Rand Water

TARIFF CONSULTATION PROCESS

10TH OCTOBER 2011

1

2

• DWA / TCTA raw water pricing6th Oct 2011

• Customer consultation10th Oct 2011

• Customer notification30th Nov 2011

• Submission to DWA 10th Dec 2011

• Parliamentary approval15th Mar 2012

• Customer Notification of Parliamentary Approval 15th April 2012

PROCESS AND IMPORTANT TIMELINES

3

DRIVERS

• Municipal Finance Management Act: 6 months advance notice

• National Treasury & SALGA: 40 days for consideration

• Bulk Water Supply Contract: prior consultation and information sharing

4

Rationale for tariff increment

• Rand Water has followed a consistent rationale for increasing its tariff over the years.

• This rationale has been based on assessing the Rand Water internal rate of inflation.

• This is a projection of the expected increase in total costs.

• A breakdown of the total costs and their overall expected rate of price increase is then proposed as the proposed tariff increment.

2004 2005 2006 2007 2008 2009 2011 2011 20124.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

9.0%

5.7%

5.3%

5.0%

4.5%

5.6%

8.3%

14.1%

12.9%

Historical Tariff Increments

5

Raw Water Tariff Increment

2012/2013 % ChangeBeginning of the year tariff 39.698ROA (PPI - April) 18.41 0.89%Depreciation 11.02 5.15%Non-pumping O&M (incl. functional support) 6.86 1.78%Pumping 4.71 112.16%Functional Support 2.14 6.47%Total DWA unit cost 43.14 8.67%

DWA Raw Water Charge (cents / m3)

• In previous years, lower tariff increments have been followed by high tariff increments, as shown above.

• This makes the exercise of multi-year tariffs difficult to achieve.

Year 2004/5 2005/6 2006/7 2007/8 2008/9 2009/10 2010/11 2011/12 2012/13

Tariff (cents / m3) 28.34 26.82 26.82 27.81 32.16 41.36 52.356 39.698 43.14% Increase -5.30% 0% 3.10% 15.70% 28.60% 6.50% -24.18% 8.67%

History of DWA Raw Water Tariff Increments

6

Consumer Price Index (CPI) Adjustment - Phase 1 • This covers the outstanding debt of Phase 1 of

the Lesotho Highlands Water Project (LHWP). This increased by 4.60 per cent (8.95 cents / m3). This increase coincides with the May 2011 CPI figure, as formulated by the TCTA model.

Phase 2 – Lesotho Highlands Water Project (LHWP)• This relates to the second phase of the LHWP.

Therefore, the tariff overlaps the two phases.

2012/2013 % ChangeBeginning of the year tariff 194.52CPI adjustment (CPI - May) 8.94792 4.60%LHWP - Phase 2 in Portion 1 of 6 3.86 1.98%Total TCTA unit cost 207.328 6.58%

TCTA Raw Water Charge (cents / m3)

Trans – Caledonia Tunnel Authority (TCTA)

7

3.0%

3.5%

4.0%

4.5%

5.0%

5.5%

6.0%

4.2%

3.7%

3.5%3.2%

3.4%

3.6%3.5%

3.7%3.7%

4.1%4.2%

4.6%

5.0%

5.3% 5.3%

5.2%

5.9%

5.4%

6.2%

5.7%

CONSUMER PRICE INDEX

8

2012 2013 2014 20155.0%

5.2%

5.4%

5.6%

5.8%

6.0%

6.2%

5.7%

5.4%

5.6%

5.5%

5.9%

5.4%

6.2%

5.7%

Comparison of BER Projections Between 2010 and 2011

BER PROJECTIONS IN 2010

BER PROJECTIONS IN 2011

9

Energy Costs

Rand Water has to take into consideration tariff increments of 24.8 per cent : 201125.2 per cent : 201226.1 per cent : 2013 This is a huge imposition on Rand Water input costs which many customers struggle to understand.

Rand Water receives its energy from Eskom as well as three other municipalities. Therefore Rand Water still has to pay an additional energy tariff increment from the three municipalities over and above the 26.1 per cent energy tariff increment. A historical trend analysis shows that these municipalities have increased an additional 12.5 per cent over the tariff imposed by Eskom.

In addition, this is an increment to an already higher tariff.

Eskom - R0.4752 per kWhRange of municipal tariffs - R0.6211 - R0.7782 per kWh

oEkurhuleni ~ R0.8923 88%oCity Power – Joburg ~ R0.9813 107%oEmfuleni ~ R0.7832 65% R 2,009.00 R 2,010.00 R 2,012.00 R 2,013.00

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

22.0%

9.5%

14.3%

17.9%

21.6%Composition of Energy In

Total Costs

10

Energy management

Energy Efficiency improvement

Energy Efficiency improvement

CogenerationCogeneration OtherOther

Security of supplySecurity of supply Tariff minimizationTariff minimization

Energy Cost optimization Energy Cost optimization

2007 2008 2009 2010 2011 2012 -

10

20

30

40

50

60

70

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Cost of energy

c/kWh % growth yoy

c/k

Wh

2007 2008 2009 2010 2011 440

445

450

455

460

465

470

475

480

485

-6%

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

Energy usage

kWh/ml % growth yoy

kW

h/m

l

11

Chemical Costs

• An important component of chemical costs is that some of the chemicals are imported.

• Therefore, it is important to take note of the current weakening of the Rand.

• Taking into consideration the rising CPI, chemical costs are expected to increase by 12.5 per cent.

6.00

6.50

7.00

7.50

8.00

8.50

9.00

9.50

7.68

7.35

7.31

6.96

6.98

7.11

6.64

7.19

7.006.85

6.60

6.926.85

6.67

7.09

8.03

8.108.03

8.45

8.89

9.18

R / US$ EXCHANGE RATE

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Chemical costs analysis

2006 2007 2008 2009 2010 2011 Budget Budget 2012 2006 2007 2008 2009 2010 2011 Budget Budget 2012

% growth in chemi-cal costs yoy

0.168655529037391

0.147719537100069

-0.420041518

386714

0.280954377639829

0.363216849097427

0.431357505549147

0.202945990180033

R'000/mgl/d

42.49 45.89 26.77 33.18 45.90 63.27 76.07

-45%-35%-25%-15%-5%5%

15%25%35%45%

5

15

25

35

45

55

65

75

42.49 45.89

26.77 33.18

45.90

63.27 76.07

% growth in chemical costs yoy R'000/mgl/d

R,00

0

Water volume increases

Chemical prices increases

Treatment option (organic coagulants or hydrated lime and activated silica)

Required chemical dosage increased

Turbidity deteriorated over the period

• Revenue increased driven by a 4% increase in volumes compared to 2009/10.

• Normal growth in volumes of 2% projected going forward.

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for the year ended 30 JuneActual

2009/10Budget2010/11

Budget2011/12

Income statement

Revenue 4 960 5 866 6 699

Cost of Sales (2 435) (2 702) (3 031)

Gross Profit 2 525 3 165 3 669

Financial Performance

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for the year ended 30 JuneActual

2009/10Budget2010/11

Budget2011/12

Income statement

Gross Profit 2 525 3 165 3 669

Other operating income 48 91 81

Staff costs (934) (978) (1 093)

Energy (688) (900) (1 164)

Chemicals (170) (244) (294)

Other operating expenses (289) (347) (328)

EBITDA 492 751 871

Depreciation and amortisation (167) (178) (192)

Income from operations 325 572 679

Financial Performance

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Funding Sources for Capex

2010 2011 20120

200

400

600

800

1000

1200

1400

1600

935 1013

481

963

External funding

Internally generated

R’m

• Capex funding released from the redemption reserve of RW02 bond which was switched to RW21 amounting to R468m.

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for Financial Year Ending 30th June 2013

Price Forecast Percent WeightedYear-End ~ 30 June increase 2013 of total

% R m % %

TCTA 8.18% 2888 40.7% 3.5%DWA 10.3% 590 8.3% 0.7%Raw Water 8.5% 3478 48.9% 4.2%Energy - Eskom 26.1% 808 11.4% 3.0%Energy - Municipalities 38.6% 726 10.2% 3.9%Chemicals 12.5% 330 4.7% 0.6%Multi-Partnered Uncontrollable Costs 5342 75.2% 11.7%Labour 8.2% 1165 16.4% 1.3%

Other 5.4% 598 8.4% 0.5%Total 7105 100.0% 13.5%

Target bulk tariff increase 13.5%

Bond Raised (R m) 1151

Rand Water Tariff = Rand Water Internal Inflation

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Thank You

18

Cost Comparison

Previous Year Current YearRaw Water 7.4% 8.5%Energy - Eskom 25.2% 26.1%Energy - Municipalities 37.7% 38.6%Chemicals 10.0% 12.5%Labour 9.8% 8.2%Other 11.6% 5.4%

RAND WATER INTERNAL INFLATION PROJECTIONS

19

Energy Costs

Rand Water has to take into consideration tariff increments of 24.8 per cent : 201125.2 per cent : 201226.1 per cent : 2013 This is a huge imposition on Rand Water input costs which many customers struggle to understand.

Rand Water receives its energy from Eskom as well as three other municipalities. Therefore Rand Water still has to pay an additional energy tariff increment from the three municipalities over and above the 26.1 per cent energy tariff increment. A historical trend analysis shows that these municipalities have increased an additional 12.5 per cent over the tariff imposed by Eskom.

In addition, this is an increment to an already higher tariff.

Eskom - R0.4752 per kWhRange of municipal tariffs - R0.6211 - R0.7782 per kWh

R 2,009.00 R 2,010.00 R 2,012.00 R 2,013.008.0%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

22.0%

9.5%

14.3%

17.9%

21.6%Composition of Energy In

Total Costs