BOARD OF DIRECTORS' REPORT
On 2nd June 2020, Sohar Power Company shareholders held their Annual Ordinary General Meeting (“AGM”) and an Extraordinary General Meeting (“OGM”) to approve the amended Compnay’s Article of Association. The AGM and OGM were hold online using the platform provided by MCDC pursuant to the CMA instructions.
Sohar Power was incorporated in 2004 after the award of the Sohar IWPP project resulting from a competitive bidding process and started its operations in 2007. The Company owns and operates the 585MW electricity generation and 33MIGD seawater desalination plant in Sohar Port and Freezone industrial area. It sells electricity and water to Oman Power and Water Procurement Company SAOC (“OPWP”) under a 15-year Power and Water Purchase Agreement (“PWPA”), in a regula ed but not competitive environment. The Company has been listed on the Muscat Securities Market since 2008.
Health & Safety
The year 2020 has seen excellent Health and Safety performance for Sohar Power. There were no Lost Time Accidents (LTA), accumulating to 2,894 days without LTA at the end of the year. The Health and Safety of our employees, contractors, and visitors remains the utmost priority for the Company and its operator Sohar Operations & Maintenance Company LLC (“SOMC”).
The year also saw a unique global challenge in the form of the COVID-19 pandemic that required Sohar Power, its contractors and stakeholders to activate their Business Continuity and aspects of Disaster Recovery plans . At the Muscat office, all employees were instructed to work from home, minimise exposure to others and follow all government laid down rulings. At the Plant, the Operator SOMC instituted a lock down at the Plant, preventing unessential movement to and from the Plant and stationing two shifts for a period of 14 days, which continued for a period of 3 months commencing March 22, 2020. While these measures have now been relaxed, the Company and its Operator remain vigilant, promoting social distancing, and ensuring that all protection measures are in place going forward. The Company has donated OMR 10,000 and OMR 15,000 to support the COVID-19 initiatives of MoH fund and Sohar Industrial Port respectively.
The demand for power and water significantly decreased in 2020 compared to 2019 due to the entrance of new water plant in the port area. The plant was in standby mode most of the time in this year; thus the demand for power has also decreased. Accordingly, the load factors of the plant reached 2% for power (39.1% in 2019) and 1% for water (47.6% in 2019).
An aggregate of 96 GWh net power and 0.5 Million m3 potable water was delivered to the electricity and water grids during the year.
The plant achieved 99.59% reliability for power and 99.06% for water in 2020. Forced outages amounted to 0.41% for the power plant and 0.94% for the water plant.
The Contract Year 14 started on 01 April 2020. The annual performance test was successfully undertaken, demonstrating to OPWP the guaranteed capacity of the plant on fuel gas only.
Following the plant being operated for annual performance test , the plant went through preservation process on April and May 2020 for the entire water plant and water/steam cycle.
The Company was able to undertake the required annual maintenance activities of its key equipment during the 2019-2020 winter period.
Maintenance activities were performed by SOMC and its sub-contractors, in accordance with Original Equipment Manufacturers’ recommendations, while applying the best standards and practices for health & safety and maintenance of the industry. All gas turbines underwent regular annual maintenance during the Winter Period; there were no Major Inspections undertaken during the Winter Period.
The Board of Directors would like to announce that the Company has ended the year with a net profit of RO 2.256 million compared to a net profit of RO 1.155 million in 2019.
The increase in net profit in 2020 is mainly due to the lower direct cost (fuel oil and import power) and indirect cost compared to 2019.
The revenues for the year 2020 amount to RO 27.3 million against RO 50.6 million for the year 2019. This mainly due to lower load factor of the plant (low power and water demand). As per the PWPA agreement with the off-taker, the variation of the Load Factor has no impact on the company profitability as the mainstream of the profit is generated from the available capacity and reliability of the plant, (load factor is a pass-through item under the PWPA (and financially neutral to the Company).
The direct costs, have decreased from RO 31.1 million in 2019 to RO 7.2 million in 2020, due to mainly the decrease in gas consumption as a result of lower load factor.
Long term loans were repaid, and swaps were settled on their due dates. The hedging deficit on the Company's swap agreements at the close of business on 31 December 2020, was RO 3.3 million, in comparison with valuations as of 31 December 2019 of RO 4.2 million. As per IAS 39, hedging deficit is calculated on each balance sheet date, and it represents a notional loss, which the Company may incur if it opts to terminate the swap agreements on this date. However, under the terms of Financing Agreements, the Company is not permitted to terminate its swap agreements and, as such, the loss is notional.
The reduction in finance costs by RO 0.6 million in 2020 in comparison to 2019 is associated with debt repayments during the year.
Under its Financing Agreements entered into with its lenders, Sohar Power is subject to a cash sweep mechanism which started on 30 September 2015 and will last until the full repayment of the long-term loans. The cash sweep mechanism prevents the distribution of dividends to shareholders since all the available cash is devoted to the repayment of the loans. This mechanism is common in financing agreements throughout the region and helps to provide a competitive tariff for an off-taker such as OPWP at the time of the bid. As previously disclosed, the payout of dividends ended in 2016, and there will be no more dividend distributions to shareholders unless the debt of the Company is refinanced and the cash sweep is successfully removed. The Company has explored and continues to explore opportunities to refinance its project finance debt.
As a consequence of the cash sweep, the inability of the Company to distribute dividends, and the decrease of the global and Omani Capital Market indices in 2020, the share price dropped from RO 0.061 to RO 0.045 during the year.
There are no legal proceedings against the Company as of 31 December 2020.
In line with efforts deployed in previous years, the Company ensured that its organization, systems, policies, and procedures follow the highest standards of governance to comply at all times with the Code of Corporate Governance promulgated by CMA, including the new Code requirements effective since July 2016.
After the issuance of the new Company Commercial laws in Feb 2019 pursuant to the Royal Decree 18/2019 , the company has amended its Article of Association (“AoA”) to ensure full compliance. The new AoA has been approved by the board of directors and then by the shareholder in an online EGM held on 2nd June 2020.
Audit Committee and the Board have pursued the action plan arose from third-party consultant audit to review the internal audit system and process of the company was set to address the recommended action for further improvements.
After resignation of the internal auditor of the Company, the Audit Committee and the Board has appronted, after CMA approval, an external firm to perform the IA activities of the company for Q3 and Q4 of 2020.
Pursuing their continued efforts to develop, train, and employ Omanis, the Company and its operator have maintained the Omanisation level at 84.5% at the end of 2020.
Corporate Social Responsibility
In 2020, the Company further extended its support to the local community and municipality projects, mainly in North Batinah Governorate, while focusing on education, health and safety, social development and environment protection. Sohar Power was able to contribute to local projects intended for the local communities and the people of the Sultanate of Oman. The world faced unprecednt challenge of COVID-19 in 2020, the company has contributed and support the Ministry of Health with 10,000 OMR to alleviate the spread of COVID-19. In addtion to 10,000 OMR; The Company has contributed 15,000 OMR to the SIPC initiative to setup a dedicated testing laboratory under the auspices of the Ministry of Health for COVID-19 and other type of viruses. The laboratory should speed up the testing cycles to ensure the smooth operation in the port area in which the plant is located.
The Company has co-supported an initiative of The Ministry of education to train around 200 students on mobile app development and then launch a competition for them. The top 2 will participate in international MIT (Massachusetts Institute of Technology) competitions. The donation amount is around 8,000 OMR.
Outlook for 2021
Looking ahead, the Company expects to maintain high reliability even though the delivered power and water level is expected to be at a same level seen in 2020, while undertaking periodic maintenance activities, in a safe working environment for its employees, contractors and visitors.
During the year 2018, the Company engaged in the ‘2022 Power Procurement process’ launched by OPWP. As part of the process, OPWP has notified the Company on 7 February 2019 that it has pre-qualified its Power only offer but did not pre-qualify its Power and Water offer. The Company has submitted a Binding Bid for its Power only offer on February 28, 2019, after seeking approval during the Ordinary General Meeting held on February 26, 2019.
As a consequence, the Company will not be able to extend the operations of its water desalination plant beyond the term of the current PWPA ending in March 2022. This situation triggered an impairment review of the Desalination plant, which resulted in an impairment loss of RO 18.554 million that is recorded in the financial year 2018. The useful life of the Desalination plant has also been revised to 15 years from the earlier estimate of 30 years. The Desalination plant will have a remaining useful life of around three years starting January 2019, and the residual book value will be amortized over the coming 3 years.
The Company engaged as well in the second phase of ‘2022 Power Procurement process’ launched by OPWP RfP on 16th October 2019. The Company has submitted its offers on 29th April 2020 as per the processes of the RfP. OPWP feedback is still awaited which got delayed due to the impact of the COVID-19 pandamic and other factors. As per the recent communication from the Authority of Public Services Regulation (APSR), the response is expected by the end of Q1 2021. APSR is assessing the market readiness for direct sale of power by allowing bilateral contracts which may provide generators with expiring PPA an additional avenue to contract their power capacity.
The Company’s main objective for 2021 is to secure a new PPA with effect from 2022. The Company will also engage with different stakeholders to assess the feasibility of the potential bilateral contracts for its plant. In case SPC is unsuccessful in the Power 2022 Procurement process, the Company may operate in the Spot Market currently being developed in Oman, for which the rules are not yet fully finalised. Revenues will not be contracted in the Omani Spot Market, it will be subject to the overall supply and demand in the Market. In view of the uncertainties surrounding the Spot Market, it is very difficult to predict the future of the Company in its current technical configuration, should it operate in the Spot Market, but it will be very challenging. In such case, restructuring the outstanding debt after the current term of PWPA will be very challenging as well.
The energy transition is accelerating in Oman, caused by the continuous drop in prices for renewable energy such as photovoltaics and wind. This is likely to impact the competitiveness of existing conventional thermal plants and might substantially reduce their value beyond the term of their current P(W)PA.
On behalf of the Board of Directors, I wish to thank our valued shareholders for their continued support, trust, and confidence. I would also like to thank all the personnel associated with the operation and maintenance of the plant in Sohar and the staff of the Company for their loyalty, dedication and commitment.
I would also like to express our gratitude to His Majesty Sultan Haitham bin Tarik and His Government for their continued guidance, support and encouragement to the private sector.