MHLATHUZE WATER presentation to Portfolio Committee

1. MHLATHUZE WATERpresentation to Portfolio Committee FINANCIAL REPORT - 2008/2009 TARIFFS 2010/11presented by : D. Myeni – Chairperson Vic Botes – Chief Executive N. Nyewula – GM Finance 4 May 2010

2. STRATEGIC DIRECTION • To form strategic partnerships with WSA’s • To establish strategic networks with all role players • To support and assist WSA’s to meet their mandates

3. BUSINESS OBJECTIVES • MW respects position of WSA’s as responsible for water service delivery in area of jurisdiction • MW recognises that WSA’s cannot achieve this on their own • MW to step into this gap to support and co-operate with the WSA’s

4. MW OPERATIONAL AREA • MW’s operational area covers 4½ WSA’s in the Zululand area: • UmhlathuzeLocal Municipality. • Umkhanyakude District Municipality. • Zululand District Municipality. • uThungulu District Municipality. • North of Ilembe District Municipality.

5. OPERATIONAL AREA MAP

6. Operating Areas and Services Provided Projects implemented include: Working for Water, schools sanitation and bulk infrastructure projects

7. AREA OF OPERATION -Analysis Mhlathuze Water’s Area of Operations • Largely rural and poverty stricken; • Impoverished, unemployed community cannot pay for full cost of providing water • Few large businesses within most Municipalities; • Difficulty for Municipalities to attract skills; • Compliance with S19(2) (Priority use of water boards); • Lack of infrastructure and development; • Poor access to water; • Inability to pay for water and infrastructure cost;

8. Relationships with Municipalities • ACHIEVEMENTS : • Successful Partnership with DOE and DWA on School Water Services Programme • Completion of the draft Water Regional Master Plan covering , uMhlathuze City, uThungulu DM , Zululand DM and uMkhanyakude DM • Partnership with uThungulu for Middledrift Scheme project • Negotiations with WSA’s to expand our services • Increase in volumes and Empangeni Phase II – ULM • Tender submitted to Zululand DM ( for O&M) • Tender submitted to Ilembe DM ( for the Upgrade and maintenance of KwaDukuza Wastewater Treatment Plant ) • CHALLENGES: • UMDM – Debt recovery issues, contract expiry • Financially challenged municipalities • Impact on tariff negotiations

9. ACHIEVEMENTS • LABORATORY RECERTIFIED - SANS 17025 • ENVIRONMENTAL RECERTIFICATION -SANS 14001 • KZN TOP BUSINESS IN UTILITY SECTOR • PRISM AWARD – INTERNAL COMMUNICATION • CESA (Consulting Engineers of South Africa ) AWARD ON ENGINEERING EXCELLENCE ON PROJECT GREATER THAN R100 MILLION . • SAICE ( South African Institute of Civil Engineers ) AWARD ON TECHNICAL EXCELLENCE OF C-LINE (Dense effluent ) outfall

10. FINANCIAL ANALYSIS

11. Overview of the income statement

12. ANALYSIS OF THE I/S • REVENUE • 25% (R34,357m) increase attributable to: • 32% (3.6 mega-litres) increase in raw water volumes • Increased off-take by RBM • Tariff increase • average of 10.2% vs 5.8% in 2008

13. ANALYSIS OF THE I/S Cont… • EXPENDITURE • 27% ( R29,496m) increase attributable to increase in • Staff cost (15% - increase in staff complement) • Energy cost (99.9%) • Maintenance material cost – 77% (repair of the dense waste water scheme cost R2.5m) • Depreciation_ B-Line Diffuser replacement project • Extra-ordinary expenditure • CSI project – R12m to assist UMDM

14. Balance Sheet Highlights Non-current assets • increased by 6.2% to 17% in 2009 • B-Line Diffuser Replacement project for Foskor • Nsezi Expansion project only started in April 2009 Current assets • 10 % increase attributable to : • Short term investments ( projects delayed)

15. LIABILITIES NON-CURRENT LIABILITIES • Decrease due to delays in capital projects • No new funding was required • projects funded internally CURRENT LIABILITIES • Interest-bearing borrowings – loans redeemable on 30/06/2010. RESERVES • 19.1 % increase due to net income realised

16. Financial Ratios • Unfavourable - Increase in trade creditors caused by the delays in billing by DWA for government water charges • DWA Receivable of R14,784m caused deterioration of the debtors days and UMDM • 17% Improvement on the prior year

17. OPERATING CONDITIONS • AGED INFRASTRUCTURE • Nsezi plant over 25 years old • refurbishment and expansion – (80% complete to date) • LOW RAINFALL • Pumping from Tugela River to Goedertrouw dam • Increase in electricity bill • Improved water quality • Reduced chemical costs • RECESSION IMPACT • Customers delayed projects • Pulp united, Exxaro and Afluorco

18. AUDITOR’S REPORT • Financial statements were prepared in accordance with SA GAAP, Water Services Act and the PFMA. • Unqualified Audit Opinion for FY2008/09; • No Matters of Emphasis;

19. PRESIDENT’S PROCLAMATION • An investigation by the Special Investigating Unit (SIU) was instituted on the affairs of Mhlathuze Water as per the President’s proclamation: • (Proclamation No. R.35, 2008) • Mhlathuze Water has fully co-operated with the investigation. • Report has not been released

20. TARIFFS 2010/2011

21. BULK WATER TARIFF DWA Bulk Water tariff - 12.6 % IMPACT OF THE ABOVE TARIFF TO MW Overall - 9% on raw water and 4% impact on purified water Above CPI Imply proposed tariff has to be above CPI Current Customer contracts limit the increase to CPI

22. PROPOSED 2010/11 Tariffs The Board of MW approved and proposed increase to DWAE as follows: 22% for Purified Water 18% for Raw Water 10 % for Effluent Average tariff in rand terms : R2.07 to R2.46 (still the lowest tariff compared to other Water Board) SALGA and National Treasury requested motivations and actions on cost savings DWAE Minister approved tariff as proposed

23. Negative economic conditions experienced by our clients played a major factor during the consultative process, Everyone is trying to cut costs in order to survive these challenging times A lower rate was expected by our clients CHALLENGES DURING CONSULTATION

24. CHALLENGES continued… HIGH TARIFFS WERE PROPOSED DUE TO: Aging Infrastructure requiring - High capital expenditure Nsezi upgrade - over R185m excl. interest Empangeni Phase II - over R70m Capital cost to be recovered through tariffs over 20yrs Loan term limited to 15yrs maximum Interest rate at 12% average High Energy cost increase 31% from Eskom 34% from uMhlathuze Municipality Reduced consumption volumes Previous years shortfall due to tariff adjustment from proposed 18% to 14% +/- R5m shortfall on Revenue

25. CHALLENGES Unresolved objections to Tariff increase Customers only prepared to take CPI related increase – 9.1% Customer contracts limit the increase on CPI and Anything above CPI to be agreed with customers Big challenge since recession Negotiations ongoing Municipality – option of increasing their volumes Impact of objections on Mhlathuze Water MW will be in a deficit position for more than 2-3years which is unfavourable 1/6/2020 25

26. IMPACT OF RECESSION ON VIABILITY OF MW WITH RECOMMENDED TARIFF MW will not be able to recover all capital costs, create the necessary reserves to fund new planned projects Reduction in consumption Volumes Most consumers have reduced their volumes Due to reduced productions Challenges in securing new business Most proposed projects have been delayed and others withdrawn 1/6/2020 26

27. MW 5Point Turnaround Strategy • Review pricing strategy and take corrective measures to achieve full recovery • Restructure the organization to reduce and optimize overhead costs (indirect costs are 51% of total cost) • Re-direct investment into maintenance to prevent future shocks • Reconstitute the Infrastructure Project Department into a Profit Centre • Re-structure to inculcate succession to ensure retention of skills

28. We are confident that • With the turnaround intervention approved by the Board, • MW will return to a surplus position in 2 years. THANK YOU