Nebras Energy Q.P.S.C. (QEWS) Earnings Call Transcript & Summary

Thank you. Hi, hello, everyone. This is Bobby Sarkar, Head of Research at QNB Financial Services. I wanted to welcome everyone to Qatar Electricity & Water Company's Fourth Quarter and Fiscal Year 2021 Results Conference Call. So on this call, we have Narayana Rao, who is the acting Finance Manager at QEWC. We have Gojy Augustine, who is the Head of Investment Accounts; and Abdulla Al-Janahi, who's the cost and budget controller. So we will conduct this conference with management first reviewing the company's results followed by a Q&A. I would like to turn the call over now to Narayana. Narayana, please go ahead.

Salam Walekum to everybody. Good morning to everybody. I'm Narayana Rao. As Mr. Bobby introduced you already, I'm acting finance -- as CFO of QEWC. As you know our results have been announced on 13th February, two days before after our Board meeting, Board approved the results. First of all, I want to tell that under the chairmanship of our His Excellency, Saad Bin Sherida Al-Kaabi, and our Managing Director and GM Mr. Mohammed Al-Hajri, QEWC performed very well during this year with the increase our profit by 27% compared to earlier years. It is really an excellent year in all respects as our -- I think some of you already gone through our presentation, I don't want to -- just go by exactly by that. I will just readout the summary. Actually, our profit has gone up by 27%, but revenue, slight decrease there in revenue. It is a small amount, which is just 4% due to lesser demand from Kahramaa, we can say. And if you see the Slide #12, we mentioned that sent-out power and water figures from QEWC and JV companies during the year compared to the previous year are almost same, there's not much difference. 7% drop in sent-out water is mainly due to additional 61.45 MIGD capacity addition by UHP, Umm Al Houl Power and hence, lower water offtake from QEWC's fully owned plant. Due to this, some small dip in the supply is there, which resulted in the total revenue drop by 4%, but it has not affected our gross profit. Gross profit has gone up by only 8%. It is due to the reduction in the cost of sales, which is again due to the -- mainly due to the reduction in gas cost and manpower cost. Gas cost has come down because of the lower demand supply -- supply is low, of course, naturally gas cost becomes little low and efficient management of the plant also due to which the heat rate has come down, which resulted in the lower gas cost, in turn lower cost of sales. And EBITDA, earnings before interest, tax, depreciation and amortization is concerned, it is also -- of course, simply, we can say it because of the better heat rate, lower manpower and G&A expenses, higher other income. Net profit has gone up by 27%, earnings per share also gone up by same percentage, higher profit from JV in the subsidiaries, lower net interest expenses, lower manpower and G&A expenses, higher other income all those contributed to this. This gross profit already I explained, and I think I can go to share of profit from JVs. There is a small increase 3%, which is not a -- no explanation required on that. Even a few areas we may have had some reduction in the profit, but other JVs compensated that. Overall, remained at the same level. Other income has gone up by 17%, [ QAR 186 million to QAR 218 million ] mainly due to the reversal of inventory provision to the extent of QAR 33 million during the first half of the year. Net profit, first of all, this has explained. It is -- of course, as explained in the Slide #17, last year, we had a reversal of QAR 140 million -- sorry, some provision of QAR 140 million against some of this Kahramaa claim, which is one of the reason for this difference between the 2 years. Even after that, also, we had around, I think, more than 13% increase in the profit even excluding that also. It is not only due to that factor alone. Quarterly performance is concerned also, we are -- we have done very well compared to last year. Of course, if you exclude -- mainly G&A was the reason last year where this QAR 140 million additional provision was there. Otherwise, gross profit also, it is 16% higher excluding that if you talk also, it did very well during this quarter. If you move to balance sheet, of course, there is no place on the balance sheet. Just -- we analyze the balance sheet in next 5 minutes. We have got 10% increase in the noncurrent assets, which is mainly due to the investment in joint venture companies, which is around QAR 1.1 billion against the total increase of QAR 1.25 billion. Second, the MRI, why it has gone up, the joint investment has gone up, it is mainly QAR 1.1 billion out of that is due to the -- sorry, QAR 700 million, QAR 0.7 billion out of -- due to the valuation of IFRS and other hedges. This is not a real increase. It is the -- QAR 700 million is just because of the valuation of the hedges. And QAR 200 million is because of additional investment in the UHP and balance QAR 200 million is the retention of the profit, that is net profit and dividend paid. We also have had an increase of QAR 593 million in the equity investments at fair value that is in the shares -- invested in the shares listed the Qatar Exchange. This is also purely because of the -- mainly because of the valuation because this market gone up during the year. We invested in the better steps we can say, due to which market value has gone up. QAR 500 million, of course, we invested in the -- through asset managers where purchase and sales are going on during the year. Others around QAR 1.5 billion we invested directly through our own channel. And there -- of course, invested through QNBS, but we are only suggesting and we are holding it directly without through any asset managers. There also significant increase is there in value. Total value increase is around QAR 600 million compared to last year, I can say. And of course, others are reduction in the plant and equipment and all others brought it down to QAR 1.2 billion instead of -- from QAR 1.6 billion increase in these 2 categories. At the current assets, of course, there is not much variation, even though cash and bank balance has gone up QAR 148,000. Equity and liabilities, out of that equity is concerned, equity has gone up by 21%, almost QAR 2 billion, QAR 9 billion to QAR 11 billion, it has gone up by QAR 2 billion. As I explained already, that is QAR 0.7 billion in the IRS (sic) [ IFRS ] valuation of hedges of joint venture companies, which has got effect in the equity also. And retained earnings, we have got QAR 1.46 billion profit, but dividend gone out was QAR 0.7 billion during the year, and QAR 0.3 billion or QAR 30 million we have paid to Social and Sports fund as a allocation from the equity. This added up to -- this QAR 2 billion -- this is the major reason for QAR 2 billion in the equity, we can say. Mainly QAR 0.6 billion in the fair value valuation increase and balance because of the equity -- increase in the equity -- in the retained earnings, balance in the increase in the retained earnings. And current liability is concerned. Noncurrent liabilities, it is because of the loan repayment only not much increase, around QAR 332 million only the decrease. It is because of the loan repayment major reason. Current liabilities, we have got QAR 350 million decrease, QAR 350 million. Current liabilities decrease needs to be explained, I think so. That's why bank -- what we did during the year is we repaid USD 125.5 million loan to SMBC. Also, we repaid USD 150 million loan to -- in U.S. dollar terms, I'm talking. Mizuho -- sorry, MUFG Bank, not Mizuho, sorry. MUFG Bank, totally USD 275 million loans have been repaid during the year. Against that, we have taken USD 125.5 million loan from Bank of China and a USD 50 million additional loan from DBS. Totally net repayment of the short-term liabilities, USD 100 million, short-term loans is USD 100 million or QAR 365 million roughly. This is actually explained -- this QAR 350 million -- sorry, USD 365 million, basically. USD 365 million it explains the major reason for the major decrease in the current liabilities. I think with this, I explained the most major movements in the balance sheet during the year 2021 -- as of December 31, 2021, against the position as of December 31, 2020. With this, I think, of course, our market capitalization is concerned, our worth is around the QAR 18.26 billion as of December 31, 2021, against QAR 1.1 billion common shareholding company. This is really a excellent year for QEWC. And we expect the same thing to continue in the future years. Thank you for -- thank you to all of you for attending this call. And I think now you can go for the question answers if any.

[Operator Instructions]

Operator, this is Bobby Sarkar again. While we are waiting for Q&A from external parties, I would like to get started with a couple of my own. My first question was on your Nebras joint venture, I see that earnings are down significantly this year from QAR 285 million last year to QAR 206 million this year. What's the reason behind that? And what is the kind of normalized run rate in earnings we can expect in Nebras because it has been very volatile the past couple of years? And then just staying on Nebras, given your announced acquisition of the 40% stake, what -- when can we expect this to be completed at what terms in terms of how much will it be, how much leverage would be used? And also, how would this impact Nebras' operations this year? And then my final question is, if you could give us a sense of your capital spending for this year, that would be great.

Your second part of the question, that is about Nebras' 40% takeover. That will be most likely happening in the end of quarter 1. Already, we signed the SPA on 30th of December 2021. And now all the legal formalities is getting approval from various countries, that is in progress now. Shareholders approval has to be -- will be obtained in the AGM to be held most -- on the March 14, 2022. Once all this process is completed, of course, we can say the completion -- process completed taking over of this 40% -- purchase of this 40% shares by the Ras Laffan operating company, which is the 100% owned subsidiary of QEWC. And the future of Nebras is concerned, of course, we are going to -- going for this transaction on the assumption that definitely Nebras has got a very good future and the QEWC's earnings will be going to be higher because of having is -- instead of 60% profit from Nebras, it's having 100% from them, definitely, which will improve the position, all those things we looked into, and this is the major reason for going for the whole deal. And the first part of your question, what exactly it is -- you are telling this year, it is down Nebras profit, right?

Yes. It's down significantly this year versus -- in 2021 versus 2020. And it was -- and it's down significantly from 2019 as well. So what -- it's been on the down trend. So if you could just share what we can consider as a normalized level of earnings for Nebras at 100%?

Mr. Gojy, you will take this question or you want to me to continue? I think you are the better person to explain that.

Yes. Mr. Rao. Yes, Nebras' transaction, actually in 2020 was an exceptional year for Nebras. One reason was there was -- especially in the Indonesian investment, there was a reduction in the tax due to COVID. There was a reduction in the corporate tax structure in -- Paiton Indonesian asset. And in 2021, they were expecting it, but it did not happen. That reduction was not there and it resulted in the booking some provision for the tax, corporate tax in 2021 December. That's why there was a reduction in the profit in -- that is the main reason for reduction that profit in Nebras. What was the other question, Bobby?

Yes. Just to follow up with the Nebras question, I understand that the tax was not -- the tax break wasn't gotten in 2021. But Nebras, we were expecting a run rate of like $100 million a year and hasn't happened so far. I mean it's been down -- it was -- it's been down last couple of years, actually, last 3 years. So what's the normalized run rate given your current assets in Nebras, we can expect on a 100% ownership going forward? And then my last question was what's the general level of capital spending this year for QEWC?

Nebras' normalized profit will be similar to this year, but there are a few commissioning going to happen in 2022 in Netherlands projects and -- also there is some -- Stockyard Hill, actually, it was a partial operation in 2021 around 286 megawatts only was -- only in operation. That was also in the -- after July 2021. So Stockyard Hill in Australia, that project will be fully operational in 2022. And also Nebras is looking at some other projects like something in Ukraine. And there is another project in Bangladesh, which is going to be commissioned by end of 2022. So there can be -- based on the current assets holding, this is the -- I mean, the normalized profit for Nebras is current years. But in the future, there is some commissioning activities and transformation of construction phase to operational phase, then there will be some additions. And on the other question regarding the capital spending for QEWC, this year, we are not expecting any -- Rao, right, any...

Yes, yes. Any major. Except now, of course, we are -- Nebras is concerned, that is one of the big assets we are acquiring during the year, which is funded by the loan arrangement already, we negotiate -- of course, we got the loan already. We raised the loan also, USD 550 million we got from the Mizuho has declared -- disclosed in our financials also. The agreement signed on the 6th of January, and we raised the amount also in the second week of January. The only thing they have to pay once all formalities are getting finalized. All things streamlined there. And apart from that, of course, all normal capital expenditure only. Even Facility E, when it is supposed to be this first requirement there, Mr. Gojy, anything you have finalized there?

Actually, for Facility E, the spending from QEWC side will be only in 2025.

'25 only.

In between -- 2025 only, maybe there can be some equity contribution in between and that may be arranged through equity bridged on that is still not decided.

Yes. That is not coming in 2021 -- '22, you mean. That's what...

Yes, yes.

Because Gojy is handling that area. But whatever our major is Nebras and other things are normal maintenance, lockdown maintenance and all those things have some -- apart from that, there is no major capital expenditure during the year.

Our first question comes from [indiscernible] from Ashmore.

Just going back to Nebras, please. The first question was, just to clarify your rationale for buying that 40% stake. You obviously had the potential to sell if you wanted to, but opted to buy. So I'm wondering, given the different mandates, so to speak, and Board structure, et cetera, why you went ahead and purchased that? Second question, please. Is there anything you can give us on your views on the implied multiple you're paying for this transaction or anything you can say about valuation? I say that because, obviously, Nebras tends to release its documentation a lot later than you. So just give us some color. And then the final question was, when do you think you can tell us about what the Board structure of the new enlarged group will look like once you fully take over Nebras?

Okay. Nebras takeover is concerned, we appointed Deloitte as the financial consultant. They made full analysis of the Nebras based on the -- all their structure -- wherever whichever country they are holding the assets and all those things, and they have come up with a fair valuation of the Nebras business. And final phase, whatever decided it is within the range, whatever suggested by the consultants and it is negotiated with the Qatar Holding. Final price was USD 530 million, which is within the valued amount. Of course, we are coming up with the, what you say, next week, probably we are coming up with this AGM notice to the shareholders where we'll be giving a brief explanation of this Nebras SWOT analysis of the strength, weakness, opportunity and threats and all those things what we consider. And based on that, we evaluated all those things. So I think valuation is a very fair valuation and price whatever we negotiated and finally we agreed is also very much reasonable as per the FRC in the whole deal. That's what I have to say on that.

So you said next week, there will be some sort of shareholder notice about a little more of the transaction?

Yes. 21 days before the AGM, we are supposed to issue the Notice of AGM, along with the AGM. Of course, our financial result as we are issuing in the newspapers and all. Along with that, we are giving a brief note on the -- I think one of the agenda for the AGM is the approval of the SPA by the shareholders in the AGM. We are giving a brief note on this SPA, including where we are explaining the strength, weakness and opportunity and threats on the Nebras business, yes.

Okay. Fair enough. And is it too early to talk about the Board's composition post this, that's a fully owned subsidiary then?

Pardon?

Is it too early to talk about what you think the Board structure will look like once you own 100%?

Okay. Of course, once we own 100%, definitely Board will also be fully from the QEWC members, right? You're telling about Nebras, right?

Yes. Yes. Yes. So once it's -- yes. So it currently has its own stand-alone Board. I'm just curious what changes after you own 100% compared to when you own 60%, et cetera?

Yes. It's -- as you mentioned, it is too early to talk about it. Maybe by end of March only, we'll have a definite answer on that.

We now take our next question from Ejayan Al-ahbabi, Al Rayan Investments.

This is Pervez from Al Rayan Investments. I've got 2 questions. Firstly, could you tell us more about your cost of gas consumption actually declined by about 16%, 17% for '21, even though your electricity went up. So could you tell us what led to this decline in the cost of gas? Or are there any changes to the pricing? Or it's just efficiency? Second question is that you have borrowed $530 million -- $550 million for the acquisition of Nebras. You already have a lot of cash on the balance sheet, about $3.6 billion. What was the rationale for borrowing? Why didn't you just use the cash?

Okay. Second part I will answer first. And first part will be answered Gojy later. And borrowing $550 million is exclusively for Nebras deal, even though it is a general corporate borrowing. And the existing cash in the balance sheet, as I explained earlier also, most of them are in U.S. dollars. It has been in -- if you see the other side, a lot of short-term loans. If you compare both short-term loans versus whatever cash we are holding, it is -- you can take net as it is stated in the balance sheet also when they're calculating the -- I think somewhere it has been gearing ratio when they calculate, they made it as a deduction from that. And net loan is around QAR 2 billion only. This is what they are mentioning there after deducting the cash holding. This is -- this amount is almost equivalent to short-term loan, whatever we are having total cash balance. This short-term loan, if we repay tomorrow, there will not be so much of cash. It will be a small cash amount. It helps us to manage the cash properly. Whenever we need the cash for some purpose, we can take out from that, later you can replace. But it's all within 1 year repayment. We should be prepared within 1 year. We are not losing -- if we are losing anything by keeping that, we will repay it immediately, but we are not losing anything. You can look into our earnings, interest in deposits and all those things, you can understand why we are using by looking -- yes. Pardon?

So you will repay all this short-term debt or you will refinance?

We will repay if it is not worth for us to keep this short-term debt. But now it is worth for us to keep this short-term debt. We are earning by taking that short-term rate. And we are having the very much flexibility in managing our cash flow by using this short-term debt. But in turn, we are not losing anything, we are gaining. That's what it is. We are getting a good deposit rate on whatever money we are keeping, which is not less than whatever we are paying.

So basically, you're paying -- you're earning more on the cash than paying on the loan? So that's why you are not...

Yes, yes. That's what. It helps us to manage our cash flow also in turn. Yes.

Sounds good. And...

Okay. On the other question regarding the fuel gas, right? Yes. Regarding that, actually, there was no change in the fuel price, except the normal inflation adjustment as for the fuel supply agreement that is linked to the consumer price indexes. And see, QEWC's revenue or even all the JV companies, revenue is purely -- most of it comes from the -- comes from capacity charges, and capacity charge is paid based on the availability. So sent out power, Kahramaa is having a fuel optimization strategy, whereby Kahramaa is taking power from the cheapest plants for fuel -- more fuel efficient plants. So like Umm Al Houl, which is a recent plant where they have a better efficiency in the fuel. So Kahramaa will be taking more power and water from those plants. But since our revenue is not affected because of the capacity charges. But output charge is affected, and that's why you see a slight drop in the revenue. And that is the reason for -- that is the main reason, of course, and there is a better heat rate during the year due to many reasons. So I hope this explains the drop in the fuel gas costs.

We now move on to our next question from [ Sultan Syed ], a private investor.

Yes. I'm not sure can you hear me?

Yes, yes. We can hear you.

Yes.

First, just to make -- to clarify, I think this question is asked by many. What I understand now regarding the Nebras acquisition is that you are taking 1 year loan from Mizuho and then you're going to repay it within 1 year only, right?

Yes, yes. That's right. Actually, this year, 1 year bridge loan, what we are taking now. At the end of -- even after 6 months, of course, even before that also, we are thinking various options how to repay it. We have got mainly 3 options. One is going for a syndicated loans within -- before this loan -- refinancing it by a syndicated arrangement. Other one is going for a bond issue, debt arrangement. We have to see how to get that plan in mind. Other plan is, as you see, we have got QAR 3 billion worth of investment in listed companies, that is fair value investments in equity. We can liquidate a portion of that amount to take care of this also. And otherwise, we can take partly from there, and partly, we can renew the loan for after 1 year. So many options are there. That, of course, we are still under -- looking into the various options. And probably within 1 or -- first or second quarter, we will come back on that. Yes.