Financial review

Robust financial results

ACWA Power has delivered robust financial results in a year still blighted by the residual upheavals of the Covid pandemic, the Russia-Ukraine war fueling rampant inflation, restricted supply chains and rising interest rate environment, with all key financial indicators posting solid growth over 2021.

This section provides an analytical review of the financial performance of ACWA Power as at and for the financial year ended 31 December 2022, and it should be read in conjunction with the Company’s audited consolidated financial statements for the subject period as audited by Ernst and Young & Co. Public accountants.

"Current quarter" or "Q4 2022" or "the fourth quarter of 2022" corresponds to the three-months period ended 31 December 2022 whereas "Q4 2021" or "the fourth quarter of 2021" corresponds to the three-months period ended 31 December 2021. "2022" or "2021" corresponds to the full year ended 31 December of the year mentioned. "Current year" corresponds to 2022 whereas "current period" corresponds to either 2022 or Q4 2022 depending on the context where it is used.

In the audited financial statements, certain figures for the prior periods have been reclassified to conform to the presentation in the current period.

This section may contain data and statements of forward-looking nature that may entail risks and uncertainties. The Company’s actual results could differ materially from those expressed or implied in such data and statements as a result of various factors.

Key factors affecting the comparability of operational and financial results between reporting periods

Although the Company’s business model of Develop, Invest, Operate, and Optimise allows it to generate and capture returns over the full life cycle of a project, these returns may differ from one reporting period to another, depending on the number of projects in the Company’s portfolio and where these projects are in their project life cycles (i.e., in advanced development, under construction or in operation). Projects achieving financial close ("FC") and projects achieving either initial or project commercial operation dates ("ICOD" or "PCOD" respectively) are typical examples that may lead to such variances in the values presented on the financial statements from one period to another, potentially rendering analysis of these variations unreasonable without additional transparency. The Company considers this or similar type of transactions as "ordinary course of business." Accordingly, the financial value of these transactions does not lead into any financial adjustment to the Company’s reported consolidated net profit for the period attributable to equity holders of the parent ("reported net profit"). For a summary of this type of transactions, please refer to the section Material ordinary-course-of-business transactions that did not result in adjustment to the reported net profit for the year ended 2022.

In addition to the above, there may be transactions that the management would consider as non-routine or non-operational as they are either one-off and are not expected to repeat in the future or are unusual in nature. The impact of such transactions on the reported net profit are adjusted in the respective period of their realisations to arrive at adjusted net profit attributable to equity holders of the parent ("adjusted net profit") for the concerned period. For a summary of this type of transactions, please refer to the section Material transactions that resulted in adjustment to the reported net profit for the year ended 31 December 2022.

Material ordinary-course-of-business transactions that did not result in adjustment to the reported net profit for the year ended 2022

Projects achieving financial close ("FC")

Typically, a project company achieves its FC when it has access to funding from its lenders. Upon achievement of the FC, the Company normally becomes entitled to recognise development fees from the project company and recover the project development and bidding costs, including reversal of any related provisions. Moreover, the Company typically earns additional service fees such as project and construction management fees, which are recognised during the construction period of the project based on pre-determined milestones.

The following table lists all projects that achieved their respective FCs in the past 24 months to 31 December 2022.

Projects achieving initial or project commercial operation dates ("ICOD" or "PCOD")

A project starts providing power and/or water, partially or fully, under its offtake agreement in the year it achieves either ICOD or PCOD and begins recognising revenue and charging costs into the profit or loss statement. It is typically at this stage that NOMAC starts recognising its stable and visible O&M fees too.

Depending on its effective ownership and control relationship in the project, the Company either consolidates the financial results of the project (subsidiary) or recognises its share of net income in the project (equity-accounted investee) on the Company’s consolidated financial statements. The Company additionally receives dividend distributions in proportion to its share in the project in case the project distributes such dividends.

The following table lists all projects that achieved their respective ICOD or PCOD and thus have begun contributing to the Company’s results in the past 24 months to 31 December 2022.

Liquidity management and financial optimisation

During 2022, the Company has initiated and/or completed several transactions as part of its group-wide liquidity management and financial optimisation agenda.

Partial prepayment of APMI One’s ACWA 39 Bond

In May 2017, APMI One, ACWA Power’s 100% -owned subsidiary, issued bonds with an aggregate principal amount of USD 814.0 million (SAR 3,052.5 million). The bonds are listed on the Irish Stock Exchange and are non-recourse to ACWA Power.

During the year, ACWA Power, through APMI One, has partially bought back pre-amortisation aggregate principal amount of USD 400.7 million (SAR 1,502.7 million) of bonds at a discount through a tender offer. The Company recognised a gain of SAR 74.8 millionon the buyback, net of the proportionate share in the unamortised transaction cost in relation to the bond’s issuance, which is presented within other income on the consolidated statement of profit or loss.

Prepayment of Silk Road Fund’s convertible loan

During 2018, ACWA Renewable Energy Holdings Limited ("APREH") entered into a convertible, interest-bearing loan agreement with CVXF Inc. (a subsidiary of Silk Road Fund ("SRF") of China) at an amount of SAR 1,361.2 million, which was partly exercised and converted into equity. The Company fully prepaid the remaining outstanding balance on 30 September 2022.

Early settlement of equity bridge loans ("EBL" or "EBLs")

During the year, the Company prepaid in full its portion of the EBLs in Rabigh 3 and Sakaka projects and terminated the hedges placed in relation to ACWA Power’s portion of these EBLs. Consequently, respective projects have transferred to the Company an aggregate gain amounting to SAR 55.7 million realised from the settlement of the hedging contracts, which the Company disclosed under other income on the consolidated statement of profit or loss.

Refinancing of Barka Water and Power Projects SAOG ("Barka")

During the year, Barka, a subsidiary of the Company, concluded restructuring of its senior debt amounting to OMR 24.1 million(SAR 236.2 million). The loan carries an annual effective interest rate of 5.5%.

Refinancing of Rabigh Arabian Water and Electricity Company ("RAWEC")

During the year, RAWEC, a subsidiary of the Company, concluded the second phase of its debt refinancing. A new facility amounting to SAR 2,231.2 million was drawn in two tranches, at a 4% fixed rate each, repayable on a semiannual basis from June 2022 with the final instalments to be paid in June 2034. Upon successful completion of the refinancing, RAWEC paid a one-off fee of SAR 236.3 million to the offtaker in accordance with the terms of the Water and Energy Conversion Agreement ("WECA"). The payment has been classified as other asset and will be amortised over the remaining term of the WECA.

Restructuring and refinancing of Shuaibah Water and Electricity Company ("Shuaibah 3″ or "SWEC")

On 20 June 2022, Shuaibah 3, an equityaccounted investee of the Company, signed a new WPA that amended and restructured the existing PWPA as part of the conversion of the existing plant ("Old Plant") from an oil-fired asset to a seawater reverse osmosis desalination plant ("RO Plant").

The RO plant, at an estimated total investment cost of around SAR 3 billion, will be developed under a concession period of 25 years, with the project commercial operation date ("PCOD") scheduled for Q2 2025, until when he Old Plant shall continue to operate. Upon achieving the PCOD, the Old Plant shall be decommissioned although the underlying project company will continue to receive the capacity payments (as adjusted for the average availability based on the last three years’ performance before decommissioning), until the expiry of the original PWPA term of Q1 2030. The project company has accounted for this transaction under IFRS16 for lease modifications. The transaction has no impact on consolidated statement of profit or loss or financial position of the Company.

Following the restructuring, SWEC has successfully replacedUSD and SAR tranches of its then existing outstanding senior debt of USD 415 million and SAR 285 million with USD 420 million and SAR 285 million facilities, respectively, repayable semi-annually with final instalment to be paid in January 2026. Additionally, the then existing subordinated debt facility of USD 112 million was replaced with a USD 230 million subordinated debt facility at a favorable interest rate, repayable semi-annually with final instalment to be paid in January 2026.

Partial divestment of ACWA Power Redstone Holding (RF) Proprietary Limited ("Redstone")

On 28 July 2022, ACWA Power Green Energy Africa Proprietary Limited (a 100%-owned subsidiary of ACWA Power) (the "Seller") entered into a Sale and Purchase Agreement ("SPA") with a thirdparty buyer (the "Buyer") in relation to the Seller’s 25.92% partial shareholding in Redstone (a 98%-owned subsidiary of the Seller before the SPA) for an agreed consideration of ZAR 276.8 million (SAR 61.0 million). Legal formalities in relation to the share transfer were completed in December 2022.

Full divestment of Vinh Hao 6 Power Joint Stock Company ("Vinh Hao")

On 20 October 2022, ACWA Power entered into a Sale and Purchase Agreement ("SPA") for the sale of its complete 60% stake in Vinh Hao, Vietnam, an equity-accounted investee of the Company, subject to the satisfaction of conditions precedent in the SPA. For the purpose of these consolidated financial statements, carrying value of ACWA Power’s investment in Vinh Hao amounting to SAR 77 million was classified as assets held for sale.

Partial divestment of Shuaa Energy 3

In December 2022, a Sale and Purchase Agreement («SPA») was entered into for the partial divestment of Shuaa Energy 3 project. Legal formalities with respect to divestment are not completed as of 31 December 2022; following the completion, the Company’s effective shareholding in Shuaa Energy 3 project will be reduced to 12.24% from 24.00%.

Partial divestment of ACWA Power Uzbekistan Project Holding Company (the "Investee Company")

On 14 September 2022, ACWA Power entered into a Sale and Purchase Agreement ("SPA") with the Silk Road Fund of China – CVXF Inc. ("SRF") for the sale of a 49% stake in the Investee Company, a wholly-owned subsidiary before the SPA, which holds 100% stake in ACWA Power Sirdarya, the project company for the 1,500 MW Sirdarya CCGT project (the "Sirdarya") in Uzbekistan that is under construction. Legal formalities in relation to divestment were completed on 27 December 2022. Consequently, ACWA Power lost control in the Investee Company, recognised a gain of SAR 235.7 million and started to account for the Sirdarya using the equity method of accounting in accordance with the requirements of IFRS 11 – Joint Arrangements.

Full divestment of Shuqaiq Water and Electricity Company ("SQWEC")

The SQWEC sale transaction that was entered into in September 2021 was completed on 17 March 2022, the sale consideration of SAR 391.4 million has been settled and the Company recorded a net loss of SAR 17.2 million, mainly driven by recycling of cash flow hedge reserve deficit and allocation of goodwill on disposal.

Material transactions that resulted in adjustment to the reported net profit for the yearended 31 December 2022

Provision/(reversal) of provision for project development cost in relation to a coal project

In 2020, ACWA Power has decided not to pursue any new coal projects in line with its commitment towards decarbonisation and has fully written off the incurred project development and related costs of the Nam Dinh 1 IPP coal project in Vietnam amounting to SAR 80.9 million. Following the successful completion of the transfer of the Company’s effective shareholding to a new partner, the Company fully reversed a provision for project development cost of SAR 14.3 million in 2022 and posted an adjustment of the same amount in arriving at adjusted net profit for the yearended 2022 (as the impact of the original transaction was an adjusting item in 2020).

Impairment in Barka Water and Power Projects SAOG ("Barka")

Barka is a subsidiary of the Company, comprising one conventional power generation plant, one multi-stage flash (MSF) water desalination plant and two reverse osmosis (RO) water desalination plants. Due to the non-renewal of the power side (PPA) of the PWPA in 2021 by the offtaker and existing unfavorable spot market in Oman, an impairment assessment was performed by the management under IFRS to assess the recoverable amount. The recoverable amount was assessed to be lower than the carrying amount of the asset and an impairment of SAR 121.6 million (ACWA Power’s share is SAR 51 million) was charged in 2022 (2021: nil), which was subsequently adjusted to arrive at adjusted net profit.

On 2 February 2022, Barka extended its WPA for the RO plants for the next 23 months with an option to extend further by another nine months. Following the renewal of the WPA, Barka successfully restructured its senior debt (please refer to Refinancing of Barka Water and Power Projects SAOG ("Barka")).

Key financial indicators

ACWA Power’s management uses several key performance metrics to review its financial performance. These metrics are defined and analysed below.

Operating income before impairment loss and other expenses

Operating income before impairment loss and other expenses represents ACWA Power’s consolidated operating income before impairment loss and other expenses for the continuing operations and includes ACWA Power’s share in net income of its equity-accounted investees.

For the year ended 31 December 2022 ("2022″)

Operating income before impairment loss and other expenses for 2022 was SAR 2,614 million and 13.5%, or SAR 311 million, higher than SAR 2,303 million of 2021. The higher variance was mainly due to:

1. new contribution or full year impact together with the corresponding O&M income from projects that achieved their ICOD/PCODs during or after 2021 (please refer to Projects achieving initial or project commercial operation dates ("ICOD" or "PCOD"));
2. higher contribution from development and construction management services for the projects which achieved financial close during the year (please refer to Projects achieving financial close ("FC"));
3. lower project development cost, provision and write-offs, net of reversals, due to higher provisions/write offs in 2021;
4. recognition of liquidated damages and insurance recovery pertaining to incidents in 2022 and earlier; and 
5. higher employee long-term incentive plan (LTIP) expense in 2021 that was recognised for both fullyear2020 and 2021.

These were partially offset by:

1. reversal of an impairment loss of SWEC in 2021;
2. lower contribution from projects on account of 
   1. extended outages in certain power generation plants, mainly Noor 3 in Morocco and Al Mourjan in Saudi Arabia, all of which are back to normal operation;
   2. episodic operation of Barka power plant in Oman due to expiry of the offtake contract;
   3. higher maintenance costs in some plants due to unplanned and/or extended outages; and 
3. higher corporate expenses.

Adjusted profit attributable to equity holders of parent

Adjusted net profit represents profit/(loss) after adjusting the consolidated profit/(loss) attributable to equity holders of the parent ("reported net profit") for the financial impact of non-routine, unusual or non-operational items (please refer to Key factors affecting the comparability of operational and financial results between reporting periods).

For the year ended 31 December 2022 ("2022″)

Adjusted net profit for 2022 was SAR 1,575 million, and 32%, or SAR 381 million, higher than SAR 1,194 million of 2021.

Total adjustments to the consolidated reported net profit for 2022 was SAR 35 million and was recognised to eliminate mainly the financial impacts of:

1. the impairment charges mainly in relation to the Barka power plant’s non-renewal of the offtake agreement and existing unfavorable Oman’s spot market conditions, net of non-controlling interest, of SAR 51 million;
2. the reversal of the project development cost for the Nam Dinh project in Vietnam of SAR 14 million, following the completion of the transfer of the Company’s effective shareholding to a new partner.

In 2021, there was a SAR 435 million adjustment to the consolidated reported net profit. Please refer to the Company’s Investor Report for the year ended 31 December 2021 for details of 2021 adjustments.

Consolidated profit attributable to equity holders of the parent

Reported net profit for 2022 was SAR 1,540 million and 103%, or SAR 781 million, higher than SAR 759 millionof 2021.

In addition to SAR 311 million higher operating income before impairment loss and other expenses (please refer to Operating income before impairment loss and other expenses), the growth was largely driven by:

• lower impairment loss and other expenses in 2022 by SAR 105 million, mainly driven by the recognition of a one-time share-based IPO grant expense of SAR 280 million in 2021, partially offset by the recognition of arbitration/ legal claim and supplier settlements of SAR 112 million and higher impairment charges by SAR 62 million;
• higher other income, net, by SAR 353 million, mainly driven by:
  1. higher income earned on deposits in addition to gain on change in fair value of derivatives, in aggregate by SAR 205 million;
  2. income in relation to early settlement of long-term financing and funding facilities and termination of hedging instruments by SAR 113 million (please refer to sections Partial prepayment of APMI One’s ACWA 39 Bond and Early settlement of equity bridge loans (EBLs)).

• higher profit from discontinued operations by SAR 282 million, mainly on account of the gain recognised on sale of a 49% stake in Sirdarya (please refer to Partial divestment of ACWA Power Uzbekistan Project Holding Company (the "Investee Company")).
• higher net loss attributable to non-controlling interests (NCI) by SAR 49 million;

which were partially offset by 

1. higher finance charges by SAR 176 million mainly due to Rabigh 3 coming into operations and higher finance cost on Sukuk; and 
2. higher Zakat and tax charge by SAR 153 million.

Parent operating cash flow (POCF)

POCF represents parent level, or corporate, operating cash and comprises

1. distributions from the project companies and NOMAC;
2. development, construction management and other fee revenues;
3. cash generated by financial optimisation activities including partial and/or full divestments of the Company’s investments and refinancings.

These cash flows are then reduced by corporate general, administrative expenses, Zakat and tax expenses and capital expenditures as well as the financial expenses related to the ACWA39 non-recourse bond.

Total cash inflows increased by 100.9%, or SAR 2,510 million, due to the proceeds from:

1. the refinancing (please refer to the section Refinancing of Rabigh Arabian Water and Electricity Company ("RAWEC")) and subsequent capital reduction of RAWEC;
2. the divestment of SQWEC (please refer to Full divestment of Shuqaiq Water and Electricity Company ("SQWEC")); and
3. the repayment of a shareholder loan from Sirdarya following a partial divestment by the Company (please refer to Partial divestment of ACWA Power Uzbekistan Project Holding Company (the "Investee Company").

Total discretionary cash (TDC) and year-end cash

Total discretionary cash comprises the corporate opening cash for the current year, the POCF and new equity or debt capital raised by the Company, if any.

TDC for 2022 was SAR 9,015 million and 4.1%, or SAR 388 million, lower than SAR 9,403 million of 2021 mainly on account of the additional debt and equity capital that the Company raised in 2021, including the proceeds from Sukuk Tranche 1 and the Company’s IPO, which also resulted in higher opening cash for 2022.

Net of the SAR 470 millioncollection of a limited notice to proceed (LNTP) advance, the Company’s uses of cash during 2022 amounted to SAR 4,718 million (SAR 5,188 milliongross uses of cash). The Company used SAR 5,188 million as follows:

1. debt service of SAR 3,158 million , including
   1. partial buyback of ACWA 39 bonds at pre-amortisation aggregate amount of SAR 1,408 million (please refer to Partial prepayment of APMI One’s ACWA39 Bond);
   2. prepayment of outstanding SRF convertible loan and payment of several other EBLs, altogether amounting to SAR 1,549 million (please refer to the section Prepayment of Silk Road Fund’s convertible loan and section Early settlement of equity bridge loans ("EBL" or "EBLs"));
2. SAR 1,195 million for investment in its projects including in UAE, Saudi Arabia and South Africa;
3. SAR 562 million for dividends; and 
4. SAR 272 million for other advances and project development costs.

Total year-end cash on 31 December 2022 stood at SAR 4,297 million and was 4.9%, or SAR 223 million, lower than the year-end cash balance on 31 December 2021.

Parent level leverage

Parent level, or corporate, leverage consists of 

1. borrowings with recourse to the parent;
2. off-balance sheet guarantees in relation to the equity bridge loans (EBLs) and equity letters of credit (LC) and other equity-related commitments; and 
3. options entered with lenders of mezzanine debt facilities by the Company’s JVs or subsidiaries.

Parent level net leverage represents parent level leverage net of the year-end corporate cash.

Parent net leverage stood at SAR 8,818 million as at 31 December 2022 and was 8.8%, or SAR 712 million, higher than SAR 8,106 million as at 31 December 2021, driven by higher total parent leverage by 3.9%, or SAR 488 million, and marginally lower year-end corporate cash balance by 4.9%, or SAR 223 million.

Total on-balance sheet leverage stood at SAR 6,553 million and was 5.2%, or SAR 356 million, lower than SAR 6,909 million as at 31 December 2021. Corporate borrowings at SAR 2,792 million comprised Sukuk and corporate revolving facilities, which remained flat versus 2021. Project recourse borrowings at SAR 2,941 million were higher by 19% mainly on account of new recourse debt for several projects, partially offset by 

1. the repayment of recourse debt in relation to other projects and 
2. reclassification of the Sirdarya EBL commitment to off-balance sheet leverage following partial divestment (please refer to the section Partial divestment of ACWA Power Uzbekistan Project Holding Company (the "Investee Company")), which resulted in the project being treated as an equity-accounted investee instead of a subsidiary.

Other liabilities at SAR 820 million decreased by 50 %mainly because of the prepayment of an outstanding loan (please refer to the section Prepayment of Silk Road Fund’s convertible loan) and a reduction in coal supply derivative liability, which were partially offset by interest unwinding on the PIF loan for the currentyear.

Total off-balance sheet leverage stood at SAR 6,562 million and was 14.8%, or SAR 845 million, higher than SAR 5,717 million as at 31 December 2021, mainly as a result of a reclassification of the Sirdarya EBL commitment from on-balance sheet to off-balance sheet leverage following partial divestment in addition to other EBL commitments for projects including the Shuaibah 3 IWP.

Leverage ratios

The Company’s management monitors two ratios with respect to its net leverage position, namely Parent Net Leverage to POCF ratio and Parent Net Leverage to Net Tangible Equity ratio.

As at 31 December 2022, the Parent Net Leverage to POCF ratio stood at 2.12x (times) and was 2.91x (times) lower than the 5.03x (times) as at 31 December 2021, mainly due to higher POCF (please refer to the section Parent operating cash flow ("POCF")).

As at 31 December 2022, the Parent Net Leverage to Net Tangible Equity ratio stood at 0.64x (times) and remained stable versus 2021 as a result of proportional increases in parent net leverage and net tangible equity balances between 2021 and 2022.