1. MHLATHUZE WATER/AMANZI
PRESENTATION OF THE 2017/18 ANNUAL REPORT
Presented by
Mr Mthokozisi P. Duze
(Interim Chief Executive)
06 MARCH 2019

2. Presentation Content Background Financial year highlights Governance
Overview of organisational performance
2017/18 Audit Outcome
Operating statement
Statement of financial position
BBBE/BBE Spend
Reflections

3. Background
Mhlathuze Water is one of South Africa’s leading water utilities providing services mainly to the Northern KZN
Area of operation extends to the entire KZN province
Supplies raw, clarified and potable water to both municipal and industrial customers
Owns and operates one of the biggest off-shore effluent disposal systems in the country
Implements water and waste water infrastructure projects on behalf of various government departments
Provides operation and maintenance services on water and waste water bulk infrastructure to municipal and industrial clients
Operates and maintains the Tugela-Goedetrouw Inter-basin Transfer Scheme on behalf of DWS

4. Financial Year Highlights
Drought interventions
Nongoma and Abaqulusi projects – identification and protection of water sources, and borehole reticulation. Benefiting a total of approximately 3379 households
Reservoirs at the Nsezi Water Treatment Plant
Construction of two 20 Ml reservoirs completed and the system has been commissioned
SCADA Phase 2
The Nsezi Water Treatment Plant operates on an automated system with all relevant pumpstations
Pump station upgrades
Tronox Pumpstation upgraded and commissioned in February It is now able to meet the future demands for the areas it supports
Upgrade of electrical works and pumps at the Mondi Pumpstation completed, now operational
Empangeni Pumpstation upgraded and commissioned in February 2018

5. Independent Audit and Risk Committee
Governance
Accounting Authority
Mhlathuze Water Board was dissolved on 26 April 2017 and the Minister appointed the Interim CEO as an Accounting Authority until the new Board is appointed
Process of appointing Board commenced in May 2018 and the new Board was subsequently appointed on the 05th December 2018
Independent Audit and Risk Committee
An Independent Audit and Risk Committee was appointed in August 2017 to oversee all strategic financial and risk matters

6. Overview of organisational performance
Out of the 41 planned Shareholders Agreement targets, 28 were achieved, which accounts for 68% of the planned targets
13 (32%) targets were not achieved

7. Overview of organisational performance 13 targets not achieved
Objective 13
Unachieved annual target
Redress
Build Relationships with stakeholders 2
Unable to support 2 municipalities in Rural Development
Adopted a targeted approach according to MW mandate.
As at December 2018, 1 municipality for support
Unable to contract 9 bulk agreements
Contracted 7 customers with valid agreements with 1 of the 7 customers having signed 2 extensions. [9] However AG opinion that it remains 7 customers
As at December 2018, the achievement is 7
Compliant with statutory obligations 5
Unable to submit 2016/2017 AR by 31 October
Delayed audit process caused the AR to be submitted on 13 November
For 2017/2018: the Audited AFS and Audit report submitted to DWS on 31 October 2018
Published version of AR submitted to DWS submitted on 30November 2018
Unable to meet unqualified audit opinion
Qualification
Unable to meet 0 breaches of materiality
8 breaches
0 internal audit findings
31 findings
0 unresolved internal audit findings
26 unresolved

8. Overview of organisational performance 13 targets not achieved
Objective
Unachieved annual target
Redress
Long term financial viability 3
Unable to meet ≥80 of gross profit margin
Achieved 57% due to adjustments in GRAP standard requirements
As at December 2018 achievement is 68%
Unable to meet ≤30% remuneration costs to operating budget
31%.
As at December 2018, the achievement is 26%
Unable to spend 90% of the allocated budget
81.68% expenditure.
Cost containment strategies are effective
As at December 2018, the achievement is 89.68%
Resourcing the organisation 2
Unable to maintain <5% staff turn over
Achieved 6.55%
As at December 2018, the achievement is 2.76%
Unable to award 25 internal bursaries
Achieved 18
As at December 2018, the achievement is that 5 applications received and adjudication process underway
Environmental and Safety compliance 1
Unable to meet 0 incidents of health and safety
1 employee suffered a reportable injury
As at December 2018, the achievement is 0

9. Overview of organisational performance
A Clean Audit was received on performance information for 2017/2018
This compared to the 2016/2017 set of performance information that was riddled with qualifications.
A single, but minor issue was raised in the management report.
This related to the targeted number of bulk agreements. However, the matter was corrected as recorded on the Annual Report
Based on performance of 68% for 2017/2018, no performance bonuses were paid to any management staff

10. FY 2017/18 Audit
An overall qualified audit opinion was expressed by the AG
Qualification emanated from:
Receivables From Exchange Transactions:
Overstatements of Accounts Receivables on Secondary Activities (Section 30) – inter-divisional journals not eliminated on consolidation at year end

11. FY2017/18 – Irregular Expenditure
All new Irregular Expenditure resulted from:
Spend > R500k on contracts entered into using an RFQ process
Deviation from SCM process not approved
Prior years Irregularities balance (R248,7m)
Process followed to date:
Investigations on all confirmed Irregular Expenditure concluded
Disciplinary processes concluded
Criminal charges laid with SAPS
Accounting Authority submitted request seeking condonation from National Treasury
Way forward:
Referral to Accounting Authority for removal

12. FY 2017/18 Inherent Risks
The following inherent risks were identified by the AG:
Investigations into potential fraudulent activities:
The Chief Executive being on suspension pending finalisation of the forensic investigation and legal action
Some of EXCO members were subjected to forensic investigation & disciplinary process relating to non-compliance with SCM policies
Fraud risk factors that may lead to misstatements due to fraud:
Possible overpayment of claims on invoices due to not having adequate & complete contracts register
Unjustified variation to capital projects resulting in irregular, fruitless and wasteful expenditure
Media articles & whistle-blower reports of potential irregular, fruitless and wasteful expenditure

13. FY 2017/18 Inherent Risks
The majority of the irregularities emendated from prior year audit periods, but only discovered during the 2016/17 audit period and some projects are still under implementation which led into the irregularities rolling over to the 2017/18 financial year
An Audit Recovery Plan was developed to address findings arising for the AG audit
Good progress in resolving findings noted by AG has been reported by Internal Audit. Majority of findings have been addressed and will be audited by the AG during their interim audit in April 2019.

14. FY2017/18 - Operating Performance
The Surplus for the Year increased by 22% from prior year due to cost containment measures amidst lower water sales volumes

15. FY2017/18 - Operating Performance
Revenue is earned in the following operating segments:
Section 29 (Bulk Water Sales & Waste Water Disposal)
Section 30 (Operating & Maintenance; Project Implementation)

16. FY2017/18 - Operating Performance
Steady increases amidst drought
conditions

17. Statement of Financial Performance
FOR THE YEAR ENDED 30 JUNE 2018
2018
2017
Note
R'000
Revenue from exchange transactions
Sale of goods and services 12
Cost of Sales 13
( )
( )
Gross Profit
Other income 15
17 400
14 414
Expenditure
( )
( )
Employee related costs 16
(93 107)
(86 920)
Remuneration of board members 17
(620)
(2 679)
Depreciation and amortisation
5-6
(7 852)
(6 386)
Finance costs 18
(6 021)
(9 850)
Lease rentals on operating lease
(2 805)
(2 566)
Debt impairment -
(293)
Repairs and maintenance 20
(48 088)
(40 748)
Electricity and water
(1 914)
(2 026)
Chemicals
(796)
Other expenses 21
(74 745)
(81 918)
Operating surplus
88 008
72 255
Gain (loss) on disposal of assets 23
(6 058)
(2 815)
Surplus for the year
81 950
69 440

18. FY2017/18 – Financial Position
Current Ratio
Debt Equity Ratio
Stronger liquidity status & less reliance on financing
asset acquisitions, thus reduced risk exposure.

19. FY2017/18 – Financial Position
Interest Turnover Ratio Return on Assets Debtors Days
Stronger ability to service interest on outstanding debt
Significant improvement in efficiencies in utilising assets to generate earnings
Great effort in collection of debtors, thus improving cash flows

20. Statement of Financial Position
ANNUAL FINANCIAL STATEMENTS
STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 2018
Note
2018
2017
R'000
ASSETS
Restated
Current assets
Inventories 2
32 828
30 587
Receivables from exchange transactions 3
Cash and cash equivalents 4
Non-current assets
Property, plant and equipment 5
Intangible assets 6
4 643
6 645
Total assets
LIABILITIES
Current liabilities
Short term interest bearing borrowings 7
22 110
Payables from exchange transactions 8
Vat payable 9
1 389
1 735
Employee benefit liability 10
16 645
13 206
Income received in advance 11
7 965
Non-current liabilities
Long term interest bearing borrowings
79 679
279
258
63 189
71 154
Total liabilities
Net assets
Capital replacement reserve
Business development reserve
17 601
16 220
Self insurance reserve
5 124
4 722
Maintenance reserve
9 514
8 768
Environmental rehabilitation reserve
2 370
1 410
Accumulated surplus
Total net assets
Total net assets and liabilities

21. BBBEE/BBE Spend
The target for 2017/18 was 50.1% of discretionary spend on black owned companies
The total spend on goods and services was R365m of which R194m was spent on black owned companies
The actual achievement was 53,14%

22. Tariff Proposal for FY2019/20
As per Circular 23 of the MFMA, Mhlathuze Water engaged the Water Services Authority (City of uMhlathuze) on proposed tariffs for FY2019/20.
This engagement was further extended to other industrial customers, to create transparency.
The proposed tariff pack was submitted to the Department of Water & Sanitation within set deadlines, to allow for consideration & tabling by the Minister.
The tariff proposed for the Water Services Authority is discounted as an initiative to give back to the community.

23. Variable Operating Costs Variable Raw Water Costs (TRWP factor)
TARIFF COMPONENTS
Capital Charges
(C-Factor)
Depreciation and Finance charges
Fixed Operating Costs
(A-Factor)
Payroll, Maintenance, Fixed Electricity and Operating Costs
Variable Operating Costs
(Tc-Factor)
Variable Electricity and Chemicals
Variable Raw Water Costs (TRWP factor)
Government Levies
MW accounts for Schemes, Connections and Central services in
dedicated cost centres. The Central Services are then apportioned to Schemes by means of an Activity Based Costing system. The reporting and budgeting process follows this structure in order to arrive at the cost pertaining to each Scheme Tariff components.
Capital charges (C-Factor)
Depreciation and Finance charges
Fixed Operating Costs (A-Factor)
Payroll; Maintenance; Fixed Electricity and Operating Costs
Variable Operating costs (Tc-Factor)
Variable Electricity and Chemicals
Variable Raw Water Costs (TRWP factor)
Government levies

24. PROPOSED TARIFFS

25. PROPOSED TARIFFS

26. GOVERNMENT LEVIES Government levies comprise of the following:
Water Research Levy (increases 1st of July)
Water Resource Management Fee (increases 1st of April)
Water Use Tariff (increases 1st of April)
The current DWS proposal is as follows:

27. PROPOSED TARIFFS

28. PROPOSED TARIFFS DROUGHT

29. Reflections The Financial Overview has highlighted operational
challenges mainly due to the current drought which has
exerted some pressure on the financial sustainability of
the organisation.
The organisation has however shown great resilience through these turbulent times and remains sustainable in the medium to long term.
Although the impact of the drought is short term, the organisational culture needs to be improved to focus more on better management of operational expenditure and cash flows, prioritisation of capital projects and the driving of the growth strategy.

30. THANK YOU