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

Hello, and welcome to the Qatar Electricity & Water Conference Call. I would like to advise all participants that this call is being recorded. Thank you. I'd now like to welcome Bobby Sarkar to begin the conference. Bobby, over to you.

Thank you, Bhavesh. Hello, everyone. This is Bobby Sarkar, Head of Research at QNB Financial Services. I wanted to welcome everyone to Qatar Electricity & Water Company's second quarter 2023 results conference call. So on this call from QEC, we have Narayana Rao, who is the acting finance manager; and Abdulla Al-Janahi, who is the cost and budget controller. We will conduct this conference with management first reviewing the company's results followed by a brief Q&A. I would like to turn the call over now to Narayana. Narayana, please go ahead.

Thank you, Mr. Bobby. [Foreign Language] Good afternoon to everybody. As you know, QEWC had a Board meeting on August 7th, i.e., day before yesterday. The Board of QEWC approved the financial results of QEWC for the half year ended 30th June 2023. As you know, we reported a net profit of QAR 760 million. This is a 20% increase compared to first half of 2022. Revenue of the company has also gone up by 15%. If you look into only Q2, net profit, it has gone up by 24% and H1 profit totally, it is 12%. As of June 30th, market capitalization of QEWC is QAR 19.47 billion, that is QAR 17.7 per share for 1.1 billion shares, if you multiply you'll get that amount. QEWC retained its credit rating at A1 with stable outlook. This is Moody's rating, while reduction in the sent-out power and water, if you see our disclosure, there you can see some small, i.e., I think 4% in power and 2% in water. And quarterly, if you see, it is 4% and 6.6%. It is due to some scheduled or unscheduled outages during the period compared to last period. This year, it is little more due to some -- of course, this is not negligible, this is not a big amount. Revenue increase by 15% is mainly due to change in revenue recognition policy of RAF-B, which is to be in line with the accounting standards. We went for this. Actually, it is earlier, we based on the dispatch. We used to recognize the revenue based on the dispatch, now we are recognizing this on the committed offtake. But the impact is not much because other said gas cost is also going up in the similar way since both sides we changed the policy after recognition. Even Nebras is the one off factors apart from this, which is to be considered since last year, first half, Nebras was treated as joint venture company with 60% ownership by QEWC. From second half, that is from 1st July 2022, we consider it -- we changed the status as subsidiary, line by line consolidation started from the 1st of July after our taking over 40% ownership, that is after us becoming 100% owner of Nebras. If I exclude Nebras, our increase in the sales is coming down to 9%, actually, it is not 15%, for comparison purposes, if look into that. Then increase will be only QAR 109 million, which is mainly due to, as I explained, RAF-B gas and RAF-B1, we have got some increase due to the renewal of the agreement, that is agreement with the Kahramaa, which is result -- where gas cost has gone up based on the new turn, Kahramaa as well as Qatar Energy, of course, on the fuel agreement is concerned. Gas cost has gone up. Because of that, our P&L billing also proportionately gone up, which has also resulted in some additional revenue of QAR 29 million, RAF-B around QAR 92 million. These are the major reasons for the increase in revenue. Then coming to the gross profit. Gross profit has come down as shown in the schedule, but that's because of increase in revenue and minus increase in the cost of goods sold. Cost of goods sold has actually gone up from QAR 737 million to QAR 947 million, where, again, Nebras is the major reason. Nebras -- QAR 53 million has come from the Nebras there. And as I told already, B1 gas cost has gone up, RAF-B gas cost also gone up because of the change in revenue recognition. Put together, almost QAR 110 million increase in gas cost is there. Of course, here, it is only mainly the policy of the company and recognizing the revenue and the gas costs, some additional provisions has to be made in the accounts when we are accounting the other side based on the offtake -- committed offtake, that are the major reasons. And RAF-B1 increase in gas cost is compensated by the increase in the revenue billing to Kahramaa also. Net, there is no impact on the profit of the company by these arrangements. That's about the cost of goods sold and the gross profit. In effect, it has come down by 6% due to all these things. EBITDA is concerned, earnings before interest, tax, depreciation and amortization. We have got some 15% increase, which is mainly due to the full consolidation of the Nebras and recognition of the profit on sale of interest in Siraj Energy. Siraj Energy as you know we sold our ownership, that is 49% to the Qatar Energy. During the last year, we signed the agreements due to -- subject to some conditions, which has been materialized this year, and we recognized the revenue of around QAR 78 million because of that. That is also one of the reason for the increase in the EBITDA. And then coming to the G&A. G&A, we have not given any schedule or any chart in our presentation. But G&A is in control. If I exclude the Nebras cost, increased only 5% in general and administration expenses. Finance cost, of course, every company, you'll see this year increasing the finance cost because LIBOR as well as SOFR rates have gone up like anything compared to the last year. We have got -- of course, in our finance cost, we have got around QAR 192 million of finance cost of the Nebras, which is not there in the last year's P&L in comparison how to exclude that also -- sorry, QAR 108 million Nebras. If we exclude that, it will be a different figure. Net only QAR 84 million increase is there in the finance cost, which is an increase in the SOFR and LIBOR rates -- due to SOFR and LIBOR rates, recently saw the increase. Other income, it shows 390 -- sorry, I think it shows QAR 137 million against QAR 43 million -- sorry, this is the wrong chart, QAR 398 million versus QAR 210 million, QAR 210 million last year, QAR 398 million this year. QAR 398 million versus QAR 211 million, right? QAR 398 million actually in the -- for accounting reasons, we have shown QAR 12.5 million profit from discontinued operations. This also from the -- one of the company, that's why we clubbed that also. Sorry, it has been clubbed with the share of -- share of the profit from JVC, clubbed it, that's right, here QAR 398 million includes interest income also. Interest income is a major income. Interest income is QAR 150 million this year against QAR 49 million last year. This is the major reason for the difference and gain and loss on sale of the asset, that is, Siraj Energy, QAR 78 million we gained there, that is our Siraj Energy. Of course, last year, we have got QAR 86 million loss on the sale of the Lusail land, which was clubbed in last year's this one. Last year, we had around QAR 46 million increase in dividend income as a whole. Put together, all those impact is this QAR 398 million -- increase in QAR 398 million to QAR 211 million, 89% increase in the other income. Of course, it included QAR 96 million from the Nebras, which was not there last year. That was one of the major reasons for the increase. Then share of profit from the joint venture companies, that has also gone up from QAR 165 million to QAR 331 million. Here, it is due to -- last year, Nebras, we have to exclude to comparison. This year, we have got a lot of Nebras joint venture company's profit, around QAR 133 million came from the joint venture companies of the -- joint venture and associated companies, our equity-accounted company of the Nebras, QAR 331 million includes that QAR 133 million. As I told, QAR 12.5 million of CTC -- that's discontinued operation of the Nebras joint venture, that's also included here. And last year's QAR 76 million loss also to be excluded. If you compare that, it is not a big increase this year. Some companies, I think, little reduction also there this year compared to last year, which is the reason for this fall -- decrease in the joint venture and associated company profits as far QEWC alone is concerned. Of course, next in the chart we have given the net profit only. Individual head wise I explained, all head sites increased, total net profit is QAR 769 million against the QAR 865 million of the last year, 12% increase in effect. This 12% increase mainly, I can say here few factors, QAR 78 million of Siraj Energy, profit from the sale of Siraj Energy is one of the major reasons for the increase in the profit. And of course, dividend income last year, it is higher. This year, it has come down. And this year, finance cost is more, so many impacts are there. Totally -- and last year, Nebras, we had a loss for the half year. This year, we have a profit of around QAR 90 million providing for all the expected details. Totally, the position is improved compared to last year. There is no doubt on that. Then going to the balance sheet. Balance sheet is concerned in the case of assets, total assets, of course, you will see a little fall in the total assets, which I'll explain here current assets and noncurrent assets separately because not much definition required on the noncurrent assets because only 2.37% increase is there, it is around QAR 400 million. This QAR 400 million is mainly due to the reduction in investments in the listed company shares. As you know, it reflects in our cash flow also. We sold around QAR 360 million worth of the listed shares, which is shown in the balance sheet as equity investments at a fair value through other comprehensive income. Around QAR 0.4 billion, that is QAR 400 million reduction is there in this item only. QAR 316 million due to the sale of shares. And the balance is the change in the fair value, which is minimal. Again, you will see some movement in 2 heads mainly, that is loans receivable from the related party and reduction in the equity accounted investees, which is both; one side, it has increased QAR 0.5 billion, other side decrease of QAR 0.5 billion. This is due to some reclassifications, which is earlier it was not correctly classified last year. This year, we modified it. This, of course, in effect only QAR 0.4 billion reduction is there. And current assets are concerned, you will see there around QAR 1.5 billion decrease, that is 20% decrease, which is if you look into the bank balances and cash, reduction is only in this item, others are negligible reduction. It is because of the repayment of the USD 550 million loan to the Mizuho in the first quarter of the year. Then coming to the equity, equity also you'll see minimal reduction of around QAR 500 million, you can see. Out of that, around QAR 200 million plus, it is in the retained earnings only. Retained earnings, it is actually just you need not make any calculation for that, it is dividend paid minus the profit earned at 6 months, roughly. That itself is the reduction. Others are minimal in other heads. Noncurrent liabilities, you will see a reduction of around QAR 1.4 billion there. This is, if we verify here in the balance sheet, it is interest-bearing loans and borrowings have come down to that extent. Here, in reality, there is no reduction. It is the reclassification in the Nebras' asset because of the, what you say, term of the loan. If it comes below 1 year, it has to be reclassified as the current liability. It has gone to current liability instead of -- here it is reduced and increased the other side in current liability. Otherwise, there is not much movement in noncurrent liability except regular repayment of the installment of the loan. And current liabilities is concerned, as I told already, cash balance is affected by the repayment of USD 550 million Mizuho loan. Here also, it is affected by a reduction of the interest-bearing loans and the borrowings. This QAR 2 billion, it has been reduced; and QAR 1.4 billion, it is increased due to the Nebras reclassification from noncurrent assets to current asset. We moved QAR 1.4 billion from noncurrent assets to current asset. In effect, it is almost QAR 0.5 million reduction only. I think that's only the movement in the current liabilities also. Noncurrent liabilities and current liabilities both I explained. I think balance sheet, we covered. Now of course, as I understood, generally, people want to know more about the Nebras, which we have not given much in our presentation. I would just highlight what is the status on the Nebras. Construction of the solar PV project in Duisterweg with 14.5 MW capacity in the Netherlands is going on, with the target COD by the end of the year. Nebras has 40% in the project, with the remaining stake owned by the local developer. This is other information in Brazil. Nebras and local energy player agreed to form a joint venture focused on the greenfield gas-fired power generation. Partial closing achieved early this year for one of the development projects with bidding process scheduled for next year. And 584 megawatt gas-fired combined cycle power plant in Bangladesh, that is Unique Meghnaghat Power Project, they call it, UMPL in short form, is under construction. The plant is expected to start commercial operations before end of 2023. UMPL has already signed a long-term power purchase agreement. Nebras has 24% ownership in this project. And other big projects, Syrdarya II projects in Uzbekistan achieved financial close in August. This is after balance sheet event. It is a 1,600-megawatt megawatt natural gas project. Of course, expected to be commissioned in 2025 or early 2026. It is -- now financial closure achieved. It is under construction. Furthermore business development activities are ongoing in collaboration with the partners in the other markets as well. For instance, Saudi Arabia, Uzbekistan, South Africa and Australia. In Ukraine, situation seems to be under control, but if QEWC is concerned, we provided 100% on our investment. But now we are studying whether any other impairments is under -- on the receivables end. As of now, there is no material impairment. Anyhow, we have to wait and see. But the only good thing is, we provided 100% on the investment that will take care, if anything happens later also. Only we have to concentrate on other impairments if any, on receivables end. With this, I conclude my speech. But definitely QEWC did very well compared to -- I mean even compared to the last year, and we are going to do better in coming quarters. That's what the assurance we are going to give. With this, I conclude my speech. Thank you to one and all. You can ask questions, if any, from your side.

[Operator Instructions] Mr. Abdullah Amin from QNB.

Can you hear me now?

We can, yes.

I have few clarification kind of questions I need to ask. If you can go to your half yearly report, so if you go to footnote #15, revenue, it says that there is a split between operating lease revenue, capacity charges of QAR 209 million for the quarter, and revenue from customers like by selling the product, QAR 492 million. And if you go to cost, the cost exactly around QAR 492 million, QAR 240 million, like slightly different. So you are not really making money on selling the product. It's only the capacity charge that's making money. That's my first question.

Not fully audible. Note number?

Note #15 and 16.

Okay, 15 and 16.

So if you go to Note #15, it says -- yes, so there's a breakup of revenue. One is a capacity charge of QAR 209 million and the other is QAR 492 million for the quarter of 2023, second quarter, charges from customers directly QAR 492 million. And similarly, when you we to the cost structure, Note #16, the cost is also QAR 492 million. So other than the capacity charge, are we -- are you guys selling the product at the same price as you are producing?

I am not getting from where you are taking the figure.

Note #15 and 16.

QAR 492 million, where it is, that figure?

That's at the bottom of the page, Page #17. So if you see revenue from customers -- contract with customers..

Okay. Quarterly figure you are telling, okay, sale of water...

Yes. Even half yearly, the same.

Okay. Cost of sales, it is QAR 306 million, QAR 705 million depreciation, QAR 492 million and QAR 240 million, cost of sales.

Yes. And if you look at the Note #15 and part of Note #15A, it says revenue from contract with customers is also QAR 492 million. If you remove the capacity charges, so are we -- is QEWC selling the product at whatever they're producing at? How does that work? I just wanted to understand that.

One minute, I'm just trying to understand your question and this grouping. One minute, total revenue is QAR 1,379,648, QAR 1,340,926. Okay. This is regarding -- mainly here, if I'm right, contracted with costs of sales of water, there it is included the water related elements such as takers of outside the State of Qatar. Total revenues are QAR 101 million. Here, operating revenue capacity charges are QAR 209 million. Revenue from contract with the customer sale of water, here cost of sales, they include -- cost of sales includes others also, right? Here, it is revenue only. I think...

Yes, I agree. It covers those, but the amount is so close to each other that if there was no capacity charges of QAR 209 million, that would we've been like selling at the same price as the cost of production. So if I am wrong somewhere, please let me know.

Mainly, capacity billing is almost equal to cost of -- gas billing, right, normally, generally, it is as if a reimbursement. And the other part...

I didn't understand. Can you explain?

Energy billing means, it is based on the gas cost we incurred. We are billing the Kahramaa also. It is as if it goes as some inflation, I just mentioned, all those things are there.

So it will move in line with the cost?

Yes, it will be as cost and all, yes, yes.

And the second question is, on the Footnote #20, operating segments continued Part B. Should I start? So if you see the operation outside Qatar, the segment profit before tax is only QAR 85 million, which is, I think, primarily Nebras, right?