National Central Cooling Company PJSC (TABREED) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to Tabreed's call to discuss the acquisition of Emaar District Cooling assets. I hand over the call to your host, Ms. Souad Jamal Al Serkal, Vice President Strategic Communications. Madam, please go ahead.

Hi, this is Souad Jamal Al Serkal, Vice President of Strategic Communications at Tabreed. On behalf of Tabreed's management team, I welcome you all, and thank you for joining us on such a short notice today to discuss Tabreed's acquisition of the world's largest district cooling scheme in Downtown Dubai for Emaar -- from Emaar Group. As you are aware that in this unprecedented COVID-19 situation, all of us are working remotely, so kindly excuse for any technical issues during the call. Before we begin our presentation, I would like to remind you that some of the statements made in today's conference call may be forward-looking in nature and may involve risks and uncertainties. Kindly refer to Slide 2 of the presentation for the detailed disclaimer. I would now request you to turn to Slide #3 for today's agenda. On today's call, we have with us Bader Al Lamki, Chief Executive Officer; Adel Al Wahedi, Chief Financial Officer; François-Xavier, Chief Development Officer; Richard Rose, Senior Vice President of Finance; Faisal Tahir, Acting Vice President of Regional Business Development. Today, Bader will first provide a brief overview of the transaction, following with FX, who will engage into a detailed discussion on the strategic rationale. Richard will then discuss the key transaction terms and integration and synergies, following which Bader will conclude the presentation before opening lines for Q&A. Thank you, and over to you, Bader.

Thank you, Souad. Thank you, everyone, for joining us today. Well, indeed, today is a remarkable day in the history of Tabreed. I'm pleased to announce that we have a transformational transaction for the company. Tabreed is now proudly the partner of choice for Emaar, an investment-grade counterparty to provide cooling for their most iconic developments in Downtown Dubai. This is AED 2.5 billion transaction or approximately USD 677 million. It involves acquisition of 80% interest in Emaar existing Downtown Dubai district cooling company, with Emaar retaining the balance 20%. The transaction includes a long-term concession to exclusively provide up to 253,000 RTs of cooling to Dubai's most iconic and prestigious developments and therefore, paves the way for a long-term relationship with one of the world's largest and most reputable real estate developer. The acquisition and transaction costs will be funded by a 5-year USD 692 million senior unsecured term loan with 100% bullet payment. Tabreed anticipate reaffirmation of our investment grade credit rating, given our robust cash flow and our ability to deleverage quickly. This is something that Tabreed have been delivering year-on-year, and we are consistently delivering against the comments that we make. Tabreed has full operational control, and majority of the Board of SPV. And we'll be leveraging our excellence in operation and maintenance in trialing a sustainable and uninterrupted operational cooling assets. The transaction has concluded in Q2 of this year. With this, I'll now hand over to FX to take us through further details.

Good afternoon, all. Thank you, Bader. My name is François-Xavier BOUL, in short FX. I'm Chief Development Officer at Tabreed. I'll go through the strategic rationale of the transaction together with some of the details of the deal on its own. We think this transaction is a fantastic transaction for Tabreed. As Bader said, it's transformational. It's strategic in its nature. It's helping us to jump from #4 position in the Dubai market -- Dubai being, of course, the largest district cooling market in the world, and this scheme being the largest as well in the world. This scheme helps us to jump to #2 in Dubai and retain, of course, our leading role as a leading district cooling developer in their GCC region and beyond. We are now indeed the market leader in all the geographies that we're operating in. It's also a transaction that helps us diversify our customers' risk in terms of concentration. We have here a very high-quality investment with investment-grade customers, with strong cash flows and also delivering potential future growth in the future with the fact that we have a long-term contract and exclusivity rights. This is a transaction, in line, with our strategy. It helps to accelerate our growth that we've been looking to achieve over the last few years. And the last, but not least, integration of this -- these assets will be rather straightforward in a view. It will help to get some synergy -- we'll get some synergies, we'll benefit some synergies from the operational excellence that we have in our O&M teams. These plants are plants well operated as of now. They're well maintained. They have been designed and built to the highest standards, and they're very much similar to the plants that we have in our existing portfolio. It meets -- this transaction meets our test, being qualitative test on key parameters that include the customer quality, the type of contracts with robust structure and bankability of these contracts, and of course, the economics of the project. I'll jump to the next slide which describes slightly more detail the transaction, the location thereof and indeed the market positioning that we will achieve through this transaction, Slide 8. Dubai being the largest district cooling market in the world. It attracts a lot of tourists. Dubai Downtown is a prime area of Dubai. For those familiar with Dubai, I think it goes without saying. For those not familiar with Dubai, Dubai Downtown is where the Burj Khalifa, The Dubai Mall are located. So it's basically the most iconic buildings of Dubai. Together with the existing assets that we have in Dubai, mostly with RTA, with the metro station and also with our other Dubai plants serving development across the Sheikh Zayed Road, on both sides of the Sheikh Zayed Road here. We think we've got quality assets in Dubai, the best quality assets that we can have basically available to us in the Dubai market. District cooling opportunities of this nature through M&A are very scarce. Not a lot of these opportunities available, we think we secured it at the right time and for the right conditions. So it's transformational transaction. It comes with concession growth, which means contracts in place and future contracts of loads coming in the next year. It's a long-term deal. I think I've got -- I've covered that enough. We'll move to the next slide, which is describing, on the left-hand side, the diversification of our top customers' concentration, showing that it's helping us to reduce the concentration of top 3 customers now are at 44% compared to 56% last year. The deal itself means that 90% of the connected capacity is already contracted with Emaar Group entities where Emaar properties will guarantee these loads. Rest are with blue chips. You can see some of the names, like HSBC, Standard Chartered, Mashreq, all of the top institutions and it comes as a very diversified pool of customers. 84% of the estimated concession capacity of 235,000 tons is already contracted. And that's also -- a lot of value is derived from that fact in our valuation has been embedded into our valuation and price being paid to Emaar. The contracts -- the underlying contracts are long-term contracts. They are very similar to the contracts that we have in our existing portfolio. It comes with a load. It comes with tariff and take-and-pay structure ensuring future cash flow visibility. Next slide is a slide that you're probably familiar with. It is showing basically the 5 pillars of our strategy. This transaction ticks 4 pillars of that strategy. It's a concession. It's a long-term concession as Emaar provides exclusivity to service current and future developments in Downtown Dubai. The fleet of 3 existing plants plus 1, which is under construction, the fleet requires no expansion CapEx. And for the length of the concession, there is a limited need for maintenance CapEx, given the young age of the fleet, and these assets have been operated in the best standards. So basically, meaning that we will take them over in very good condition. So the first is concession. Second aspect, an acquisition. So it's value-accretive from day one through EBITDA and P&L. The EBITDA contributions are slightly shy of AED 200 million for 2019, and that's the typical impact that we will expect going forward. It's also -- in a longer term, it will bring new connections to Tabreed, given the exclusivity nature -- the exclusivity that we have and the nature of these contracts means that we have an exclusivity of an area where future developments will come to be connected in the near term -- near to medium term. And last, but not least, it's of course, I think full plants ultimately to our portfolio of 80 plants plus 3 today, meaning 83 plants now. Overall, the transaction is in line with our growth strategy of adding monopoly like concessions with strong cash flow generation. We move to the next slide, which could have been one of the first slides, actually, which is on the right-hand side, showing the plants in the Downtown Dubai area. You've got 4 plants here, including 1 in construction on the right-hand corner. And these are 4 plants -- interconnected plants serving all the developments in Dubai Downtown, which inclusive of the Burj Khalifa, of course, the highest tower in the world, the Dubai Opera, The Dubai Mall, the Address Hotel and other iconic developments in this part of town Dubai. Emaar District Cooling was 100 -- is 100% owned by Emaar, ultimately. It was an exclusive provider of these Emaar developments. We've acquired 80% stake from Emaar District Cooling. Emaar Group will remain 20% shareholder. As I've mentioned before and throughout the due diligence that we've performed -- very extensive due diligence that we performed, these assets are in extremely good conditions. They are young. They are very much to the standards of our designs and the standards of operation. We will, of course, bring our first-in-class kind of expertise to continue to operate them at the highest levels and bring operational excellence to bring energy efficiencies at the highest possible levels. In terms of financials, the -- you've got some of the financials here. The additional contribution of this acquisition will mean an increase of 13% of capacity, leading to a 9% increase of our revenues at Tabreed level for 2019 numbers and a 10% EBITDA growth for Tabreed. And as expected for a transaction, which is concession of this nature, we have exclusivity over this area on current developments, but also on future development, which, as I said, will bring about future connection opportunities over the longer run. With that, I hand over to Richard for more details on the deal -- on the transaction terms.

Thank you, FX. So turning to Slide 13, everyone. This slide outlines the transaction structure. As FX was describing, Emaar has transferred all of the district cooling plants networks, service agreements and the concession agreement to an SPV called Downtown DCP LLC. And Tabreed has acquired an 80% stake in that entity, with Emaar retaining 20%, thereby enabling a long-term future partnership with Emaar. The CCSA is third-party customers, not part of the Emaar Group, have also transferred to new entity. The existing contracts are consistent with Tabreed's normal contract structure and CCSAs include fixed capacity charges with variable consumption charges with the utility pass-through mechanisms. Moving on to the next slide. This slide outlines the financing and the rating agency considerations. The transaction is on 100% debt-financed through a fully underwritten corporate facility of USD 692 million with a tenor of 5 years and a 100% bullet at maturity. The cost of the debt is IBOR plus a margin and all-in cost is marginally below our existing corporate loan facility. This new facility allows penalty free prepayments, therefore, enabling refinancing flexibility for Tabreed. We're confident that our ability to generate strong cash flows will enable us to manage the leverage profile and bring it back into line with the guidance provided by the rating agencies within an 18-month period. And we expect to continue to enjoy investment-grade ratings with stable outlook, which has been confirmed today by Moody's and which is testament to our strong financial position and cash flows. The transaction does not impact our working capital liquidity, which consists of cash on hand and a AED 590 million revolving credit facility. I'll now move on to talk a little bit more about the combination and integration of the business. I think as FX said, we don't consider this to be highly complex, but Slide 16 sets out the combination synergies. So Downtown DC assets increased Tabreed's current connected capacity by 13% from 1.18 million tons to 1.22 million tons with further expansion potential. Downtown also adds 21% to our revenues and 24% to our EBITDA based on 2019 financials. Initial technical due diligence concluded that Emaar's plants are operating well and are maintained to industry standards. The assets are even similar in nature and currently designed to Tabreed's existing plants in UAE. A detailed integration plan has been prepared and smooth integration of the assets is a key 2020 priority for Tabreed's management and Board. And to facilitate that smooth handover, Tabreed has retained the workforce responsible for operating plants. Some cost savings are expected due to the transition of external maintenance contracts to Tabreed's existing in-house maintenance teams, but also through improved electrical and water efficiencies over time. The average age of the plants is less than 6 years with minimal replacement through refurbishment CapEx requirements expected in the next 10 years. With this, I'll pass back to Bader for closing remarks.

Thank you, Richard. Before we open the Q&A, let me make some few remarks, indeed. This acquisition is strategic in nature and transformational in the history of Tabreed and its shareholders. We are delivering against our ambitious growth strategy. It significantly enhances Tabreed's market position in the largest DC market in the world, Dubai. And we are doing so through a long-term partnership with Emaar, the leading real estate developer in the region. The transaction is funded through an attractive 5-year flexible term -- flexible term loan with 100% bullet payment. And we are confident of maintaining our investment-grade rating through strong cash flows that will be generated driven by our contracts with the investment-grade companies such as Emaar, who actually have the 91% of the current offtake. With this, so I'd like now to ask the operator to start putting through the question that you may have. Thank you.

[Operator Instructions] The first question comes from Divye Arora from Daman Investments.

Congratulations on the acquisition. So we just want to understand right, and the total capacity is around 235,000 RT. And currently, the utilized capacity is around 150,000 RT. So you are saying that soon you will reach 190,000. And how soon do you want to expect maximum utilization of the full capacity, it will take you 3 years or 4 years from now? That's number one. Number two is, what sort of an equity IRR, you will get on this acquisition? So I'm sure that you guys must have done your math. So typically, you target something about 10%. So is it well in that range? Hello, can you hear me?

Divye, this is Richard. Just give us a second, some logistical problems, and we'll come back to you, okay.

Okay.

So Divye, again, this is Richard. Thanks very much for the question. So as you say, the ultimate capacity of the concession is 235,000 RT. We currently have 150,000 connected capacity, a 190,000 is contracted. So there's 40,000, which is already contracted with take-or-pay dates, which we'll be connecting in the next 3 to 4 years. That's the expectation. Overall, we'd anticipate that the entire concession is connected within the next 10 years. It's going to take some time, but I would say, in 7 to 10 years. And in terms of equity IRR, I think you're right. We normally say that we're going to be around about low double-digit numbers. I think this is very high single-digit numbers, but it is broadly in the range that we would anticipate, given the very, very high-quality assets at a very, very high-quality concession area and inevitably a very, very high-quality customer base as well.

So you're saying the IRR is in high single digits for the time being? That is based on 150,000 connected capacity, right?

That's based on the future discounted cash flow for the concession area, which currently has 150,000 of connected capacity, yes.

Okay. So you're -- obviously, you're assuming that the -- in 10 years, the full capacity will be connected, almost close to the whole capacity will be connected. So based on discounted cash flow, the IRR is coming -- equity IRR is coming to be high single digit.

That's right, yes.

So is it not below -- we understand that it is a high-quality asset, but is it not below the expectations you had early when you do acquisitions? Because you generally go for low double digit, but this is in high single digits?

I think we've indicated in the last few presentations that we've done at investor conferences and so on that for the right assets, our WACC came down last year. And for the right assets, we would reduce our low double-digit target slightly if we move to. This is very slightly. So it's just dipping below that double-digit number, and we consider these are the right assets.

Okay. And any indication on the cost of debt, cost of funding, you said, LIBOR plus margin? So what would that be?

So the -- I mean you have to look at not just the margin. I mean the all-in cost of the debt, including fees is very slightly below the existing facility that we have. The margin on the debt is, I think, about 15 basis points below the existing facility that we have. And I mean, clearly, there's an opportunity at the current time as well to fix the -- fix the LIBOR at very, very low levels indeed. So we'll be looking to try and take advantage of that.

And you're saying you're going to hedge it, right? So that will be -- it will be a 50% hedge? Typically, you hedge it right 50%, right? Not the full hedging, the floating rate?

So I think our Board-approved policy is, as we've stated before, is the hedge up between 50% and 70% of our floating rate exposure. I think given the very, very low levels of LIBOR fixed rates available in the market at the moment. If we can secure those, we may go beyond that 75%, and we'll certainly talk to the Board about doing that.

The next question comes from [ Bilal Al Farazi ] from [ Luimasels ].

Bilal Al Farazi here. Quick question. On the actual timing of payment to Emaar, are you expecting to make the payment straightaway? Or will it be staggered over a period of time? And second question relating to the financing. Is that with a group of Emirates Bank or are international banks involved? Give some color on that, please?

Yes. Thank you for your question. It's Richard again. In terms of the financing, the facility is 100% underwritten by HSBC. And the intention is that, that facility will be syndicated out. I'm not going to disclose at this time what HSBC's target hold is on the facility. But we are looking to do a syndication exercise. And I can say that, that has kicked off extremely well in the first day. So a quite significant portion of the facility already mapped by another bank. So that's the plan for that. In terms of the payment to Emaar, this is a single payment to Emaar at the point of acquisition. So we have made that payment today.

[Operator Instructions] The next question comes from Franck Nowak from Franklin Templeton.

Three very quick one. Fully understood on the rationale, the logic, the assets. I just wanted to ask since Emaar, as a group, is facing a challenging times. And I fully understand also that the nature of your contract is take-or-pay. But how have you looked at like customer risk in the end? And I don't know whether I want to go into the very extreme scenarios, but I was just wondering if you had thought about it and mitigated it in any way, would be one? The second would be, you've said clearly that you expected your ratings to be maintained, which, I assume, would be leverage going down 2, 3 years down the cycle. I was just wondering also if you could elaborate on what impact it could have on your dividend policy? And my last one would be, this is a significant acquisition for you, and I know in the very recent past, you were looking at other markets as well to expand. So I was just wondering if also you could give us a brief latest thought on future developments, even though integrating this one would probably take some time.

This is Richard, again. Yes, that's 3 very, very good questions. I'm going to take them in reverse order, if I can. So in terms of our future capacity to grow and what would we expect in the future. This -- we still believe that we have significant capacity for further growth. However, we are very conscious that we need to deliver that growth in a controlled manner in light of our rating agencies commitments to retain the investment-grade status. And also, as you say, that we need to make sure that we integrate this asset in a professional and effective and efficient manner as quickly as we can. So we still believe we have capacity. We still believe there's opportunities out there. But we'll get this done first, and then we'll start looking around and making moves. But as I say, we'll retain that focus on our investment-grade status. Now coming back to that question that you asked. I mean, I think you mentioned 2 to 3 years, I think our modeling suggests that or shows that we will come back within the guidance for leverage from the rating agencies within around about 18 months after the completion of this transaction. So that is our intention. And that is the discussion and the data that we've shared with Moody's and Fitch. And Moody's indeed have confirmed our investment-grade status today following this transaction with stable outlook. So we're very confident on that. In terms of dividend, I'm afraid, I have to give the same answer I give when everyone asked about dividends, which is that it really is matter for the shareholders and the Board. We haven't talked about any kind of change in dividend policy. The dividend policy stands as it is. And I don't expect any change to that, but it is ultimately a matter for the shareholders. And then lastly, your question on Emaar. I mean, clearly, we're all living through unprecedented and extremely challenging times, as you say. I think what I'd emphasize is that this is an outright acquisition of 80% of the value of these assets and a 50-year concession agreement that we're signing with the largest team, Emaar properties and Emaar customers. So a short-term problem arising from the COVID analysis and the situation that we have. And we don't believe it should stuck us and closing the transaction of this nature. We have done detailed analysis of what we think the impact could be, and it doesn't -- in the worst-case scenario that we're looking at, we don't believe changes the return metric significantly on the deal because it is a 50-year deal. Emaar is an investment-grade group, and we're confident in their ability to honor their obligation, we are extremely confident.

The next question comes from Ambereen Jiwani from Ajeej Capital.

So I have 2 questions. One on the valuation. I -- the multiple seems a bit high versus your current multiples in the market and previous acquisitions. I mean, if you could just give us an understanding on what you guys think of it and have you justify the multiple? Secondly, I mean this might just be irrelevant. But if you could explain to us what portion of this district cooling asset that you're acquiring serves the hospitality and retail portion of the business? And then -- sorry, my third question is if you could just explain to us if -- how the utility cost and current consumption and other tariffs are structured in the contract? I just want to kind of understand, even with your current business if there is -- like the discounts that the government's giving on the utility cost, would they be passed through to the customer? Or do you guys benefit from it?

Sure. Thank you. Thanks for your question. On the valuation, have to remember that back in 2019 multiples are in the region of maybe 16.5x. We are [indiscernible] essential infrastructure.

I'm sorry, you're cutting out. I'm not able to hear you clearly. Could you please repeat that?

Okay. So in terms of -- this is -- in terms of 2019, the multiple is in the region of 16.5x. We think it's a right multiple for an essential infrastructure we are rendering here an essential service. Cooling in this part of the world is to be considered as an essential infrastructure and essential service. And these are long-term contracts. And on top of that, we are acquiring a company that is in growth. So actually the 2019 EBITDA multiple is not fully relevant for that matter. There is growth coming. And definitely, that growth is also secured through the contracts with take-or-pay provisions, including debts in these contracts. So on that basis, the way we've looked at that is this is a result of our valuation and some of our assumptions, which we believe are realistic assumptions. And in terms of hospitality, I mean, this is a destination, of course. The downtown area is a mix of retail and hospitality in this part. I would say it's about 50% -- probably just below 50%, if we aggregate The Dubai Mall and the various hotels and hospitality developments in the Downtown area. Last, but -- I mean, of course, having said that, again, it's backed by Emaar, and this is a utility. So you know that -- again, this is an essential service or they -- this is a utility as a cost. There is an OpEx for these -- for our customers. Last question was on the utility costs themselves that are indeed been lowered by the various entities of the Emirates. The way it is passed through is very equivalent to the way it's passed through in most of our contracts at a big level. So we're not benefiting from that effectively. It's a pass-through.

The next question comes from Rakesh Tripathi from Franklin Templeton.

Congratulations for the acquisition. I had a few questions. My first one was regarding your capacity addition guidance that you earlier gave for the next couple of years, the 75,000 RT. So does that still hold? And what sort of CapEx would you be looking to make any revisions to your CapEx plans for the year in light of this acquisition? That's the first one. The second one is the 1 plant that you mentioned is currently under construction, what sort of CapEx -- additional CapEx would you expect to be spent on that one? The third one is related to the shutdowns and the COVID-19 impact on the economy. Have you had any of your customers coming back to you and having discussions with you with regards to the concessions with number of assets being closed down as well? I understand that temporarily -- at least, I understand that these are take-or-pay contracts, but have you had any customers reaching out to you for any discussions in that regard?

This is Richard, again. So thanks very much for those questions. In terms of capacity guidance, we do expect additional capacities to come online in next 2 years from the Downtown concession that we signed with Emaar. However, I think given the uncertainties around how long the COVID scenario is going to last and what impact that might have on the initial guidance that we gave at the beginning of the year, we've decided to retain our guidance at 75,000 additional tons for 2020 and 2021. Clearly, we all hope that the COVID scenario finishes soon and is resolved, and then we can get back to normal. And if that happens, and the 75,000 number can be increased, then we'll come back to the market and we'll revise at that time. In terms of the fourth plant, so there won't be any additional CapEx arising on the fourth plant, but that plant will be handed over to Tabreed on completion for no additional cost. And there won't be any additional CapEx arising in our plants from this acquisition either. So as I said in the presentation, the age of these plants on average is only about 6 years. And they've been well maintained and very well managed, and we don't anticipate any additional CapEx arising on the plants. In terms of COVID-19 impacts, we don't discuss individual contracts with individual customers, I'm afraid. So I can't specifically answer your question in relation to COVID impact. Clearly, it's a situation which is evolving every day. It's unprecedented. We don't know how it's going to end or impact wider economy. What I can say is we believe that our business model is inherently resilient to short-term fluctuations in the market. And the -- 85% of our EBITDA comes from that capacity charge, which is fixed and flat for our customers. Consumption has a relatively small impact. And I can also say that as of yet, we are not seeing reductions in consumption across our network. Indeed, consumption so far this year was up than last year. So it's very difficult and too early for us to give a detailed assessment of what we think the overall impact of COVID-19 will be.

Yes. Okay. Sure. Just a follow-up on that. So regarding the capacity guidance, you mentioned you retain it as of now. But would it be fair to say that the CapEx related to this, to some extent, would be flexible and you'll see how the situation evolves? And would you have the ability to adjust the CapEx spending related to this addition -- these additions?

Yes. If there's delays to connections, there will be delays during the CapEx that is required to deliver those connections as well. Yes, that's the case.

Okay. Okay. That answers my question. Just one last point. The 190,000 contracted capacity on these acquired assets, this entire capacity would be take-or-pay, right?

Yes.

The next question comes from [ Maja Verejabara ] from London Investment Management.

Just a quick question please. Can you shed some light on the cost of funding there? And yes, that's it.

So you mean that the cost of the debt facility that we've taken out?

Yes, exactly. Yes. Yes.

Yes. So it's LIBOR plus a margin. The margin is in its -- the overall cost of the facility is slightly less than you'll see for our existing corporate facility in the financial statement. So I think that we de publicized the margin on our existing facility at 165 basis points plus LIBOR, and this is a bit less than that. The -- in addition to that -- I'll reemphasize, I think there's a significant opportunity in the market at the moment to hedge the LIBOR rate at almost unprecedented low levels. So we will be looking to do our best to secure those low levels through hedging transactions and fix the cost of the facility in the long term.

The next question comes from Anoop Fernandes from SICO.

Congratulations on the acquisition. My question is on your forward EV/EBITDA guidance. So you mentioned that the deal is being -- the valuation is 15.5x [indiscernible] and 14.5x forward. So that roughly -- that is about a 10% EBITDA growth. So could you please give us a sense of where this EBITDA growth is [ evident ] on the back of volumes? Or is it these OEM savings that you've spoken about? That's question number one. Secondly, are there any CPI escalation clauses that you have structured in these contracts as well? And what specifically happens to these contracts when we are in a deflationary mode? Does this -- does your revenue accordingly adjust on the downside as well? And the third question is on the accounting of the assets. So will all the AED 3.1 billion be recorded under PP? Or do you expect some goodwill to be recorded as well?

Thank you. Thanks for your question. In terms of the first question, in terms of multiples, the growth I mean that's, of course, inherent to the growth in EBITDA, the growth from 2019 to 2020 as far as the way we are foreseeing that growth is coming, it's a combination of capacity and volume. But of course, the bulk of it, as it is in our business, industry cooling is capacity. The margin of it is mostly a capacity based margin. And on the second question on CPI, they are very limited circumstances, allowing us to pass CPI indexation in the contract. So we don't think there is, say, escalation or indexation of the tariff over the course of business. And then last, Richard, maybe you can cover the goodwill question?

Thanks, FX. I think as far as goodwill is concerned, we anticipate, clearly, we have a PPA, purchase price allocation exercise to do. And then we had detailed discussions with our auditors on that. And then I'm -- as I'm sure you're all aware, we have 12 months under the standards to look again at that purchase price allocation and revise. So it's quite a long process to finalize that activity. I think we anticipate a small amount of goodwill arising from this transaction. The vast majority of the assets we anticipate being recorded as PPA.

Okay. Just a follow-up on the OEM savings that you've mentioned. Could you please throw some light on what the savings could be versus what the cost was earlier?

I don't think we're ready to put numbers on that yet. What we can say is that a lot of the maintenance that was conducted previously was conducted by the original equipment manufacturers of the equipment installed in the plants. And in our experience, that tends to be much more expensive than having your own in-house operations when you have to kind of scale of operations that Tabreed does. So we will be gradually transferring the maintenance of the equipment to our in-house operations, and we do expect to see cost savings arising from that. But I don't think we're in a position to talk about precise numbers just yet.

The next question comes from Rita Guindy from Arqaam Capital.

Just a follow-up question to confirm. You mentioned earlier that the 190,000 RT capacity should be connected within 3 to 4 years. And that we should reach 235,000 within 10 years. Is that correct? Did I hear it correctly?

Yes, that's correct.

The next question comes from Divye Arora from Daman Investments.

I have a follow-up question. So just to make sure, you were saying that the dividend policy remains same. So can you reiterate what is the dividend policy? Is it 50% of the net income in terms of payout? Or is it 60%? That's number one. And number two is, so this acquisition takes you, I think, much above 5 levels, maybe 5 to 5.5 levels in terms of net debt to RCF, which is how you are measured in terms of your investment grade rating. So can you tell us about what is that cutoff that you have to be inside to maintain your investment-grade rating? And how far are you going to go away from that? Number three is the -- so you're talking about some cost savings and -- on the operations and maintenance, given your experience in this business. The margins of Emaar are already pretty high, I think were around 57% versus yours 50% levels. So where do you expect these margins to reach?

I do apologize because I didn't quite get that last question. Could you repeat the last question?

Yes. The last question is that the margins of Emaar District Cooling business that you have acquired, it has around 57% EBITDA margin. And your EBITDA margin is around 50% in the existing business. So where do you think this 57% margin could be taken up, can it go to 60% level? Because you're talking about some cost savings?

So I think on that last question, a point I'd like to make is that the valuation that we have done for this business does not rely on us delivering significant cost savings or massive synergy benefits. It's based on the contracted cash flows from the contracts that we have with the Downtown DCP LLC company and the customer base. So I think I don't want to get hung up on cost savings. They're really not significant to the valuation. In terms of dividend policy, I think what we've seen in the last few years is that the dividend, which is either a whole number fills or a half number fills. So it does vary in terms of payout ratios and around about 55% to 60% just under in terms of payout ratio. The Board's dividend policy is to grow dividends in line with growth of the business. And that's the state dividend policy that has not changed at this time. And I'll reiterate again that ultimately, the dividend is a matter for the shareholders and not for management and the Board. And then in terms of rating agencies. So you're right. We do go above the guidance. And Moody's have issued their opinion on this transaction today. And they clearly stated in that, that we do reach their targets for us in terms of leverage as a result of this transaction, but that based on the cash flows, the existing group and this acquisition generate, we -- and the -- our ability to delever as a result of those cash flows that we should be back within the margins, the debt metrics within about 18 months. And that's our target, so we expect to deliver.

Sorry, what's the -- can you share that number for you to be investment grade? What is the net debt-to-EBITDA, net debt-to-RCF ratio as per the rating agencies?

The -- so the -- so we have 2 different metrics, 1 from Fitch and 1 from Moody's. So they are slightly different in the terms of how they're calculated, but the Moody's metric for leverage is 10%. So that's the target that we need to get to.

Okay. So you were talking about that you have done the valuation based on the contracted capacity, right? And you have not taken into account a lot of...

Cash flows, yes.

Yes. So cash flows. So basically, when you say contracted capacity, you mean to say that ultimately, you'll be contracting close to the full. You're not doing the valuation based on 190,000 RT. You're doing valuation based on ultimate like 220,000 to 230,000 RT right, which is, let's say, 95% utilization?

Well, as I said in -- as we said in the presentation, 190,000 is the contracted capacity. And that does drive the majority of the valuation, but ultimately, the valuation considers the full concession size.

There are no further questions in the conference call. I will now give back the floor to Ms. Souad.

And this concludes our call to discuss the acquisition transaction. Tabreed does look forward to interacting with you at our earnings calls -- conference calls and investor conferences. Should you have any further questions, please don't hesitate to contact us. Have a great day, and thank you, once again, for joining us on this call, and please do stay safe.

Ladies and gentlemen, this concludes today's conference call. Thank you all for your participation. You may now disconnect your lines. Thank you.