ACWA Power Company (2082) Earnings Call Transcript & Summary

Thank you very much, Lauren. Good afternoon, everyone, and once again, welcome to ACWA Power's financial results conference call with the investors. As Lauren has mentioned, in this session we will be covering the 6 months of 2022 period, which ended June 30, 2022, for our financial results. Together with me are here Mr. Paddy Padmanathan, he's sitting in Riyadh. And he is the Vice Chairman and CEO of ACWA Power. Next to him is sitting Mr. Abdulhameed AlMuhaidib, and he is the Deputy CFO of ACWA Power. And the 3 of us are going to host this call this afternoon. If I look at the agenda, we are going to be starting with the highlights, and Paddy is going to take us through the highlights of the quarter as well as the 6 months of the year. After that, we're going to go over the financial review, Abdulhameed is going to take us through that and we will have the closing remarks by Paddy. All of this is going to be followed, obviously, with the questions-and-answer session as usual. So without further ado, let me just give the word to Paddy. Paddy it's over to you, please.

Thank you. Thank you very much. Good day to all of you. Thank you for spending time in joining us, and good day to my colleagues, too. Again my pleasure and privilege to be sharing the salient features of our performance of the last quarter. Good news is that we've had a very solid quarter in terms of project development, a very strong performance. We signed power purchase agreements for fairly large projects like the Egypt 1,100-megawatt wind farm, a 91-megawatt IPP photovoltaic plant in the Kingdom. And also for me, quite excitingly, a water purchase agreement at Shuaibah, technically it's called the Shuaibah 3 IWP, which is actually taking an exit -- of our first investment in the Kingdom when we were founded, Shuaibah independent water power plant that is oil fired is to take that site, decommission that plant and convert it effectively putting a 600,000 cubic liter a day diesel plant. So what is significant about this quite apart from all of that is the fact that we will be decarbonizing, continuing our quest to decarbonize our portfolio, and we'll be taking out 9.5 million tonnes per year of carbon dioxide from 2030. So that's -- those are the kind of exciting projects that we're involved with. We became preferred bidder on 2 floating solar photovoltaic power plants in Indonesia. We went to Indonesia a few years ago, and we -- these are the first lot of bids that we submitted, and we're very pleased to see 2 very interesting projects. We become preferred bidder, we'll be working to close that project and take it to construction. And then we have gone on just to that very solid sort of big pipeline, as you are aware. So we've gone on to now prepare submissions. So some of the interesting projects, a 500-megawatt photovoltaic independent power plant in Uzbekistan, 600,000 cubic meter a day independent water power project in the Kingdom of Saudi Arabia and at Amaala, which is a site between NEOM and the Red Sea in the Kingdom, along the Red Sea Coast, the second mega-tourism project in Saudi Arabia. So as you are aware, we are already the utility service provider for the first one, the very iconic Red Sea project, regenerative tourism project. We are now bidding for the second one. And also we -- as you're aware, we have a framework contract. We call it the PIF strategic framework agreement within which we are developing and will be developing similar projects over the next 8 years. And we are now -- we've already gone into construction on the first one. We have now submitted the proposals for the next. And during this period also, we've made lots of progress on the NEOM green hydrogen project on the financing, and we now are confidently expecting to achieve financial close on NEOM green hydrogen project, the first project of this scale that is going -- that has gone into construction in the world and the full notice to proceed will be released to the EPC contractor and the project will proceed on track. And finally, in terms of -- technically, in terms of project development, if you like, Jazan the Group 2 [indiscernible] assets should start being transferred to us in October 2022. And then we've got also on the operating side, which is very important for immediate sort of revenue generation, 3 projects have either started to come online or has completed coming online. So Taweelah, the largest reverse osmosis plant that is being developed in the world. The first phase of it, 50% of the capacity came online in this quarter. And at Al Dur in Bahrain, we brought online the second and the final phase of this very large IWPP. And at Dubai, where we are building this -- well, we're building a very large CSP plant, and we're also in construction of the big photovoltaic plan additional capacity of another 100 megawatts came online. And these projects are now obviously contributing to revenues. In fact, in terms of numbers, SAR 249 million is contributing into the revenue and the operating income line before [indiscernible] losses, and that includes the O&M component of it during the first 6 months of this year. And I think you will see a lot more detail on some of these sort of very large iconic projects, including values in terms of project costs. I'm not going to necessarily go through that in detail. I think you're much more interested in the actual financial numbers. Okay. So that's all lots of improvement, lots of growth on track, exciting stuff. But I absolutely need to also be very frank and share with you that there are some really, really significant sort of challenges that we are also having to work through. The first one is that I need to -- very disappointed and sad to share with you that we had 2 fatalities in the 6 months on our sites. Look, safety is very, very much our first core value, and we are redoubling our efforts to live that core value, convert it to practice as well. Losses are -- people tragedies are not something that any of us want to report on, but they have happened, and I need to share that information with you. And the second one is that we continue to be, look, plant unplanned outages are expected because we are operating these kinds of assets, and we don't plan for them, but we kind of -- we recognize a certain level of them and we budget for them. But disappointingly, we are seeing more outages than we would like. And even more concerningly, more of these outages are due to failure of equipment supplied by world renowned world-class OEMs, original equipment manufacturers. But, okay, these are the challenges that we have to deal with on a day-to-day basis. Overall the numbers are not terrible. They are not as good as they were if I were to compare them from the last year, the same period, if you like. But at the same time, they're reasonable. Power is still running at 86% as opposed to 88% in 2021. Water is running at 96%, which is a little bit better, I guess, than the 92% of the prior year. But we don't want these outages, we need to minimize them. We are redoubling our effort on understanding failure, single point, group causes, and we're putting a lot of effort into increasing reliability of supply. And we're also putting a lot of [indiscernible] utilization and predictive performance monitoring in order to reduce these kinds of failures. And then, of course, the third challenge that we're having to manage, which we have to deal with it even though it's an external matter, the war impact on the ongoing war in Europe and the ongoing COVID sort of shutdowns in China and coming out of COVID, the supply chain challenges and stresses that we have had. The bottom line is that we have experienced -- we had enough period of global high costs sort of rapidly rising inflation levels and fairly tight component supply, human supply. And of course, this is, of course, affecting our projects that are in construction as well as we're being very careful with projects that are in advanced development. Look, the good news is that we are able to work with our partners, our construction partners, our OEMs as well as our project counterparts, off-takers in negotiating relaxation in project deadlines and working with also even governments, invoking government relationships to help ease supply chain. Overall we're not seeing in terms of financial process of new projects, the projects that we're working on. We're not expecting any delays to financial process during the remainder of the year. We, for sure, will expect to see some additional costs in projects that are in construction as a result of these challenges. But there are contingencies, but that's what contingencies are for. And we expect to work hard at managing these cost differences through such facilities we have. I think with that, let me pass you on to Abdulhameed to go through the critical detailed ACWA financial review for the quarter.

Thank you, Paddy. [Foreign Language] Good afternoon, everyone. Allow me to give you a quick maybe close up to the financial side. I'm going to give you a quick reminder, and the question on the key financial [indiscernible] which is the foundation for the upcoming few sites. So we are doing this for the first time. This is a key slide to understand. So we have 5 metrics when it comes to financial reporting. The Phase 1 is related to the operating income for impediment, losses and other expenses. And this is in line with what we are reporting in all of these financials. So it would show you the exact income before the purpose. And then on the second one is the adjusted profit attributed to the equity holders. And on this slide, specifically should be the profit adjusted to [indiscernible] or nonoperational items. And every quarter, we will show what the profits that are there and this is the process for you to be understanding the full picture. So these 2 metrics we are reporting them on a quarterly basis. On the CD annual basis, we have also included the key financial figures. The first one is the [indiscernible] operating cash flow. So this metrics has 3 main components. The first one is the distribution from the project company [indiscernible]. And the second one is all the fees related to the management fees, services, development revenue. And the third that most important one also is the optimization part has come to the center of saltwater process. All of these elements contribute to the current operating cash flow. The fourth one is related to the [indiscernible]. So here we are showing all the recourse borrowing to the [indiscernible] and also including any off-balance recourse facilities. Sometimes we do have equity [indiscernible]. So based on that, we are also including [indiscernible]. And we are netting all of that from the cash based on which we are getting the apparent net [indiscernible]. Finally, we have [indiscernible] divided by the parent company cash flows. So these are [indiscernible] semi-annual basis. So what we're going to present now is a summary of the financials. And please feel free to access our website [indiscernible] our website. You will get much more detail when it comes to the MD&A, the presentation and also a detailed investor report. Moving to the second slide. So here, also another important slide when it comes to what has changed, right? If you want to compare 2 quarter, to quarter 2 or also the full year, half year of this year compared to the half year of last year. So we are showing who, let's say, the new changes that is important for you to make the right comparison. So June 2022 also [indiscernible] fees, we have 3 units or 3 projects that came into operation. So these units have been contributing positively to 2022 compared to 2021, which will be well under construction. This one is [indiscernible] site, Taweelah in Abu Dhabi, 50% capacity and 100% additional capacity in [indiscernible]. Also if you are comparing the first 6 months of this year compared to the first 6 months last year, you have to add into account the projects that came out in the last, let's say, 2 quarters of [indiscernible]. So there have been several projects, 9 projects that have been coming online during this period. So we need to add to this comparison. So this is an important slide to show you what has been added. So moving to the actual operating income before impediment. So here we are comparing both 6 months of last year to 6 months of this year. And you can see that what was mentioned also [indiscernible] by value, SAR 250 million almost, contribution coming from the operational assets, including the [indiscernible] site. We have also added SAR 80 million from other operating income. [Indiscernible] is coming actually from a liquidated [indiscernible] contractor. Another SAR 50 million from other income, including a difference between the, let's say, [indiscernible] last year on 18 months basis, well, as of this year was probably 12 months. So there was an upside here as well. On the other side, we have the SAR 255 million [indiscernible] contribution due -- because of the outages we had this year unfortunately. So this is including [indiscernible]. This is still there, and we have reported that to be until October, November of this year. We have also 2 other big outages that was [indiscernible] Noor II in Morocco, now started operations this April and also Hajr and Mourjan in Saudi. So with that, it was also a [indiscernible] which was mainly due to the conversion that Paddy was talking about since we signed the MOU at that time. So this takes us to SAR 1.1 billion for the 6 months of 2022. Moving to the profits, the net profits. So here we are showing you both the net profit, the reported net profit and [indiscernible] net profit. So when you look at the reported net profit [indiscernible] was a 21% increase compared to last year. This has been mainly driven by higher operating income. And also there has been a cost included for financial income increased mainly due to some deposits that has been contributed positively when it comes to the financial retail. Also there has been other income coming from -- financial income coming from other related partners. And on the other side, there has been a negative income of -- I think it's impact of [indiscernible] income mainly from the loss of sales and also some loss of revenue of that quarter of 2022. There is also a SAR 140 million coming from mainly from the deferred tax in Morocco and also it include other the cash expenses for the 6 months of this year. This brings us to under SAR 542 million net income when it comes to the 6 months of 2022. So if you take out, let's say, that the deferred tax impact, this is almost an increase of 54% of the reported net income and down 25% of the adjusted net income. When you talk about the adjusted net income this quarter or this year, we didn't have much of adjustments. So it has only [indiscernible] adjustments of reversal. One is SAR 40 million reversals due to risk mainly because of better performance in [indiscernible] on a previous provision. Also there has been a reversal on a SAR 40 million on Vietnam projects. And this is mainly because also we're getting bigger, let's say, cost as compared to the final settlement that we had after the transfer of [indiscernible]. Moving to the next slide. So here, we will not spend much time on what the [indiscernible] profit as we just explained it. But one important element here, we would like to emphasize on is that the operating model of [indiscernible] components, we develop, we owned and we operate and we optimize. And the beauty of this model is simply on learning what [indiscernible] income. And that you can see here, almost equally, the 4 components of our operating income has been contributing almost equally for the 6 months of 2022. So both the development, the ownership assets and the operational assets and optimized assets contributed to this adjusted net profits. Moving to the third reporting metrics, which is the current operating cash flow. So in this one, we are breaking down also the -- yes. So we have also distributed -- we have actually divided a lot of balance available cash into the different elements that allow me also to easily compare 2021 6 months with 2022. So the distribution, you have seen a better distribution for this year. We have also seen a big upside mainly on the [indiscernible] included which is SAR 1.6 billion. This is mainly 2 elements. One is [indiscernible] which we did a refinancing of the assets and also the [indiscernible] assets that has happened also during the 6 months. Also if you look at the finance operating cash, there has been a big jump of almost from SAR 260 million to SAR 2.1 billion as of today. On top of that, actually, we have also a big cash position, mainly coming from [indiscernible]. We continue to invest on the specific investment that -- which we have been investing in the last [indiscernible] where we continue to distribute our equity there and also financing our green hydrogen project NEOM through the [indiscernible] which was announced also during this last quarter. On the consolidated and current net debt, this is also an important slide to understand how we arrived at that net debt [indiscernible]. So we are showing here that basically we have both recourse and nonrecourse facilities at our balance sheet. So if you take out first, which is nonrecourse on our balance sheet and this is mainly -- it was consolidated because of our ownership in these projects. But in reality, they are all nonrecourse. So we [indiscernible] SAR 20.5 billion, you will end up with the recourse facilities of SAR 7.7 billion. This is including, of course, the report of [indiscernible] that we have and the SAR 2.7 billion book and also other [indiscernible]. Adding to that another SAR 7.2 billion, which is mainly off balance sheet, but recourse facilities, which is mainly equity [indiscernible] equity achieved, you will end up with a total balance leverage of around SAR 15 billion. With this SAR 15 billion, if you [indiscernible] the cash of SAR 7 billion, you will end up with a total balance leverage of -- net leverage of SAR 7.9 billion, all right? With this number, if you take a simple ratio between tenant net debt operating cash flow [indiscernible] multiple. And this is actually below our expectation and so, let's say, one off. And the way that we would like to see it in the future as we [indiscernible] multiples. And for that, if you just exclude the capital recycling that we did, we'll end up actually with the current net debt divided by operating cash [indiscernible] 5.3 is more or less in the same range that we are expecting. It's much better than what we have reported back in December '21. With that, I will hand it over back to Paddy to give a closing statement. Thank you.

Thank you very much, Abdulhameed. Well, fairly straightforward closing remark really. As you can see, a very strong progress in project development, including now the PIF pipeline, they are starting to kick in properly. And the project is becoming operational, which is part of our business model. We develop, we get things built, they come online and they keep adding to our portfolio, creating additional savings and visible income and cash flow streams. Look, yes, so the sad part, we don't like these plant outages, but they are happening. But we are taking very strong action in order to increase reliabilities of that, and we're using all the tools that are available, including now increased use of digitalization. Robust 6 months -- the first 6 months of 2022 and a healthy balance sheet. We had a quiet year in terms of financial closes, just being sort of billing up. All that means is we're going to have a very busy year, busy 6 months, now wrapping up. So we do expect several financial closes, which will in order to be then, what, good news, results in higher development and construction management fees. We are continuing to monitor this ongoing war situation and the ramp in inflation and the tight supply chains and doing our level best with the support of our construction partners, our suppliers as well as our stakeholders, our counterparties that continue to deliver solutions and minimize and manage those additional costs. And we are not expecting a major sort of adverse impact on projects that we are working on. With that, I will hand back to person managing the calls for questions.

[Operator Instructions] Our first question is a written question from [indiscernible] who asked, do you receive any insurance claims for the loss on revenue due to plant outages? If yes, what would be the percentage of the lost revenue or operating profit?

A quick answer and then we can take in a detail if you want. But yes, we do have insurance, since then we obviously make sure that we maximize those claims or we optimized a bit of it. Well, we claim whatever is huge. They do have deductibles. You can just about insure anything, but they come at a cost. So we do sort of balance them out. So there are some deductibles that we can answer that. Well, these are bespoke transaction by transaction, it's all different. The insurances are related to very specific events. What we can tell you is that we are definitely able to recover quite a bit from whatever is due from the insurances. But what I'm not going to be able to do, and I'll be amazed that everybody else can do it is to give you percentages or numbers because it's actually the bespoke transaction by transaction. Somewhere in our numbers, definitely you should be able to see the insurance proceeds, how much we have received in insurance claims that is there. But then I would suggest that anybody take those numbers and do any magic divisions and come up with as a sort of standard average for the future. Now it's all bearing on a transaction-by-transaction basis.

Yes. Thank you, Paddy. Just to add one important point that we only book that sort of as a clear one you want [indiscernible] settle by the insurance company. So once spoke, we actually chose also no finances. So there is a number of outstanding insurance claims that we are continuing discussing with our insurance agents. And whenever we close the case [indiscernible].

We have another question from [indiscernible] asks, how does the war situation affect your projects apart from inflation and supply chain issues?

Look, I mean the straight immediate sort of impact is we have projects, for example, in Uzbekistan. We are moving, as part of this construction in large components, wind turbines, generating gas turbines. And the only way you can move stuff looking at the geography, we're going to come through to the Black Sea, while unless we start building roads and bridges on the right-hand side, which obviously is not our job. So and right now, insurance cover is a big problem for traffic in the Black Sea. And of course, in terms of passing through the black sea is very much in the hiatus virtually on [indiscernible] day by day. So these are -- so we're having to, therefore, a delay. We are heading to resource. We're going to have to -- so there's a whole lot of strategies that we work in order to manage this. But that's the immediate sort of issue. And lot of issue of work, of course, is the energy crisis. And that also is impacting in terms of stuff that is in construction. We're adding to the inflation pressures.

[Operator Instructions] Our next question comes from the telephone line from Oliver Connor from Citi.

2 questions. The first one, just statement around bidding on the framework within Saudi --

So Oliver, you are not clear.

Yes, you are breaking up a little bit. Yes, the framework. Go ahead.

Can you hear me now?

Okay. Yes, I think it may be better. You go ahead.

Yes. So the question is on the PIF framework. So can you remind us what capacity is actually on offer here? Is this to do with the sort of round 4, 5 renewable auctions that had been mentioned previously. And the second question is on your project in the 1.1 megawatt onshore project, obviously, significant scale for that technology. Could you give us any indication of how you see the levelized cost of these projects coming in, in terms of they being signed. Obviously, you've got a view on the overall capital cost, but a sense of load factors and where that would come as a competitive supply of onshore wind versus other markets around the world?

Okay. I'll answer both of them as specific as I can. First of all, on the phase of bidding the PIF framework contract and the next project that we have submitted our offers to. Okay. So just to be very clear, you then started to talk about round 4 and round 5 and so on and so forth. Okay. So just to be clear, if you know Saudi Arabia is deploying a significant amount of [indiscernible] public. A significant amount of renewability capacity, stated objective is 60 [indiscernible].

It's 70% --

Sorry, no, 60 something gigawatts by 2030. Now then that total number, as we sit into 70% and 30%. 30% has been given to the Ministry of Energy through the renewable energy procurement agents in [indiscernible] in order to tender transaction by transaction in groups. So that's the sort of round 4, round 5 that you are. So that's a tender process, and we participate in those. So in fact, some of the projects that we are talking about [indiscernible] or whatever is one that we won on one of those rounds. So we continue to do that, and that's an ongoing process. Quite separately, the 70% is being entrusted to PIF as a development and a whole series of projects to be developed over the next 8 years. And ACWA Power is a partner with 2 PIF net program as the developer, investor and the operator. The first project Sudair is already -- I think we have reported on this. It has already gone into construction. It is in construction right now, 1,500-megawatt floatable big plants. Now we have got that, okay. So that took part a while. We have agreed to a single contract, the overall general contract to go and then always the first one to structure the contract. Because these contracts are, by the way, we don't just invent the tariff. We have to demonstrate competitiveness by relating them to the competitive bid procured tariffs. So Sudair, we have to establish all of the methodologies and everything else. And now we have achieved all of that, but it's not in contracting. We are now starting to sort of roll all of that program. And so we've got a second one that has been submitted because it has been submitted, it's now to be the evaluation by PIF and then finalized with us. I'm not able to share much more details beyond that.