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

Good morning, everyone. We are pleased to present the company's financial statements for the period ended 30th June 2025. During this session, we will be focusing on discussing the results for the period. We kindly request that any questions be directed toward the financial statements for the period as the company will not be providing forward-looking forecast at this time. We really appreciate your understanding and look forward to constructive discussion. For the benefit of people who are joining us for the first time, we will be presenting complete background, we will go through the financial performance of the company for the period in intent and operating performance followed by Q&A. The construction of the project was started in 2009 and achieved a commercial operation date on 25 May 2012. The project cost of the company was approximately USD 1 billion. The project was started with 75, 25 debt equity ratio with the consortium of 9 banks. Initially, the project was a joint venture between Sembcorp Oman Investment Corporation, by 60 and 40 ratio. However, in October 2013, the sponsor shareholders offered 35% of their shares to the public through IPO. Today, Sembcorp owns 40%, Oman Investment Corporation 13% and rest of the shares are held by the public and institutional investors. The project debt of approximately USD 75 million or to be exact $723 million was funded by consortium of 9 international and local banks, out of which approximately USD 623 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 PWP, this contractual arrangement guarantees cash flows as soon as the plant is available, irrespective of dispatch of electricity or water. This is the reason the company PFO and EBITDA remains stable from year-on-year basis. The company 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. Currently, the company is contributing 50% of total electricity demand and 50% of total desalinated water demand of the region. On the financial performance, the company reported a net profit of OMR 11.5 million, which is approximately the same as previous year, rather slightly better by OMR 0.1 million compared to the previous year. Revenue is higher than the previous year, mainly because of increase in fuel charge revenue. And that is resulting from the increase in plant load factor. EBITDA and PFO is lower compared to the previous year due to lower plant reliability and higher maintenance costs. With respect to the dividends, the company sought approval from the shareholders in an annual general meeting to pay up to baizas 8 per share on 2nd November 2025. If we look at the detailed variance analysis, the marginal increase in profit for the year is mainly due to increase in -- mainly due to decrease in net finance costs. Revenue is higher than the previous year, mainly because of increase in fuel charge revenue. Fuel charge revenue increased due to increase in plant load factor from 52% to 55%. Fuel charge is pass-through in nature with the increase in fuel charge, there will be corresponding increase in the fuel cost as well. And therefore, increase in fuel charge does not increase the profitability significantly. Cost of sales increased mainly due to 3 main reasons: number one, increase in fuel cost, which I already mentioned, is a pass-through in nature and does not have significant impact to the profitability. Number two, the increase in maintenance costs resulting from more maintenance conducted during the period; and number three, increase in LTSA cost due to inflation indexation adjustment. Net finance costs reduced due to the partial repayment of term loan in line with the repayment profile. On the statement of financial position, total assets have reduced mainly due to the impact of depreciation on the plant and machinery. The company's gearing has reduced from 32 to -- from sorry, from 23% -- 23 to 17 due to repayment of loan. Net assets per share increased due to increase in retail earnings. Cash flow from operating activities. Increased due to the working capital changes. Working capital changes is just due to the timing difference. Our operating cash flows, excluding tax and finance costs remain close to EBITDA. Cash flow from investing activity reduced mainly because cash deposit to fixed deposit placement. Loan repayment has increased as compared to the corresponding period previous year. If you look at the last 5 years' historical performance, it shows that the company has a strong and stable EBITDA and PFO, which is mainly due to the capacity-based business model. You can see there is a consistent growth in the net profit over the past 5 years. On the operating performance, we are experiencing increase in electricity demand, which is arising mainly due to industrial development. Water production marginally reduced mainly due to -- mainly because the load was equally shared with other power plant in Salalah. Last year, we were producing more than the plant besides us. Electricity generation and water production does not impact the financial performance significantly because variable revenue, which is based on power generation and water production is to cover the cost of the company. The company has a very high plant reliability and availability trend. Plant reliability for the period is 98.13% as compared to 99.82% for the previous full year. Water plant reliability was 99.98% as compared to 100% reliability of the previous full year. Planned outages are within the allowable limit of PWP. As explained earlier, fuel cost is pass-through in nature, except the company retains heat rate efficiency margin. The company's heat rate efficiency margin for the year was better than the planned model. Can we open the floor and can we take the questions?

Mana, I think you are mute.

Hello?

Hello, yes.

I just have some questions. One being, you mentioned that the plant availability was lower during the first half. So what would be the plant available for the rest of the year?

Plant -- sorry, plant reliability?

Availability.

Okay, availability is approximately the same as last year. It is just the plant reliability, actually, which is lower than the last -- the power plant reliability is lower than the last year. But actually, we are not expecting that it will follow the same trend. Hopefully, we'll end the financial year plant reliability with better results.

Okay. So in terms of the maintenance expenses also it was higher. So will there be any further maintenance expenses during the second half as well?

Yes. Okay. The maintenance expenses are higher, and I think it will remain the same. The trend will remain the same for the next half of the year as well.

So can you provide like an approximate amount as in how much can we factor into the expenses?

As I mentioned, actually, we are not going to give you the forecasted numbers. But my apologies, I will not be able to share with you in this session. But you can assume that it will have the same trend.

As the first half?

Yes.

Okay. So first half, we see a maintenance expense of OMR 750,000. So the second half will also, how does it continues?

No. Actually, not OMR 730,000. You have to add the operational and maintenance cost as well. Yes, Matthews?

Good morning, Tariq. Thank you for the participation. My question is on your recent announcement that you said you are in discussion with OPWP for the new PWPA to be entered. Can you please throw some more light on that? Because what I understand is earlier OPWP was planning to finish this contract and signed the contract during the first quarter of this year. And now we are in the third quarter of the year. So how much time -- when do you expect this to be concluded? And what are the reasons for this delay in concluding this contract?

Okay. I'm not sure from where you're getting this information that they are going to conclude it in the first quarter of 2025. But actually, it's a government process. So they have multiple layers of approvals. So it usually take time.

Yes. I got it from OPWP because they have already published this, they were planning to conclude this contract in the first quarter. They were planning to conclude it in the first quarter. So when do you expect this to be concluded?

Tariq, I'll take this one, anyhow. I think, see, again, you refer to them that they have got kind of -- I mean maybe remarks or announcement or maybe they refer to this to be completed by quarter 1, we're not aware of this. Of course, as Tariq just mentioned, the process is quite lengthy. So we cannot really today advise or predict when this will be finished. We are in discussion, okay, serious discussion, I can say that with OPWP until we cleared all the discussion, we cannot really advise the date. It can be months, it can be weeks, it can be year. So once we, of course, completed this process and get things to know, then, of course, we'll advise the market. But today, we're not in a position because even ourselves we don't know, honestly to be very much specific, even though to answer.

Okay. Got it. Will it be possible for you to provide some color on the direction of discussions on the possible tariff levels or the duration of the contract, for which duration are you negotiating? Are you negotiating for 5 years, 10 years or 15 years or even longer. And also on what level of discounts should we be looking at in terms of the tariff level? Now will it be something similar to the recent contract renewals that OPWP had? Or will it be materially different from those?

I can only say one thing on this, see, I don't think that we cannot share honestly since, nothing is certain now today. But of course, there are different options on table, okay, be it in terms of durations in terms of, I would say, tariff. So since all of those are not yet finalized, since all of those is not only to do with Sembcorp, but to do also depends on the negotiation how it goes, nothing being concluded today, to say we're going this direction or that direction. Also the amount, I would say, of discount or tariff that's going to be finalized, also not yet finalized. So I mean nothing to be advised on this, I mean, that information that we cannot disclose at this point of time since we are not certain, again, to what direction we are going to conclude.

But your plan is to conclude a new contract, right? You will not -- you will not say that now we are stopping it here. There will -- we don't agree on the tariffs, so let's stop it here. That's not the intention, right?

That's not the intention from our side for sure, but also we never know what government want, what government expectation, okay, what they are going to accept. As I said, we are negotiating, okay? And until you conclude everything, you'll not be able what decision at the end of the day, you might submit different proposal, different actions. But what option you are going to get is something we don't know. Okay, what will work fast, maybe it will not work for them. So what we see is visible, maybe it's not visible at that end. So until we come to a landing, I mean, what is the best for both parties, okay? Definitely, we are really kind of helpless, if I may say so, to advise as our time line or maybe to even give a hint on where we are heading towards a tariff. But definitely, at the end of the day, okay, today or tomorrow, okay, there should be a conclusion, okay? But when that conclusion, could be this year, could be next year also. I mean now you just said that they were expecting this to be concluded at quarter 1, but we are now at quarter 3, okay? And we have not yet concluded. So there is no guarantee that the concluded today. It could be concluded also next year. But that doesn't mean I'm telling you also -- I mean, there might be -- we might not conclude something shortly, but there's nothing that we can really today give a commitment towards it.

Okay. Okay. Got it. And which are the -- what are the major negotiation points? Are you looking at duration or tariff because now this is getting so much lengthy process. So where are you getting stuck in terms of reaching a conclusion?

See, of course, these two elements are also a major element, but I don't say we are stuck, but there are a lot of things associated with this. In order to finalize the tariff, you need to come to a landing in terms of assumption, okay? You need to really align yourself with the new term. You need to really forecast things better. In order also to come up with -- I mean, to conclusion in duration that's due with the government. Government can really say, I want this plan maybe for short term, for long term and I have this plan. And those plans we are not exposed to. So we don't understand what the government is up to. I mean, see, whatsoever you do the plan today, you cannot compare to a new build, from efficiency, okay? And if the government want to really take a call that, I mean, we want to look at the energy, I would say, transition and fuel charge differently and hence, maybe we look at short term to be maybe better or maybe long term to be better, that decision has to be taken by them, okay? At the end of the day, we have to be open to whatever duration government want to go for. And that's why we cannot really, I mean, comment on the duration. But in terms of tariff, definitely, there are a lot of -- but nothing we are stuck on. It is an order, okay? We move here. I don't want to resist, okay, we also find something that we fix this. And until we fix everything, we will not come to a conclusion. And all of those elements, sub-elements I call them, they are linked, of course, again, mainly for us the total of duration, purely it's a government decision. I want to say that, I mean, it is a bit -- I understand the question, and I mean two other shareholders have also tried to ask this question, but we are still not at the stage where we can really answer many things, but also there are a lot of, I would say, information that we cannot disclose, we cannot share.

You know there is a confidentiality clauses in our negotiation process as well. And it won't be possible that, okay, we will share the our proposal details to anyone outside PWPA. So it will not be possible, number one. Number two, actually, you know that our PWPA is expiring in March 2027. So you know that the previous discussion did not happen in such a way that they have given the time for the negotiation. But this time, actually, they started early -- the process they started early just to negotiate with the clients. So that's why they have taken their time. So it is not actually -- ultimately, we have to get a new PWPA by March 2027. So it is -- the process is not delayed.

No, I understand that. But when they -- if they are planning to go for a new build procurement, then now the time has elapsed. So now you need at least 3 years for the plant to come in and everything. So mostly, you're -- you may be at an advantageous situation or I don't know, but it's between you and OPWP that the discussions are happening. So I just wanted to check because this is supposed to be overdue and Salalah doesn't know water capacity Salalah, once you are out of the system, then there will be a water scarcity in Salalah. So I just wanted to check how these things are coming together and what are the points that you are also trying to negotiate, so that we can also take an informed decision in terms of the purchase decision or the selling decision. So just thank you for the answer. And I understand you...

Yes, okay, go ahead. Matthew, Yes.

See if you want, I can go back in queue and then come back, later. Please proceed.

This is another question by Mohammed Al-Abri. The question is kindly elaborate the major maintenance schedule in 2025 and 2026 prior to PPA expiring. Okay. So we are now actually it's time that, okay, we are going through the second major inspection of our gas turbines in 2025 -- sorry, in 2026. It will start from 2026. Yes, Joseph?

Just wanted to check your outlook on -- in terms of, are you still focusing on further reducing your debt and then what happens to the dividend payment because I can see that there is still room for dividends to grow.

So you know that our debt is expiring on September 2026. We will be able to do the financial planning once we'll get the PWP extension. Right now, our -- we will not be able to elaborate on our financial planning at the moment. Yes, Matthews?

Tariq, you just mentioned about the planned maintenance activities, but when I look at the Sembcorp Salalah plant, what I'm seeing is you had a load factor of average around 50% during the tenure, if you look at that. And probably that might be a blessing for you because maybe you may not have -- might not have too much of any capacity -- the maintenance activities. But when you prepare yourself for the new contract, what kind of maintenance requirements do you see post PPA or in 2026, '27. Are there any major maintenance activities or plant lifetime extension that needs to be carried out on the plant or the turbines before you go for the new contract? And if that is there, can you please provide an overview of your plannned maintenance activities? And over the next 1.5 to 2 years, what would be the -- your budgeted numbers for that? How much would you be required to allocate for this?

Okay. So our planned maintenance activities will not change. It will remain the same because it is the same plant and we'll follow the OEM plant maintenance schedule, which will remain the same as it was there in the past. We might need to incur some of the LTE CapEx, lifetime extension CapEx, but it also depends upon the extension -- period of extension, how much -- how long will be the extension. So that's why actually it is not possible. And we will not be able to give you any forecast. My apologies for that.

But if I look at it, some of the other plants have been talking about almost OMR 5 million required similar capacity plans. If I assume somewhere around OMR 5 million to OMR 10 million, what would be your comment on that? Will it be overestimated, underestimated or somewhere in the region -- somewhere in your budgeted levels?

It depends upon the extension, as I mentioned, it may be okay. We may need more funds as well, but we don't know right now at the moment.

Okay. But during this PPA, you have -- you said you have a major maintenance activity which is being carried out right now. And the similar kind of maintenance expenses should be looked at for the remaining part of this year. What about 2026 and '27...

That's what I told you that 2026 and 2027, we have major inspections of gas turbines. Not this year. We have, in 2026, 2027, we are going to have major inspections.

Okay. So what were the reasons for this additional maintenance expenses during this quarter specifically if I look at it.

See it is -- our gas turbines major inspection is going on next year and the year after next, but there are some like steam turbine major inspection was this year. And also, there are -- because the plant is getting older. So obviously, there will be more maintenance going forward as well. If you look at the percentage wise, it did not increase that much, which should alarm anyone.

Okay, got your point. And when we talk about your financial planning. See, you are said to become net debt free by this end of year, right? And that would be around 15 months of your contract, but it's still remaining and that we are talking about maybe an approximate EBITDA if everything goes well, then probably we will be talking about OMR 52 million. And your cash flow requirements probably would be around OMR 8 million for tax and whatever CapEx that you might require for the LG and maintenance. So you will be sitting on huge amount of cash -- free cash flow over the next 18 months. So I'm assuming that this will be distributed to the shareholders whatever CapEx requirement, even if it is OMR 10 million, still we are talking about almost OMR 35 million.

Matthews, I think you know our dividend policy, we don't want to sit on the cash, and we will not be sitting on the cash at all. You will see that, okay, whenever there will be cash, we will pay to the shareholders. This is subject to the working capital requirement and the CapEx requirement.

Tariq, exactly, that's my question. How -- what period should I be looking at? Should I be looking at 2 dividends in 2026 and 1 dividend in 2027 or just 1 dividend in 2026 and the balance cash will be distributed in 2027?

Okay. So basically, I think we have discussed this a couple of times before as well. We have been paying the tax in the month of April. And for that, we need cash. And you know that it is a huge amount, basically. And there is a seasonality factor. And due to the seasonality factor in summer period, we are getting more revenue and in the winter period, we'll be getting less revenue. So that is why actually we were not able to pay the dividend in March. And whenever we pay the dividend, you can see the dividend is 2.5 baizas per share and the major dividend actually is in the month of November. If any cash, we will forecast in the month of March that we can pay to the shareholders. It will be paid to the shareholders at that point of time. And -- but our -- even if we'll not be able to pay, then we will be able to pay in the month of November.

Okay and then, again, on the financial planning. You've mentioned that you are still working on the financial planning. So -- what's your strategy? Could you please explain the strategy if you get a PPA, then will you be looking at releveraging your balance sheet because it's going to be a very guaranteed payments for the duration of the PPA. So what's your objective? Will you be looking at deleveraging the balance sheet and giving those cash -- try to give back those cash to the shareholders? Or will you look at completely debt-free company? And then look at paying dividends over the period of this PPA, the new contract?

Matthew, answer is not that simple because you don't know the market. We'll get the extension. We need to get a loan next year maybe, what will be the market? Interest rates are very high or low. What would be the liquidity position in the market, local market, international market? So it is -- the decision is usually always based on the market conditions. I cannot comment on that at the moment. That's why I told you that we are parking this question, we'll come back to this later.

And when you talk about the cost of funds, you are already at a higher level. You are the highest cost of funds and if you look at any current market situations, then definitely, there will be an advantage for you, right?

In the current market condition, yes, but who knows about 1 year down the road.

True , but we all will be planning with certain assumptions, right, which probably will say that the current scenario will prevail.

Yes. But I would not like to speculate anything right now.

Got it. Got it. My last question is on the accumulative outage covered under force majeure during this current contract period, how much that would be so far over the last 13.5 years?

Okay. It is approximately 40 days for water plant and approximately nothing for the power plant.

Okay. So how will we work on that when you don't have anything on the power plant?

That is also under negotiation.

Got it. Thank you very much. Thank you. Wish you all the best for the negotiation.

Any other questions?

[Foreign Language]

[Foreign Language]

[Foreign Language] Can you speak Arabic?

Humaid is there, he will -- he can answer, yes.

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[Foreign Language]

Any further questions also from anyone? I think Tariq, there are no further question?

Okay. Thank you, everyone, for joining. If there is no questions, then we can close the session, and we will see you next year for another session. Thank you. Thanks a lot.