Sembcorp Salalah Power & Water Company SAOG (SSPW) Earnings Call Transcript & Summary

Tariq, let's start. Okay. So, I think it's the time to start.

Okay. Thank you, everyone for joining Sembcorp Salalah MSX discussion session for the -- to present financial statements for the year-ended 31st December 2024. Okay. So, Humaid, can you please take this up. When anyone will join, please let them in.

I'll take care. Don't worry.

Okay. This session is recorded and will be published on the company's website. We request everyone to stay on mute during the discussion session and there will be a question-answer session at the end of the meeting. We will be presenting in this presentation deck, the company background and financial performance for the year. We request everyone to stay on mute during the discussion session. If there will be any questions, we will be having a question-and-answer session at the end of the meeting. Thank you. In this presentation, we will be presenting company overview, financial performance and operating performance and then followed by a question-and-answer session. On the company background, the total investment of the project is USD 1 billion. And -- sorry, someone...

Gazib, can you please have mute because I think you have a background from your side. I think he's not responding. Gazib? Okay. Let's mute him, Tariq.

Yes, I muted.

Okay.

Okay. The total investment of the project is $1 billion. The initial shareholding was Sembcorp owned 60% and Oman Investment Corporation, 40%. And the plant achieved commercial operation date on 25th May 2022. In October 2013, the sponsor shareholders offered 35% of their shares to the public through IPO. Today, Sembcorp owns 40% and Oman Investment Corporation, 13% and rest of the shares are held by public shareholders or institutional investors. The project debt of approximately USD 733 million was funded by consortium of 9 banks and local banks, out of which approximately USD 600 million has already been paid off. Total contracted capacity of the power plant is 445 megawatts and water plant capacity is 15 million gallon per day. The company has 15 years take-or-pay PWPA. This contractual arrangement guarantees cash flow as soon as the plant is available, irrespective of dispatch of electricity or water. This is the reason the company PFO and EBITDA remained stable from year-on-year basis. The company also has an O&M contract of 15 years with Sembcorp Salalah O&M Services Company, which is owned by Sembcorp 70% and Oman Investment Corporation, 30%. In addition, the company also has long-term CSA contract with GE for 15 years, who is actually OEM of the gas turbines. Currently, the company is contributing 50% of total electricity demand and 50% of total desalinated water demand of the region. If you look at the financial performance for the year 2024, our financial performance was excellent. Our net profit was OMR 22.5 million, which is 9.45% higher than the previous year. The increase in net profit is mainly due to better operating performance and lower net finance costs. Revenue is also higher as compared to the previous year because of the increase in capacity charge and increase in fuel charge revenue arising from the increase in plant load factor. If we look at the EBITDA and PFO, as I already mentioned that EBITDA and PFO of the company is stable on a year basis because of the business model, take-or-pay business model. EBITDA of the company is slightly higher than the last year, mainly because of the better operating performance. Likewise, PFO is better than the previous year because of better plant reliability heat rate efficiency margin. If we look at the dividends in 2024, the company paid dividends of 10.5 baizas per share in total. We are also seeking approval from the shareholders to approve dividend up to 8 baizas per share, which will be paid on 2nd November 2025. If you look at the detailed variance analysis as compared to 2023, increase in -- the main variance is coming from the increase in revenue, which is mainly due to the increase in capacity charge and fuel charge revenue. And fuel charge revenue is a pass-through in nature, which does not have impact -- significant impact to the profitability. You can see that there is a similar increase in net operating costs that is also due to the fuel cost. Decrease in net finance cost is mainly because of the repayment of term loan. The company has been paying the term loan as per the repayment schedule of the project finance due to which the interest finance cost has reduced. There is nothing much to report on the statement of financial position. Total assets overall reduced from OMR 273 million to OMR 261.5 million, mainly because of the depreciation impact of the plant. Other than that, the liabilities also reduced because of the loan repayment. Shareholders' equity increased mainly because of the increase in retained earnings. On the cash flows, cash flow from operating activities are higher than the previous year, mainly because of the higher operating profit -- higher profit and also the lower working capital adjustment. Working capital adjustments are of temporary nature and will not recur. Our cash flow from operating activities will remain approximately same as the EBITDA. Cash flow from investing activities increased from OMR 0.02 million to OMR 6.55 million. That is only because of release of fixed deposits, but it also has only temporary impact. These are not real cash savings. On the repayment of term loan, we paid OMR 24 million during the year. Dividend payment, it was higher than -- significantly higher than 2023. Approximately, we paid 30% dividend higher than the previous year. If you look at the historical financial highlights, as I already mentioned, that our revenue has increased mainly because of the plant load factor and which does not significantly contribute to our profitability. EBITDA is year-on-year basis approximately the same. On 2024, the EBITDA is higher, mainly because we have one-off insurance claim. Other than that, our EBITDA is stable over the period. PFO, you can also look at, it will remain stable -- it is stable throughout the past 5 years and it is expected to remain stable. On the net profit, the profit is increasing mainly because of the -- because the company has been paying loan repayment and the finance cost is reducing. On the operating performance, as I mentioned earlier that in 2023 -- as compared to 2023, 2024 plant load factor has increased significantly and that is mainly because of the demand arising from the local industry. On the water side, water plant load factor also increased from 70% to 87%. The reason is that the company has supply more water to the government. Basically, there are 2 plants in Dhofar region. And previously, they were supplying because other plant has a higher capacity, so they were supplying slightly more than us, but now we are contributing 50%, 50%. On the power availability, power availability, as usual, it is always very high. It is above 89%. It is a composition of planned outages and force majeure outages. The company has 15% planned outages as per PWPA for power plant during winter period. And so this is within 15% planned outages. So, there is no impact to the financial performance. On the reliability power, the reliability of power is better than the previous year and consistent over 5 years. Availability water, as per the PWPA, we are -- the company is allowed to take 5% planned outages. So, as soon as we are within 5% planned outages, it does not have impact to the financial performance. On the reliability of water in 2024, water plant reliability is 100% and there is -- which is very unique, I would say, for a water plant to have 100% reliability. On the heat rate efficiency margin, we -- usually, the fuel cost is pass-through in nature. But if there is any fuel efficiency, the company keeps heat rate efficiency margin. Our fuel -- our actual consumption, fuel consumption is better than the fuel demand model. So that is why we have a saving of 2.43%, which is contributing our profitability. Thank you, gentlemen. If anyone is having any questions.

Yes, Abbas.

Tariq, a couple of questions. The first one is just on the plant itself. Now I saw there was a big jump in power generation. And of course, you've been doing all these planned outages and maintenance exercises. So, when something like this happens, do you think till the end of the PPA term, you need to do another major maintenance because suddenly your generation has gone up or the plants are very well equipped to handle with these kind of generation requirements. And the follow-up question is, are there any major maintenances or LTE, lifestyle extension CapEx -- lifetime extension CapEx plan before the end of the PPA? That's my first question.

Okay. On the major inspection, the company will likely to have a second major inspection before the expiry of PWPA. And that -- the cost of which have already factored in our business model. And we have -- as I already mentioned that we have a long-term service agreement with GE and there is a responsibility of the GE to conduct the major inspection.

Okay. So, when you say the cost is already factored in, if I have to circle back to EBITDA, you're generating close to OMR 41 million to OMR 42 million. And then on the balance sheet, if I take the interest plus debt repayment, that is around OMR 31 million and plus you have taxes of another OMR 5 million. Now -- so that's -- so basically, you're left over the OMR 6 million and then you have this OMR 18 million sitting on your balance sheet. So basically, I'm trying to link all of this to the major maintenance. So suddenly, you have OMR 6 million of distributable cash, then you have OMR 18 million that's sitting on the balance sheet. And then you have this major maintenance requirement that may come up and I'm not even talking about the LTE CapEx. So, I'm trying to see how is the company planned for this in terms of what distributions they can give to shareholders and what they'll have to retain. You see that's the question.

Okay. So on the OMR 6 million, which we have on the balance sheet cash, see, the business model is like that, that we pile up cash for 6 months and then we make the repayment. So, OMR 6 million does not mean that we will -- we are going to have -- we'll be having a free cash because ultimately, we have to pay to the repayment to the lenders as well.

Tariq, if I can just explain myself, what I mean by OMR 6 million is if I look at your EBITDA or your CFO that you generate of OMR 41 million to OMR 42 million, so -- and if you have your debt repayment, okay, of OMR 31 million and taxes of OMR 5 million, effectively, after meeting the debt obligation and finance costs and tax obligation, you're still left with OMR 6 million free cash flow, which is available for distribution to shareholders. I mean that's my first clarification. Is that understanding correct? Or am I missing something?

Actually, we are expecting more than that. We are going to pay around OMR 8 million -- sorry, around 8 baizas per share -- up to 8 baizas per share. We are seeking approval from the shareholders.

And this 8 baizas should be sustainable for the next 2 years based on the cash flows that I just highlighted to you.

Likely.

Okay. Now what will bring this 8 baizas into risk? Is there this major maintenance? When you said it's already part of the O&M agreement, but there's a cash outflow. That's something that will have to come back -- come out of the pockets of Sembcorp Salalah, right? Or is that something already built in? That's the clarification I wanted.

That will be paid from the operating cash flows. That will be paid from the operating cash flow.

And is there a magnitude of that, that you -- how much are you looking at based on some industry ballparks?

Abbas, actually, this MSX discussion session is for -- to present the financial statements for the year-ended 31st December 2024. My apologies. I will not be able to give you the forecast, future forecast of our financial numbers. But the figures, you can consider that historically, we have also done the major inspections. So, you can look at historically how our cash flows and operating cost, the movement is.

Got it. And the final question is, I mean, even though I know you're talking about 2024 numbers. But in general, when we engage in management, there's always talk about like there was a Barka call and we were talking about when -- what sort of extension to the RO plant could come about? So similarly for you, have you already started talking to OPWP regarding an extension beyond your current PPA or that discussion is still long in the future? That's my final question.

Still, we have 2 years. I think -- and then obviously, we -- obviously, we will discuss with the OPWP, but any news will come to the public when the process will go on. Any other question from -- yes, Matthew.

Just to follow-up on the earlier questions. See, when we look at your financials, we're seeing there is close to operating cash flow of around OMR 96 million, which is going to come by 2027, until April 2027 and now if you have any force majeure outage, then that also will be added. Then this OMR 96 million plus OMR 18 million is around OMR 114 million for this -- due from OPWP for the next -- over the next 2.5 years, right? And you have a debt repayment up to that service of around OMR 55 million, which will come over the next 15 months. I think your last repayment will be in March 2026. Am I right? And then there will be additional per tax of let's say maybe around OMR 15 million, OMR 16 million. So, how are you planning to distribute it? During 2025, '25, you are already taking it at 8 baiza. So, should we -- why did you say that 8 baiza is a sustainable one when we are looking at a bigger cash flow instead of looking at 2026-centered selling?

I mean that when I say sustainable, I mean that it will not be lower than that. It will -- it can increase, but it will not be lower than -- so that's why actually I said sustainable. But our policy is that -- our dividend policy is that we pay off all the cash to the shareholders as a dividend. And we don't retain it for any other purpose unless the Board of Directors will change their policy, there will be some other requirement, then actually our policy may change. But right now, the policy is that whatever the cash we will have, we will pay off to the shareholders, free cash.

So this -- the deposits will get free by March 2027 -- '26, correct?

Deposits, yes, correct.

So you will be able to -- if everything goes well, then you will be able to distribute that in April?

No. Sorry, September 2026.

September 2026. That's the distribution comes in. But this will get free in March, okay?

Yes.

Okay. Fine. And could you please remind us how much was the average CapEx -- major maintenance CapEx that you have incurred in the past? When or at least when did you have the major maintenance CapEx?

Yes. In the past, actually, if you look at on average, it is around $1.5 million a year.

$1.5 million Okay.

Okay. Abbas, you have a question or --.

No, I'm good. I'm good.

Okay. Great. Thank you. If there is no more question, thanks a lot, everyone, for joining the MSX discussion session. We'll meet after 6 months. And...

Tariq.

Yes, Matthew.

Excuse me. One more question. Since your PPAs are now going to expire within the next 2 years, have you ever thought about an impairment testing of the plant? Is it something which will happen maybe in 2025, '26?

We do impairment testing every year. It all depends upon our future forecast after our negotiation with PWP because obviously, we have to go to OPWP for extension. When it will come, when the tariff will be determined, we'll be able to know that, okay, if there is any impairment required. Right now, there's no impairment required to the financial statement as per our best estimate.

Okay. So have you started discussions with OPWP for the contract extension?

No. Actually, we basically said that, okay, when we'll go to the OPWP for extension.

Okay. Okay. And KPMG is your auditor, when was they appointed for the first time?

The KPMG is getting out. Now AGM will appoint the next auditor.

Tariq, just one clarification. Can you remind me about this deposit that Joyce alluded to, what is the size of it? And you said it's going to free up on in September 2026. Can you just remind me what this is about? I know we've spoken about it in the past, but I'm an old man, so I have a bad memory.

It is a DSRA account, which we have fully funded. It is which the company cannot use -- it is not a free cash. And the company -- once the loan will be repaid, it will be released.

Okay. And the loan obviously will be repaid from your internal accruals, cash flows that you already contracted with OPWP?

Yes.

So this entire amount. And what is the size of the amount right now, the latest?

As per -- it's around $28 million.

$28 million. And this, you're not going to dip -- there is no release that happens on a yearly basis for this till 2026.

There might be. It depends upon the repayment. So, it can increase or decrease.

This can increase or decrease. Okay. But -- and are you -- okay, fine. Because I was just trying to see that every time it's released, are you going to dip into that to pay your 8 baiza or minimum 8 baiza and higher of that? You can use that basically. The moment it's released is available for you to distribute, logically speaking.

Yes. As I already mentioned, our dividend policy is that free cash flow will pay to the shareholders.

Got it. And it's not going to release at one time. This $28 million, it's not going to like OMR 11 million to OMR 12 million. It's not like suddenly I'll see this coming in September '26. There might be a gradual release, as you said. Okay. Interesting.

Larger portion will be on September 2026 only. If there is no other question, we'll close the session. Thank you, everyone.

Thanks, everyone and thanks, Tariq, to take the team through the slides and thank, everyone who asked questions as well.