ALS PART F NATIONAL TREASURY QUESTIONNAIRE 30 September 2020 @WRCA PRIVATE AND CONFIDENTIAL This report has been prepared for the Honourable Minister, Dr LN Sisulu, Department of Human Settlements, Sanitation and Water, MP, the Director-General, the Lepelle Northern Water Board, its Committee and Management. In compiling the information contained in this document, Outsourced Risk and Compliance Assessment (Pty) Ltd (“ORCA”) has relied on the representations of management and employees of LEPELLE NORTHERN WATER, as well as documentation provided. The matters raised in this report are those which have come to our attention arising from our review that we believe needs to be brought to your attention. As a risk-based review methodology was generally adonted (based on Lepelle Northern Water’s management's risk assessments), we cannot be held responsible for not reporting all risks in the business nor all internal control weaknesses. Attention has been paid to covering high probability, high impact risks/matters in our review. This report is part of the continuing communication between ORCA and Lepelle Northern Water. It is therefore not intended to include every matter that has come to our attention. For this reason, we believe thatit would be inappropriate for this report to be made available to third parties. No responsibilty to any third party is accepted as the report has not been prepared for, and is not intended for, any other purpose or party. This report has been prepared solely for the parties identified above's use and should not be quoted in whole or in part without having regard to the context of the subject, and reference to ORCA.@RCA Debtors 1. Are accounts receivable increasing significantly faster than revenue? 2019 2018 2017 Revenue (Rm) 561.1 541.9 548.9 '% Change 35 “127 Debtors 1,203 1011 84S '% Change 16 B Debtors’ Days 5a 492 554 1% Change 10 et Yes, accounts receivable is increasing faster than revenue, which is supplemented by the increase in debtor's days. The poor debtors’ collection period is largely attributable to the ineffective debt repayment agreement with the Mopani District Municipality ("MDM") and the long outstanding Department of Human Settlements, Water and Sanitation (DHWS”) debt, which Is the main causes for accounts receivable increasing faster than revenue, 2. Are accounts receivable generated by a few significant customers? Yes, accounts receivable is mainly generated by MDM, Sekhukhune Municipality and DHWS account for more than 80% of the total debtors outstanding. These are long standing customers of LNW and no significant changes to LNW’s customer base wes noted. 3. Are any significant customers experiencing financial difficulties or viability issues? If so, are the related amounts reserved adequately? Yes, Mopani, Sekhukhune and DHWS. MDM relies on equitable shares to operate from Treasury. At this stage, provision for the impairment of MDM and DHWS is understated; however, more analysis is required to quantify a reasonable provision for these debtors. LNW needs to perform an exercise based on their experience and history of their customers. 4, Areseasonal factors contributing to changes in the turnover of accounts receivable? Turnover has remained constant, notwithstanding there is a marginally higher consumption of water demand and consequent turnover during summer months. 5. Are aging categories becoming older? Yes, the current debt repayment arrangement with MDM is inadequate, including the inconsistent repayments of the DHWS debt. The inconsistent payments from these debtors despite a debt repayment agreement with MDM, effectively results in a c, R507million debt which is reduced by €.R2,3 million per annum. A detailed explanation is provided in point 8 below.@RCA 6. Are discount incentives offered on a fair basis and as per policy? Discount incentives are generally not provided to customers, which includes the OHWS debt. Notwithstanding, the Board has approved on a case by case basis, the writing off of interest charges to certain customers that are experiencing financial hardship in relation to settling their debt with LNW. {Is the composition of the customer base changing significantly? No, the composition of customer base has remained consistent over the years. The main customers include MDM, DHWS, Sekhukhune, Capricorn Municipality, Polokwane Municipality, Vhembe Municipality and Palabora Mining Co, among others, 7. Have unusual payment terms or other forms of financing been extended to any customer? If so, why and how much? Yes, a portion of the MDM debt should be classified 2s non-current asset, where payment terms exceed 12 months. Considering the onerous long-term debt repayment contract and repayment ‘terms, a significant portion of the amount should be classified as @ non-current Asset. Long outstanding (120+ days) debt constituted (2018:45%-R462 million) and (2019: 77%-R933 milion) respectively, increased by 70% from 2018. The MOM debt, despite the debt repayment contract, increased by 52% From R326 million (2018) to R499 million (2019). In our professional opinion, the debt repayment agreement is wholly ineffective, was not approved by the Board and appears to have been intentionally designed to enrich Phambane Inc Attorneys (Debt Collector) and possibly a few individuals within LNW who might have colluded with them, We also have on record that certain employees at MDM had a vested interest and stood to be personally enriched through the current repayment scheme. ‘The contract was structured to ensure that the legal firm (Debt Collector) receives an annuity (debt collectors fee) of cR15,5m annually (9,3% of ¢. R377 million-2017, increased to <.R498 million, 2018), Due to the ambiguous nature of the contract and the continuous spiralling of the debt, we cannot determine the actual period of which the annuity will endure. The current bulk. water charges, plus interest, plus legal fees less current payments made by MDM equates to @ net, reduction of c. R2,3m per annum against the total debt of R507 million; essentially, this means that in accordance with the current contract, the debt repayments will endure for a period of c. 220 years, (Refer to Annexure A~ prepared by LNW) Have receivables been factored? if so, what was the business reason for the factoring? No, receivables have not been factored presently. Management has not indicated any specific reason for not factoring debtors. 9, Are there unusual trends in the allowance for doubtful accounts receivable? No unusual trends noted, however MDM, Sekhukhune and DHWS debtors are materially significant and critical introspection is required to determine the best strategy to recover amounts owing.Inventory and Sales a Is there an unusual relationship between inventory and sales (e.g, sales are decreasing but, inventory is increasing)? Yes, Inventory increased by 23% from 2018, however sales increased by 3,5% for the same period. The unusual relationship appears to be attributable to a prior year adjustment and recalculation of inventory balances in the 2018 financial period. Are there events or changes in demand or price indicating that carrying amounts of inventory may be too high? Water demand for the financial periods remained consistent, with arbitrary changes due to seasonal demand. Water tariffs are approved annually by Parliament. Based on the review, carrying amounts of inventory does not appear to be too high Are adjustments resulting from physical invent: s significant? There are adjustments from inventory, however these relate to consumables and chemicals used during the raw water treatment process which are insignificant. Are the books adjusted or are differences dismissed after taking a physical inventory? Yes, adjustments are processed in the accounting records after a physical inventory stock-take. Notwithstanding, we have noted that management does not necessarily investigate the underlying causes for the inventory differences nor is there evidence of consequence management undertaken by management in cases of stack differences arising due to theft or misappropriation. Are inventory obsolescence, returns, and warranty reserves adequate? We have reviewed inventory obsolescence and they appear reasonable. Are purchase commitments appropriate relative to the growth in sales? Raw water is purchased from the DHWS from dams and rivers in certain instances; relative to the growth in sales, they appear reasonable,@RCA Fixed Assets 1. Were physical counts of fixed assets performed and reconciled to the general ledger? Physical counts were performed by an external service provider; however, there is no assurance to confirm that all assets were counted, given the multitude of asset components of the water plants, waste works and equipment, According to the Technical Asset Manager the consultants are only 85% complete. 2. Was there a change in the depreciation or amortisation method and/or life of fixed assets or intangibles? If so, what gave rise to that change? LNW embarked on @ comprehensive asset componentisation exercise during 2018, resulting ina restatement of depreciation and carrying values for assets in 2018. There were no changes in deprecation or amortisation methods during 2019. 3. Are capitalisation and depreciation policies consistent with prescribed standards? Yes, they appear reasonable in accordance with GRAP Standards, 4, Are actual capital expenditures significantly different from budgeted amounts and is adequate cash flow and/or financing in place for planned capital expenditures? LNW is currently negotiating funding with DHWS and National Treasury; its cash-flow is inadequate for planned capital expenditure. LNW had cash and cash equivalents amounting to €. R37 million and c. R52 million at the end of the 2018 and 2019 financial periods, respectively. The Corporate Plan for 2019/2020 to 2023/2024 revealed that current abilities will exceed current assets, therefore it is apparent that LNW will not have sufficient cash to fund working capital future years. On 13 February 2019 LNW applied to HWS and National Treasury for funding, amounting to R3,2 billion for the Ebenezer and Olifantspoort Schemes (R2,8billion), Growth Investments (R300 million) and Revolving Short-Term facilitates (R100 million), which is yet to be approved. 5. Were tests performed to detect impairment of long-lived assets including goodwill? Were there any? Yes, conditional assessments were performed by the consultants detailed in point 1; however, R1,2 million of assets classified as poor, broken and damaged were not included in the impairment charge. A further c.R165 million was not marked on the fixed assets register with any ‘condition assess ment'- we assumed the consultants have not yet evalusted these assets and therefore cannot conclude on the accuracy and completeness of the impairment charge. 6. Were there indications of impairment based on the tests or on other conditions? If appropriate, were write-downs taken? Yes, projects categorised as Assets Under Construction amounting to ¢.R30 million were terminated some 2 years and should have been fully impaired. No write-downs for these assets have been processed in the accounting records, to date,@RCA 7. Does the entity lease significant fixed assets? If so, what is the business reason? No, LNW does not lease significant fixed assets. We have raised this point asa finding in light of tthe recent cash purchase of Isuzu bakkies for c. R6 million. 8. Are there any sales or leaseback transactions? No, we are not aware of any sales or leaseback transactions,@RCA Financing/Funding 1. _Isor has the entity been in violation of debt covenants, possibly requiring disclosure and reclassification of long-term debt to a current liablity? LVW currently has no long-term or short-term debt that requires disclosure or reclassification. 2. How close was the entity in meeting or violating its covenants during this period and what is. projected over the next four quarters? LNW currently has no long-term and short-term debt. 3. How much additional borrowing capacity does the entity have under its existing debt agreements and how much is projected over the next four quarters? Interms of the LNW's Corporate Plan for 2018/2019 to 2023/2024 it appears that LNW currently has an unutilised borrowing capacity of R770 million. LNW has recently applied to the Honourable Minister, DHWS 24 October 2019 for funding amounting to c. R3.2 billion for the period 2019- 2023. The Minister, HWS has submitted the request to the Finance Minister; no response has been provided, to date. 4, How much excess cash flow did the entity have during this period and how much is projected over the next four quarters? LW’s cash and cash equivalents amounted to ¢.R37 million and ¢.R52 million for 2018 and 2019, respectively, LNW's projected cash-flow in terms of detailed Corporate Plan: 2019/2020 31,242 2020/2021, 33,190 2021/2022, 43,638 2023/2023 R81,125 2023/2024 133,076 5. Are there any cross-default provisions that could be triggered by a single debt covenant violation? LNW has no long-term and short-term debt; consequently, no debt covenants will be violated. Our review did not reveal any cross-default provisions; therefore, we are unaware of the existence of any cross-default provisions. 6. Are there debt covenants relating to unspecified “material adverse changes”? LNW has no long-term and short-term debt; consequently, there are no debt covenants. We are unaware of the existence of potential “material adverse changes”@RCA Deferred Tax 1. Have there been cumulative losses in recent years or ather conditions that may require @ valuation allowance for net deferred tax assets? LIVW is not required to register for Income Tax purposes and Is not registered for Income Tax purposes. Consequently, the raising of a deferred tax asset or liability in the accounting records of LNW, is not applicable.Creditors 1. Are there unusual trends in accruals? We have not noted any unusual trends in accruals during our review. 2. Did estimates related to the calculation of accruals (e.g., warranty, environment, merger, restructuring, ete.) change in the current period? If so, why? The review did not reveal any changes in the calculations of estimates and accruals. Estimates and accruals were confined to provisions for leave pay, bonuses and retirement fund provisions, among others, 3. Have all probable and estimable contingent liabilities been recorded? The review did not reveal any potential contingent liabilities. We have also enquired with and engaged management, specifically in relation to legal and other matters as to the potential presence of contingent liabilities and their recording thereof. Management indicated the probability and estimates of contingent liabilities have been considered, and recorded accordingly, where applicable. 4, Have circumstances in the current period resulted in over accruals as at the balance sheet date? Ifso, have the accruals been reduced as appropriate? The review did not reveal any “over accruals” as at balance sheet date, The provision for accruals have remained consistent during the 2017/2018 and 2018/2019 financial periods.@RCA Financial Risk Guarantees/Commitments Does the entity have sufficient cash or undrawn credit to meet its guarantee commitments? LNW had cash and cash equivalents amounting to ¢. R37 million and c. R52 million at the end of the 2018 and 2019 financial periods, respectively. The Corporate Plan far 2019/2020 to 2023/2024 revealed that current liabilities will exceed current assets, therefore it is apparent that LNW will, not have sufficient cash to fund working capital in future years. On 24 October 2019 LNW applied to DHWS and National Treasury for funding, amounting to R3,2 billion for the Ebenezer and Olifantspoort Schemes (R2,8bilion), Growth Investments (R300 million) and Revolving Short-Term facilitates (R100 million], which is yet to be approved. The review dic not reveal any guarantee commitments due by LNW, Are guarantees related to core businesses? ‘The review did not reveal any guarantees relating to LNW's core business. Is the entity exposed to credit/default risk due to financial problems or bankruptcy from a significant entity with which it does business, such as a supplier / customer, service provider, lessor/lessee, debtor, financial guarantor, Investor/investee, joint venture partner, derivative counterparty, and/or trading partner? Yes, LNW is exposed to credit risk mainly in relation to its key customers i.e. MDM, Sekhukhune Municipality and DHWS. Does the entity have significant purchase commitments and/or cbligations? LNW does not have any significant purchase commitments and/or obligations, apart from raw water purchases from the DHWS. The short-term debt (creditors owed by LNW to DHWS for raw water purchased amounts to ¢.815 million). The review did not reveal other significant purchase commitments and/or obligations. Has there been an “other than temporary” decline in investment securities classified as held to maturity or available for sale, or in equity- or cost-besis investments, requiring loss recognition? LNW has no investment securities classified as held to maturity or available for sale, on in equity or-cost-basis investments. Istherea need to disclose an early warning sign related to a decline that has been experienced by not yet deemed other than temporary? LNW’s inability to continue as a going concern is evident from the review performed. Is there an appropriate, documented risk management policy and derivative/hecging strategy in place, and ifso, is it being followed? LNW does not have a documented financial risk management policy as the entity does not have an internal Treasury function, There are no documented polices in place, relating to LNW's derivative/hedging strategy as the entity does not undertake derivative and/or hedging. 10@RCA 10. 11. 12. 13. 14 15. 16. 17, Is the economic effectiveness of the entity's hedging strategy being evaluated on a quarterly basis? LW does not have a formal hedging strategy and does not enter any forms of hedging: Consequently, the effectiveness of LNW’s hedging strategy cannot be determined. Is there an appropriate risk management infrastructure in place and adequate technical resources in piace to monitor and manage these? LNW does not have a documented financial risk management policy as the entity does not have an internal Treasury function. Hovis counterparty credit risk evaluated? ‘The evaluation of counterparty credit risk is informal. There are no detailed processes in place including management review and approval of credit risk monetary limits for customers. ‘Are assets and liabilities appropriately included from the balance sheet? If excluded, why are they excluded? Yes, based on the review, assets and liabilities in our opinion, are included in the balance sheet. We are not aware of assets or liabilities that are not included in the balance sheet, Has management reviewed significant recorded (i.e. on-balance-sheet) transactions that may ive rise to off-balance-sheet commitments and contingencies? Yes, management has recorded on balance sheet items. Qur review did not reveal any potential off- balance sheet commitments and contingencies Were transactions engineered to achieve off-balance sheet treatment? Based on the review performed and discussions with management, we are not aware of transactions engineered to achieve off-balance sheet treatment. Was it the underlying economic or business reason for the arrangement? Not applicable Has management evaluated its exposure to credit and other losses from off-balance-sheet transactions and, where appropriate, provided for losses arising from these transactions? Not applicable What factors could cause the obligation to move onto the balance sheet? Not applicable If the transaction had been with a non-related party, would it have been structured the same way? Would the transaction have taken place? Not applicable uu@RCA 18, Is there off-balance-sheet debt? What is the operating or business reason for having off-balance- sheet debt? Not applicable 2ser ANNEXURE A. ‘gan Dati unipaly DebtorRacancTaon 701 [repared by NW] PevodOl Peroda2—PesodGs ——Peiod Ot PeviodG Pued oS Paved ParPeigd@) PeviadiOFevod i avodi Tol. ‘Mopan' src Manipal lorerinatt so7c987376 sti MROROORS IGS TIRING LIRA WENT OROLGTT ISKNSET FERAL 6M BiMImN usHIMS amerGLR intrest LASOETS LSIATHLGS —AAINGSRIR LRH SHROD LelM.928 LA GLT] LATINA LOTLSGART | AoDAaIaG 1910630 LaShaRD—-m-LABPA| leaicon aosc0c00 235.000 3.305.0000, 3.305 c0000 21050000 165250000 BINS RS ROR 70 Rs EAEAES MMSIOLA SESS 6 70.03 TAROT MARTA ALOR 907073 Permant nwards rot 800100000 nomc0000 ‘9000000 aoK70 ¥ sn0enKo009 0N00000 ‘00700090 _s,on8.7030 rovmenstowaiselsdebt 3470000000 1709000 som. _L7H60900_3,.09920000 3. 70080000, 1.700000 3545020090 3,709 s0.00 THOR GEOG 1.70, 090.60 9400 00000 —,7f0000_9,900000 SANGO wa 70940000 30OUD 31. 7ORON.co RUDE SO verte TAT TRAE) AEST TTAB (SST) TESS [LITT F TOTO (SRTBTISH) MARGE SST) aT 13