Barka Water and Power Company SAOG (BWPC) Earnings Call Transcript & Summary

[Audio Gap] fourth quarter 2024 presentation. What I'll try to cover or will cover, a brief introduction, high-level introduction, performance of the company during the fourth quarter and effectively the sum of the 2024 and business risks and the expected outlook in the coming years. From a high level...

[indiscernible].

Go ahead. Is anybody having a question? [ Joseph ], are you trying to say something? Okay. I'll proceed then. By way of sort of giving you a high-level summary of the year and particularly the fourth quarter, the company entered into a purchase agreement for power and water with Nama Power and Water Procurement Company, effectively, PWP, which includes both power and the water through the multi-stage flash evaporator system. And for the power, it is effectively close to 9 years, and the MSFE is a 3-year contract with option to extend for additional 3 years and additional 3 years, matching the power contract effectively. Now the Water Purchase Agreement for both RO units, RO 1 and RO 2, officially concluded on 29th September. This was an extension because the original contract was in March. Subsequently, we notified the market for additional extension and effectively ended on 29th September 2024. And we have, as a -- we have satisfied, based on the new PWPA, the early power conditions and availability of plant on the 6th of June. Immediately within the same month of June toward the 24th of June, we had encountered a major shutdown failure -- generator failure for gas turbine 2. This was attended for and effectively, the plant came back on full capacity toward the end of August. The company successfully completed the commissioning of the -- all multi-stage flash evaporator desalination units. And we have concluded the availability as per the PWPA, and we have achieved the annual performance test on 30th September 2024. Subsequently, we completed the water connections and then we were able to complete also the commercial operation dates -- the contractual commercial operation date on the 11th November 2024. As a result, based on this new contract and the early start-up of the operation, the company also has successfully completed the refinancing of its long-term loan facility with additional funding for capital expenditures, repayment of liabilities, and we were also able to provide early dividend distributions. An interim dividend of OMR 0.322 per share were distributed to the company's shareholders during the year 2024. I'm happy also to highlight that the company achieved 22 years without lost time incident on May -- 2nd May 2024, and there were no environmental accidents during that year. Next slide, Adnan, please. For the RO plants, both plants maintained high availability, 99.9%, with an average load factor of 44.5%. Predictive and preventive maintenance procedures performed to ensure high reliability of those 2 assets. As indicated, the Water Purchase Agreement expired on 29th September '24. And since then, both RO plants are idle stage. For the power plant, we satisfied the requirement for early power condition and availability of a plant commencement on 6th June 2024. Power had achieved a reliability factor of 87.5%, particularly due to the failure of the gas turbine 2 generator. And then we had a load factor of 36.6% for the operating period. The gas turbine 2 outage on 23 June due to the generator differential current, which was highlighted in the market at that time. The repair works completed and after that, required maintenance. The plant was available again on full dispatch at full capacity of 412 megawatts in the first week of September after the annual performance test. For the desalination MSFE plant, we completed the commissioning of all the 3 units and commenced operation on the 11th November 2024. The plant -- the MSFE plant also achieved reliability factor of 82.2% and a load factor of 11.8% for the reporting period. Next slide. And now I'll give -- let my colleague, Adnan, give you a high-level financial performance.

Thank you, Salim. So with respect to financial performance, as Salim previously explained, year 2024 was very different as compared to 2023. In 2024, our -- we got award for power plant and MSFE plant, and our RO plants got expired in September. So overall, the revenue stands at OMR 25.7 million for year 2024 with a bottom line net profit of OMR 2.7 million. The gross profit margin stands at 17%, and our net asset per share was at OMR 0.201 per share. The contribution to the increased revenue and the gross profit and the net profit definitely is from the power plant and MSFE plant operations, slightly net of expiry of the RO plants. One thing which we would like to highlight here that company did a detailed impairment assessment as at 31st December 2024. As a result of award of power and MSFE contracts, we had impairment reversal of OMR 20.2 million in our books. However, simultaneously, due to expiry of our WPAs for our RO plants, we had impairment loss of OMR 19.5 million. So overall, on the net basis, we had impairment reversal of OMR 0.7 million in the profit and loss account of 2024. So this is with respect to financial performance. Regarding business risk, handing back to Salim.

Okay. As indicated earlier in the past presentation, we had a huge business risk in the past due to unavailability or not contracted debt capacity. With the grace of God and the new contract awards, major risks were mitigated and got closed with the exception of the RO plants, both RO plants, RO 1 and RO 2. The Water Purchase Agreement, as indicated, expired on 29th September, and this is the major risk pending in the company that is nonoperational. And for mitigation purposes, we are still in discussion with relevant authorities, whether there is a need -- future need in the interim period for these 2 RO units. And if in the event of nonrequirements by Q1 -- by end of this month, we will reconsider obtaining permit to resell these 2 assets and recover some of the value from those RO units as a mitigation. From a future outlook, we are very much striving to maintain the safety and environment record without any incidents. And also, we will continue to proactively schedule maintenance, preventive maintenance and ensure high availability and reliability of the assets, both power and MSFE plants. And we are currently in that process of preparing the plant for the upcoming summer period. As indicated for both RO plants, which are uncontracted and part of the mitigation for the risk -- business risk, we are exploring potential extension or additional capacity within this quarter by end of the month. And most likely, if not achieved, we will be reconsidering for resale of these assets and recovering the captive value. That's all what we have for the fourth quarter update and 2024. And the floor open for any questions you may have.

This is Abbas Muslemi from Vision Capital. Congratulations on the renewal, of course. Regarding the RO plants, what is the carrying value of these plants in your book right now? And has an impairment exercise been done already?

I'll let Adnan elaborate on it. I'll let Adnan to elaborate a bit, but he mentioned already about the impairment. Go ahead, Adnan.

Yes. Thanks, Salim. So Abbas, with respect to the carrying value, as I previously explained, we already recorded the impairment on these RO plants in our books. So now the carrying value is very limited, which is just equal to the scrap value in the books after the recording of the impairment. So we don't have any further exposure in our books with respect to RO plants.

What is the scrap value approximately of the plant?

Approx OMR 1.5 million.

Okay. And as Mr. Salim mentioned, conversations are still going on with OPWP. And one way or the other, you don't know yet, right? When do you expect to hear from them that -- one way or the other? When do you think the deadline is for that?

Yes. Actually, it's not -- it's a moving target because we have anticipated some discussion in the early January. There has been a request by the authorities to reconsider the decision and defer until end of Q1. What we understand, there is a review going on from the water network operations and in particularly the potential increase in demand. However, the outcome has not yet been made public. And what we are aiming at by April, we will be formally requesting the position of the off-taker and regulator. And in the event that there is no such clarity, we will be seeking the process of resale of these assets.

Now a similar activity went on across the power sector, Power 2024, and you and I had a long chat about this...

Yes, yes, yes.

Last year when we spoke, and you shed a lot of light on it. So obviously, there's a lot of weight that I put on your experience [indiscernible] and your connection. So from the way you see it, the way you see the demand situation, the way you see the technology of your RO water desalination plant, what do you think the chances are of a renewal versus you going ahead and scrapping or selling the plant? Because there is not much -- there's only scrap value to this plant, right? I mean, effectively, I can't take this machinery from you and go and set up something in Saudi, for example, right? It's not that easy.

Yes. But I think to give you a broad picture on the water side, the award of multi-stage flash evaporation methodology or technology, which is primarily on a limited contract as an option for 3 years, it has a better, broader scope and operating envelope in all seawater condition. That's one of the advantage. The MSFE capacity is in line with both RO 1, RO 2. So what we see now, there is more utilization of the MSFE. Making the potential use of ROs is extremely limited with exception -- that's why I cannot say 100% that it is -- the 2 ROs will not be contracted. With the exception that, what we understand, there are -- new projects are being considered within certain industrial areas within Oman that some of these projects require quite a large capacity of potable water, a part of their industrial need. So these things are dependent on -- I mean, from water section, it is dependent on the outcome of the conclusion of those projects. That's why I understand the delay. But the likelihood -- as I mentioned, the likelihood is extremely minimal.

Extremely minimum of? Of you getting it? Of you getting an extension?

Yes. Because there is -- Barka 5 has just started. There is -- Ghubrah 3 is coming up with early water. There is -- there are some discussions, which -- what we see from public domain that Ghubrah will start with early water as well in early 2026. So the window where there is potential utilization of our RO capacity is extremely minimal.

Got it. I think unless there is like an interconnection system that the way we have in the power side, where if you have an interconnected across the country or water pipeline system where there is -- I think if that system is in place -- because for me -- I'm just thinking, because -- since you've already paid off most of your debt, so effectively, you'll be much more competitive on tariff terms than anyone else, right? Because -- and plus your cost of equity, my -- what I think is could be more competitive versus the others, right? Yes.

You are spot on. But just to maybe bring more detail to it. The water connection is also -- the water network is also fully integrated in the Sohar -- from Sohar area, Northern Batinah region, South Batinah, Muscat, Barka, Central Oman, all the way to Sur, [indiscernible], Bahla. This is all what I call the northern ring win similar to the power. So it's already interconnected. The challenge with the water, unlike power, there is a lot of system losses in the system, and this is something being addressed. So the demand is fully covered at this stage with the contracted capacity. As I mentioned, there is a potential of a couple of projects being sanctioned. This will add in addition to what have been already under execution. So what I mentioned, Ghubrah 3 has already been accounted for. It's a 300,000 cubic meter desalination plant. So this has already been accounted for. So only in the event of additional capacity demand from industries we have a chance in the both ROs.

Very clear, sir. It's always a pleasure asking these questions because you give a lot of clarity in terms of what's happening as well. I have a couple of questions on the...

I try my very best to understand...

No, I appreciate that. I have a couple of questions for Adnan maybe on the debt side. Now when I see your current portion of liabilities, I see a OMR 5 million loan and -- which is expected to be paid over the next 1 year. And then I see this OMR 20 million sitting in the long-term loans. At the same time, when I open your notes, I see that your plan is to pay down these loans until 2031. So could you tell us, what is the annual outflow in terms of interest plus principal for this year and the years after this? Because the numbers were not making sense to me because this year, it seems you're paying more, and then you're going to start paying less from next year. Is my understanding correct? Or am I missing out something?

We are -- to some extent, that is correct. So basically, how we refinance our loan is -- that is based on our power contract, which is for 9 years, and plus MSFE. So MSFE, we have -- as you are aware, we have confirmed a contract of 3 years. So for initial 3 years, there will be high repayment of the loan. And after that, subsequently, there will be low repayment because that would be only based on the power cash flows. So that's how our debt repayment has been scheduled. So that's why in the initial 3 years, high payment. And after that, it will be low.

Right. Okay. Okay. That makes sense. Any update on the tax dispute with the government, with OPWP?

No, still [indiscernible].

[indiscernible]. Okay. So where are we right now in the process? Which court are we in?

So our appeals are in different courts, if you see my text note in the financials. So we have different years from 2010 to 2016, which are right now in our appeals court. So those got rejected from primary court, and now we filed the appeal in appeals court and hearings are in process. And for the year 2017 to '20, that is still -- our appeal is with Tax Grievance Committee. So their hearing is still pending. For year 2021 until 2023, still we are awaiting for the final assessment from tax authorities. Yes, [ Bishen ]?

Hello? Am I audible?

Yes, we can hear you.

Yes, yes.

Just a few queries to build up on what's been discussed before. If you could just give us some sense in terms of the cash flow split up between the power plant and sort of the desalination plant to get some sense in terms of if in the worst-case scenario, you mentioned the power -- the water agreement does not get renewed after 3 years. What sort of cash flows are we looking on a stand-alone basis from the power plant?

So basically, I think -- okay. I cannot share the detailed status of that, yes. But...

Just let me take that response, Adnan, if you allow. So [ Bishen ], actually, this is very difficult to differentiate the cash flows because costs are on consolidated basis. So you cannot like separate the cost. So this is difficult. However, what we can tell you that, of course, cash stream from power side is better than MSF. So this is what we can tell you. However, differentiation is not possible.

[ Bishen ], if you allow me 1 minute to elaborate a bit.

Please go ahead.

Yes. One thing on the water, it is unlike any other water, which is continuous production like the RO. That's why then you have a fixed revenue expectation. In our case, the multi-stage flash are contracted on a very specific and customized nature on emergency basis. So there is -- most of the time or majority of the time in normal operation, it will be only power, while the MSFE will be on standby. But then on emergencies, then the water will kick in. So the predictability, how -- basically, load -- revenue expectation from the MSFE is not really predictable apart from the fixed operation, which is already integrated with the power. So one of the challenges, as I mentioned, it's not easy to [ bring ] is purely because of the contractual nature.

Duly noted. Now I'll just tell you where I'm coming from so at least we form a sort of bridge between the technical and the financial part. So building on what Abbas mentioned, if I look at your outstanding loan, it's OMR 26 million, of which OMR 5 million will be paid in '24 -- sorry, OMR 5 million will be paid in FY '25. Adnan mentioned that you will have sort of a step-down where you'll have an accelerated payment for the next 3 years, probably '25, '26, '27, that's -- assuming it's OMR 15 million, and the balance OMR 6 million over the balance 3 years. Is that understanding correct in terms of at least numbers where you have a higher payment for the next 3 fiscal years and the proceeding -- and the succeeding years, you'll have a lower payment. Is that understanding fundamentally correct?

So Bishen, to some extent, right, the numbers -- those numbers are not like exact how it is. So as of 31st December '24, we had a loan balance. But our facility is a little higher. We are still incurring some CapEx and inventory, which is part of our refinancing. So there will be further drawdowns in the year 2025. So overall, with respect to the repayment, as you are saying, that is very much right. The -- few repayments will be higher in the first initial 3 years. And then after that, repayments will be low because of the lower cash flows, if MSFE will be out. So the restructure is definitely like this, yes.

Okay. Noted. Now if I look at your interest rate, it's fixed for the next 2 years at 6%. And after that, it's supposed to be reset annually. What is it referenced to, the reset?

The reset is a reference to our lenders' weighted average rate [indiscernible] margin.

Okay. Okay. Fine. And sorry, some sense in terms of what that current number would stand at, given the drop in interest rates? There's only been a small drop, but if this were to be realigned today, would there be a change? Or would it still be at 6%?

6%, yes.

Okay. Okay, fine. And now to sort of bring it together in terms of what I was alluding to, if you look at -- you mentioned that the water sort of contract might not be renewed. Now I'm just interested in 2 things primarily. One is the cash flows that come from, let's say, post 3 years from the power plant alone, are they enough to service this sort of debt? Or do you see some further sort of financial engineering or restructuring post 3 years, if the water sort of contract is not renewed? That's the first question. And secondly, the idea was, if I look at your -- the dividend announced, it's been OMR 0.32 in December. And then there's been a further sort of OMR 0.8, OMR 0.088, if I'm not mistaken, for this year. Now is it a combination of these 2 numbers? Is it only the second number in terms of the free cash flow ability of the company, a, with both the sort of contracts; and b, just for the power contract? And I think that's important for us to understand in terms of what is the ability of the company to generate and distribute cash. Again, not asking you for a commitment on the dividend, but just to give us some comfort around what the ability of the company is to generate that cash in the first place.

Okay. Yes, [ Bishen ]. So answering the first one is -- as I previously explained, how the loan is restructured is based on the firm cash flows from contracts of power and MSFE. So when MSFE will be out, our loan repayment will be automatically lower. And so right now, if nothing changed, then there is no need for any further restructuring. That will go ahead as it is until there is some other future developments or anything else. Coming back to this dividend. As we did an interim dividend distribution, OMR 0.32, that was part of our refinancing. So we distribute that high dividend because company had not distribute dividend for the last 6 years. Now going forward, as you correctly said, this OMR 0.8, OMR 0.088 which we had proposed for the year 2025, that is based on the -- our financial model, which is after our repayment of the loan, OMR 5 million, as you know, what will be the free cash flows company will have -- company will distribute to the shareholders. And definitely, it will be subject to availability of the cash and our repayment of the loans. So that subjectivity is definitely there, but that's what expected is, yes.

Okay. Okay. And the only rationale for asking about the water sort of contribution and the power contribution was to see what you generate in cash flow from operation less CapEx, less this OMR 5 million, what that number comes to and what that number would look like if the water was not renewed. But I take your point in terms of not being able to give it tangibly. I understand that.

I think if there's no further questions, we'll conclude the session.

I'm sorry, I have -- sorry, Mr. Salim. I have one clarification.

Yes, please.

When does the power PPA expire?

Last one, that was February 2022.

'22. And -- okay. So this one will expire in '31.

Yes.

This one -- sorry, this one is expected to expire in February 2033.

'33. And when are you planning to pay down your debt? By '31, right, you're planning to pay down your debt, become debt-free.

December 31. Yes, correct.

So effectively, you are going to get all the cash flows available to shareholders from 31st -- '31 onward until the expiry of the power project, right? There will be a big chunk. Does it make sense?

Yes, definitely. If all loan will be repaid by 31st December 2031, after that, there will not be any further debt payments, yes.

My question is why didn't we try extend the repayment terms to the end of the PPA? Because that's what we see across the sector in all the companies, right? Because that way, you can maximize your yearly payout. So is there a reason we didn't do that?

Yes. Abbas, this is a very, very good question. And we tried our best to get the same terms. But banks are also very conservative considering their history with Barka. As you know that previous -- after our power contract was expired, so there was some contingency and they were also not clear that what will happen. Though they were supported, but they don't want to take the risk. That's why they need some benefit of around 1-year period.

To add a bit of a technical explanation as well, Barka 1 is the first plant now in -- or one of the first plant in Oman that, by completing this 9-year contract, will achieve the 30-year technical age of the assets, which is the technical limit. Typically, these plants are catered for 30 years. And then thereafter, you need to major investments, rehabilitation, it's called repowering, and major capital investment to operate again. And many of these plants go beyond 30, 40 years even. So what we believe at this stage that we have done a lot of the major maintenance, lifetime extension in the previous contract before the 2022 in anticipation of this renewal. We don't foresee major, but we have to be vigilant that this plant may -- at the term of the end of this contract, there is life in it still technically, depending on the market and the availability of CapEx to repower the plant. So -- but effectively, what the banks are aiming at is the 30-year technical limit. [ Joice ], do you have any question?

One question that I have is on your capacity charge. You have -- your power capacity charge has been around OMR 4.7 million during the year. So -- now if I understand that correctly, the early power was in beginning of June. So -- and you had an outage during the course of this year. So is this for the 7 months capacity charge, including everything? Or is there any lost revenue component that are there in 2024?

Yes. So that's starting from 6th June until 31st December. That's our total capacity charge, what comes as a revenue in our financials, net of all the losses which we have incurred as part of nonavailability of the plant due to the repairs. So that's a net of revenue, which comes in 2024 financials.

So how much was the lost revenue part?

So from June to August, the plant capacity almost half, almost half.

For 2 months, 60 days.

For almost -- June, July, August, 90 days, you can say.

Okay. 90 days was 50%...

Not exactly 90 days because it started from June '23. Adnan, the date when our plant capacity was half was June '23, right?

Effectively, you can say from beginning of June because in early June, we were not completing -- we have not completed the steam turbine major maintenance. So effectively, we were on half capacity throughout the first 3 months.

So 90 days basically.

Okay. And this was the peak power charge period, right?

Correct. Right.

So how does the seasonality works out? How is the EBITDA will be behaving during the summer months and the slower months?

So [ Joice ], what happened, fortunately, we had the RO at that time because RO plant operated until September 2024. So they supported in terms of cash flows and EBITDA. So they contributed. So that's why, fortunately, we got some savings from that part.

Okay. Okay. From the -- see, my question was on the tariff point of view. How much -- what's the multiplier during the summer months as compared to winter months in terms of capacity, the power capacity? Can you throw some idea on that?

These are confidential by the off-taker side, so it cannot be shared.

Okay. Okay. Perfect. And the RO contribution was around OMR 7.5 million, if I'm -- if my calculations are correct. Is that right?

That I will need to check. I cannot comment straight on that.

All right. All right. Yes, that's it. And is there any CapEx plans that we are looking for the power plant in the next 2 years? Any planned outage, major CapEx requirements?

Yes. It's indeed -- I mean, this is part of the rehabilitation of the plant. There are ongoing activities at the moment. Part of the CapEx, first of all, the sort of -- we had to -- because of the nonavailability of the RO plants, we are installing a smaller modular RO unit to compensate for the permeate water for the steam turbine. There are upgrades on software, and this has already been captured -- part of the program of the debt financing. And what Adnan has mentioned, we have CapEx ongoing at this stage. We anticipate to complete all these CapEx-related activities by end of '25.

Okay. So what's the extent of CapEx? Any idea?

Yes. We cannot -- right now, we cannot disclose those numbers. But yes, soon, hopefully, by June, you will know the numbers.

All right then, I think we conclude the session. And it was very live and dynamic. Thank you for sharing and keeping us knowledgeable on what your requirements are.

Thank you. Thank you all.

Thank you.

Thank you.