BOARD OF DIRECTORS' REPORT
On behalf of the Board of Directors of Sohar Power Company SAOG (“Sohar Power” or the “Company”), I am pleased to present you with the Directors’ Report of the Company for the period ended 30 June 2022.
On 27 March 2022, Sohar Power Company shareholders held their Annual Ordinary General Meeting (“AOGM”) and Extra Ordinary General Meeting (“EGM”). In addition, an Ordinary General Meeting (“OGM") was held on 22 June 2022.
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. Till recently, the Company had a 15-year Power and Water Purchase Agreement (“PWPA”) with the Oman Power and Water Procurement Company SAOC (“OPWP”) for sale of electricity and water. Since May 15, 2022, the Company’s PWPA Term has come to an end.
The Company has been listed on the Muscat Securities Market since 2008.
Health & Safety
The First Half of year 2022 has seen excellent Health and Safety performance for Sohar Power. There were no Lost Time Accidents (LTA), cumulating to 3,440 days without LTA at the end of the period. The Health and Safety of our employees, contractors and visitors has been and remains the utmost priority for the Company and its operator Sohar Operations & Maintenance Company LLC (“SOMC”).
The Contract Year 15 ended on 31st March 2022. However, on account of Force Majeure events suffered by Sohar Power during the PWPA Term and approved by OPWP, the Term was extended in accordance with the PWPA until May 15, 2022; 18:00 hours.
The demand for power and water in the First Half from Sohar Plant (i.e. until May 15) was low. The load factors of the plant reached 3.1% for power (2.2% in H1-2021) and 1.5% for water (1.9% in H1-2021).
An aggregate of 78.9 GWh net power and 0.42 Million m3 potable water was delivered to the electricity and water grids during the period.
The plant achieved 99.85% reliability for power and 99.87% for water for the period H1-2022. Forced outages amounted to 0.15% for the power plant and 0.13% for the water plant.
Since May 15, the plant has been maintained under preservation by SOMC. Such preservation is required for possible future operations under frameworks being discussed with the Authorities.
The Company was able to undertake the required annual maintenance activities of its key equipment during the 2021-2022 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 period with a net profit of RO 2.2 million compared to a net profit of RO 1.3 million in the same period of 2021. The net profit in the period is mainly due to lower depreciation charge as a result of the impairment charge of OMR 45.7 million that was recorded in December 2021 based on the market valuation study that was conducted after the annulment of Power 2022 procurement process, and has resulted in full equity erosion.
The revenues for the period amount to OMR 10.2 million against OMR 13.9 million for the same period last year. This is mainly due to lower tariff compared to previous period and the expiry of the PWPA on 15 May (i.e. 4.5 months in 2022 compared to 6 months in 2021). 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 increased from OMR 4.1 million in the first half of 2021 to OMR 5.1 million in the same period in 2022 , mainly due to the increase in gas consumption as a result of higher load factor.
The current principal, interest and swaps were settled on their due dates. The hedging deficit on the Company's swap agreements at the close of business on 31st March 2022, was OMR NIL, in comparison with valuations as of 31st December 2021 of OMR 0.6 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. The swap agreements have expired at the end of their terms on 31st March 2022.
The reduction in finance costs by OMR 0.9 million in the first half of 2022 in comparison to the same period in 2021 is associated with debt repayments during the period.
Under its Financing Agreements entered into with its lenders, Sohar Power is subject to a cash sweep mechanism which started on 30th 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 suspended its exploration of opportunities to refinance its debt until new sustainable source of revenues is secured.
Given that revenues were expected from the Force Majeure extension period (Apr 1 to May 15) and the expected announcement by APSR of a bilateral framework for direct sale of power, the Company requested for an extension to the Final Maturity Date by 3 months; i.e from March 31 to June 30 2022. Lenders provided their consent to this request.
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.
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 appointed , after obtaining CMA approval, an external firm to perform the IA activities of the company until the end of 2022.
Pursuing their continued efforts to develop, train, and employ Omanis, the Company and its operator have maintained the Omanisation level at 94.6% at the end of period.
Outlook for second half of 2022
Following the annulment of the Power 2022 Tender by OPWP, one of the options available to the Company for continued operations was the Spot Market, which went live on January 1, 2022. Revenues cannot be currently contracted in the Omani Spot Market due to oversupply; it may be possible in the future depending on the evolution of the overall supply and demand in the Market. Recently, OPWP published the 7 Years Statement for 2021 – 2027 (the latest one is yet to be published), which shows a demand increase by 2024. However this does not modify significantly, the earlier conclusions reached by an independent consultant engaged by the Company that it is very unlikely that the Company will be able to secure sufficient source of revenues under the current design of the Spot Market.
The energy transition is accelerating in Oman, caused by the continuous drop in prices for renewable energy such as photovoltaics and wind. This will exacerbate the competitiveness of existing conventional thermal plants and might substantially reduce their value beyond the term of their current P(W)PAs.
An option open to the Company for continued operations is the expected executive regulation from the Authority that would enable generators like Sohar Power to be able to enter into bilateral contracts with customers for direct sale of power, using the existing transmission network. In anticipation of this Framework, the Company has proactively engaged in discussions with potential customers. APSR has also circulated a stakeholder consultation paper that the Company reviewed and responded to.
Pending the announcement of such framework, in late May 2022, the Company received a one-time approval from APSR for a short term direct sale of power contract with OQ Plastics LLC, under certain conditions for a period until September 30, 2022. Based on the Company’s proposal, OQ Plastics has approved such an arrangement until July 31, 2022, with a condition for further extension after mutual agreement. The Company is working with various stakeholders in Oman and with its Lenders to facilitate this arrangement. Revenues from this operation is expected to cover the Company’s costs during this operations period. These operations should also provide useful inputs to all stakeholders – APSR, OPWP, OETC, Distribution Company – on the methodology of such operations that can form the basis of the expected framework announcement by APSR.
According to OPWP published the 7 Years Statement (2021 – 2027), the current over cacapity that shall persist for the next 2 years. Considering this Sohar Power has submitted an offer to OPWP for the preservation of plant during 2 years. If OPWP is willing to secure that the Company’s plant will be available to respond to the demand in 2 years, OPWP shall contribute to the costs to achieve that goal.
In accordance with the approval received at the 22nd June 2022 OGM, the Company has entered into a contract with SOMC for the continued preservation of the plant. This will not only ensure the availability of the plant for future use when the power demand is likely to pick up, but also secure the retention of trained Omani workforce for such operation while avoiding demobilisation costs.
The outstanding debt by the end of PWPA is expected to be around OMR 39 million. In case of none of the above options is feasible or viable, restructuring the outstanding debt will be very challenging. As stated above, the Final Maturity Date is currently June 30, 2022. However, since the Framework for Direct Sale of Power has not yet been announced by the APSR and other requests made by the Company to OPWP are still awaited, the Company has requested the Lenders for a further extension to the Final Maturity Date to September 30, 2022. The Company has received confirmation from its Lenders to this request; however, some administrative steps are still ongoing with regard to related documentation.
Due to the erosion of more than 50% of the Company share capital, the board of directors called for an EGM pursuant of article 147 of the Company Commercial Law which was held on 27 March 2022. The shareholders have decided to wait for issuance of bilateral framework by APSR to evaluate and pursue bilateral deals with potential customers. As per the EGM resolution, the company should update the shareholders regarding potential bilateral contracts framework by holding another EGM prior to 30th June 2022, the Final Maturity Date at the time of such EGM. The Company has since received approval from its Lenders for an extension to the Final Maturity Date to September 30, 2022 and also, has entered into a Preservation Contract following OGM approval. Accordingly, the Company announced to the Muscat Securities Market that it shall await (i) OPWP response to its 2 years preservation offer and (ii) the formal bilateral framework announcement by APSR. The Company will subsequently coordinate with CMA for an EGM to inform the Investor community.
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.