BOARD OF DIRECTORS' REPORT
On behalf of the Board of Directors of Sohar Power Company SAOG (“Sohar Power” or the “Company”), I am glad to present you with the Thirteenth Annual Report of the Company for the year ended 31 December 2017, corresponding to the eleventh year of operations of the Company.
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 regulated but not competitive environment. The Company is listed on the Muscat Securities Market since 2008.
The year 2017 has seen excellent Health and Safety performance for Sohar Power. There was no Loss Time Injury (LTI), accumulating at the end of the year 1797 days without LTI. Health and Safety of our employees, contractors and visitors remain the utmost priority for the Company and its operator Sohar Operations & Maintenance Company LLC (“SOMC”).
The plant was operated reliably during the period. An aggregate net power quantity of 3,320 GWh and a total volume of desalinated water of 46,539,164 m3 were delivered, as a consequence of the lower demand for power and higher demand for water and of the improved performance of the plant, when compared to 2016.
The plant achieved 98.8% reliability for power and 98.9% for water in 2017. Forced outages amounted to 1.2% for the power plant and 1.1% for the water plant, reflecting the excellent operational performance during the year.
The Contract Year number 11 started on 01 April 2017. The annual performance test was successfully undertaken demonstrating to OPWP the guaranteed capacity of the plant on both fuel gas and fuel oil.
In terms of maintenance, the Company was able to undertake the required annual maintenance activities of its key equipment during the 2016-2017 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.
The demand for power has decreased in 2017 when compared with 2016 as a result of dispatch priority given to more efficient plants but remained high for water during the year. Accordingly, the load factors of the plant reached 64.8% for power (72.0% in 2016) and 85.0% for water (80.8% in 2016).
During the year 2017, Sohar Power started implementing the recommendations of the energy audit undertaken in 2016, the outcome of which, in the future, is expected to enhance the thermal efficiency and reduce the internal power consumption of the plant.
The focus on energy efficiency and monitoring of operations with a view to minimise input natural gas is an ongoing effort. During the year, an online software was developed that should enable operators to determine, in real time, whether the operations of the Plant are in line with optimum design efficiency at any given configuration.
In addition, and following the outcome of the assessment of efficacy of technical operations and maintenance processes at site, actions are being implemented to improve the business processes and manage in a better manner all the risks that could potentially be faced by the project.
The Board of Directors is proud to announce that the Company has ended the year with a net profit of RO 2.030 million.
In comparison, the profit for the year 2016 amounted to RO 4.543 million. The decrease in net profit in 2017 is explained by the increase in income tax expense due to the increase in tax rate from 12% to 15%.
The revenues for the year 2017 amount to RO 64.5 million as against RO 66.3 million for the year 2016, decreased mainly by the decrease in revenue from gas which is a pass-through income (financially neutral to the company) together with the contractual decrease in tariff rate.
The direct costs have also decreased over the period from RO 53.7 million in 2016 to RO 52.2 million in 2017, mainly reflecting the decrease in gas consumption.
Long term loans were repaid and swaps were settled on their due dates. The hedging deficit on Company's swap agreements, at the close of business at 31 December 2017 was RO 8.2 million, in comparison with valuations as of 31 December 2016 of RO 11.6 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. 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 0.8 million in 2017 in comparison to 2016 is associated with debt repayments during the year and compensates for the decrease in tariff rate while contributing to the net profit of the Company.
Under its Financing Agreements entered into with its lenders, Sohar Power is subject to a cash sweep mechanism starting from 30 September 2015 until the full repayment of the long term loans. This mechanism prevents distribution of dividend to shareholders since all the available cash is deployed to the repayment of the loans. As previously disclosed, the pay out of dividends ended in 2016 and there will be no more dividend distributions to shareholders until the debt of the Company is restructured and the cash sweep is successfully dealt with.
As a consequence of the cash sweep and the inability of the Company to distribute dividends, the share price dropped from RO 0.230 to RO 0.150 during the year.
Following the decision issued by the Executive President of the Capital Market Authority (Decision No. 6/2017) dated 22 August 2017 ("Decision") warning the Company that it is in violation of Article 5 of the Capital Market Law, the Company filed an appeal against this decision with CMA Appeal Committee. In its decision announced on 27 November 2017, the Appeal Committee of CMA accepted the appeal in form and cancelled the CMA’s Decision in substance. The underlying issue with CMA had arisen from divergences of views amongst auditing firms about the accounting treatment adopted by the Company in recognizing its revenues. However the Company has consistently applied the same accounting treatment since the beginning of the project and adequately disclosed such accounting treatment information to its shareholders and the investors’ community.
Subsequent to year-end, the Company was notified that CMA has referred this matter de novo to its Disciplinary Committee. Thereafter, the company attended a hearing before the Disciplinary Committee. The outcome of the proceedings remains unknown at the time of preparation of this report.
There are no legal proceedings against the company as of 31 December 2017.
In line with efforts deployed in previous years, the Company ensured that its organization, systems, policies and procedures follow the highest standards of governance in order to comply at all times with the Code of Corporate Governance promulgated by CMA, including the new Code requirements effective since July 2016.
The appraisal of the Board was conducted during the year 2017 by an independent consultant, appointed at the AGM held on 29th March 2017.Based on the criteria approved at the AGM, an appraisal was done of the Board and its committees. The report of the consultant was received by the Chairman of the Board. The appraisal concluded that the Board performance was satisfactory during the year and has been effective in meeting Board’s objectives. Certain improvements were recommended and action on these is being considered by the Board.
Pursuing their continued efforts to develop, train and employ Omanis, the Company and its operator have improved the employment of Omanis in the project from 74% in 2016 to 77% at the end of 2017.
Corporate Social Responsibility
In 2017, the Company further extended its support to 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, through financial contributions to local initiatives amounting to RO 17,784 in 2017.
Outlook for 2018
Looking ahead, the company expects to operate reliably and to deliver uninterrupted supply of power and water to its customer, while undertaking periodic maintenance activities, in a safe working environment for its employees, contractors and visitors.
OPWP clarified in 2017 their new procurement process for contracting power capacity with effect from 2022, together with the new spot market rules that will apply in 2022 for generators, in a merchant market condition, i.e., without Power and Water Purchase Agreement. During the year 2018, the Company will engage in this ‘ 2022 Power Procurement process’ with the objective of successfully bidding and securing a new PWPA with OPWP with effect from 2022.
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 Qaboos Bin Said and His Government for their continued guidance, support and encouragement to the private sector.
May Allah protect them all.
Saif Abdullah Al Harthy
Chairman of the Board