Annual Report 2006 Presentation to Portfolio Committee on Public Enterprises October 10 2006

Annual Report 2006

Presentation to Portfolio Committee on Public

EnterprisesOctober 10 2006

2Contents of presentation

• Strategy confirmation and structure • Strategy implementation• Financial results 2005/2006• Discontinued operations• Pension fund update • Post-balance sheet events• Conclusion and questions

3

Strategy confirmation

and structure

4Strategy confirmation and structure

Non-core portfolio

TRANSNET COMPANY TRANSNET COMPANY

StrategyStrategy

StructureStructure

Enabling economicgrowth

Enabling economicgrowth

Focused freight transport company

Delivering effective and competitive

services

SpoornetSpoornet

RAILRAIL

TranswerkTranswerk

PORTSPORTS

National Port

Authority

National Port

Authority

SA Port operationsSA Port

operationsPetronetPetronet

PIPELINEPIPELINE

Operational divisions(continued businesses)

• SAA• Viamax• V & A (26%)• Autopax• Metrorail• freight dynamics• Equity Aviation• VAE Perway

• SAA• Viamax• V & A (26%)• Autopax• Metrorail• freight dynamics• Equity Aviation• VAE Perway

Discontinued businesses

Other to be sold• Propnet – non-core

portfolio• Housing assets• SA Express• “C” class preference

share

• Propnet – non-core portfolio

• Housing assets• SA Express• “C” class preference

share

5Strategy: Four-point turnaround plan

4-Point turnaround

plan

Corporate governance and risk management• Shareholders compact• Memo and articles

of association• IFRS• Legal review• EWRMF

Human capitaldevelopment• Skills audit and matching• Recruitment and retention• Skills and training• Performance management• Career management

• Succession planning

Balance sheet restructuring• Pension fund deficit• Transfer SAA to government• Disposal of non-core

businesses

Redirect & re-engineer the business• Re-engineer core

business• Corporate HO

restructure• Operational synergies

• Customer focus• Infrastructure development

Lower cost of doing business

Targetedsectors

Economic development

6Strategy implementation: Progressmade

Redirect and re-engineerthe business

Redirect and re-engineerthe business

Balance sheet restructuring

Balance sheet restructuring

Corporate governance and risk management

Corporate governance and risk management

Human capital development

Human capital development

Progress summary– Major re-engineering program – “Vulindlela”

underway– Commenced with roll out of R64,5 billion

investment plan– Disposal of non-core assets– Established governance structures and risk

programmes implemented – Comprehensive HR strategy

Progress summary– Major re-engineering program – “Vulindlela”

underway– Commenced with roll out of R64,5 billion

investment plan– Disposal of non-core assets– Established governance structures and risk

programmes implemented – Comprehensive HR strategy

7Strategy implementation (continued)

• Restructuring the balance sheet• Exit of non-core assets

–PFMA approval obtained for the disposal of non-core assets–Businesses sold

Business Buyer Effective date Sale priceSAA Government

(DPE)31 March 2006 subject to fulfillment of suspensive conditions

R2 billion (no cash flow)

MetrorailSARCC(Dept of Transport)

1 May 2006: Effective date 20 December 2005: Risk and reward R1,00 (cash)

Transtel: Full service network (Metro fibre and electronic assets)

SNO (Neotel) 3 May 2006 R256 million (equity)

V&A Waterfront L&R Consortium 18 September 2006 R7.04 billion (cash)

Sale process started•Viamax, freightdynamics, TPFA, Equity Aviation, VAE Perway, Non-core Property

Future Plan•Sale of Housing Assets, SA Express, Autopax, “C” class preference share

8SAA (suspensive conditions)

• PFMA approval

• International air services council approval

• Air services licensing council approval

• Third party contractor approval

• Listing of SAA as schedule 2 public entity in terms of the PFMA

• Passing of special resolution by Transnet

–Amendment of Articles of Association

–Share buy back

9V&A Waterfront sale

• Sold to L&R Consortium for R7.04 billion (cash)• Black & Cape-based investors hold 23.1%• 2% set aside for V&A black staff• Winner selected from 9 short-listed bidders• Selection based on:• - Price 85 points• - BEE 10 points• - Employee retention 5 points

10V&A sale (what it means)

• L&R committed to: further development; more investment & jobs in the Waterfront

• L&R pledged to guarantee existing jobs for at least two years• Process regarded as “fair and reasonable” by KPMG,

independent process advisers• Process outcome welcomed by unsuccessful bidders as being

good for SA • Sale subject to Reserve Bank and Competition authority approval

11Viamax, freightdynamics & TPFA

• Following businesses are on the market – RFPs are underway–Viamax - to be completed end-October 2006

–freightdynamics - list of recommended bidders approved

–TPFA – data rooms are being created

12Strategy implementation (HR)

• The successful implementation of Transnet’s turnaround strategy lies fundamentally in creating a work environment where our people can excel

• Human capital strategy• Completed redesign and staffing of corporate centre• Introduced a talent management programme• Begun capacity building exercise for operational requirements

and skills demand study for medium term• Introduced a new reward and performance management system

and the roll out has begun• Introduced a leadership development programme• Redefined partnership with labour for the transformation

of Transnet

13Strategy implementation (HR)

• Transnet supports all transformation instruments of Government• Transformation is a business imperative• We are committed to implementing the initiatives of EE & BBBEE

Acts• Transnet submitted their EE Reports to the Department of Labour

for the 2005 Reporting Period as required• DoL acknowledged receipt of the 2005 reports, and provided

feedback to the business units by indicating their overall score-card rating as well as progress made to date on EE targets

• Transnet has copies of the reports submitted, and the acknowledgment of receipts

14Strategy implementation (EE)

• Transnet complied with the EE Act and its regulations when it submitted its reports

• (in the 2005 reporting year there was no requirement for a consolidated EE report for the group – this has only been introduced for the 2006 reporting year)

• Transnet has made significant progress in achieving equitable representation across its divisions

• EE is a strategic initiative driven by the Transnet EXCO and is intimately aligned with the organisational transformation process

15HR (EE)

EEA2 Reports as @ Jun 06 Male Female Total

African Coloured Indian White African Coloured Indian White Total

TransnetTop & Sen Management

(101-106) 104 26 46 124 54 4 14 32 404

Professionals (108-109) 147 42 70 310 91 25 22 38 745

Skilled Technical (610) 626 208 182 1507 337 89 56 131 3136

Semi Skilled 15778 7356 992 6342 3444 620 236 1230 35998

Unskilled 6518 645 30 116 307 70 13 134 7833 48116

16

African56.96%

White20.71%

Coloured18.88%

Indian3.45%

Male85.56%

Female14.44%

Note: Data is for Transnet’s Core Business Units, NPA, Spoornet, Petronet, Protekon, Transwerk, Corporate Centre, Transnet Foundation, Esselenpark and Transtel SS

0.22% of Employees at Transnet are living with a disability

Note: Data is for Transnet’s Core Business Units, NPA, Spoornet, Petronet, Protekon, Transwerk, Corporate Centre, Transnet Foundation, Esselenpark and Transtel SS

Note: Data is for Transnet’s Core Business Units, NPA, Spoornet, Petronet, Protekon, Transwerk, Corporate Centre, Transnet Foundation, Esselenpark

What does Transnet look like?Current EE representation – June 06

Profile of Transnet EmployeesJune 2006 (n=48116)

22.5% of females are White

17

78.97% of Semi skilled employees

47.77 % of Skilled Technical Employees

(610)

53.29% of Professionals

(108-109)

61.39% of Top & Senior Mngt

(101-106)

96.81% of Unskilled employees

38.61%

46.71%

52.23%

21.03%

3.19%

Femal

e Em

ploye

es a

t Tra

nsnet

Black Employees at Transnet

Transnet Representation for Black and Female Employees

How do our Core BU’s look like?

Note: Data is for Transnet’s Core Business Units, NPA, Spoornet, Petronet, Protekon, Transwerk, Corporate Centre, Transnet Foundation, Esselenpark and Transtel SSNote: Black is the collective term for African, Coloured and Indian employees

Note: Data is for Transnet’s Core Business Units: NPA, Spoornet, Petronet, Sapo, Protekon, Transwerk, Corporate Centre, Transnet Foundation, Esselenpark Note: Black is the collective term for African, Coloured and Indian employees

18Transnet Preferential Procurement

PROCUREMENT AVAILABLE TOTAL SMME TOTALTOTAL

DIVISION SPEND"DISCRETIONAR

Y" PROCURED WBE % DPBE % (all races) % BEE BEE

SPEND VALUE VALUE WBE VALUE DPBE VALUE SMME VALUE %

1SPOORNET

R 1,533,280,000.00 1,533,280,000.00

4,095,640,000.0

0 54,220.00 0% 13,390.00 0% 728,370.00 0% R 805,000,000.00 53%

2 NPAR

2,455,200,000.00 2,755,000,0002,455,200,000.0

0 N/A**unava

ilable **unavailable**unavailable

**unavailable

**unavailable

R1,178,496,000.00 48%

3 SAPO 611,224,004

611,224,004 901,993,000.00

24,687,044 8.00%

1,086,001 0%

**unavailable

**unavailable R 309,294,675.00 51%

4PETRONET R 153,168,854.29 153,168,854.29

1,077,406,157.0

0 **unavailable**unava

ilable **unavailable**unavailable

**unavailable

**unavailable R 51,905,942.83 34%

5TRANSWERK

R 2,316,000,000.00 N/A

2,316,000,000.0

0 59,000,000 N/A 415,000 **unavailab

le**unava

ilable R 714,000,000.00 31%

6PROTEKON

R 590,814,000.00 R 590,814,000.0 976,243,000.00 R 184,350,000.00 31%

TOTALS R 7,659,686,858.3 5 643 486 858.29

11,822,482,157.

0 R 83,741,264.0 3.00% R 1,514,391.0 0.05%R

728,370.0 48.00%R

3,243,046,617.83 42%

(1,3,5,only) (1,3,6 only) (1 only) (All)

83741264 / 2760474872.8= 3%

1514391/2760474872.8 = 0.05%

Based on 1 only = 48%, otherwise

3243046617.83/ 7659686858.3=42%

Not all Units were able to report on WBE, DPBE and SMME due to different Financial Systems being used. Efforts will be made to enable split reporting in future “Discretionary Spend" fluctuates due to budgetary considerations / available spend and types of "BEE-able" commodities / services procured, etc.

19Strategy implementation

• Corporate governance and risk management• Shareholder compact completed and approved by Board

awaiting approval from Shareholder• Revised articles of association approved by Board awaiting

Shareholder approval• Litigation and material contracts due diligence completed• Enterprise Wide Risk Management Framework completed

–Key risks identified and monitored for each operating division

–Internal audit (outsourced) now fully functional focusing on • Control environment /compliance reviews• Transaction audit (a comprehensive payroll audit completed)• Assessment of major projects and special investigations

–Developed and completed a fraud prevention plan, core values,

ethics statements and contracts for all employees

20

Transwerk R2,6 billion• Equipment

10%

4%

48%

8%

29%

Capex spending five-year plan

Planned spending over next five years (core businesses): R64,5 billion

Petronet R4,9 billion• Multi-product pipeline DJP

(R4,2 billion)• Gas line upgrading (R0,4 billion

Sapo R6,3 billionMainly capacity increases• Durban (R1,5 billion)• Richards Bay (R1,0 billion)• Ngqura (R1,2 million)• Cape Town (R0,9 billion)• Saldanha (R0,6 billion)

NPA R18,6 billionUpgrade and expansion• Durban (R8,7 billion)• Cape Town (R3,9 billion)• Ngqura (R2,5 billion)• Richards Bay (R1,4 billion)

Spoornet R31,5 billion• Coal line (R8 billion)• Ore line (R2,7 billion)• General freight (R10,8 billion)• Maintenance capitalisation

(R8,1 billion)

21

Transnet core businesses five years gross capital investment budget

Financial years

12,015,3

11,414,7 11,1

64,5

53,3

41,4

26,7

11,4

0

10

20

30

40

50

60

70

2006/2007 2007/2008 2008/2009 2009/2010 2010/2011

Rb

n

Financial years

22Salient features: 2006

Results 2006: Continuing operations2006

R million%

change

Turnover 26 346 +7

Operating profit 8 478 +57

Operating margin % (before impairments) 32,2 +51

Capital and reserves 27 706 +31

Cash generated from operations 11 233 28

Gearing % 47,1 -24

ACHIEVING PERFORMANCE OBJECTIVESACHIEVING PERFORMANCE OBJECTIVES

23

Financial Results 2006

24Financial results 2006

for the year ended 31 March 2006 %

change2006

R million2005

R million

Turnover 7 26 346 24 706

Notional revenue on embedded derivatives 14 554Net operating expenses excluding impairments (10) (17 882) (19 846)

Profit from operations before net finance costs and impairments 57 8 478 5 414

Impairment of assets and fair value adjustments 318 4 023

Profit from operations before net finance costs 8 796 9 437Net finance cost 14 (2 395) (2 107)Taxation 25 (1 978) (1 582)Income from associates 33 62Profit for the year from continuing operations 4 456 5 810

Profit from discontinued operations 115 754

Net profit for the year 4 571 6 564

Operating margin % 32,2 21,4

Consolidated income statement

25Transnet operating profit margin(after impairment before fair value adjustment)

HIGHEST MARGIN IN LAST SEVEN YEARSHIGHEST MARGIN IN LAST SEVEN YEARS

1

5

12

4

0,4

12,2

17,6

0

3

6

9

12

15

18

2000 2001 2002 2003 2004 2005 2006

%

Transnet Group (Including discontinued operations)

Average previous6 years = 5,8%

26Performance measures against budget

Total Transnet Spoornet NPA SAPO Petronet

Operating margin

Operating margin – Actual (%) 28.5 11.8 68.7 25.4 56.4

Operating margin – Budget (%) 26.1 9.7 65.7 28.1 53.5

Revenue Growth*

Tariff - Actual 3.4 3.8 1.7 4.2 3.1

Volume - Actual 3.0 0.7 9.3 5.1 0.7

Total Actual Revenue Growth* 6.5 4.5 11.0 9.3 3.8

Tariff - Budget 2.6 1.8 1.7 5.7 4.5

Volume - Budget 5.5 4.7 9.0 5.3 3.2

Total Budget Revenue Growth * 8.2 6.6 10.9 11.3 7.8

Infrastructure investment

% of capital expenditure spent (%) 100.7 147.2** 45.3 86.7 65.1

Gearing*

Gearing – Actual (%) 47

Gearing – Budget (%) 59

Cash flow return on investment*

Actual (%) 5.8

Revised budget (%) 4.1

* Continuing operations

**Includes an amount of R681m relating to capitalised maintenance

27

767

1 695

2005 2006

Rm

Operating profit

Spoornet performance 2006 versus 2005

• Financial• Turnover increased by 4% to R14,4 billion• Capex spending R3 809 million in

2005/2006 and R31,5 billion over the next five years

• Operational • Total volumes transported increased by

0,5% to 182mt• Iron-ore line volumes achieved: 29,6mt

(increase of 5% over 2004/2005) • Coal line volumes transported was

68,7mt (increase of 2,7% over 2004/2005) • General freight volumes decreased by

2,7% to 83,8mt over the year

121%

*Includes a net amount of R681m for capitalisation of maintenance under IFRS

*

28NPA performance 2006 versus 2005

• Financial• Turnover increased by 11% to R5,5 billion• Capex spending R783 million in 2005/2006

and R18,6 billion over the next five years

• Operational • Bulk volumes increase 6% due to

increased demand for coal, iron-ore (China) and other commodities

• Full container imports grew 9% while exports did not reflect growth due to currency strength, competition and quality issues

• All ports were accredited as being ISPS code compliant

3 806

3 211

2005 2006

Rm

19%

29SAPO performance 2006 versus 2005



• Operational • Container volumes increased by 7%

and is expected to further increase by 8% in 2005/2006

• Breakbulk volumes dropped 5% due to competition and the trend towards containerisation

• Volumes in automotive sector reflected strong growth due to the rand’s stability and local manufactures securing export contracts

• A record 28,8mt was exported through the Saldanha iron-ore terminal

910

875

2005 2006

Rm

4%

30Petronet performance 2006 versus 2005



• Operational • Petronet successfully complied with the

“clean fuels” requirements in January 2006• ‘De-bottlenecking’ project became

operational in October 2005 resulting in an 18% improvement on the constraints

• Existing refined products pipeline (DJP) is running at close to capacity while crude line feeding Natref is operating at 75%

597

457

2005 2006

Rm

31%

31Transwerk performance 2006 versus 2005



• Operational • Output achieved during the year which

entails refurbishing, upgrading, building and modifying

–7 213 wagons–316 locomotives–550 coaches–2 113 traction motors–62 830 wheel pairs

671

459

2005 2006

Rm

46%

32

SAA: Financial performance 2006 versus previous two-years: three-year view

Turnover Operating profit

16,3

17,4

19,6

15

16

17

18

19

20

2006 2005 2004

Rb

n

12,6%

0,3

1,0

-3,7-4

-3

-2

-1

0

1

2006 2005 2004

Rb

n

33Financial results 2006

at 31 March

2006

R million

2005

R million

ASSETS

Non-current assets 49 131 59 442

PPE and other 47 112 56 725

Long-term loans and advances 2 019 2 717

Current assets 28 202 17 609

Inventories, receivable assets and cash 7 588 13 700

Derivative financial assets 3 874 3 909

Assets classified as held for sale 16 740 –

TOTAL ASSETS 77 333 77 051

Consolidated balance sheet

34Financial results 2006 (continued)

at 31 March 2006

R million2005

R million

EQUITY AND LIABILITIES

Capital and reserves 27 706 21 106

Non-current liabilities 22 996 30 717

Borrowings and provisions 17 724 23 421

Post-retirement benefit obligations 4 348 7 238

Deferred taxation 924 58

Non-current liabilities 26 631 25 228

Payables and other 13 699 25 288

Liabilities classified as held for sale 12 932 –

TOTAL EQUITY AND LIABILITIES 77 333 77 051

RATIO’S

Gearing (%) 47 62

Return on total assets (%) 11,0 7,0

Consolidated balance sheet (continued)

35IFRS: Impact on 2004/2005

for the year ended 31 March 2005 R million

BALANCE SHEET

PPE deemed cost (land and buildings) 4 183

Other (65)

INCOME STATEMENT

Mainly depreciation (98)

Financial statement prepared under IFRS with effect from 1 April 2004

36Retirement benefit obligations

Retirement fund obligations2006

R billion

2005R billion

Transnet Pension Fund (fully funded)

Transnet Second Defined Benefit Fund (a) 1,6 4,3

Post-retirement Medical Benefits (b)

SATS pensioners 1,6 1,6

Transnet employees 0,8 0,8

Other 0,3 0,5

Total 4,3 7,2

Consolidated balance sheet

(a) Restructuring and funding plan in progress(b) Funding monthly including Transnet subsidy

Unfunded liabilities

37Financial results 2006 (continued)

for the year ended 31 March 2006 Deviation % 2006R million

2005R million

Cash generated from operations (note 1) 11 11 233 10 089

Cash flows from investing activities

Capex - expand (1 745) (3 678)

Capex - maintain (4 856) (1 963)

(6 601) (5 641)

Aviation adjustments – (1 849)

(74) (6 601) (3 792)

Cash flow from financing activities (4 001) 2 437

Decrease in bank and cash (615) (2 018)

Abridged consolidated cash flow statement

Note 1: Effective 28% increase after adjustment for the decrease in SAA operational cash flow of R1,7 billion

38Funding requirements: Next five years

Cash flow

Adjusted Budget

2006/07 R billion

Projections:

Excluding non-core

2007/08 R billion

2008/09 R billion

2009/10 R billion

2010/11 R billion

Gross capex spend (11.5) (15.3) (14.7) (12.0) (11.1)

Cash available from operationsOther investment

7.80.9

8.8(0.8)

12.30.1

15.70.1

18.20.1

Cash (shortfall/surplus) (2.9) (7.3) (2.3) 3.8 7.2

Loan redemptions (0.9) (1.1) *(8.6) (0.9) (4.7)

Gross funding requirement (3.8) (8.4) (10.9) 2.9 2.5

*Includes : Promissory Note R2bn and T004 R5.5bn

39Post-balance sheet events

• SAA – sale agreement signed • Metrorail sale agreement signed• Sale process launched for Viamax, TPFA and freightdynamics • Second network operator (Neotel) – Telecommunications assets

to be sold• SAX – overall PFMA approval (conditions being discussed)

40Summary

• Sound financial performance for the year

• R64,5 billion investment program underway

• Vulindlela project underway that will deliver significant

improvement in efficiencies, profitability, productivity, cost

reductions and customer service

• Disposal of non-core entities has begun and will be complete by

December 2006

41Conclusion

• Progress to date is pleasing but still significant challenges ahead

• The sustainability of the turnaround achieved to date and future improvements can only be achieved through relentlessly driving the implementation of the strategies

• Our optimism for the future is based on the commitment of management and staff to focus on priorities and work as a team to deliver

WE THEREFORE MOVE INTO THE FUTURE WITH CONFIDENCEWE THEREFORE MOVE INTO THE FUTURE WITH CONFIDENCE

Thank you

Documents

Annual Report 2006 Presentation to Portfolio Committee on Public Enterprises October 10 2006