Audited Condensed Consolidated Financial Results
For the year ended 31 March 2016
Market Demand Strategy
focus areas
Optimising capital investments and growing the asset base.
Growing volumes and market share.
Improving productivity and operational efficiencies.
Prioritising safety, health and environment.
Enabling regional integration.
Creating regulatory certainty.
Meeting complementary New Growth Path objectives of skills development and job creation.
Group financial position
Revaluation of property, plant and equipment

The Group assesses the revaluation of its rail infrastructure, port infrastructure and pipeline networks in line with its accounting policy, which requires an independent valuation every three years, as well as index valuations in the intervening years. During the year, rail infrastructure assets were revalued based on the depreciated optimised replacement cost method, limited to the discounted cash flows generated by the assets in order to ensure they are not carried at amounts in excess of their recoverable amount. Index valuations were performed on port infrastructure, port operating and pipeline assets.

Accordingly, the carrying value of rail infrastructure required a devaluation of R6,6 billion from the first-time revaluation in the prior year of R49,8 billion. The carrying value of port facilities required a revaluation adjustment of R4,7 billion (2015: R4,6 billion). The carrying value of pipeline networks required a net revaluation adjustment of R808 million (2015: R843 million). These revaluation adjustments are performed in accordance with IAS 16: Property, plant and equipment.

Deferred taxation

The deferred taxation liability increased to R44,4 billion (2015: R43,1 billion), mainly as a result of the charge of R1,1 billion for the year, together with the deferred taxation impact on the revaluation of property, plant and equipment, which has been recorded directly in equity, and offset partially by the deferred taxation asset resulting from the Company's taxation loss.

Cash flows

Cash generated from operations amounted to R27,7 billion (2015: R27,3 billion), an increase of 1,7% from the prior year, evidencing the ability of the Group to generate sustainable cash flows. Cash generated from operations after working capital changes have decreased by 8,0% to R28,2 billion (2015: R30,6 billion) as a result of the reduced inflow from the changes in working capital.

The cash interest cover ratio at 3,1 times (2015: 3,6 times) is above the internal target of 3,0 times, despite a significant increase in net finance costs resulting from increased borrowings to fund the capital investment programme. This is significantly higher than the triggers in loan covenants.

Borrowings

A well-defined funding strategy has enabled Transnet to raise R40,9 billion for the year without government guarantees, comprised mainly of the following funding sources:
  • R8,3 billion from development finance institutions;
  • R8,5 billion of commercial paper and call loans;
  • R19,1 billion of domestic bank and club loans; and
  • R4,6 billion of domestic bonds.
Transnet repaid borrowings amounting to R27,5 billion, which related predominantly to loans and commercial paper that matured during the year.

The Company borrows on the strength of its financial position, and has maintained an investment-grade credit rating, confirming its solid standalone credit profile.

The gearing ratio increased marginally to 43,1% (2015: 40,0%) due mainly to the execution of the capital expenditure programme. This level is below the Group's target range of 50,0%, and is well below the triggers in loan covenants, reflecting the capacity available to continue with its investment strategy, aligned to validated demand. The gearing ratio is not expected to exceed the target ratio over the medium term.

Derivative financial assets and liabilities

Derivative financial instruments are held by the Group to hedge financial risks associated with its capital investment and borrowing programmes. The 'mark to market' of these derivative financial instruments resulted in a net derivative financial asset of R13,2 billion (2015: R11,3 billion). The recent volatility of foreign exchange rates gave rise to this net asset position. Cross-currency interest rate hedges and forward exchange contracts were executed to eliminate foreign currency and interest rate risk on borrowings. These hedges have been hedge accounted for in terms of IAS 39: Financial Instruments; Recognition and Measurement.

Pension and post-retirement benefit obligations

The Group provides various post-retirement benefits to its active and retired employees, including pension, post-retirement medical and other benefits. The two defined benefit funds, namely the Transnet sub-fund of the Transport Pension Fund (TTPF) and the Transnet Second Defined Benefit Fund (TSDBF) are fully funded with actuarial surpluses of R3,7 billion (2015: R3,1 billion) and R3,3 billion (2015: R3,5 billion) respectively. Transnet has not recognised any portion of the surplus on these funds, as the fund rules at present do not allow for the distribution of a surplus.

The Board of Trustees of the TTPF and TSDBF approved the payment of ad hoc bonuses to their beneficiaries, during the year, amounting to R20 million and R145 million respectively. In addition, further ad hoc bonus payments amounting to R24 million for TTPF beneficiaries, and R174 million for TSDBF beneficiaries, were approved in May 2016 and were paid in June 2016. The total value of ad hoc bonuses paid by the TTPF (since December 2011) and TSDBF (since November 2007) to their beneficiaries amounts to R214 million and R2,7 billion respectively. These payments continue to supplement the current statutory increase of the beneficiaries of the TTPF and TSDBF to provide pensioners with increases above CPI.

Following the certification of the pensioners' class action proceedings on 11 June 2015, Transnet was served with a summons issued out of the Pretoria High Court. According to the summons, the pensioners seek an order directing Transnet and the funds to increase the pensions of all the members of the funds by an annual rate of not less than 70% of the rate of inflation with effect from 2002; as well as an order that Transnet pays to the funds a legacy debt of R17,5 billion, plus interest from 1 April 1990. Lastly, an order is also sought that Transnet pay a sum of R309,1 million to the TTPF as repayment of an amount allegedly donated by the TTPF to Transnet from a members' surplus in 2001.

Transnet and the Funds filed 'exceptions' to the summons (legal technical arguments demonstrating that the particulars of claim are defective and should be dismissed). The exceptions were heard in April 2016. On 18 May 2016, judgment on the exceptions was delivered, wherein the court upheld three of Transnet's exceptions and gave the plaintiffs 14 days within which to amend their Particulars of Claim, to enable Transnet and the two pension funds to file their respective pleas.

Transnet's senior counsel has advised that even if the exceptions were unsuccessful, the action against Transnet is likely to fail on the merits.

The post-retirement medical benefit obligation is approximately R800 million (2015: R1,0 billion).

Contingencies and commitments

There were no material movements in contingencies since 31 March 2015. The significant decrease in capital commitments is due to Transnet's structured approach in maintaining its financial stability by optimising its capital expenditure, based on validated demand.

Guarantees

The sole Shareholder in Transnet SOC Ltd, namely the South African Government, has guaranteed certain borrowings of the Group amounting to R3,5 billion (March 2015: R3,5 billion) representing 2,6% of total borrowings of R134,5 billion. No further guarantees have been issued since 2005.

Capital investment

The global economic slowdown has resulted in our key customers experiencing depressed commodity demand and in some cases deferring their expansionary programmes.

Accordingly, Transnet has experienced a concomitant reduction in commodity freight demand. Transnet responded by continuously assessing and validating medium to long term demand outlook as well as value engineering and re-phasing key investment projects and programmes. The capital investment programme will continue to dynamically respond to changes in global commodity markets. This results in a significant adjustment to the timing of capacity requirements in latter years.

Transnet has applied a structured approach in maintaining its financial stability by optimising capital expenditure in excess of R60 billion, which will yield planned spend of between R340 billion and R380 billion over the next ten years, based on validated demand. Transnet's capital investment for the year amounted to R29,6 billion, representing an 11,9% decrease from the prior year (2015: R33,6 billion), reflecting the Company's capital scrubbing efforts. The capital investment for the year represents R11,1 billion invested in the expansion of infrastructure and equipment, while R18,5 billion was invested to maintain and sustain existing capacity.

Progress on major projects

Rail infrastructure projects:

General freight anticipated volume growth did not materialise; however, these volumes are expected to rise steadily in the year ahead. The rise in growth will be driven by new business development initiatives, and an increase in tractive effort by acquiring new rolling stock (locomotives and wagons), as well as implementing interventions to maintain, upgrade and renew the rolling stock fleet and infrastructure.

Locomotives

Transnet concluded various locomotive acquisition contracts since the 2014 financial year which resulted in the contracting for approximately 1 319 new locomotives for the general freight business and coal business over the corporate plan period.

For the year ended at 31 March 2016, R8,8 billion has been spent against the above mentioned locomotive contracts, with the spend since inception amounting to R26,3 billion.

All of the 95 Class 20E electric locomotives were delivered and accepted into operations by 30 June 2015. The 60 Class 43 diesel locomotives were fully delivered and accepted into operations by 30 September 2015.

To support the expansion of the export coal line, 100 Class 21E electric locomotives have been acquired. These locomotives were accepted into operations by November 2015.

The composition of the 1 064 diesel and electric locomotives for general freight business is as follows:
  • 359 Class 22E electric locomotives - to date 55 locomotives have been delivered, but are still undergoing acceptance testing.
  • 233 Class 44 diesel locomotives - to date 34 locomotives have been delivered, but are still undergoing acceptance testing.
  • 232 Class 45 diesel locomotives - Production line commenced, to date two locomotives have been completed.
  • 240 Class 23E electric locomotives - Prototype locomotives delivered, to date nine car bodies have been completed.
Wagons

Freight Rail and Engineering have embarked on a programme to build new wagons in line with expected demand growth. For the 2016 financial year, 2 100 wagons were built and received by Freight Rail, resulting in a capital investment of R2,3 billion.

Further, Engineering signed a contract with Swaziland Railways in February 2016 for the delivery of 40 new container wagons and 50 refurbished fuel tanker wagons. The delivery of the wagons was concluded five weeks ahead of schedule in May 2016.

Capitalised maintenance

Transnet continues to invest capital to sustain and protect current capacity with R7,1billion invested for the current financial year, of which R2,8 billion was invested in interventions to sustain the Company's rail infrastructure, with R4,3 billion invested to maintain the condition of the rolling stock at a sustainable level.

Manganese expansion to 16mtpa

South Africa holds more than 80% of the world's medium- to high-grade manganese ore reserves, making it a sustainable, lucrative supply market to Europe and China. The prevailing market conditions and fundamental changes in forecasted manganese ore prices and global demand, necessitated the introduction of a scalable export capacity, initially at 12mtpa and, thereafter, to 16mtpa, to meet sustainable export levels.

The phasing of the investment over a longer period will sustain the competitive position of existing and future producers. The manganese expansion programme will increase manganese export capacity through the upgrade of the rail network between Hotazel and Coega; and the provision of a new bulk terminal in the Port of Ngqura. The project aims to retain South Africa's position as the leading exporter of high-grade manganese ore.

Coal line investment programmes

The coal line is the main channel for export coal. It starts at the mines in Mpumalanga, proceeding through the Overvaal tunnel to the Port of Richards Bay Coal Terminal (RBCT). Plans are in place to increase rail capacity to 81,0mtpa in the near future and, thereafter, to 97,5mtpa in the medium- to long-term. The timing of this investment will be determined by the outcome of demand validation. The coal programme comprises the following key projects:
  • Export coal expansion to 81mtpa: This investment is currently at 79% stage of completion and to date, R2,2 billion has been invested to expand capacity on the export coal line to 81mt per annum. For the year ending 31 March 2016, R256 million has been invested in the coal line expansion for upgrading yards, lines and electrical equipment.
  • Waterberg upgrade Stage II: This investment aims to grow capacity to 6mtpa through incremental upgrades of the existing rail networks and yards by means of additional loops; as well as the maintenance of existing axle loads, electrical upgrades and improved train control systems. The project is currently at the FEL 4 stage with final engineering design and execution plans underway.
  • Overvaal tunnel doubling: The current Overvaal tunnel only houses one rail line, of which the infrastructure is deteriorating. A new double track tunnel will be constructed adjacent to the existing tunnel to reduce the current risk. Capital spend has been approved for the second Overvaal tunnel, and final engineering designs are underway.
New Multi-Product Pipeline (NMPP)

The NMPP is a strategic investment to secure the supply of petroleum products from the coastal terminal in Durban to the inland (predominantly Gauteng) market over the longterm. It is one of the largest and most complex multi-product pipelines in the world.

An amount of R1,3 billion has been invested in the NMPP project for the year ended 31 March 2016. The 24” and associated 16” pipelines have been fully installed, commissioned and is operational. However, the 24” pipeline is only in diesel service and awaiting multiproduct capability once the tightlining capability is effected on completion of activities at the coastal and inland terminals . Construction at the coastal terminal (tightlining solution) and inland terminal is awaiting completion. This will then ensure security of fuel supply for the South African economy is achieved over the medium to long term. The accumulator tank storage facility at the coastal terminal is planned to be fully functional by June 2019 and would add to security of supply.

Port infrastructure, equipment and floating crafts

As part of MDS, Port Terminals and the National Ports Authority have plans to invest in infrastructure and equipment to unlock demand and contribute to the economic development of South Africa. In the current year, Transnet has invested R4 billion for the maintenance and acquisition of cranes, dredgers, tugs, straddle carriers, minor works and other infrastructure investments.

Durban container terminal (DCT)

The port of Durban is the largest South African container port situated on the east coast of South Africa, with dedicated container handling facilities at the Durban container terminal. DCT handles approximately 65% of the total containerised cargo of South Africa and is the main link to South Africa's industrialised hub, Gauteng.

The DCT berth 203 to 205 reconstruction, deepening and lengthening has commenced with the design stage.

Private sector participation

Transnet's private sector participation strategy has the objective of creating a more leveraged capital base that incorporates private sector innovation, technology, skills and risk transfer, which alleviates pressure on limited Company resources. This alternate funding strategy, broadens the available capital base for infrastructure investment but more importantly optimises the developmental and transformation impact on the economy.

To date, Transnet has concluded a joint development agreement with Sun International on the Blue Train. Further, Transnet is in the process of awarding the Grootvlei coal handling terminal to a preferred bidder- this transaction is a critical initiative by both Eskom and Transnet to migrate coal traffic from road to rail. Transnet also has received requests for proposals in the market for the East London Grain Elevator, Durban Agricultural Port, Tambo Springs Intermodal Container Terminal and an offshore supply base in support of Operation Phakisa initiatives.