Annual report for the 2015/16 financial year Magalies Water PRESENTATION TITLE Presented by: Name Surname Directorate Date

CONTENTS Part 1: Overview of financial performance Part 2: Overview of non-financial performance Part 3: Tariff management Part 4: Kgetleng Rivier Local Municipality drought relief measures

Part 1: overview of financial performance

Statement of financial performance – audited outcomes: 30 June 2016 2015 Variance REVENUE Revenue from exchange transactions 455 163 411 535 10% EXPENDITURE Employee benefits costs 119 663 101 873 15% Operating expenditure 271 757 241 518 11% Depreciation, armotisation and impairment 29 413 32 984 -12% SURPLUS 34 330 35 160 -2%

Statement of Financial Position – Audited outcomes: 30 June 2016 2015 Variance ASSETS Current Assets 400 873 569 132 Cash and cash equivalents 36 412 17 130 53% Receivables from exchange transactions 231 088 336 315 -46% Financial Assets 110 220 193 650 -76% Inventory 23 153 22 037 5% Non-current Assets 1 975 332 1 598 901 Property Plant and Equipment 1 934 455 1 579 514 18% Intangible Assets 40 877 19 387 Total Assets 2 376 205 2 168 033 9% LIABILITIES 1 132 486 975 291 14% Current Liabilities 264 969 239 781 10% Payables from exchange transactions Non-current liabilities 867 517 735 510 15% Financial Liabilities: Deferred Income EQUITY 1 243 719 1 192 742 4% Accumulated Surplus Total equity and liabilities

Key financial ratios 2016 2015 Commentary Liquidity: Current Ratio 1.6 2.3 Liquidity decreased due to collections from debtors and funds utilised for capex programme. Cash generated from operations R217million R130million Positive cash was generated by Magalies Water from its own operations Debtors days 50 days 62 days Reduction in creditors days was mainly due to collection from debtors, especially the Department of Water and Sanitation Creditors days 27 days 46 days Processes for timely payments of creditors were instituted. Return on Equity 4% 5% Magalies Water profitably traded from its own operations

Analysis of expenditure Compensation of employees 30.5% Goods & services 69.5%

Analysis of Irregular expenditure (a) Non compliance with Procurement Policy: R3million incurred without following compliance to the procurement policy. Employees implicated have been subjected to disciplinary hearings (b) CIDB Regulation not complied with in awarding the contract: R3.4million incurred in the 2015/16 financial year. The contract was evaluated in three phases and awarded to a single contractor in 2014. This irregular expenditure was first reported in the 2013/14 financial year and therefore successively reported from the previous financial years (c) Non compliance with delegations of authority: R9million was incurred and relates to a contract that was paid over the original contract value. This expenditure was first reported in the 2013/14 financial year and therefore successively reported from the previous financial years. (d) Non compliance with Preferential Procurement Regulations: R50.5million was incurred in the 2015/16 financial year. This irregular expenditure was first identified in the 2014/15 financial year and thus successively reported from the prior financial year. Various Bid Committees have been trained in technical aspect of the Preferential Procurement Regulations No financial losses were suffered by Magalies Water in the conduct of above transactions

Fruitless and Wasteful Expenditure 2015/16 2014/15 R'000 Opening balance 5 Fruitless and wasteful expenditure – relating to current year 4 46 Fruitless and wasteful expenditure condoned during the financial year (51) Fruitless and wasteful expenditure relates to a supplier who charged interest on account. This was due to technical challenges encountered during implementation of the SAP system

OVERVIEW OF audit report

Analysis: Audit Opinion 2011/12 2012/13 2013/14 2014/15 2015/16 Unqualified Number of matters raised in the management letter - annually

Part 2: overview of non-financial performance (PERFORMANCE AGAINST THE SHAreholder compact)

Analysis: achievement of the strategic oriented goals

Analysis of performance-Customer and Stakeholder perspective Performance Objective Indicators Target: 2015/16 Actual Performance: 2015/16 Achievement indicator Water quality compliance Test results, SANS 241 Acute health-100% Chronic health-97% Operational-95% Aesthetic -95% Acute 1 -97.4% Chronic health – 99.5% Operational -95.7% Aesthetic – 96.6% Non-revenue water Water lost as a % of total water produced 5% 5.9% Reliability of supply % number of days supply disrupted / total number supply days 0% Achieved (100%) Achieved (100%) Achieved (100%)

Analysis of performance-Customer and Stakeholder perspective Performance Objective Indicators Target: 2015/16 Actual Performance: 2015/16 Achievement indicator Increased access to services Actual spend on expansion related projects (initiatives by the Minister as a % of budget) 50% 43% Bulk supply agreements concluded with municipalities % municipalities with bulk supply agreements 100% Implementation of ministerial directives % progress against implementation plan Achieve statutory reporting compliance % submission dates met Partially achieved (50 – 99%) Achieved (100%) Achieved (100%) Achieved (100%)

Analysis of performance-Finance perspective Performance Objective Indicators Target: 2015/16 Actual Performance: 2015/16 Achievement indicator Improve financial ratios Current ratio 2 1.6 Gross profit margin 17% Net profit margin 12% Return on Assets 5% 4% Debtors days 50 days Repairs and maintenance as % of PPE 5.3% Staff costs as a % of operating expenditure 33% 30% Financial reporting compliance Unqualified Audit report Unqualified opinion Increase operational expenditure in relation to operational projects % of operation expenditure awarded to SMME 20% 27% Manage costs within the approved budget Expenditure variance 10% 9% Engagement in secondary activities % of total turnover 6% Capital expenditure programme Overall capital projects completion milestone within target 100% 65% Partially achieved (50 – 99%) Achieved (100%) Partially achieved (50 – 99%) Achieved (100%) Achieved (100%) Achieved (100%) Achieved (100%) Achieved (100%) Achieved (100%) Achieved (100%) Partially achieved (50 – 99%)

Analysis of performance-Processes perspective Performance Objective Indicators Target: 2015/16 Actual Performance: 2015/16 Achievement indicator Board effectiveness % Board members attendance of all Board/Committee meetings 100% 96% Decision making:%number of resolutions vs number of resolutions required Effective internal controls and risk management Number of internal audit findings   0 Repeat findings 0 Unresolved findings Good governance Breaches of materiality and significance framework 0 breaches of materiality and significance framework Corporate Social Responsibility Number of initiatives undertaken 6 CSI programmes Partially achieved (50 – 99%) Achieved (100%) Achieved (100%) Achieved (100%) Achieved (100%) Achieved (100%)

Analysis of performance-Learning and Growth perspective Performance Objective Indicators Target: 2015/16 Actual Performance: 2015/16 Achievement Indicator Staff levels Staff turnover 3% 1.32% Jobs Created Total Number-Direct 24 22 Total Number-Indirect 500 259 Training and skills development Training courses, learner-ships, bursaries Internal and external bursaries-30 Internships-10 Learnerships-20 Internal and external bursaries-36 Increase BBBEE spend   % of contracts awarded to black owned companies awarded on the capital expenditure 30% 43% Achieved (100%) Achieved (100%) Achieved (100%) Achieved (100%) Achieved (100%)

Performance Indicators not achieved Performance Objective Indicators Target: 2015/16 Actual Performance: 2015/16 Factors that contributed to partial achievement of performance objectives Capital expenditure programme   Overall projects expenditure to budget 92% 39% Project expenditure and milestones were not met due to funding shortfalls as funding was not available to carry out the committed capital expenditure budget to an amount of R1 billion. Projects milestones and expenditure were however prioritised on the basis of available funding to an amount of R395 million which was fully utilised for the financial year. A funding model, which is aligned to the capital expansion master plan and budget will be implemented in the 2016/17 financial year.

Part 3: TARIFF MANAGEMENT

Funding Philosophy Magalies Water is a self-funding entity No reliance on National Government Grants or Subsidies for operations The entity operates on a commercial basis Has adequate reserves to continue as a going concern

Considerations in determination of tariffs National Water Pricing Strategy - The increases in the price of raw water are determined by the DWS in terms of the Raw Water Pricing Strategy. Affordability to end users Financial sustainability to ensure recovery of operations and maintenance costs Capital tariffs to make provision for current and future capital expansion Cost drivers informing the tariffs are competitive, and are determined by the market forces - prevailing economic conditions have been considered in determining the tariffs Inflation targeting – The inflation rate has been taken into account

Tariff determination process Tariffs are indicative of operational and prevailing economic conditions The tariff structure consists of operations and maintenance component and capital tariff Tariffs are scheme based and independently determined per bulk water scheme on four bulk water schemes owned by Magalies Water Affordability to end consumer is considered through harvesting of efficiencies in our operations Consultation processes is carried out with customers in compliance with Section 42 of the MFMA Written comments received from the WSA’s and other stakeholders are taken into account

Proposed tariffs – 2017/18 Plant Tariff-2016/17 R/KL % increase Vaalkop 5.28 11.63% 5.79 9.66% Klipdrift 6.33 12.08% 6.98 10.27% Wallmannsthal 8.38 12.33% 9.93 9.67% Cullinan 6.02 9.65% 6.57 9.14%

Part 4: Kgetleng Rivier Local Municipality drought relief measures

Background of the intervention Swartruggens and Borolelo are supplied with potable water from the Swartruggens Water Treatment Plant (WTP) The demand from the dam exceeds the yield of the dam and the area runs out of water during the dry season of every year Dam is silted up and constructed in an area where slate or mudstone dominates the geology of the basin hence the dam leaks

Water Demand Projections – sourced from census 2011 Average annual daily demand: 250ℓ per capita for formal areas; and 125ℓ per capita for informal Summer peak factor of 1.5 20 % allowance for losses and unaccounted for water. Overall seasonal peak demand is equal to 4.5 Mℓ/d - 2030 DWS all town study – 5 Mℓ/d - 2030

Long Term Solution

Medium Term Solutions Importing raw water from the Lindleyspoort Dam Increasing the storage of the Swartruggens Dam to increase the safe yield Importing water from the dolomite areas some 40 km to the south of town; and Re-using treated sewage effluent

Dolomitic Water Import water from the dolomites; and Augment raw water supply at the Swartruggens Dam Quick solution – Can take approximately 4 months to implement Water tested – positive results (quality & quantity) Pipeline designs completed Land issues resolved EIA Authorisation Implementation ready

Source Development

Route Analysis Route A (Preferred): makes use of the shortest path, gravitating water from the dolomite area to the Swartruggens Water Treatment Works.   Route B: using an alternative route, the water has to be pumped for the first half where after the water gravitates to the Swartruggens Water Treatment Works with the ability to gravitate water to Mazista. more input energy from the boreholes. It was calculated that the first 20km of the pipeline will have to be pumped. The additional energy required was calculated at 40.57Kw.

Hydraulic Analysis Dynamic Pressure (m)

Hydraulic Analysis Option 1 - A combination of GRP PN10 (22km) and PN25 (13km) material Option 2 - A combination of GRP PN 10 (32,5km) and PN25 (1,5km) material including a Pressure reducing valve Option 3 – A combination of uPVC (22km) and oPVC PN 25 (13km); and Option 4 – uPVC the entire route including a pressure reducing valve

Total project cost estimates for the four options   22km PN10 GRP 13km PN25 GRP 32.5km PN10 GRP 1.5km PN25 GRP Pressure reducing valve 22km Class 9 uPVC 13km PN25 oPVC 32.5km Class 9 uPVC 1.5km Class 16 uPVC Pressure reducing valve Total Construction Value (excl. VAT) R129,640,752 R122,091,088 R112,067,952 R110,095,888 Professional Fees and Disbursements R22,108,089 R21,017,162 R19,568,819 R19,283,856 Total Project Value (excl. VAT) R151,784,841 R143,108,250 R131,636,771 R129,379,744 Total Project Value (Incl. VAT) R173,000,000 R163,150,000 R150,070,000 R147,500,000

Thank you