ACWA Power Company (2082) Earnings Call Transcript & Summary

Welcome, everyone, to the ACWA Power Financial Results Conference call for the 9-month period ended September 30, 2022. My name is Terry, and I will be the operator for today's webinar. [Operator Instructions] I would now like to hand the call over to Ozgur Serin, Head of IR, to begin. Please go ahead.

Thank you, Terry, and good afternoon, everyone, from [indiscernible], and good morning to all of you who are in a different time zone. So welcome to our 9 months 2022 financial results earnings call. And this is the third earnings call we are conducting this year after ACWA Power became listed. And together with me today, I have Abdulhameed, Mr. Abdulhameed Al Muhaidib, who is sitting next to me, and he is the CFO of ACWA Power Group. And we also have Paddy, Mr. Paddy Padmanathan, who's the Vice Chairman and the CEO of our group, and he is joining us from Cairo, where he is on a business trip. Hi Paddy. So as the operator kindly mentioned, we will be covering the quarter, which we just finished as well as the 9 months results. We have our prepared remarks, which we will follow through the presentation. Let me give you a few reminders before I pass the word to Paddy. First one is all the materials available -- are available on our website as well as Tadawul's website, which include an investor report, which also includes the management discussion and analysis of the financial results, which accompany the financial statements. Secondly, all of you know, we will be using some forward-looking statements. So you all know that you are going to take them with a salt grain, and there's a display for the forward-looking statements that we will use. Without further ado, let me pass the word to Paddy. Paddy, it's all over to you.

Thank you. Thank you. Good day to all of you. Once again, thank you for the interest in joining us this afternoon. Let me open straight away with the highlights of the past quarter and kind of a few points just on the outlook for the next quarter. So in the third quarter, we are pleased to have delivered robust financial results, where operating profit, 11% ahead of last year and adjusted net profit, 7% ahead of last year. Now during the third quarter, we also signed a share purchase agreement to bring China's Silk Road Fund as a co-investor for 49% in the 1.5 gigawatt Sirdarya CCGT project in Uzbekistan, that's a SAR 3.75 billion investment. We also signed the Heads of Terms in Uzbekistan for the SAR 9 billion 1.5 gigawatt wind project. And delighted to say that during that quarter, also, we brought fully online, the 681,000 -- 681,900 cubic meter a day Naqa'a IWPP in UAE, that's a reverse osmosis plant. And in the fourth quarter, we have already brought online the second 300-megawatt group of PV capacity at Shuaa Energy 3. This is the Phase 5 of MBR Solar Park in Dubai. So now we have 600 megawatts of the 900-megawatt full capacity dispatching. We achieved financial close for Shuaibah 3 IWP. That's SAR 2.4 billion nonrecourse project finance debt. And we completed a refinancing of Shuaibah IWPP as part of the conversion process. This is the oil-fired power generation and desalinated water production plant, our first development way back in 2005 to 2009. So this plant is getting phased out and is getting converted to a reverse osmosis plant Shuaibah 3, which will save 9 million tons of CO2 emission per year once completed. We have completed the refinancing of this. And as sort of we roll into November and into December, we expect to achieve a few more financial closes. And we also expect to be signing the power purchase agreement for the next projects in the PIF Saudi pipeline, the framework contract that we have to develop 70% of Saudi Arabia's renewable energy target for 2030. And the next project is also a mega one at over 2 gigawatts of PV capacity. So that's quite a lot of activity. But realistically, and as you all know, within the framework of sort of unprecedented global geopolitical tensions and significant economic stresses, which are -- there is no end in sight and which are nowhere getting better for the -- so we are living through a persistent higher cost and interest rate environment, even while we are grappling to still recover fully from the COVID-19 pandemic. And this is exacerbated -- of course, this is sort of seriously exacerbated by the continuing war exerting more stress and prolonging the supply-demand imbalance. And quite frankly, this is affecting projects in contraction. It is most affecting our EPC contractors who really have to operate in this very stressful environment, putting a lot of stress on supply chains and on time for construction. It is also impacting some of our advanced development projects. Look, I think it's -- we're going to be very straightforward and explain that we are experiencing cost overruns, but they are within -- today, they are within our project contingencies, and we are able to continue to manage the situation and work with the trusted relationships that we have built with our EPC construction partners and our offtakers in order to keep these projects on track. And we continue to remind ourselves that we need to remain very much focused at completing these projects and keep developing new projects at scale and keep driving our growth. But it's our resilient business model supported by strong financial relationships, governmental relationships, contractual relationships that we have built up over the last 2 decades that allows us to sort of manage these stresses and steer through these challenges. And I am reasonably confident of our continuing positive momentum in driving growth and building up our scale in power, water and now in green hydrogen with financial closes and new bids already lined up, rapidly lining up and lined up for the next year and beyond. So just thinking about the future in terms of new horizons, green hydrogen is a hype of activity. We're making solid progress at the Neom Green Hydrogen Company, where we are working towards achieving financial close by the end of this year. The teams are working very hard. But at the same time, we have now, with all the confidence of all the learnings and the confidence of having taken this project into construction and racing towards financial close, we have started to work on fairly significant projects having executed MOUs in Oman, South Africa and Egypt. And in Senegal, we have signed a memorandum of understanding to develop a 300,000 cubic meter a day seawater reverse osmosis desalination facility and also 160-megawatt combined cycle gas-fired power plant. Reverse osmosis plant will be cited in Grande Cote located northeast of the capital Dakar. And once completed, this will be the largest desalination plant in Sub-Saharan Africa. Sustainable infrastructure financing, MOU with EBRD is quite a landmark achievement in terms of consolidating an extremely well-established relationship with EBRD, who are a very reliable financial partner who have worked with us over a decade now. And this MOU that we signed last week on the sidelines of the Saudi future financing initiative is focused at specific corporation in the next 5 years on development in the green energy, renewables, hydrogen and green desalination across the operating creator where we overlap, that is Central Asia and North Africa. And another sort of noteworthy achievement, if you like, is that we have started to -- we have a -- we generate a lot of carbon credits, and we have been trading carbon credits through in the international market through agents, who function as middleman. But we're very happy to see that the Saudi sovereign wealth fund, PIF, has established a MENA voluntary carbon market platform, and we were 1 of 5 partners who have already signed up to that platform and in fact, entered the first trades that were launched last week on the sidelines of FII and all of this will accelerate efforts that the Kingdom has to achieve net 0 by 2016. That's kind of introductory. I'm sure you're very keen to get into the detail. Let me pass you over to Abdulhameed, who will now go through the details of all the activities during the last quarter and as we look forward to the new one, next quarter.

Thank you very much, Paddy. Good afternoon, everyone. Thank you very much for joining us today. Just a quick refreshment for those who are joining us for the first time. This is a slide presenting the key financial metrics that we will covering this everning. We have 5 metrics that focus on measuring the health, the financial health of the organization. The operating income before any impairment losses and other expenses, so this is specific metrics, we will be covering the operating income of the last 9 months as against the 9 months ending 20 September 2021. We'll go through the details what has been the drivers behind each variable change in these efforts. The second one is the adjusted profit. And this is where we will take the next part of what I just said to make sure that we can show you an apples to apples comparison. The net income, if you adjusted for non-routine and nonoperational items, to give you a favor of [ founders ] that is income aside from net income is presented within the 9 months period. We also usually present on the parent specific -- semiannual basis, the parent operating cash flow of the company. And then we also present the total parent net leverage, where we also finally have the POCF divided by the net -- the parent net leverage to get the ratio. This is due to we present the annual basis. So all this data are actually presented and now available as well in our website. But within the course of today, we'll be focusing mainly on the first 12 months. So moving to the operating income. We have -- I'm delighted to see SAR 1.8 billion this quarter, and this is a comparison of almost 11% increase from the same period of last year, which was concluded at around SAR 1.6 billion. If you take the distribution and the main drivers for changes, big contributor is actually the new project that Paddy has already covered as assets came into operation. So around SAR 450 million came from these assets. And the beauty of that increase actually came from different technologies and also different -- both from the power side and other side. So looking at that, we had actually aside from design, we had also 2 of the products that have contributed to this increase in UAE, mainly [indiscernible] and Al-Quwain project. We have also 2 renewable projects that has contributed to this, which is NOOR Energy and Shuaa Energy, both of them actually came into operation within the last 9 months. Then the development cost, there is an upside of saving compared to the same period of last year. And this is mainly where we had a significant development cost last year for specific projects. And when you do that assess and compare it with this year, it was an upside of SAR 85 million. Another increase is related to the other operating income. And this has been highlighted in the first 2 quarters of this year. We had liquidity -- liquidated assets, one, that has been bought, one specific project due to non-performance of the FSA factor. And we have other operating income that contributed to the overall SAR 84 million. The final one, which is also not a negative contributor is actually due to force outages that we had -- we've been suffering from during the course of year. Unfortunately, this year, we had several forced outages that took longer than usual, I would say. This has been highlighted also as we received in our annual report. For example, we had in Morocco 2 CSP project that has been in forced outages longer than usual. We had also 2 other assets in Saudi, where the execution was also from a forced outage longer than expected. I think you see is that out of the 4 major outages, this was the successful operation. And the last one, we are also expecting it to come into operation by next month. So with that, all the forced outages that we've been suffering from will need to come back into operation before the end of the year itself. Moving from the operating income to the net income. This analysis will present the 9 months. So first we'll go to the reported net income. I'd like to see what actually a remarkable increase compared to the same period of last year, so SAR 420 million to around SAR 883 million or it's a 110% increase. On that, we have already extended the first component, which was the SAR 189 million in the operating income. Going back to the second figure, which was the other income, it was SAR 203 million. This was mainly contributed by 2 elements. The first element is that the deposit rates and also the cash balance that has been the come back for the last 9 months has contributed a good financial income into this element. The second one is a reversal on which we had earlier on the call for IPP projects. The last one or the last increase is SAR 282 million impairment losses and others. And this one is related to a specific project that has been affected during the last year. Also, one important pair is that the IPO grant expense -- IPO grant has been there last year to a one-off, and this is the big difference when you see the increase for overall, obviously. There is a negative effect of SAR 187 million that is mainly driven by the deferred tax impact. And this was actually due to the devaluation of the Moroccan Dirham against U.S. dollar, which continued to be impacting us. We have been reporting that in the Q1 and Q2 of this year. And this is the main driver as we have 4 to 5 assets in Morocco where we had been impacted to this loss. This brings us to the SAR 883 million as reported. When we come to the adjusted net income, I'm delighted as you will, we almost believe that it's very important for us to share is if we take that adjustments out and no one-off, non-routine items off, you will end up with a 7% increase on this period. This year, we have done only 2 adjustments to the net profit. One is related to Kirikkale, because we have [indiscernible] full impact of Kirikkale and asset is performing well, and they are paying the oil contractor, based on which we had reverse SAR 12 million on the one side. On Vietnam projects, we have continued the divestment. We have earlier actually provisioned a lot out. And as we conclude the project, there's a positive saving on that provision based on which and the adjusted net profit, we are also elevating to SAR 14 million. Overall that brings us to SAR 858 million as a bottom line for the adjusted net profit for this period. With that, I would like to highlight significant matters that has arrived during this quarter. Paddy has already covered a remarkable divestment of 49% of Sirdarya CCGT project. This is now subject to a quarter of CPs, and we are expecting probably that we'll complete this transaction. This is a construction that is being -- that would Silk Road Fund from China. Also, during this period, we have prepared an outstanding loan we have with Silk Road Fund. This is a fund -- this is a facility that we may primarily utilize as it gets more of the attention of equity contribution specific assets for ACWA Power. However, as it's going to be entire next year based on our assessment, we have decided to retire as there is no upcoming utilization for this sale. Extended force outage, I have already covered NOOR III, and I will start to bring it back hopefully by the end of December. The remaining CSPs has already came back to operation. With that, I conclude the finance update, and we'll open it up for the Q&A. Thank you very much.

[Operator Instructions] We do have a question from Taher Safieddine from JPMorgan.

This is Taher from JPMorgan. Two questions, if I may. The first one is just on the overall guidance. I know maybe we don't need to look at this business on a quarterly basis. But at the time of the IPO, you highlighted doubling of the operating income between 2020 and 2023. So I just want to understand if there's any update to that guidance? That's my first question. And the second question, maybe Paddy, you mentioned the PIF expects some signing of the framework quite soon. I think, on this point, I mean, -- are you concerned about the delays on that? I mean, why has it been taking time? That's my first part. And the second part, how significant, I mean, could we expect? So if you can just shed some more color?

Can you just repeat that last -- on PIF framework contract. So how's concerned am I of the space at which it's being done? And what is the second? We lost you.

Yes. So the first one is just on the delays. I mean, is there anything wrong, just if you can comment on why has it taken so much time? And the second part, assuming we start getting these projects coming through, what magnitude we're talking about in terms of capacity and maybe potentially time line to see this coming through?

Yes. Okay. Let me answer the second, and I'll pass the first question to Abdulhameed. So on PIF framework contract that we have, framework contract for that 70% program, yes. So first of all, please understand the framework contract is to deliver a certain capacity -- at least a certain capacity by 2030. So it's over the next 8 years. Okay. It's, I mean, human nature to think that then therefore you take the capacity and divide it by 8, and [ walla ], it will be done. So many -- but that in reality, in real life, that's not the way it happens. So what has happened is that, areas had to be allocated -- they were already identified where the plants were going to go, but then making sure that good connections are in place, the infrastructure is in place. So there has been quite a bit of preparatory work and also getting to an alignment with the grid operator and the dispatches in terms of scheduling priorities at the different locations. So all of that has taken quite a bit of time. So okay, [ Karlangsar ] is short though. We have gone into construction on the first project. We are now about to go to sign the PPA and going to construction definitely in 2023 into the second and possibly the third one. And as always, the way these things work, they start off slow, slow, slow, and then ramp up. One of the other points I want to emphasize is that the objective has always been, if the Kingdom is going to procure and the Kingdom is procuring a massive amount of renewable energy, I mean these numbers are world-scale sort of numbers. The Kingdom should also be working to localize industrial capacity technology in the Kingdom, so wind turbines, TV assembly lines and then working all the way back even to making silicon. So PIF in parallel -- but that's not our business, our business is to develop power generation projects and the special reliable energy at the lowest possible cost. So -- but PIF has been very much focused on their objective as well and has been working towards making sure that, that gets built in Saudi Arabia in parallel. So there is a temptation to say that understandably that, look, okay, let's get on with projects, we're not going to slow them down. But at the same time, if we kind of build everything in the first week, all that industrial capacity is going to come online in order to then expand. So there is a case of phasing in a way that the system can take and the industrial capacity gets delivered and gets aligned. So all in all, we're not -- we're from the private sector. So we want it to all done next week, of course. But I mean that's not realistic and reality. So we're comfortable. We're comfortable. There's a lot of engagement. We are working -- we have a reasonable visibility. And the good news is, the project is starting to come. So I don't see any particular issue with this at this time. Abdulhameed?

I would like to also add on this specific point. Look, on the PIF pipeline, we have already stated 1,500 megawatts under advanced construction. In fact, I was having a [indiscernible] study with the team, the first small [ nut ]of the PV panels they are already generic. So progressed very well and this is being delivered on stages. Another 2 gigawatt of PIF transaction, it is under very advanced development stage, which is expected to close out. And then, the pipeline will be coming as mentioned by Paddy. I think, if you look at what has happened in the last 2 years when it comes to supply chain issues, probably nobody was expecting that at all, which definitely affected the time line. 2 years delay, and the overall delivery should not impact the Al Dur program. I think, the most important thing is that you see the program coming, and there is a sequence of it. And this is what we are actually seeing. On the operating income point, that is your question, if you look at where we average today, which is SAR 1.8 million, a 11% decrease from last year and 9 months, a significant decrease despite the fact that as we highlighted, 4 large assets are actually [ for Saudi ]. This is also aside from other small outages that has happened. This is actually -- for myself, I think it's a challenging operating year. However, we have -- still state that we will be able to deliver a 11% increase. So with that, I think I remain actually optimistic about the operating feet that we have as an organization. Yes, we are affected by these 4 outages. Yes, there is some projects are supposed to complete the construction and switch to operations, but it will not happen this year. But overall, I believe that we will be delivering a very healthy operating income by [ an event ].

I would like to add 1 point on the Saudi energy transition, if you allow me. We all are focusing on PIF and 42 gigawatts in the pipeline, but there is another 20%, which is a significant amount. And it's through the Ministry of Energy, and it used to be called REPDO, and now it is being called e National Renewable Energy Program. I hope you're still hearing me so far. So what I'm saying is, there is quite a chunk of things happening in that 30% as well. Already, more than 6 gigawatts has been tendered. Just 2 weeks ago, 3.3 gigawatts of round 4 has been announced and to be tendered. And as ACWA Power from the first 3 batches, we've already got into our umbrella almost 2 gigawatts. So I just wanted to mention that it's the Saudi transition, it's not with the IRPs, not only the PIF pipeline, but there is another leg, which is moving actually relatively speaking faster than the [ PRA Power ]. I hope that you got the full feedback because there was one question drop and came back on that [ side ].

I'm not sure if we are being heard.

It seems that Taher has disconnected from the call. So I'll move on to the next question, which is a written question. So ACWA and Egypt's NREA and EETC signed an MOU to build a 10-gigawatt wind farm in Egypt. Has the land for this been earmarked? All of Egypt's current wind capacity is on the Gulf of Suez. Will that likely be the location? Is there a time line at all for such a huge project? When could start-up happen if the project is ratified? And what sort of level of financing would be needed for a project of this size?

Okay. Let me pick it up and my colleague can add if they want. So at this stage, what we have done is entered into a -- we have already an established business in Egypt. We have got operating assets and we've got assets that are going into construction. So we've got -- so Egyptian government, we're very familiar with the Egyptian government's ambitious renewable energy program and targets. And we are already working with NREA. And so it is in that context we have entered into the -- so it is a Memorandum of Understanding that sets out the ambition and the target. And the target is 10 gigawatts of wind. NREA has identified all the land where optimum resources are available and the grid capacity exists to evacuate energy generated. So our first job is to be working with NREA to locate the sites that will be applied to the specific framework. And once we have done that, we will then develop the specific projects and the time line to again to phase in with their dispatch needs and the ability for the group to be able to absorb this, along with all the other projects that they're developing. So long story short, answer to all your questions in here is work-in-progress. It's very early stage, but there is a very definitive partnership between us and NREA in order to realize this ambitious 10-gigawatt program. So that's what this MOU sets out.

Our next question comes from Najmul Hasnain from Morgan Stanley.

Two questions. First one, if you can please share the water and power plant availability in third and second quarter separately? And the second question is kind of more general. With the higher interest rates and the inflationary impact that we are seeing across the board, what is the impact you're seeing on your planned cost? I know it's kind of a broad question, but if any guidance you can provide there? And flow-through impact on your end customers in their appetite to move forward with the announced projects.

Okay. Let me deal with the second one, and then Abdulhameed can pick up the first one. So on the second one, look, how long is a piece of string? But at the same time, a kind of broad guidance at the moment of what we are seeing is in the order of as much as possibly 30% to 40%, okay? This is not just CapEx, but the combination of CapEx as well as rising financing costs in this capital-intensive business. So now obviously in the new projects that -- so if somebody, in very simple terms what that means is that, if there was a PV project on which there was a tender last year -- this time last year, that delivered a [ USD 0.02 ] per kilowatt hour tariff, if that project was tendered today, our sort of broad estimate would be that we wouldn't be surprised to see as much as a 40% increase in that [ USD 0.02 ] tariff. So I think that's about as far as I can go with the guessing game that I'm playing, because it is all very site-specific, technology-specific, supply chain-specific, and also right now, as much as it's ramping inflation. It's all up and down. Already, for example, we saw panel prices, solar panel, PV panel prices are ramping up very fast. But now, we are starting to see them -- starting to drop off, which is absolutely what we expected because enormous amount of capacity is getting built. This is all boom-bust cycles. This is exactly what happens. Everything go into a short supply and then more capacity comes online, and then there's a lot of surplus and then come down. So anyway, so that's about as much as I can say on that. In terms of the appetite that we are seeing from our clients with regard to projects that are already in the pipeline that we are already working on, do they want it to slow it down? Absolutely not. What we are seeing in every conversation we have right across the markets in which we operate, how much more renewable energy can you get into my system faster. For a very simple reason, 75% of the cost of fossil fuel-based energy generation is fuel. So even if you have a gas-fired power plant or a coal-fired power plant that has already been built or is being built right now, it's going to cost you 75% more on tariff because of the -- sorry, 75% of the tariff is going to be -- have to be escalated to the increased energy cost. Well, you know how much energy has increased better than me, the fuel. So everybody knows that the fossil fuel alternative is a hell of a lot more expensive than the increase of renewable energy resulting from the current inflation and interest rate environment. So that's very simple reason why everybody is after -- quite apart from the fact that everybody is much more acutely alert of their carbon emission reduction targets and also very alert to the fact that as fast as possible if they can localize as much as possible, they are better off in managing their future energy supply demand balances. And taking imported fossil fuels out of the system as fast as possible and replacing it with the sun shines on top of their land and the wind that goes on their land is the best way forward. And we are seeing that. And that is why you will see we are very confident of our growth targets. And you'll see them quarter after quarter being realized through achievements in financial close and going into construction. Abdulhameed, over to you on the numbers if there are.

Yes. So looking at the numbers for availability, this year 9 months to date, we've had almost 7.3% in terms of power availability. If you compare it to the exact same period of last year, last year was around 86%. However, our target was 89.9% for the same period of 9 months. Although it was significantly better, we had around 96% total availability for the last 9 months of this period. And our target was lower than that. So actually it was good improvement in the water. Same period last year was almost the same, 96% as well. So obviously, it was 96.3%, last year was 96%.

Just is it possible to get a quarterly breakdown?

Yes. Okay. So the quarterly breakdown for Q3 for this year is 90.8% for the power side. And for the water side, it is 97.2%. Again if you want to look at Q3 of last year, it was 93.9% for the power side and 95.5% on the water side.

[Operator Instructions] We currently have no further registered questions.

Okay, Terry. I think I can we can call it a day. Thank you very much for your help. And everybody who has participated, thank you very much for being with us today. If you end up having more questions, as usual, please reach out to us, and we will get back to you as soon as we can, which is usually a very good turnaround time. And again, thank you very much for being with us.

Thank you. Thank you very much.

Thank you.

Thank you, [ Hasnain ].

This concludes today's webinar. Thank you all for joining. You may now disconnect from the call.