operating and Royalties Charge
 Covers bulk O&M on portion of LHWP in South Africa, royalties and operating costs of LHWC




21
and LHDA
Tariff introduced in 2014/15 - over or under recovery for 2014/15 will realise by March 2015 and
will be taken into account in the 2016/17 tariff – therefore no over/under recovery in 2015/16
Is set to recover costs on an annual basis – Royalty increases linked to PPI and energy cost
LHWC and LHDA operating costs increased more than CPI due to LHWP-II activities
increasing
Increase of 15.9% required for 2015/16
Vaal River Combined Net Debt Curve vs Borrowing Limit Projection Aug 2014
Base Case: CPI +4% delayed for 1 year on low demand
Scenario 1: Base case
50
45
40
Liquidity Margin (10%)
R billion
35
30
Bonds redeemed partially through the
year
25
Debt curve excluding call deposits and
redemption assets
20
Government guarantee
15
National Treasury borrowing limit
10
5
2033
2032
2031
2030
2029
2028
2027
2026
2025
2024
2023
2022
2021
2020
2019
2018
2017
2016
22
2015
0
Vaal RIver System Net Borrowing Limit Exposure Scenarios - Aug 2014
Base Case: Scenario 1
50.0
CPI+4% delayed for 1 year,
LHWP2 capex 150%
40.0
No increase over CPI
CPI + 4% for 4 years, then no CPI
Debt R billion
30.0
CPI + 4% delay for 1 year
20.0
Base case
No long term AMD, CPI + 4%
from years 1 to 4
10.0
Government guarantee
23
(10.0)
2033
2032
2031
2030
2029
2028
2027
2026
2025
2024
2023
2022
2021
2020
2019
2018
2017
2016
2015
-
National Treasury borrowing
limit
 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 operate within the borrowing limit (growing to R 42,5 billion) and
government guarantee (R 43 billion)
 On all the scenarios, the debt peaks between R 30 and R 35 billion and the borrowing limit
is not substantially exceeded, a change in redemption strategy could successfully manage
the peaks to stay within the borrowing limit
 Passing on CPI will be in line with the constant tariff in real terms approach applied to the
Vaal River tariff previously
24
 TCTA will not exceed the borrowing limit or guarantee should only CPI be passed on for
2015/16, based on current assumptions (CUC and AMD O&M combined)
 The risk of passing on only CPI in 2015/16 is that the capital cost of LHWP-2 and the AMD
long-term could be substantially higher once confirmed after tender process, which will
require an increase in excess of CPI in the following year
 CPI increase supports end-user affordability
 No additional phasing-in of LHWP-2 tariff for this year
 No additional triggers required
25
Contacts:
Nhlanhla Nkabinde
Project Finance Specialist
[email protected]
Alicia Keyser
Senior Project Finance Manager
[email protected]
Telephone: (012) 683 1200
26

similar documents