delivering on our commitments 06 ANNUAL REPORT 2006 CONTENTS Strategic intent 1 Highlights 2 Company structure 3 Consolidated salient features 4 Consolidated performance indicators 5 Board of directors 6 Executive committee 8 Chairman’s statement 9 Group Chief Executive’s review 12 Chief Financial Officer’s report 22 Consolidated value added statement 26 Consolidated five-year review 27 Corporate governance 28 Sustainability report 31 Operational report – Spoornet 40 Operational report – Petronet 45 Operational report – National Ports Authority (NPA) 48 Operational report – South African Port Operations (SAPO) 52 Operational report – Transwerk 56 Operational report – South African Airways (SAA) 60 Audit Committee report 64 Contents to the annual financial statements 65 Glossary of terms 170 STRATEGIC INTENT Focused Delivering Enabling freight efficient and Strategy economic transport competitive growth company services Transnet is a diversified transport and logistics group wholly owned by the South African Government. With over 65 000 employees and assets in excess of R77 billion, the Group seeks to provide integrated, seamless transport solutions for its customers in the bulk and manufacturing sectors as part of the drive to increase the competitiveness of the South African economy. Transnet is currently transforming into a focused company comprising its port, rail and pipeline businesses. The refocus is designed to ensure that Transnet delivers a reliable service to all its customers, an acceptable rate of return to its shareholder and is a choice and sustainable employer. Transnet Annual Report 2006 1 HIGHLIGHTS Moving forward... A year of significant progress Year ended 31 March % (in R million) 2006 change • Revenue – continuing operations* 26 346 ▲ 7 • Profit from operations before impairment of assets, fair value adjustments and net finance costs – continuing operations 8 478 ▲ 57 • Operating profit margin – continuing operations 32% ▲ *47 • Equity attributable to the shareholder 27 593 ▲ 31 • Gearing – continuing operations 47% ▲ 24 • Cash flows generated from operations 11 233 ▲ **28 * Excluding notional revenue on embedded derivatives. ** Excluding R1,7 billion decrease in SAA’s operational cash flow. 2 Transnet Annual Report 2006 COMPANY STRUCTURE Continuing businesses OPERATING DIVISIONS OTHER BUSINESSES • Esselen Park • Transnet Housing* • Protekon • South African Express Airways (Pty) Ltd* • Propnet** * Earmarked for disposal. ** Non-core properties earmarked for disposal. Businesses classified as discontinued • South African Airways (Pty) Ltd • Viamax (Pty) Ltd • freightdynamics • Apron Services (Pty) Ltd (Equity Aviation) • Autopax Passenger Services (Pty) Ltd • VAE Perway (Pty) Ltd • Metrorail • Transtel (telecommunication assets) • V&A Waterfront Holdings (Pty) Ltd Transnet Annual Report 2006 3 CONSOLIDATED SALIENT FEATURES for the year ended 31 March 2006 31 March 31 March 2006* 2005* % Restated R million R million change Turnover – continuing operations 26 360 25 260 4,4 EBITDA – continuing operations 10 584 7 333 44,3 Operating profit – continuing operations 8 478 5 414 56,6 Net profit for the year – continuing operations 4 456 5 810** (23,3)** Number of ordinary shares issued (millions) 14 710 14 710 – Total assets 77 333 77 051 0,4 Total debt 49 627 55 945 (11,3) Capital and reserves (including minorities) 27 706 21 106 31,3 Cash flows generated from operations 11 233 10 089 28† Capital expenditure (excluding intangibles) 6 601 5 641 17,0 EBITDA margin – continuing operations (%) 40,2 29,0 38,6 Operating profit margin – continuing operations (%) 32,2 21,4 50,5 Turnover EBITDA Operating profit R million R million R million 8 478 43 637 11 837 41 278 10 584 35 811 5 721 5 414 7 442 7 333 4 750 26 360 25 260 6 060 3 657 02 03 04 05* 06* 02 03 04 05* 06* 02 03 04 05* 06* * Continuing operations in accordance with IFRS. All other years are reflected on a SA GAAP basis. For the full effect of conversion to IFRS, refer to note 36 of the annual financial statements. ** Includes the reversal of the provision for embedded derivatives in the amount of R3,6 billion. † Excluding R1,7 billion decrease in SAA’s operational cash flow. Refer glossary of terms on page 170. 4 Transnet Annual Report 2006 CONSOLIDATED PERFORMANCE INDICATORS for the year ended 31 March 2006 31 March 31 March 31 March 31 March 31 March 2006* 2005* 2004 2003 2002 Restated PROFITABILITY MEASURES Operating profit margin (%) 32 21 11 16‡ 9 Return on average total assets (%) 11 779‡ 6 SOLVENCY RATIOS Gearing ratio (%) 47 62 83 65 52 Total debt to total capital employed (%) 47 73 86 74 71 Interest cover (times) 3,5 2,4 0,1 1,9 0,3 CASH FLOW MEASURES Operating cash flow to total debt (%) 30 18 12 17 11 ‡ Excluding R2,8 billion relating to the sale of MTN Group Ltd shares and the sale of Fleetcall. Operating margin (%) Return on average total assets (%) 11 32 9 7 7 21 6 16 11 9 02 03 04 05* 06* 02 03 04 05* 06* Gearing (%) Interest cover (times) 3,5 83 2,4 65 62 1,9 52 47 0,3 0,1 02 03 04 05* 06* 02 03 04 05* 06* Transnet Annual Report 2006 5 BOARD OF DIRECTORS as at 31 March 2006 NON-EXECUTIVE CHAIRMAN EXECUTIVE DIRECTOR Mr FTM Phaswana (61) EXECUTIVE DIRECTOR Chairman Ms M Ramos (47) Mr CF Wells (56) Group Chief Executive Chief Financial Officer NON-EXECUTIVE DIRECTORS Dr I Abedian (50) Prof GK Everingham (56) Ms NBP Gcaba (35) Dr SE Jonah KBE (56) Mr PG Joubert (73) Ms NNA Matyumza (43) Mr BT Ngcuka (52) Mr S Nicolaou (41) Ms KC Ramon (39) 6 Transnet Annual Report 2006 Mr FTM Phaswana (61) Mr PG Joubert (73) MA (SA), BCom (Hons) RAU BA (Rhodes), DPWM (Rhodes), AMP (Harvard) Other directorships Director of Companies Anglo American Plc Chairman: Anglo American Corporation of South Africa Ltd Other directorships and trusteeships Naspers Ltd Chairman: BDFM Publishers (Pty) Ltd Chairman: Ethos Private Equity Ltd Hudaco Industries Ltd Cape Mental Health Society Chairman: Munich Reinsurance Company of Africa Ltd Chairman: Cape Town Graduate School of Business, Board of Advisors Chairman: Sandvik (Pty) Ltd Chairman: South African Institute of International Affairs South African Airways (Pty) Ltd Patron: Trauma Centre Chairman: Protekon (Pty) Ltd Transnet Second Defined Benefit Fund Ms M Ramos (47) South African Brain Research Institute Institute of Bankers Diploma (CAIB) (Institute of Bankers), BCom (Hons) (Economics) (Wits), MSc degree in Economics Ms NNA Matyumza (43) (University of London) BCom (University of Transkei), BCompt (Hons) (University Group Chief Executive of Transkei), LLB (University of Natal) Other directorships General Manager: Eastern Region, Eskom Distribution South African Airways (Pty) Ltd Other directorships Sanlam Ltd Born Free Investment (Pty) Ltd Mr CF Wells (56) BCom (University of Cape Town), CA(SA) Mr BT Ngcuka (52) BProc (University of Fort Hare), LLB (University of South Chief Financial Officer Africa), MA (International Relations) (Webster University, Other directorships and trusteeships Geneva, Switzerland) Chairman: Transnet Pension Fund Businessman Dr I Abedian (50) Other directorships and trusteeships BA (Hons) (Economics) University of Cape Town, MA Chairman: Amabubesi Investments (Economics) (University of Cape Town), PhD in Economics STRB Attorneys (Simon Fraser University in Canada) Chairman: V&A Waterfront Holdings (Pty) Ltd Founder and Chief Executive: Pan African Capital Holdings The PA Group Ltd (Pty) Ltd Chairman: City Couriers Growthpoint Properties Other directorships and trusteeships AFReC (Pty) Ltd Mutual & Federal (Pty) Ltd Chairman: PBS (Pty) Ltd Chairman: Basil Read Holdings Ltd Munich Reinsurance Company of Africa Ltd Chairman: Transnet Foundation Trust Chairman: DBSA (Credit Committee) National Business Initiative Mr S Nicolaou (41) Transnet Second Defined Benefit Fund Bachelor of Pharmacy (University of Witwatersrand), International Trade (Institute of International Trade of SA) Prof GK Everingham (56) Group Senior Executive: Strategic Trade, Aspen Pharmacare BCom (UPE), BCom (Hons) (UCT), MAS (Illinois), CA(SA) Holdings Ltd Professor of Accounting at UCT Other directorships and trusteeships Other directorships Aspen Pharmacare International (Pty) Ltd V&A Waterfront Holdings (Pty) Ltd Garec Pharmaceuticals (Pty) Ltd Chairman: South African Express Airways (Pty) Ltd Ms NBP Gcaba (35) Merck Mzisi Foundation BJuris (University of Fort Hare), LLB (University of Natal) Partner at Spoor & Fisher Attorneys Ms KC Ramon (39) Other directorships and trusteeships CA(SA), Senior Executive Programme graduate (Harvard Transnet Retirement Fund Property Trust Business School in conjunction with Wits Business School) Chief Executive Officer: Johnnic Holdings Ltd Dr SE Jonah KBE (56) ACSM, MSc, DIC, DSc (hc) D Phil (Lc) Other directorships Johnnic Communications Ltd President: AngloGold Ashanti Ltd Autopax Passenger Services (Pty) Ltd Other directorships and trusteeships AngloGold Ashanti Ltd Anglo American Corporation of South Africa Ltd Anglo Platinum Ltd African Regional Advisory Board of the London Business School Transnet Second Defined Benefit Fund Transnet Annual Report 2006 7 EXECUTIVE COMMITTEE as at 31 March 2006 The Executive Committee takes responsibility for the execution of the strategy. Standing left to right Seated Mr P Maharaj (Group Executive: Strategy and Transformation) Mr S Gama (Chief Executive Officer: Spoornet) Mr K Phihlela (Chief Executive Officer: National Ports Authority) Ms M Ramos (Group Chief Executive) Mr C Wells (Chief Financial Officer) Ms BS Tshabalala (Treasurer) Mr T Morwe