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VIRGIN ACTIVE SOUTH AFRICA

NERSAPublicHearingsEskom’sRegulatoryClearingAccount(RCA)Applica>on

ThirdMul>YearPriceDetermina>on(MYPD3)18/19January2016

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Virgin Active South Africa

n 124 clubs in Southern Africa, suppor>ng c.13,500 employees and contractors andwithmorethan730,000members thebusiness is the largesthealthandfitness facilityprovider inSouthAfrica

n OurclubsarepricedfromR199toR1,900andcatertoarangeofmarketsegments.

n VirginAc>vereceivedtheSouthAfricanAssocia>onofEnergyEfficiency'sEnergyPatronAwardin2012.

Costsescala*onsof22%p.a.since2007

n OurelectricitybillhasrisenfromR34min2007toR170min2015aCAGRof22%.Thisismorethan4>mesinfla>on.

n ThishasresultedinourElectricitycostasa%ofrevenueincreasingfrom2.8%to4.9%.ThisisdespiterevenuegrowingataCAGRof14%.

Priceincreasescouldnotbecompletelyabsorbed

n Capitalinvestmentandbestprac>ceefficiencieshaveallowedustosaveanaverage4.5%p.a.inconsump>on,buts>llmeantthatwehavehadtopassapor>onofthegrowingelectricalcostontoourmembers.

n This placesmember volumes under pressure,meaning fewer consumers can enjoy a healthylifestyle.Inabilitytoaccesshealthylifestylesop>onsmeanslessproduc>vityforemployeesandincreasedpressureonthepublichealthcaresystem.

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Consumption, efficiency and sustainability n VirginAc>vecurrentlyconsumeanaveragec.11,000MWH a month and c.131,000 MWH annually. Wean>cipate this to grow as we open further clubswithin South Africa and Africa and it becomesincreasinglydifficulttodrivefurtherefficiencies.

n  Through consump>on savings ini>a>ves, includinginvestment of over R100m and best prac>ce, wehave saved on average 4.5% annually on our 2011like-for-likebaseconsump>on.

n  Efficicnciesacrossourexis>ngclubshaveanabledusto slightly reduce overall consump>on despite 7-10newclubopeningsperannum.

n With 150,000+ members per day acessing ourfacili>es,webelieveVirginAc>veis:

1.  an efficient alterna>ve to many people allshowering in their homes – the scale andefficiency of our water hea>ng plants is fargreaterthanindividualhomegeysers

2.  a useful way of spreading the morning andeveninghomeconsump>onpeak

3.  An important catalyst in enriching peoples livesthroughac>venessandhealthylifestyles

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Recommendation to NERSA on the RCA MYPD3

n The reasons advanced by Eskom, in par>cular the R11.7bn revenue shorfall and R14.2bn ofaddi>onalPrimaryEnergyspend,donotwarrantarecoverythroughtheRCA/tariffincreases.

n The R11.7bn revenue shorfall resulted from lower than an>cipated electricity sales which,togetherwitha lowerEnergyAvailabilityFactor (“EAF”)of75%vs.anassumedEAFof82%–83%shouldhave resulted incommensurateopera>ngand inputcost savings. Noneof thesehavebeendetailed.

n It isnotclearwhethertheR14.2bn inPrimaryEnergycostsdrivenbyOCGT(R8bn),addi>onalcoal spend (R2bn), IPP spend (R1.7bn) and Other Primary energy (R2.5bn) could have beenavoided throughbekermanagementandplanning. Un>lNERSAestabishes this conclusively,theconsumershouldnotbebearingthesecoststhroughtherecoverymechanism.

n Business is no longer able to absorb further tariff hikes, par>cularly given the impact on analreadyweakSouthAfricaneconomy.

n Afurthertariffincreasehasamassivecompoundingeffectandisbakedintothebaseforever-compoundeffectsofpreviousyears'increasesshouldbemorethansufficientforEskom.

n Allowing Eskom’s proposed increases has the poten>al to perpetuate the poormanagementandplanningissuesatEskom.Tariffsareeasilyusedasaconvenient"releasevalve"ratherthanEskom being forced to find more innova>ve ways to address their issues (including variousinputs,capitalplanningandmaintenanceschedules).

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Recommendation to NERSA on the RCA MYPD3

n ItisacknowledgedthatthereisanewleadershipteamatEskom,buttheyare,asyet,unproven.Theycameonboardattheendofthelastmajormaintenanceoutagesandhaven’tledthroughthecrucialwintermonths. ItwouldbebekerforNERSAtoconsidertheneedforfurthertariffincreasesaoerthe impactofthenewmanagementteamonaddressingEskom’schallenges inotherways,hasbeenassessed.

n Intheabsenceofacompe>>vemarketforelectricitysupply,NERSAisobligedtoplaytheveryimportant roleofprotec>ng theconsumer fromEskommerely increasingprices,we feel thatthis includes not allowing the recovery through the RCA and proposed addi>onal tariffincreases.