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2017 ANNUAL REPORT By means of water, we give life to everything - ‘Surah Al-Anbiya’, 21:30
2017 ANNUAL REPORT
By means of water, we give life to everything - ‘Surah Al-Anbiya’, 21:30
His Majesty Sultan Qaboos Bin Said
AckNOwLEdgEmENT
The Board of Directors of the Sharqiyah Desalination Company SAOG (“SDC”) takes this opportunity to wish
His Majesty Sultan Qaboos Bin Said long life, good health and prosperity.
The Board wishes to express its gratitude to the Government of Oman for its continued support and encouragement to the private sector in creating an environment that allows participating effectively in
the growth of the economy and dedicating our humble achievements towards the building of strong Oman.
ACKNOWLEDGEMENT 04
OUR VISION, OUR MISSION 06
BOARD OF DIRECTORS (BOD) 07
BOARD OF DIRECTORS REPORT 08
OPERATIONAL HIGHLIGHTS 11
DESCRIPTION OF THE COMPANY 15
MANAGEMENT DISCUSSION 18
THE EXPANSION PROJECT AT A GLANCE 21
IN-COUNTRY VALUE (“ICV”) 23
CORPORATE RESPONSIBILITY AND SUSTAINABILITY (CSR) 26
CORPORATE GOVERNANCE REPORT 32INDEPENDENT ENTITY REPORT ON PERFORMANCE OF BOARD OF DIRECTORS 43
REPORT OF THE AUDITORS ON FINANCIAL STATEMENTS 45
FINANCIAL STATEMENTS 51
TABLE OF CONTENTS
Statement of financial position 53
Statement of profit or loss and other comprehensive income 54
Statement of changes in equity 54
Statement of cash flows 55
Notes 56
BOARd Of diREcTORSSDC’s Board of Directors comprises seven respected businessmen with vast regional and international experience and solid reputations.
THE EXEcUTiVE mANAgEmENT
Vision
Improve people’s lives through the continuous provision of potable water to the Sharqiyah region
today and for the next generations.
In delivering effective, sustainable solutions that address local needs, SDC demonstrates its
uniquely holistic approach in the Sultanate of Oman. Through a mixture of pragmatism,
entrepreneurial spirit and innovative capabilities, performance is supported by the leveraging of economies of scale, the
strength and flexibility of the company and the resilience of its vision.
Mission
SDC desalinates and produces potable water securely and cost-effectively for the benefit of the
local communities in the Sharqiyah region.
Our mission is expressed through our environmental approach and performance, and
the daily commitment and achievements of the women and men who work for Sharqiyah
Desalination Company.
Chander Kant Khanna• ViceChairmanoftheBoard• MemberoftheNomination
andRemunerationCommittee
Xavier Joseph • MemberoftheBoard• Memberofthe
NominationandRemunerationCommittee
Mustafa ahMed salMan • MemberoftheBoard• MemberoftheAudit
Committee
phillippe paulissen • ChiefExecutiveOfficer(CEO)
Jean-franCois roberge• MemberoftheBoard• ChairmanoftheAudit
Committee
patriCe fonlladosa ChairmanoftheBoard
ali KhaMis MubariK al alawi• MemberoftheBoard• Chairmanofthe
NominationandRemunerationCommittee
padManabhan ananthan• MemberoftheBoard• MemberoftheAudit
Committee
eMad Moustafa haMed • ChiefFinancialOfficer(CFO)• CompanySecretary
9
BOARd Of diREcTORSREPORT
Dear Shareholders,On behalf of the Board of Directors of Sharqiyah Desalination Company SAOG (the “Company”), I have the pleasure to present the Audited Financial Statements of the company for the year ended 31st December 2017.
UpdATE ON ThE OpErATiONS
The Company has increased its production volumes of water with a total water delivery to client of 33,334,863 m3 against 29,116,162 m3 in the previous year i.e. an increase of almost 14.5%.
The average plant availability for the year reached 99%. This consistently high availability is the result of a strict maintenance program followed and implemented by the Operation & Maintenance team, which allows meeting the water demand of the Sharqiyah region.
FiNANCiAL iNFOrMATiON
Contractual Revenue has increased by 26% as compared to previous year (ro 3,669K), however due to risk of “disputed COD” the company has recognised and adjusted a “disputed revenue” of ro 413K related to the period 1st January 2017 to 7th February 2017.
Cost of sales has increased by 36% as compared to previous year (ro 2,252K). This is mainly due to higher O&M cost due to post COD tariff and new electricity CRT (ro 8,161K in 2017 Vs ro 4,811 in 2016) offset by the impact of reduction on account of non-recurrence of the LD charges of ro 1,500K been charged by OPWP in the previous year.
Accordingly, gross profit has increased by 21.1% as compared to previous year (ro 882K).
Administrative and general expenses have increased by 14.9% as compared to previous year (ro 91K). This is mainly due to inclusion of litigation cost for COD dispute.
Finance expenses have increased by 29.3% as compared to previous year (ro 836K), as loan was not fully utilised in 2016 in addition
i. impact of the withholding taxes on interest payments. This withholding tax is to be refunded from OPWP as part of “Material Adverse Change Claim”, subject to fulfilment of conditions ro 165K
ii. Amortization of deferred finance cost ro 113K
Profit before tax has decreased by 6.2% as compared to previous year (ro 44K). Current period profit before tax represents 4.9% of the revenue.
However, the change of corporate tax rate from 12% to 15% has resulted into increase in deferred tax ro 810K (recalculation of previous years ro 380K and Current year deferred tax stands at ro 430K)
Resulting from this change the company has recognised a net loss of ro 142K. It is worth noting that this change does not affect the cash position of 2017.
BOArd OF dirECTOrS
rEpOrT
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OPERATiONAL HigHLigHTS
diSpUTES wiTh CLiENT (“Opwp”) ANd EpC CONTrACTOr
On 6th February 2017, the Acceptance Tests were approved by the Client. On 7th February 2017, the client confirmed achievement of Commercial Operation Date (COD). However, the Company continues to maintain COD on 15th September 2016.
The Company has referred the COD dispute with OPWP to an expert for determination. The process has concluded but the decision has been stayed pending the outcome of settlement discussions with OPWP, which are ongoing.
The EPC Contractor continues to refuse to compensate the Company for the disputed amounts which have been invoiced to it. The impact of the disputed amounts from the COD disputes has been provisioned in the 2016 and 2017 accounts. However, in the event that the Company is not successful in its legal actions, a negative impact to the extent of ro 1.45 million may be incurred.
iNTErNAL CONTrOL ANd COrpOrATE GOVErNANCE
The Management of the Company believes in a strong internal control system, in compliance with SOX guidelines.
The Company has in place high standards of corporate governance, which are compliant with the code of corporate governance promulgated by the Capital Market Authority.
ACkNOwLEdGEMENTS
As Chairman of the Board, I would like to thank our Shareholders, not only for their confidence, but also for their continued support and for the expertise they bring to the Company.
The Board of Directors expresses its gratitude to Oman Procurement and Water Procurement Co. SAOC, Public Authority for Electricity and Water and Oman Government for their tremendous support in regulating and developing the water sector, and for their assistance, which comforts the smooth functioning of our operations.
Finally, we would like to extend our deep appreciation and gratitude to His Majesty Sultan Qaboos Bin Said for his wise leadership; we pray to Almighty to shower him with blessings, keep him in good health and give him long life.
Thank you and kind regards,
Chander Kant Khannavice-Chairman
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CONTiNUOUS iNCrEASE OF wATEr SUppLy
As expected, the year 2017 confirmed the significant increase of water demand within the Sharqiyah region, in line with the several connection works and improvement of water access to the population by the Public Authority of Electricity and Water (PAEW).
Therefore and for the past 7 years, the water quantity produced and supplied by Sur Desalination Plant is increasing, by an average of 14% this year compare to 2016, (see Figure 1 Below).
The COD of the combined plant (existing plant + extension) was validated in February 2017, the Plant Contractual Capacity has been increased from that month forward, from 3,485.350 m3/day to 5,493.225 m3/day (“Plant Available Capacity” in the Figure 1 below).
CONTiNUOUS iNCrEASE OF wATEr
SUppLy
In 2017, due to the increase in the Plant capacity, the average load on the plant was 71% of the maximum capacity (it was 95% in 2016) despite the increase in production. The variation between low and high delivery period went up to 20% (it was 17% in 2016)(see Figure 2 Below). OCCUpATiONAL hEALTh ANd SAFETy
In 2017, the Severity Rate (12 month running) remains nil and the Frequency Rate (with day off – 12 month running) was on a decreasing trend as per target. This is the illustration of the Management commitment towards Health and Safety of everyone at the Plant.
In September, a full week was dedicated to Health and Safety. This event was part of the global occupational Health and Safety Week that has been established by Veolia and locally adapted by the Company from September 17 to September 21, 2017.
In addition to underscoring the wholehearted commitment by the Company and its managers to promote a culture of risk prevention, this dedicated week is intended to allow each and every employee, to review and clarify the safety rules currently in effect, to improve the dissemination of best practices, and give the employees opportunities to progress even more.
hiGh STANdArdS COMMiTMENT ON ASSET MANAGEMENT
To comply with the high plant availability requirements imposed by the Water Purchase Agreement (‘WPA’) (95% of the contractual capacity over the year), the Asset Management strategy has been fully audited with the support of Veolia Headquarter in Paris in order to increase it to the level of requirements of the iso 55000:2014. The Asset Management Strategy for the plant has been finalised in 2017.
COMMiTTEd TO rELiABiLiTy
In 2017, the plant has been able to honour 100% of the scheduled availability and therefore to supply OPWP with no water shortage all year long. This remarkable availability is the result of a stringent maintenance program followed and implemented by the Operation & Maintenance team.
Figure 1 - Water Delivery & Plant load factor of SUR Desalination Plant from October 2009 to December 2017
Figure 2 -Water Delivery & Plant load factor of SUR Desalination Plant for the Year 2017
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dEScRiPTiON Of THE cOmPANy
wATEr QUALiTy AT ThE BEST LEVEL
In line with the availability achievement, the plant delivered potable water complying with the Water Purchase Agreement requirements and the Omani Standards with no single non-conformity for the full year 2017.
In addition, more than 17,000 water parameters have been successfully analysed in 2017 into the plant internal laboratory facilities, including 8,062 tests on potable water following the contractual and legal requirements.
In 2017, Sur Desalination Plant laboratory implemented an action plan, in order to progressively implement the requirement of iso 17025.
OpTiMizEd OF ThE COMBiNEd pLANT pErFOrMANCES
The O&M contractor has worked with the support of the EPC contractor, of other major desalination plants operated by Veolia in the GCC and of the technical department of Veolia, on an optimisation action plan for the combined plant.
diGiTALiSATiON
With more than 2,000 pieces of equipment connected on a Centralized Supervisory Control and Data Acquisition system (‘SCADA’) hosted in our control room, our operation team is permanently monitoring the performance of the plant 24/7 and all year long.
In 2017, the SCADA system has been upgraded (both on software and hardware). This project implements the latest technologies to the system, and brings it to the level of requirements of the Authority for Electrical Regulation (AER) regarding cyber-security.
To ensure the equipment used within the plant functions at optimum capacity, maintenance and asset management play a major role in the plant activity. A dedicated Computerized Maintenance Management System (‘CMMS’) is implemented to plan, follow-up, record and guide our maintenance team in their daily assignments.
Remote control tablets connected with the CMMS makes sure that all maintenance engineers and technicians have access to the required information as well as instruction to perform an efficient maintenance task.
Finally, a long-term renewal plan of all assets based on criticality and risk assessments has been implemented to better plan the required investments.
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Shareholders
Client &Government
Mazoon Electricity Co.
Lenders
Floating35%
Water Purchase Agreement
Electricity Supply Agreement
Securities
Facilities Agreement
Electrical Connection Agreement
Water Connection Agreement
Usufruct Agreement
NPW29.25%
Veolia35.75%
O&M ContractBahwan Veolia
Water LLC
EPC Contract
Contractors
Sharqiyah Desalination
Company S.A.O.G
On 7 January 2006, the Ministry of National Economy issued to potential bidders a request for a proposal for the development of desalination facilities at Sur in the Sharqiyah region of the Sultanate of Oman on a build, own and operate (BOO) basis (the Project). The proposal included the purchase of the Existing Plant already at the location (with a capacity of about 2.66 Migd) and construction of a new desalination plant, with aggregate capacity of 17.66 Migd (the New Plant) using the reverse osmosis technology for desalination.
A consortium comprising Veolia Eau-Compagnie Generale des Eaux, National Power and Water LLC and Veolia Water AMI (the Original Founders) was awarded the Project and on 14 January 2007, Sharqiyah Desalination Company was incorporated. On 17 January 2007, the Ministry of Housing Electricity and Water (‘MHEW’) and the Company entered into a Water Purchase Agreement (‘WPA’) and a Water Connection Agreement (‘WCA’). Pursuant to Royal Decree 92/2007, the functions and assets of the MHEW in relation to the electricity and water related sector and other water related functions (including the right to sign contracts necessary for the management of the water sector) were transferred to the Public Authority for Electricity and Water (‘PAEW’). The WPA and WCA required the Company to purchase the Existing Plant and construct the New Plant, operate and maintain these facilities, make available the capacity of the facilities and sell its desalinated water output exclusively to PAEW.
The Project Founders Agreement required the Founders to float the Shares on the Muscat Securities Market (‘MSM’) through an IPO offering 35% of the share capital of the Company to the public. Following the IPO the Company converted from an SAOC to an SAOG. Shortly thereafter, the AWPA was novated and OPWP assumed the role of Buyer under the contract from PAEW.
On 10 July 2014, the Company entered into an Amended Water Purchase Agreement with Oman Power and Water Procurement Company (‘OPWP’) to build an extension to the plant which would increase the plant capacity from 17.66 Migd to a total aggregated capacity of 29 Migd. In February 2017, OPWP confirmed the completion of the expansion project and the Combined Plant is operating smoothly in its production of desalinated water. Sharqiyah Desalination Company is proud of its achievement in combining cutting edge technology and world class standards to continuously and reliably provide water to the people of the Sharqiyah Region. The Sur IWP contains the world’s largest beachwell catchment water area. Since its inception in 2007, it has operated without interruption and has delivered 200 million m³ of potable water.
BACkGrOUNd
pOST ipO
veolia Middle east s.a.s (vMe) – formerly named Azaliya SAS 35.75%
national power & water (npw) 29.25%
veolia eau 1 share
public 20.53%
pension fund of the Civil service’s employees [oman]
14.47%
7 January 2006 Bid award of the Initial Project to the Original Founders14 January 2007 Incorporation of SDC
17 January 2007 Execution of the Existing WPA between SDC and MHEW
15 May 2007 Financial Close of the Initial Project
8 october 2009 Commercial Operation Date of the Initial Project
30 June 2013 Listing on Muscat Securities Market (‘MSM’)
10 July 2014 Signature of the amended and restated WPA
16 december 2014 Increase of Share Capital and distribution of bonus shares
25 december 2014 Signature of the Ancilliary Contract
25 March 2015 Financial closing related to the expansion project
15 september 2016 COD (disputed)
7 february 2017 COD confirmed by OPWP
prE ipO
azaliya sas 55.00%
national power & water (npw) 45.00%
veolia eau 1 share
kEy dATES
Main organization of the Company
The listing of SDC on the MSM was an important milestone in the SDC project life.
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mANAgEmENTdiScUSSiON
The Law for the Regulation and Privatisation of the Electricity and Related Water Sector (the Sector Law) prescribes water desalination as a regulated activity and requires companies undertaking it to be authorised by the Authority for Electricity Regulation Oman (‘AER’) to do so. In 2016 SDC was awarded a 25-year Desalination License of a Special Nature. This licence secures SDC’s long term position as the key provider of potable water in the Sharqiyah Region.
In 2017, nominal capacity of the Sur IWP had increased by 57% by virtue of the Expansion Project. The total capacity of the enlarged plant is now 29 MIGD, which will enable SDC to meet the forecasted demand from the Public Authority for Electricity and Water (‘PAEW’) that demand for potable water in the Sharqiyah region is expected to grow by an average of 7-8% per year over the next 7 years.
The Plant is located next to the Sur Industrial Estate within 300km of Muscat. SDC’s headquarters are in Muscat. SDC and its O&M Contractor, Bahwan Veolia Water, employ 60 people.
OppOrTUNiTiES ANd ThrEATS
SDC benefits from a guaranteed long term income stream and a low risk profile.
Under a long-term Water Purchase Agreement (WPA) with guaranteed water purchase at fixed rates from OPWP, the Company is protected from the risk of falling demand, commodity prices and market fluctuations.
Payments under the WPA are based on a dual payment system – one part representing a capacity payment for the availability of the Plant and the second upon the amount of water delivered to PAEW.
The risks linked to the supply of water have been reduced during the current year as the Company has launched a program to drill additional beach wells to secure a constant supply of high quality water for the reverse osmosis modules.
In 2017 the Sur IWP has worked hard to increase training programs and professional development initiatives for its employees. The Sur IWP is a key employer in the Sur Region and so employee satisfaction is a priority for the Company.
The introduction of the Cost Reflective Tariff by Mazoon Electricity Company in the 2017 year has had a neutral effect on SDC.
FiNANCiAL iNFOrMATiON
Contractual Revenue has increased by 26% as compared to previous year (ro 3,669K), however due to risk of “disputed COD” the company has recognized and adjusted a “disputed revenue” of ro 413K related to the period 1st January 2017 to 7th February 2017.
Cost of sales has increased by 36% as compared to previous year (ro 2,252K). This is mainly due to higher O&M cost due to post COD tariff and new electricity CRT (ro 8,161K in 2017 Vs ro 4,811 in 2016) offset by the impact of the Liquidated damages ro 1,500K in 2016)
Accordingly, gross profit has increased by 21.1% as compared to previous year (ro 882K).
Administrative and general expenses have increased by 14.9% as compared to previous year (ro 91K). This is mainly due to inclusion of litigation cost for COD dispute.
iNdUSTry STrUCTUrE &
dEVELOpMENT
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THE EXPANSiON PROjEcT AT A gLANcE
Finance expenses have increased by 29.3% as compared to previous year (ro 836K), as loan was not fully utilized in 2016 in addition
i. impact of the withholding taxes on interest payments. This withholding tax is to be refunded from OPWP as part of “Material Adverse Change Claim”, subject to fulfilment of conditions ro 165K
i. Amortization of deferred finance cost ro 113K
Profit before tax has decreased by 6.2% as compared to previous year (ro 44K). Current period profit before tax represents 4.9% of the revenue.
However, the change of corporate tax rate from 12% to
15% has resulted into increase in deferred tax ro 810K (recalculation of previous years ro 380K and Current year deferred tax stands at ro 430K)
Resulting from this change the company has recognized a net loss of ro 142K. It is worth noting that this change does not affect the cash position of 2017.
OUTLOOk FOr 2018
As the Expansion of the Plant is now fully operational, the Sur IWP has undertaken a comprehensive training program to familiarize all staff with the new technological demands of the Plant, to achieve our operational, HS&E and financial targets.
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iN-cOUNTRy VALUE (“icV”)
BACkGrOUNd
In 2013, the Company entered into sole negotiation with Oman Power and Water Procurement Company (‘OPWP’) for the expansion of the plant capacity from 17.66Migd to a total aggregated capacity of 29 Migd, as allowed under the Water Purchase Agreement.
This negotiation successfully resulted in July 2014 in the signature of the Amended and Restated WPA, further to which the Company successfully refinanced its existing debt of USD 120.8 Million (ro 46.5 Million) in March 2015. The Company also raised new debt of USD 45.2 Million (ro 17.4 Million) for funding its expansion project comprising the 10.6Migd reverse osmosis water desalination facility.
The refinancing involved taking over the loans from the existing lenders by a consortium of international banks. From a shareholder perspective and as committed, the Company did not request any further equity commitment from its shareholders, and has issued bonus shares on 16 December 2014.
COMpLETiON
The construction of the extension was completed on schedule and the Combined Plant demonstrated that it
was capable of producing 100% of the new Guaranteed Contractual Water Capacity. Regrettably, a technical issue regarding the Sea Water Intake Pumps delayed the declaration of an agreed Commercial Operation Date. The COD was accepted and declared by OPWP on 7 February 2016. To assist in resolving the dispute between the Parties as to the true COD Date, the Parties jointly appointed an Expert to determine the matter in accordance with the provisions of the Amended Water Purchase Agreement. At the date of publication, this process is ongoing. Definitive resolution of the matter is expected before the end of the year.
ENVirONMENTAL MATTErS
The Company complies with the Equator Principles, which is a risk management framework, adopted by financial institutions, for determining, assessing and managing environmental risk in projects.
The Company puts a lot of effort into reducing the environmental impact of the desalination process and tackling the environmental challenges of our business.
Sharqiyah DesaliIation Company continues to assiduously protect its environmental KPIs, particularly with respect to preserving the surrounding marine environment.
100% Production Reliability main milestones in 2017
■ Resolution of the issues with the Sea water intake Pumps
■ commencement of full commercial operation of the Plant
■ No interruption to production for the 2017 year
■ implementation of additional beach wells
■ implementation of the cost Reflective Tariff
■ compliance with the Equator Principles
2524
The Company is committed to full compliance with all aspects of the Omani legal regulations.
This includes, but is not limited to, the Royal Decrees related to employment Omanisation, and to allocate a portion of the awarded contract to Omani content.
iCV TArGETS
LOCAL iNiTiATiVES
in-Country value
TOOLS
OBj
ECTiVE
M
EANS
■ Implement adapted HR procedures, & diverse programs
human resources
Identify, recruit, train & develop local talents
Capitalinvested
Maximize local investments
■ Investments in fixed assets
■ Develop local source of investments
■ Local sourcing of goods & subcontracted services
■ Development of national suppliers
procurement
Maximize the procurement of local goods & services with quality & price compliance constraints
■ Development of national training, education and R&D institutions
localdevelopment
Maximize the impact on local communities through a wide range of actions
Maximizing the in-Country value (iCv)
1. Capital invested
■ The Company has already invested USD 170 million (ro 65.5 million) in the past years, and invested more than USD 92.8 million (ro 35.7 million) for the expansion project.
■ Partnership with National Power and Water LLC which was holding 45% of the Company’s share capital at inception and is holding now 29.25%.
■ For the existing plant financing, 37% of the funding came from Omani banks.
■ 35% of the share capital of the Company was floated in Muscat Securities Market in June 2013 in favor of individuals resident in Oman as well as Omani companies.
■ Further to the IPO, 62.16% of the Company’s share capital is currently mainly held by Omani residents and companies.
2. procurement
The purchase policy exclusively targets the Omani market, provided that the products are available in Oman and comply with the international standards selected by the Company.
Beyond the legal duty, the management of the company demonstrates a genuine determination to be part of the local economy by adding value through capital investment and a wise procurement policy.
3. human resources
Maximize the local Human Resources by recruiting, training, and managing the careers of local employees.
The Company takes the following commitments with regard to recruitment on its existing and future projects:
a. recruitment policy
Omanisation in the Work Force
The Company exceeds its contractual commitments to Omanisation.
Omanisation is not only an objective; the Company considers it a goal to be prioritised and carefully planned.
b. training of omani nationals
The Company deploys an ambitious training policy and action in line with its experience in Oman to maintain and develop the competencies mobilized across the years.
There are Omani employees among the staff that are regularly trained as trainers to enable onsite training.
Several Omani staff members are trained as mentors to enable and support knowledge transfer.
Training Budget
The Company contributes to National training and knowledge transfer in partnership with local training providers and local vocational training centers.
Many of the Company’s initiatives are targeting Omani students: organization of conferences, visits of plants, free-of-charge summer camps in France for Omani students.
Training structure
The training delivered is structured as per the following categories: Technical training, QHSE training, Support function training and Personal development training.
Traineeships
The Company releases internship opportunities for Omani students for specific needs of its projects and operations. In 2017, 30 trainees have joined the Company for limited periods from 1 to 3 months.
4. local development
Since its creation, the Company has undertaken several actions in order to contribute to local development, as detailed in the Corporate Social Responsibility (‘CSR’) section.
Acting in the best interests of local development and making a positive contribution to the Omani society is not only an ethical duty for the Company, but part of its development strategy. The management of the Company sees its involvement in community matters as an investment rather than a cost.
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cORPORATE RESPONSiBiLiTy ANd SUSTAiNABiLiTy (‘cSR’)
AS pArT OF ThE COMMUNiTy OF ShArQiyAh
Following the launch of the Corporate Social Responsibility plan in December 2013, Sharqiyah Desalination Company has strengthened its commitment to the Sultanate of Oman as a determined player in the sustainable economy.
In harmony with the vision of His Majesty Sultan Qaboos Bin Said, running a responsible business is the way in which we fulfill the obligations we have to our stakeholders in the Sultanate of Oman; including our employees, customers, communities and government bodies.
Access to basic services and equitable resource distribution remain crucial issues today as the Omani society undergoes profound transformations.
For Sharqiyah Desalination Company, access to water, an essential resource, is the very core object of our business and subject of our expertise. And, because the area we serve depends on us, we strive for continuous improvement in providing this service. In this context, sustainable development forms an integral part of our day-to-day operations. Our commitments can be defined as follows:
Our corporate responsibility and sustainability approach are a proof of our sustainable integration in Oman, showing our willingness to continuously improve our business performance for local benefit, preserve the environment and support talent development.
By developing access to resources and reducing our environmental impact, Sharqiyah Desalination Company aims to supply the greatest possible number of people with the water resources needed to ensure their wellbeing.
Today, the plant produces more than 131,837 m3/day of potablewater through a reverse osmosis process, ensuring a consistent and reliable water supply for the Sharqiyah Region.
OUr COMMiTMENT
■ continue to guarantee production of potable water
■ support economic and social development
■ develop transparent and constructive relationships with our stakeholders
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MONiTOriNG ThE ENVirONMENTAL iMpACT
The Sur Desalination Plant puts a lot of effort into reducing the environmental impact of the desalination process. Three outstanding aspects are:
■ Energy recuperation and re-use due to Energy Recovery Devices (ERD) reduces the impact of the operations on the environment and also operating expenses
■ Innovative water intake based on beach wells allows a lighter pre-treatment (thanks to natural sand filtration) and allows a better water quality
■ Biodiversity survey.
To ensure the local marine environment is protected to the full extent possible, and any potential impacts the desalination plant may be having can be quantified correctly, the Company had a team on site to conduct a Marine Environmental Impact Assessment. Our environmental team also produced a marine monitoring plan to ensure the Company keeps a close eye on the condition of the environment and can take any actions to respond to changes as required.
CONTriBUTE TO pEOpLE’S wELLBEiNG ANd ThEir dEVELOpMENT
Sharqiyah Desalination Company, together with its O&M Company, Bahwan Veolia Water, develops deep roots in local communities through the services they provide and play a direct role in people’s everyday lives.
MOSQUE prOjECTS
In 2017 the Company undertook the construction of two mosque facilities in the Sharqiyah Region. The first was for the residents of a village in the Wilayat of Wadi Bani Khalid, who needed a larger payer hall. The location of the hall was chosen through collaboration with village residents, sheiks and construction experts. The hall contains a large space for use in community celebrations such as Eid.
The second mosque was built specifically for use by the employees, contractors, clients and partners of the Sur Desalination Plant.
The Company is very pleased to be able to provide these facilties for the people of the Sharqiyah Region.
wATErprOOF jACkETS FOr SUr’S FiShErMEN
In response to requests from the local community, Sharqiyah Desalination Company decided to distribute 400 waterproof jackets for fishermen in the Sur area.
As Sur’s citizens are deeply involved in the fishing sector, the Company wants to maintain an open and fruitful collaboration with the fishermen of the region. The
jackets were distributed at a ceremony organized by the Ministry of Fisheries, which provided an excellent forum for the discussion of important issues affecting the fishing industry.
This action also allows the Company to be more known among the population of Sur and other stakeholders from the community.
Saleh al alawi Corporate relation Manager (wearing the fisherman jacket)
ASSOCiATiON wiTh ThE MiNSiTriES OF SOCiAL dEVELOpMENT ANd hEALTh
This year, the Company established a partnership with the Ministry of Health and the Ministry of Social Development to provide a celebration for children with special needs within the community of Sur. A celebration was organized for the occasion of the 47th Omani National Day, where the children enjoyed a range of entertainments and received gifts from the Company.
This collaboration was further enhanced by the Company’s support of the Al Wafa Centre for Disabled Children in Sur. The Company was pleased to be able to assist with the provision of lap top computers for the Centre, which uses them in its rehabilitation programs. Sharqiyah Desalination Company is grateful for the opportunity to contribute to the Centre’s celebrations for Omani National Day and to contribute to the success of this wonderful organization in the local community.
The 2017 Safety week was organized jointly by the HSE and the operational teams in Sur, in order to raise awareness on safety and be as close as possible to the daily activities.
The management led the daily toolbox talks, and afterwards, HSE walks were organized on site to change employees’ perspective and give them the opportunity to look out for their colleagues. It was also the opportunity to review some essential basics to the safety system in place at the plant.
31
REPORT Of THE AUdiTORS ON cORPORATE gOVERNANcE
33
cORPORATE gOVERNANcE REPORT
rEpOrT ON COrpOrATE GOVErNANCE FOr ThE yEAr ENdEd 31ST dECEMBEr 2017
In accordance with the Capital Market Authority (“CMA”) guidelines, we are pleased to present the fifth Corporate Governance Report (“the Corporate Governance Report”) of Sharqiyah Desalination Company SAOG (“the Company”) for the year ended 31st December 2017.
1. Company philosophy
The philosophy of the Company in respect to corporate governance is to observe, in letter and spirit, the rules and regulations framed by the CMA and in particular the Code of Corporate Governance.
Indeed corporate governance at the Company envisages its commitments towards the attainment of high levels of transparency, accountability and business priority with the ultimate objective of increasing long-term Shareholders value, keeping in mind the needs and interests of all other stakeholders.
The Company follows the stipulations of the “International Financial Reporting Standards” (IFRS) in preparation of accounts and financial statements.
2. Composition of the board of directors (the “board”)
All current Board of Directors members were elected by the Shareholders in the meeting (Ordinary General Meeting “OGM”) held on 17th March 2016 for a term of 3 years.
The members of the Board have professional and practical experience in their respective corporate fields, ensuring proper direction and control of the Company’s activities. Their professional and ethical profile complies with the 2nd principle of the Code of Corporate Governance for Public Listed Companies effective as from July 2015.
ShArQiyAh dESALiNATiON
COMpANy SAOG
name
representative of a Juristic person/ in personal capacity
executive/ non executive
independent/not
independent
shareholder/ non-
shareholder
patrice fonlladosa
Representative of Veolia Middle
EastNon-Executive Not
independentNon-
shareholder
Xavier Joseph In personal capacity Non-Executive Not
independentNon-
shareholder
Chander Kant Khanna
Representative of National Power and
Water Co. LLC
Non-Executive Not independent
Non-shareholder
padmanabhan ananthan
In personal capacity Non-Executive Independent Non-
shareholder
Jean francois roberge
In personal capacity Non-Executive Independent Non-
shareholder
ali Khamis Mubarik al
alawi
In personal capacity Non-Executive Independent Non-
shareholder
Mustafa ahmed salman
In personal capacity Non-Executive Independent Non-
shareholder
35
Directorship / membership in other public Companies (SAOG) in Oman held during the year:
name position held name of the company
Patrice Fonlladosa None -
Xavier Joseph None -
Chander Kant Khanna None -
Padmanabhan Ananthan Director / Deputy Chairman Al Batinah Power Company SAOG
Jean Francois Roberge None -
Ali Khamis Mubarik Al Alawi None -
Mustafa Ahmed SalmanDirector Oman United Insurance Company SAOG
Director Majan Glass Company SAOG
3. functions of the board
The Board in general complies with the functions stated in the code of corporate governance with respect to the selection of the Board members and other key executives, a selection process is applied within the Company, which is overseen as from July 2015 by the Nomination and Remuneration Committee.
In order to facilitate proper governance, the following information, among others, is provided to the Board:
■ Estimated capital and operating budget and any updates;
■ Quarterly results of the Company;
■ Minutes of the board committees;
■ Information on recruitment, resignation, removal and remuneration of key personnel;
■ Material notices of penalties, fines and causes;
■ Material default in financial obligations to or by the Company;
■ Matters pertaining to possible public suits or product liability claims of substantial nature;
■ Problems arising from industrial and commercial relations, including new wage agreement;
■ Sale of investment and assets which are not in the normal course of the Company’s business;
■ Statement of compliance, or not thereof, with any regulatory requirement;
■ Details pertaining to the possibility of the company’s exposure to risks of fluctuations in foreign currency exchange rates, and steps taken to hedge such risks.
As regularly followed up by the Chairman of the Board, all Board Members are aware of the Code of Corporate Governance and its requirements.
As per the 7th principle of the Code of Corporate Governance, the Board shall draft an internal code for ethics and professional conduct, such as those set out in the Code of Corporate Governance annexure, to be adopted and implemented by the directors and executives. The Board shall adopt and disseminate the aforementioned code of conduct, and ensure that directors and executives have read it or has access to it. In 2018, the Board will draft, adopt and implement such code.
Board members’ attendance record and position held during the financial year 2017:
All of the above meetings were physically held, and none were held by videoconference.
29-01-2017 15-02-2017 18-04-2017 06-06-2017 25-07-2017 25-10-2017
name of directors position sitting fee (oMr) attendance attendance attendance attendance attendance attendance
Patrice Fonlladosa Chairman 1,500 Absent Present Present Absent Present Absent
Chander Kant Khanna Vice Chairman 3,000 Present Present Present Present + Proxy Present Present
Xavier Joseph Member 3,000 Present + Proxy Present Present + Proxy Present + Proxy Present Present + Proxy
Jean Francois Roberge Member 2,000 Present Present Absent Absent Present Present
Padmanabhan Ananthan Member 3,000 Present Present Present Present Present Present
Ali Khamis Mubarik Al Alawi Member 3,000 Present Present Present Present Present Present
Mustafa Ahmed Salman Member 2,500 Present Present Present Absent Present Present
total 18,000
4. nomination process of the board members
In nomination of candidates, the Nomination and Remuneration Committee looks for professionalism, integrity and leadership skills in compliance with the 2nd principle of the Code of Corporate Governance. Proven track record, industry knowledge and strategic vision are the key characteristics. The Committee also follows the provisions of the Commercial Companies Law.
The seven Board members above mentioned have been elected by the Shareholders during the Annual General Meeting (AGM) dated 17th March 2016.
As per the Code of Corporate Governance, the General Meeting has the authority to remove one or all the Board members.
5. remuneration of the board members
The meeting sitting fees were paid as per the amount fixed by the Board of Directors and approved by the Shareholders. The aggregate board members’ sitting fees for the year was oMr 18,000 (2016: OMR 16,000).
No other remuneration has been paid to the Board members as at 31st December 2017.
6. board and sub-committees’ performance evaluation
As per the 4th principle of the Code of Corporate Governance, the Chairman of the Board should appraise the performance of the Board impartially and independently by
a third party appointed by the AGM in accordance with a benchmark and standards set by the Board.
The evaluation report will be presented in the AGM meeting held on 7th March 2018.
As per the 3rd principle of the Code of Corporate Governance, the Board should evaluate, at least annually, the performance of specialized sub-committees and key executive officers.
7. Company secretary
As per the 5th principle of the Code of Corporate Governance, the Board shall, at the inception of each term, appoint an experienced and qualified Secretary who is able to assist the Board in complying with the provisions of the Code and the applicable laws and regulations in the Sultanate as well as directives issued by other regulators and competent authorities.
The current term of the Board members being elected as from 17th March 2016, the Company Secretary has been appointed based on the following prerequisites:
a. To have knowledge and background in accounting, audit and company secretariat;
b. To have practical experience in business administration and executive management;
c. To have no related parties’ inhibitions, as stipulated in the Code of Corporate Governance.
3736
8. audit Committee
The Audit Committee (AC) is a sub-committee of the Board of Directors, comprising of the following board members:
All the above members are experienced and have fundamental knowledge of accounts and finance. The Chairman of Audit Committee is independent, and is not a member of any other board’s sub-committees. The majority of the above members are independent.
The terms of reference of the Audit Committee are in accordance with the guidelines given in the 10th principle of the Code of Corporate Governance.
The Audit Committee has to assist the Board in the following tasks:
a. Validating and verifying the overall efficiency of the executive management in implementing the operational directives and guidelines set up by the Board;
b. Evaluating and monitoring the adequacy of internal control systems and their efficiency;
c. Creating policies for safeguarding the Company’s human, material and intellectual resources and assets.
1. Jean Francois Roberge AC Chairman
2. Padmanabhan Ananthan AC Member
3. Mustafa Ahmed Salman AC Member
Among other competences stated in the Code of Corporate Governance principle, the Audit Committee enjoys the following competences:
1. Consideration and review of the internal audit system, and consequently submitting an annual written report outlining its opinion and recommendations;
2. Consideration of the internal audit reports and follow up remedial action with regard to the comments therein;
3. Providing recommendations to the Board vis-à-vis the appointment and removal of external auditors as well as specifying their fees;
4. Following up the work of the external auditors and approving any non-audit services which they are assigned during the audit process;
5. Consideration of the audit plan in conjunction with the external auditor and comment thereon;
6. Consideration and follow up of the comments of the external auditor on the financial statements;
7. Consideration of financial statements prior to their presentation to the Board, providing opinion and recommendations;
8. Consideration of the adopted accounting policy, providing opinion and recommendations thereon to the Board;
9. Determining the adequacy and sufficiency of the internal control systems, either through examining the regular reports of internal and external auditors or appointment of external consultants;
10. Overseeing the preparation of financial statements;
11. Serving as a communication channel between the Board, external auditors and the internal auditor;
12. Reviewing the details of all proposed RPTs, and providing appropriate recommendations to the Board;
13. Setting and reviewing the Company policies pertaining to risk management, taking into account the company business, changes in market conditions and the company’s investment and expansion tendencies and approach.
10. brief profile of the directors
After several international assignments for Bouygues and Matra for ten years in the eighties, Patrice Fonlladosa has developed his experience and expertise within the Veolia group since 1994; first in the Executive Committee of the Transportation Division, leading the international development
along with Antoine Frérot; and from 2003 to 2010, at Veolia Water, as Senior Executive Vice President and member of the Executive Committee.
Among his recent missions:
■ For four years, CEO of Veolia Water North America, including sell out of US FILTERS activities to SIEMENS and re-engineering of VWNA on the American Continent.
■ President and CEO of Veolia Water AMI (Africa, Middle East and India subcontinent), including the water, sanitation and electricity concession contracts in Gabon, Niger and Morocco as well as in India and in many countries in the Middle East (Saudi Arabia, UAE, Oman, etc.).
The Audit Committee received sitting fees for their attendance for the period from 1st January 2017 to 31st December 2017, for an amount of oMr 5,600 (2016: OMR 4,800).
The AC meetings mainly focused on reviewing financial policies followed by the Company and financial statements to affirm conformity with IFRS, in addition to providing the Board with a clear picture of the Company’s financial position and risk management.
9. nomination and remuneration Committee
The Nomination and Remuneration Committee is a sub-committee of the Board, comprising of the following board members:
All the above members are experienced and have fundamental knowledge of human resources and law. The Chairman of the Nomination and Remuneration Committee is independent and is not a member of any other board’s sub-committees.
The terms of reference of the Nomination and Remuneration Committee are in accordance with the guidelines given in the 11th principle of the Code of Corporate Governance.
The Nomination and Remuneration Committee assists the Company in adopting a transparent method in the nomination policy targeting directors of high competence and caliber, without prejudice to the right of any of the Shareholders to stand for election or to nominate whoever they see fit. The Nomination and Remuneration Committee intends to maintain a proper remuneration and incentives policy to attract competent executives with proper wages and remuneration.
1. Ali Khamis Mubarik Al Alawi Chairman
2. Chander Kant Khanna Member
3. Xavier Joseph Member
The Audit Committee held the following meetings during the period from 1st January 2017 to 31st December 2017:
The Nomination and Remuneration Committee held the following meetings during the period from 1st January 2017 to 31st
December 2017:
In 2018 the Board is to approve a formal succession plan for executive management as proposed by the Nomination and Remuneration Committee.
29-01-2017 15-02-2017 18-04-2017 25-07-2017 25-10-2017
name of Members position sitting fee (oMr)
attendance attendance attendance attendance attendance
Jean Francois Roberge Chairman 1,600 Present Present Absent Present Present
Padmanabhan Ananthan Member 2,000 Present Present Present +Proxy Present Present
Mustafa Ahmed Salman Member 2,000 Present Present Present Present Present
TOTAL 5,600
12-03-2017 14-05-2017
name of Members position sitting fee (oMr) attendance attendance
Ali Khamis Mubarak Al Alawi Chairman 800 Present Present
Chander Kant Khanna Member 800 Present Present
Xavier Joseph Member 800 Present Present
TOTAL 2,400
PATrICe FOnllADOSA
3938
completed a Master in Business Administration at Ecole Supérieure de Commerce de Paris with 6 months spent in University of California in Berkeley.
Mr. Chander Kant Khanna is a Mechanical Engineer with Post Graduation in Management and has a high profile career of over 35 years. He started his career with the TATA Group, one of the largest conglomerates of India, and is currently the General Manager-Corporate of Bahwan Engineering Group (BEG) - heading the overall operations of Products Business Group and the Development of Muscat International Airport Project.
BEG is the flagship company of Suhail Bahwan Group, employs more than 14,000 employees (both nationals and expats) and undertakes mega projects like LNG, Energy & Water Sector projects, Petrochemicals, Hospitals, Commercial Complexes, Airport projects, etc. and continues to make significant contribution to the economic, social and cultural development of Sultanate of Oman.
He is a Board Member of Bechtel-Enka-Bahwan Consortium, who is responsible for the construction of Muscat International Airport Terminal Building. He was a Member of the Board of Oman Society of Contractors and Board Member of Oman American Business Council.
He was involved from concept stage to construction of the Sharqiyah Desalination project and responsible as a management representative of Bahwan Engineering Group on the OTV-BEC Consortium Management Board for construction of the project.
Mr. Padmanabhan Ananthan is a Chartered Accountant from the Institute of Chartered Accountants of India. He has over 30 years of professional experience and is presently the Chief Financial Officer of Bahwan Engineering Group.
He has vast financial experience in manufacturing and construction industries and has worked closely in developing new business ventures in the power and
He led the successful opening of VW AMI equity to prestigious first ranked minority Shareholders, IFC (World Bank) and Proparco (AFD Group), and the Group’s first joint venture creation with the UAE development company Mubadala for Middle East and North Africa in 2008. Within a few years, he contributed to the presence of the group in six additional countries and to winning numerous contracts (concessions, BOT, etc.).
In 2011, he joined the CEO’s Office of the Veolia group, where he has been conducting the relationships with financial bankers and running the Strategic Partnerships Unit (Ex: Qatari Diar). In addition, he has managed the defeasance structure of the Group. He led the “Headquarters Transformation” mission within the Convergence Plan set-up to re-engineer the Group.
In July 2014, he was appointed President and CEO of Veolia group, in charge of the business activity in Africa and the Middle East with the aim of driving the zone to emerge as the third leading position within the Group.
Graduated in 1981 from the Institut Français de Gestion, Patrice Fonlladosa is a French citizen; living in Paris, he has four children.
Now leading Veolia Middle East’s activities, Xavier was most recently appointed as Veolia’s Chief Operating Officer for Veolia in the Middle East. Xavier is an Environmental Engineer by background, with over 20 years of experience in the water industry acquired from both developing and developed countries. Xavier arrived in Dubai in 2012 from Morocco where he had been Veolia Water Morocco Deputy Chief Executive Officer for 4 years. Before that, Xavier had essentially a French carrier; he was Managing director for Nice area in his last position.
Xavier is currently sitting, as a representative of Veolia, in the Board of Directors of several companies (in France, Qatar and the UAE). His portfolio of achievements, in his past and present areas of responsibilities, includes organization of project financing for water utilities, operations & maintenance projects for water treatment plants and water utilities, and the management of companies selling Veolia unique portfolio of water services.
Xavier was born in France in 1966 where he completed his Bachelor and Master degrees in Engineering with specialization on Electricity in the Ecole Nationale Supérieure des Ingénieurs Electriciens de Grenoble. He
XAvIer JOSePH
CHAnDer KAnT KHAnnA
PADMAnABHAn AnAnTHAn
Project developments. He was actively involved in the privatization of RPC and development of SMN Barka.
Jean Francois was a director on the board of Shariket Kahraba Hadjret En Nouss S.p.A. Power Companies (Algeria), SMN Barka (Oman) and RPC (Oman). He has also served on the boards of Torresol Energy (Spain - Solar CSP Developer) and Azaliya (Abu Dhabi – Water Concession Enterprise).
He graduated from the Polytechnic School, University of Montreal, Canada in Mechanical Engineering (1987), and he is also member of the Chartered Order of Engineers of Quebec.
Ali Khamis Mubarik Al Alawi’s extensive experience in the legal field is well known in the Sultanate of Oman as it has been consolidated by the legal company that he founded and which he is now leading: Al Alawi & Co. His company is now considered as one of the leading lawyer companies in the Sultanate.
Ali Khamis holds a bachelor degree in Sharia and Law from Al Azhar University (Cairo, Egypt), he is a commercial arbitrator with a long experience in international arbitration besides his experience in the field of intellectual property.
Ali Khamis chaired many prestigious centers in the field of law and the last was the Commercial Arbitration Center of GCC.
Mustafa Ahmed Salman is the chairman and CEO of United Securities LLC, a leading investment services company in the Sultanate of Oman. He founded the company in 1994 and it grew to hold the largest market share in the Sultanate as per official records.
Earlier in his career, Mustafa Salman served on the board of Oman Chamber of Commerce and Industry. He was a director of Muscat Securities Market and the vice chairman of Muscat Clearing and Depository Company. He also served as a board member of the Oman Olympic Committee and
water sector for Bahwan Engineering Group. His areas of specialization are finance, taxation, budgeting and development of privately owned infrastructure and other projects.
He serves on the Board of a listed company (SAOG Company) in the Sultanate of Oman.
Jean-François Roberge is well known for his extensive international experience in UAE, South America, Oman, Algeria and Canada. Jean-Francois has been based in Abu Dhabi, UAE for the past 13 years.
From 2005 to 2014 and from June 2017, Mr. Roberge has been working for Mubadala Investment Company as Head Business Development utility investments.
From September 2014 to June 2017, he was Vice-President Business Development and Strategy at Farah Lesiure, a company based in Abu Dhabi that specializes in managing theme parks. Before this responsibility, Jean Francois was a Senior Manager of Mubadala Development Company having joined Mubadala in 2005.
Having previously worked with SNC Lavalin in Canada, Mr. Roberge has wide experience of large infrastructure project developments including working on 6 Independent Power
JeAn-FrAnCOIS rOBerGe
AlI KHAMIS MuBArIK Al AlAwI
MuSTAFA AHMeD SAlMAn
4140
the Oman Handball Association and was a director of National Pharmaceutical Company.
Today, he is the honorary consul of the Australian Government to the Sultanate of Oman where he plays a valuable role in strengthening the ties between both countries and serves as the deputy chairman of the Banking, Finance and Insurance Committee of Oman Chamber of Commerce and Industry. He also serves as a director and audit committee member of publicly listed companies such as Oman United Insurance Company and Majan Glass Company SAOG and is a director of Salman Stores LLC. Currently he is a committee member of Oman Kuwait Investment Company. Mustafa Salman has also expanded his expertise into the construction sector where he is an owner and founder of his construction company Mustafa Ahmed Salman Trading Enterprises (MASTE).
Mustafa Holds an Advanced Diploma in Accounting, and is a holder of the ‘International Capital Markets Qualification’ from the Securities Institute of London. He is also a registered broker with advisory license from MSM.
11. executive management
The executive management of the Company is nominated with proper contracts clearly defining the terms of reference, in compliance with the Nomination and Remuneration Committee future policies.
As per the 6th principle of the Code of Corporate Governance, the executive management executes the Company’s general policies in accordance with its strategy and plans; and implements the bylaws, resolutions and procedures adopted by the Board. The Chief Executive Officer (‘CEO’), under the supervision, direction and control of the Board manages the Company. As the CEO of a listed company, he does not hold the same position at any of the Company’s subsidiaries.
The executive management achieve high standards of professional conduct and abide by professional ethics while performing their duties.
12. related party transactions
All the related party transactions are carried out at arm’s length basis in the normal course of business and are disclosed in the financial statements.
In compliance with the 9th principle of the Code of Corporate Governance, the Company adopts the highest degree of transparency and clarity when it comes to related party transactions. All such transactions are subject to review of the Audit Committee and approved by the Board prior to execution.
13. Means of communication with the shareholders and investors
The notice to the Shareholders for the AGM including the details of the related party transactions is filed with CMA and mailed to the Shareholders along with Directors’ report and audited accounts.
The quarterly results of the Company as per CMA format are prepared by the management for every quarter, reviewed by external auditors, then reviewed by the Audit Committee and subsequently recommended to the Board which approve accordingly, uploaded on the website of Muscat Securities Market (MSM) and finally published in the newspapers as per the directives of CMA.
Important Board of Directors decisions are disclosed to the investors through MSM from time to time. The company maintains its official website, http://sharqiyahdesalination.com for its investors. The website is updated periodically.
The Board’s Report and Management Discussion form part of the Annual Report.
14. Compliance with rules and regulations
The Company has been compliant with all the applicable rules and regulations issued by MSM, CMA and those stipulated in the Commercial Companies Law 1974 as amended.
The Company also complies with the principles of the Code of Corporate Governance effective as from July 2016.
No penalties have been imposed by CMA or MSM or any other statutory bodies on the Company.
15. audit and internal control
In consultation with the Audit Committee, the Board recommends the appointment of external auditors to the AGM.
The present audit firm EY provides audit services to the Company. In accordance with the Corporate Governance Code, the services of EY are not used where a conflict of interest might occur. The Audit Committee initiates the review, on behalf of the Board, of the effectiveness of internal controls by meeting the internal auditor, the review of the internal audit reports and recommendations and meeting the external auditor, the review of audit findings and the management letter.
As a publicly traded company on the MSM, it is crucial that the Company maintains the highest levels of internal controls and corporate governance.
The Company is proud of the fact that it remains in full compliance with the Code of Corporate Governance. These will keep on being monitored, confirmed and verified by internal and external audits throughout the business cycle.
16. Market price data
a. The high and low share price of the Company since January 2016 was as follows:
The closing share market price was oMr 3.960 per share as of 31st December 2017. The opening price on 1st January 2016 was oMr 4.600 per share.
The highest share price was of oMr 4.850 (21st March 2016) and the lowest share price was of oMr 3.565 (28th November 2017).
b. The Company’s performance compared to MSM Industry Sector Index
The index of MSM Industry Sector includes a sample of the top 6 industrial companies. The objective of this index is to reflect, objectively and fairly, the prices movement of the listed shares in the market.
As per the table and chart below, we compare the Company’s share price performance with the MSM Industry Sector Index1 performance to allow our Shareholders to gauge how well the Company performed, in the context of the Omani industrial sector.
Sharqiyah Desalination CompanyMSM Industry Sector Index (in thousands)
JAN2016 2017
Shar
e Pr
ice
/ In
dex
2.90
5.405.49
5.95 5.85 5.79 5.86 5.78 5.78 5.785.55 5.51 5.51 5.51
5.00 5.00 5.13 5.13 5.10 5.10
5.74
5.49 5.495.79
5.18
4.50 4.50 4.50 4.50 4.50 4.50 4.50 4.38 4.35 4.35 4.35 4.353.96 3.96 3.96 3.96 3.96
4.604.65 4.61 4.75 4.73 4.70 4.70
3.40
3.90
4.40
6.40
4.90
6.90
5.40
5.90
JULAPR OCTFEB AUGMAY NOVMAR SEPJUN DEC JAN JULAPR OCTFEB AUGMAY NOVMAR SEPJUN DEC
Source: the Muscat Securities Market website https://msm.gov.om/
2016 2015No of shares % No of shares %
Veolia Eau-Compagnie Générale des Eaux 1 - 1 -National Power and Water Co. LLC 2,860,713 29.25% 2,860,713 29.25%Veolia Middle East SAS 3,496,425 35.75% 3,496,425 35.75%Public 3,423,077 35.00% 3,423,077 35.00%TOTAL 9,780,216 100.00% 9,780,216 100.00%
17. share Capital composition
The authorized share capital comprises 10,500,000 ordinary shares of oMr 1 each.The issued and fully-paid share capital of the Company as of 31st December 2017 is oMr 9,780,216 as follows:
42
iNdEPENdENT ENTiTy REPORT ON PERfORmANcE Of BOARd Of diREcTORS
21. Acknowledgement by Board of directors
The Board of directors is responsible for ensuring that the financial statements are in accordance with the applicable standards and rules.
There are no material circumstances that affect the continuation of the company and its ability to continue its production operations during the next financial year.
The Board of directors, through the Audit committee’s consideration of the results of the internal audit and discussions with the external auditors, together with their examination of periodic management information and discussions with the management, have reviewed the operation of internal controls during the year ended 31st december 2017. The Board of directors has concluded based on this that, internal controls are effectively being put in place.
chander kant khanna Vice-Chairman of the Board
jean francois Roberge Chairman of the Audit Committee
18. financial instruments and prospective impact on shareholders’ equity
The Company has not issued any financial instruments which would have an impact on earnings per share when exercised.
For more information on the financial instruments, please refer to the Notes 14 and 16 of the audited financial statement as at 31st December 2017.
19. professional profile of the statutory auditor
EY is a global leader in assurance, tax, transaction and advisory services. EY is committed to doing its part in building a better working world. The insights and quality services which EY delivers help build trust and confidence in the capital markets and in economies the world over.
The MENA practice of EY has been operating in the region since 1923 and employs over 6,700 professionals. EY has been operating in Oman since 1974 and is a leading professional services firm in the country. EY MENA forms part of EY’s EMEIA practice, with over 4,500 partners and approximately 1,06,079 professionals. Globally, EY
operates in more than 150 countries and employs 256,500 professionals in 728 offices. Please visit ey.com for more information about EY.
EY in Oman is accredited by the Capital Market Authority to audit joint stock companies (SAOGs).
During the year 2017, EY billed an amount of ro 13,500 towards audit services rendered to the Company.
20. details of non-compliance by the Company
To date, MSM/CMA or any other statutory authority has not imposed any penalties on any matter related to capital markets to the Company.
Moreover, the Board’s members committed in 2018 to:
■ Set up an internal code for ethics and professional conduct in order to be compliant with the 7th principle of the Code of Corporate Governance.
■ Approve the Nomination, Succession and Remuneration policies that have been prepared and validated by the Nomination committee.
44
REPORT Of THE AUdiTORS ON fiNANciAL STATEmENTS
4746
4948
50
fiNANciAL STATEmENTS
53
FiNANCiAL STATEMENTS31 December 2017
ShArQiyAh dESALiNATiON
COMpANy SAOG
Registered officeP. O. Box 685Postal Code 114, JibrooSultanate of Oman
Principal place of businessSharqiyah regionSultanate of Oman
CONTENT
Statement of financial position 53
Statement of profit or loss and other comprehensive income 54
Statement of changes in equity 54
Statement of cash flows 55
Notes 56
The attached notes 56 to 75 form an integral part of these financial statements.
5554
Share capital Legal reserve retained earnings Cumulative changes in fair
values (net of tax)
Total
rO rO rO rO rO
1 January 2017 9,780,216 2,003,269 6,178,999 (4,756,198) 13,206,286Loss for the year - - (142,266) - (142,266)Other comprehensive incomeFair value adjustment - - - 766,823 766,823
_________ _________ _________ _________ _________31 december 2017 9,780,216 2,003,269 6,036,733 (3,989,375) 13,830,843
═══════ ═══════ ═══════ ═══════ ═══════
1 January 2016 9,780,216 1,928,344 5,504,677 (6,122,362) 11,090,875Effect of restatement - 13,497 121,474 - 134,971Profit for the year - - 614,276 - 614,276Other comprehensive income:Fair value adjustment - - - 1,366,164 1,366,164Transfer to legal reserve - 61,428 (61,428) - -
_________ _________ _________ _________ _________31 december 2016 9,780,216 2,003,269 6,178,999 (4,756,198) 13,206,286
═══════ ═══════ ═══════ ═══════ ═══════
Statement of comprehensive incomefor the year ended 31 December 2017
Statement of changes in equityfor the year ended 31 December 2017
2017 2016Notes rO rO
Revenue 5 13,602,036 10,472,516Cost of sales 6 (8,563,242) (6,310,977)
_________ _________Gross profit 5,038,794 4,161,539Other income 14,728 9,847
_________ _________5,053,522 4,171,386
Administrative and general expenses 7 (696,308) (605,755)Finance charges – net 8 (3,689,005) (2,853,190)
_________ _________profit before tax 668,209 712,441Taxation 18 (810,475) (98,165)
_________ _________(Loss)/profit for the year (142,266) 614,276
═══════ ═══════Other comxprehensive income / (expense), net of taxItems that are or may be reclassified subsequently to profit or loss:Fair value adjustment on derivatives 14 711,388 1,552,459Deferred tax on fair value adjustment 18 55,435 (186,295)
_________ _________Other comprehensive income for the year, net of tax 766,823 1,366,164
Total comprehensive income for the year 624,557 1,980,440 ═══════ ═══════
(Loss) / Basic earnings per share 23 (0.015) 0.062═══════ ═══════
The attached notes 56 to 75 form an integral part of these financial statements.
The attached notes 56 to 75 form an integral part of these financial statements.
Statement of cash flowsfor the year ended 31 December 2017
The attached notes 56 to 75 form an integral part of these financial statements.
2017 2016NOTES rO rO
operating aCtivitiesProfit before income tax 668,209 712,441adjustments for:Amortisation of finance lease receivable 10 3,990,581 3,424,107Depreciation 9 31,253 21,081Movement in accruals 152,735 1,541,994Finance costs 8 3,689,005 2,853,190
_________ _________operating profit before working capital changes 8,531,783 8,552,813
working capital changes:Trade and other receivables (381,245) 28,955Trade and other payables (737,100) 363,932Due from related parties 488,970 (1,934,486)Due to related parties 441,384 (1,774,842)
_________ _________Cash from operations 8,343,792 5,236,372
Finance costs paid (3,492,586) (2,853,190)Tax paid (149,972) (165,867)
_________ _________net cash from operating activities 4,701,234 2,217,315
_________ _________investing aCtivitiesPlant expansion and equipment (161,811) (5,877,659)
_________ _________net cash used in investing activities (161,811) (5,877,659)
_________ _________finanCing aCtivitiesDraw-down of term loan on additional debts - 3,675,165Short term loan 801,008 -Repayment of term loan (4,198,631) (1,649,921)
_________ _________net cash (used in)/from financing activities (3,397,623) 2,025,244
_________ _________inCrease/(deCrease) in Cash and Cash eQuivalents 1,141,800 (1,635,100)Cash and cash equivalents at 1 January 12 688,561 2,323,661
_________ _________Cash and Cash eQuivalents at 31 deCeMber 12 1,830,361 688,561
═══════ ═══════
NOTES
5756
1. LEGAL STATUS ANd priNCipAL ACTiViTiES
Sharqiyah Desalination Company SAOG (“the Company”) was registered and incorporated as a closed joint stock company in the Sultanate of Oman on 14 January 2007. The Company was established to acquire, operate and maintain an existing water desalination plant of 2.66 million imperial gallons per day (“MIGD”) capacity at Sur and to build, operate and maintain a new 17.66 MIGD capacity water desalination plant at Sur in the Sharqiyah region, Sultanate of Oman.
During 2009, Veolia Eau Compagnie Generale des Eaux (the “parent company”) has transferred ownership of its water and waste water activities and interests in the Middle East and North Africa to a company incorporated in France, Azaliya SAS. During 2013, Azaliya SAS has changed its name from Azaliya SAS to Veolia Water Middle East SAS. During 2015, Veolia Water Middle East SAS was renamed Veolia Middle East SAS.
On June 2013, the shareholders offered 35% of the Company’s shares to the public through an initial public offering (“IPO”) on Muscat Security Market. Subsequent to the IPO, the Company became a listed public joint stock company (‘SAOG’).
The Company’s registered address is PO Box 685, Postal Code 114, Jibroo, Muscat, Sultanate of Oman. The Company’s principal place of business is located at Sur, Sultanate of Oman.
2. SiGNiFiCANT AGrEEMENTS
The Company has entered into the following significant agreements:
I. Water Purchase Agreement (“WPA”) dated 17 January 2007
The WPA is between the Company and the Ministry of Housing, Electricity and Water (MHEW) (now the Public Authority for Electricity and Water - PAEW – see (iii) below). The WPA commences from its effective date which is 17 January 2007.
The key elements of the WPA are as follows:
■ The Company will make available and sell to PAEW a guaranteed water capacity;
■ The Company’s consideration for the above supply consists of a water capacity charge and water output charge which are fixed under Schedule (B) of the WPA;
■ The plant capacity is determined by an annual performance test to be conducted by the Company
under the supervision of PAEW;
■ Invoices will be raised by the Company on a monthly basis which are due for payment within 25 days;
■ The Company shall pay to PAEW liquidated damages of ro 15,000 for each day by which the provisional commercial operation date occurs after the scheduled commercial operation date;
■ PAEW have confirmed the Commercial Operation Date (COD) as being 8 October 2009 and the term of the contract shall expire on 7 October 2029.
II. Novation Agreement dated 25 December 2014
A novation agreement was signed and executed between the Company, PAEW and Oman Power and Water Procurement Company (“OPWP”) on 25 December 2014. As per the novation agreement the parties have consented to, and acknowledged that, with effect from 25 December 2014, PAEW transferred its rights, title and interest and novated all of its duties, obligations, liabilities and responsibilities under the WPA to OPWP. Going forward, the Company will continue to have one customer, OPWP.
III. Amended & Restated Water Purchase Agreement dated 10 July 2014
The Amended & Restated WPA is between the Company and OPWP. The amended agreement will facilitate plant expansion. Post plant expansion the combined capacity of the plant should increase from 17.66 Migd to 29 Migd. The term of the amended & restated WPA will be extended by 20 years starting from COD of the new plant. All Terms and conditions of WPA dated 17 January 2007 still will be applicable.
IV. Engineering, Procurement and Construction (EPC) contract dated 17 May 2007
The above agreement was entered into with the consortium of OTV SA, Bahwan Engineering Company LLC and OTV SA & Partners LLC (related parties) for constructing the water desalination plant at Sur in the Sharqiyah region of the Sultanate of Oman for a total value of ro 58.45 million. The Construction work was completed during 2009.
V. Limited Notice to Proceed (LNTP) letter dated 10 July 2014
The LNTP was entered into with OTV SA & Partners LLC and Societe Internationale Dessalement (“SIDEM”) (related parties). for procurement of long lead items, advance engineering, surveys and civil engineering works for the proposed EPC Contract in respect of the Sur Independent Water Expansion Project. The total price of LNTP will be RO
1.29 million.
VI. EPC contract dated 23 March 2015
The above agreement was entered into with OTV SA & Partner LLC, a related party and SIDEM, a related party for a total value of RO 28.75 million to facilitate expansion of the Company’s desalination facilities at Sur in the Sharqiyah region of the Sultanate of Oman.
VII. Usufruct agreement dated 17 January 2007
The above agreement was entered into with the PAEW for a grant of usufruct rights in respect of use of the land on which the plant is situated for 25 years, with the option of an extension for a further period of 25 years.
VIII. Amendment to the usufruct agreement dated 25 December 2014
Certain provisions of the Original Site Usufruct Agreement to permit expansion were amended. The initial term of 25 years now stands extended to 31 years from the WPA effective date.
IX. Operation and Maintenance (O&M) contract dated 15 May 2007
The O&M contract, which runs for 22 years from 17 January 2007, was entered into by the Company with Bahwan Veolia Water LLC (“BVW”), a related party, a company registered in the Sultanate of Oman, for operation and maintenance of the existing and new plant. Under the O&M contract:
■ BVW shall be responsible for maintaining the existing and new plant;
■ BVW shall, on behalf of the Company, carry out the Company’s obligations with respect to the annual performance test in accordance with the requirements of the WPA;
■ BVW’s consideration for the services under the O&M Contract is fixed under Appendix (F) of the O&M contract;
■ Invoices will be raised by BVW on a monthly basis within 10 days of each month; and
■ BVW has commenced operation of the New Plant from the COD – 8 October 2009 and the O&M contract shall expire on 7 October 2029.
X. Amendment agreement to original Operation and Maintenance (O&M) contract dated 22 March 2015
The amendment agreement was entered into by the Company with BVW, a related party, a company registered in the Sultanate of Oman, to record the parties’ obligations with respect to the expansion of the existing plant in
accordance with the Amended and Restated WPA.
XI. Loan agreement dated 15 May 2007
The above agreement was entered into with various banks and financial institutions through four mandated lead arrangers: the Royal Bank of Scotland PLC; Societe Generale; Natixis; and Bank Muscat SAOG, for the purpose of financing the project (see note 15).
XII. Loan agreement dated 26 March 2015
An amended & restated agreement was entered into with various banks and financial institutions through four mandated lead arrangers: KFW, Natixis, Sumitomo Mitsui Banking Corporation (“SMBC”) and The Bank of Tokyo – Mitsubishi UFJ Ltd, for the purpose of refinancing the existing debt and financing the expansion activities. Consequently, the previous loan agreement is no longer in force (see note 15).
XIII. Short term loan agreement dated 11 June 2017
The Company entered into an agreement dated 11 June 2017 with Veolia Middle East, a related party to obtain short term loan facilities of ro 0.80 million (us$ 2.08 million). The loan is repayable in full by 30 June 2018. The loan facilities bear interest at GBP LIBOR 3M plus applicable annual margin of 0.6%. Interest shall be paid on quarterly basis.
XIV. Note on dispute relating to Commercial Operation Date (“COD”)
On 15 September 2016, the Company declared COD of the Sur expanded plant (“the New Plant”) on the basis that it has successfully passed the necessary Acceptance Tests and demonstrated 100% capacity of the New Plant. However, OPWP rejected COD due to an issue mainly with the intake pumps. Subsequently, based on satisfactory resolution of the related issue, OPWP agreed for COD on 7 February 2017. OPWP has recovered liquidated damages amounting to ro 1.5 million (the maximum payable under the Amended and Restated WPA), from the invoices raised by the Company. The Company is currently in discussion with OPWP regarding the waiver of liquidated damages. The Company followed prudent and cautious approach and accordingly amount due from OPWP is recorded after taking into consideration various disputes. In case OPWP doesn’t waive the liquidated damages, the Company will recover the amount from the EPC contractor (a related party) according to the relevant terms of the EPC contract and on the strength of legal opinion. The Company has recorded RO 1.5 million receivable from the EPC Contractor, which is under dispute. The Company has retention bond from the EPC contractor valid up to 30 September 2018, covering the substantial amount claimed by the Company. Accordingly, no impairment provision has been recorded
NOTES
5958
Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future periods affected. In particular, estimates that involve uncertainties and judgements which have a significant effect on the financial statements include:
i. assessment of impairment of assets;
ii. determination of effective interest rate implicit in finance lease;
iii. fair value of derivative financial instruments;
iv. deferred tax asset or liability;
v. recoverability of liquidated damages and lost revenue;
vi. finance income; and
vii. financial asset receivable (finance lease receivable).
towards amount receivable from the EPC contractor in these financial statements.
3. BASiS OF prEpArATiON
a. Statement of compliance
These financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) and relevant requirements of the Commercial Companies Law of 1974, as amended, and the Capital Market Authority of the Sultanate of Oman.
b. Basis of measurement
The financial statements have been prepared on the historical cost basis modified to include the measurement at fair value of derivative financial instruments.
c. Functional currency
These financial statements are presented in Rial Omani (RO), which is the Company’s functional currency.
d. Use of estimates and judgements
The preparation of financial statements requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates.
3.1 Changes in accounting policies
The accounting policies followed are consistent with prior year except as follows:
New and amended standards and interpretations to IFRS
For the year ended 31 December 2017, the company has adopted all of the following new and revised standards and interpretations issued by the International Accounting Standards Board (IASB) and the International Financial Reporting Interpretations Committee (IFRIC) of the IASB that are relevant to its operations and effective for periods beginning on 1 January 2017.
■ Amendments to IAS 7 Statement of Cash Flows: Disclosure Initiative
■ Amendments to IAS 12 Income Taxes: Recognition of Deferred Tax Assets for Unrealised Losses
■ Annual Improvements Cycle - 2014-2016
□ Amendments to IFRS 12 Disclosure of Interests in Other Entities: Clarification of the scope of disclosure requirements in IFRS 12
The adoption of these standards and interpretations has not resulted in any major changes to the company’s accounting policies and has not affected the amounts reported for the current and prior periods.
Standards issued but not yet effective
The following new standards and amendments have been issued by the International Accounting Standards Board (IASB) which may impact the financial statements of the company but are not yet mandatory for the year ended 31 December 2017:
■ IFRS 15 Revenue from Contracts with Customers
■ IFRS 16 Leases
■ IFRS 9 Financial Instruments
■ IFRS 17 Insurance Contracts
■ Transfers of Investment Property — Amendments to IAS 40
■ Annual Improvements 2014-2016 Cycle (issued in December 2016)
□ IFRS 1 First-time Adoption of International Financial Reporting Standards - Deletion of short-term
□ IAS 28 Investments in Associates and Joint Ventures - Clarification that measuring investees at fair value through profit or loss is an investment-by-investment choice
NOTES
61
□ IFRIC Interpretation 22 Foreign Currency Transactions and Advance Consideration
□ IFRIC Interpretation 23 Uncertainty over Income Tax Treatment exemptions for first-time adopters
IFRS 15 Revenue from Contracts with Customers
IFRS 15 was issued in May 2014, and amended in April 2016, and establishes a five-step model to account for revenue arising from contracts with customers. Under IFRS 15, revenue is recognised at an amount that reflects the consideration to which an entity expects to be entitled in exchange for transferring goods or services to a customer.
The new revenue standard will supersede all current revenue recognition requirements under IFRS. Either a full retrospective application or a modified retrospective application is required for annual periods beginning on or after 1 January 2018. Early adoption is permitted. The Company plans to adopt the new standard on the required effective date using the modified retrospective approach.
The Company has performed an assessment and concluded that the impact is not material because based on the Company’s contracts with customer, operation and maintenance of the water desalination plant is expected to be the primary performance obligation and accordingly, adoption of IFRS 15 is not expected to have any material impact on the Company’s revenue and profit or loss.
IFRS 16 Leases
The IASB issued IFRS 16 Leases (IFRS 16), which requires lessees to recognise assets and liabilities for most leases. The standard includes two recognition exemptions for lessees – leases of ’low-value’ assets (e.g., personal computers) and short-term leases (i.e., leases with a lease term of 12 months or less).
For lessors, there is little change to the existing accounting in IAS 17 Leases. Company will perform a detailed assessment in the future to determine the extent. The new standard will be effective for annual periods beginning on or after 1 January 2019. Early application is permitted, provided the new revenue standard, IFRS 15 Revenue from Contracts with Customers, has been applied, or is applied at the same date as IFRS 16. A lessee can choose to apply the standard using either a full retrospective or a modified retrospective approach. The standard’s transition provisions permit certain reliefs.
IFRS 16 also requires lessees and lessors to make more extensive disclosures than under IAS 17.
In 2018, the Company will continue to assess the potential effect of IFRS 16 on its financial statements.
IFRS 9 Financial Instruments
In July 2014, the IASB issued the final version of IFRS 9 Financial Instruments that replaces IAS 39 Financial Instruments: Recognition and Measurement and all previous versions of IFRS 9. IFRS 9 brings together all three aspects of the accounting for financial instruments project: classification and measurement, impairment and hedge accounting. IFRS 9 is effective for annual periods beginning on or after 1 January 2018, with early application permitted. Except for hedge accounting, retrospective application is required but providing comparative information is not compulsory. For hedge accounting, the requirements are generally applied prospectively, with some limited exceptions.
The Company plans to adopt the new standard on the required effective date and will not restate comparative information. During 2017, the Company has performed a detailed impact assessment of all three aspects of IFRS 9. This assessment is based on currently available information and may be subject to changes arising from further reasonable and supportable information being made available to the Company in 2018 when the Company will adopt IFRS 9. Overall, the Company expects no significant impact on its statement of financial position and equity.
Other IASB Standards and Interpretations that have been issued but are not yet mandatory, and have not been early adopted by the company, are not expected to have a material impact on the company’s financial statements.
4. SiGNiFiCANT ACCOUNTiNG pOLiCiES
The accounting policies set out below has been applied consistently to all periods presented in these financial statements.
4.1 revenue
Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Company and the revenue can be reliably measured, regardless of when the payment is being made. Revenue is measured at the fair value of the consideration received or receivable, taking into account contractually defined terms of payment.
Details regarding revenue recognition on net investment in finance leases, are set out in note 4.4.4.
Revenue comprises water capacity operation and maintenance charges, water capacity investment charges and water output operation and maintenance charges. Charges are calculated in accordance with the amended and restated water purchase agreement dated 10 July 2014. Capacity charge is payable to the Company for each hour during which the plant is available for water desalination. Capacity charges income is recognised on a straight line basis over the term of the agreement. Output charges income which compensates the Company for the electricity and variable cost of operation and maintenance
is recognised based on the consumption of potable water. The operating revenue is recognised by the Company on an accrual basis of accounting. No revenue is recognised if there are significant uncertainties regarding recovery of the consideration due and associated costs.
4.2 Foreign currency transactions
Transactions in foreign currencies are recorded at the rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the rate of exchange ruling at the reporting date. All differences are taken to the statement of comprehensive income.
4.3 property, plant and equipment
Property, plant and equipment is stated at cost less accumulated depreciation and any impairment in value. Capital work in progress is recorded at cost less impairment, if any.
Costs include expenditures that are directly attributable to the acquisition of the asset and any other costs that are directly attributable to bringing the asset to a working condition for its intended use, and the costs of dismantling and removing the items and restoring the site on which they are located. When parts of an item of property and equipment have different useful lives, they are accounted
for as separate items (major components) of property and equipment.
The cost of replacing part of an item of property and equipment is recognized in the carrying amount of an item if it is probable that future economic benefits embodied within the part will flow to the Company and the cost can be measured reliably. The costs of the day-to-day servicing of property and equipment are recognized in the statement of comprehensive income as incurred.
Depreciation is charged to the statement of profit or loss and other comprehensive income on a straight-line basis over the estimated useful lives of the property and equipment as follows:
Years
Building 7
Office equipment 7
Office furniture 3
Computer accessories 7
Plant equipments 7
Management reassess the useful lives, residual values and depreciation methods for property and equipment annually.
NOTES
6362
4.4 Financial instruments
Non - derivative financial instruments
Non-derivative financial instruments are recognised initially at fair value plus any directly attributable transaction costs.
Derivative financial instruments
The Company holds derivative financial instruments to hedge its foreign currency and interest rate risk exposure arising from financing activities. In accordance with its treasury policy, the Company does not hold or issue derivative financial instruments for trading purposes.
Derivatives are initially recognised at fair value; attributable transaction costs are recognised in profit or loss when incurred. Subsequent to initial recognition, derivatives are measured at fair value.
Cash flow hedge
Changes in the fair value of an effective cash flow hedge instrument which qualifies for hedge accounting are recognised directly in equity to the extent that the hedge is effective. To the extent that the hedge is ineffective, changes in fair value are recognised in the statement of comprehensive income.
Finance leases
Contracts falling within the scope of IFRIC 4 involve services generally rendered to industrial / private customers. Services include the financing of the construction of a specific asset / installation on behalf of the customer and the operation of the asset concerned. Revenue relating to the operation of the asset is recognised on delivery of the goods or performance of the service depending on the operating activity.
IFRIC 4 seeks to identify the contractual terms and conditions of agreements which, without taking the legal form of a lease, convey a right to use a group of assets in return for payments included in the overall contract remuneration. It identifies such agreements as a lease contract which is then analysed and accounted for in accordance with the criteria laid down in IAS 17, based on the allocation of the risks and rewards of ownership.
Where the lease transfers the risks and rewards of ownership of the asset in accordance with IAS 17 criteria, the Company recognises a finance lease.
Initially, at commencement of a finance lease the lessor records a finance lease receivable (finance asset receivable) at the amount of its net investment, which comprises the present value of the minimum lease payments and any unguaranteed residual accruing to the lessor. The present value is determined by discounting the minimum lease payments due using the interest rate implicit in the lease. Initial direct costs are included in the calculation
of the finance asset receivable. Where the Company is constructing the asset subject to the finance lease, prior to completion of construction, which is deemed to be the commencement date of the finance lease (unless the lease agreement only entitles the leasee to exercise its right to use the leased asset at a later date), the cost of construction is recognised within net investment in finance leases.
Over the lease term, being the period from commencement of the lease to the end of the lease agreement, interest income is accrued on the net investment in finance lease (finance asset receivable) using the interest rate implicit in the lease. The calculation of the interest rate implicit in the lease also takes into consideration initial direct costs incurred.
Receipts under the finance lease are allocated between reducing the net investment and recognising finance income, so as to produce a constant rate of return on the net investment.
Trade receivables
Trade receivables are stated at original invoice amount less an allowance for any uncollectible amounts. An estimate for doubtful debts is made when collection of the full amount is no longer probable. Bad debts are written off when there is no possibility of recovery.
Cash and cash equivalents
Cash and cash equivalents comprise cash at hand, bank balances and short term deposits with an original maturity of three months or less.
For the purpose of the statement of cash flows, cash and cash equivalents consist of cash and cash equivalents as defined above, net of outstanding bank overdrafts.
Derecognition of financial assets and financial liabilities
I. Financial assets
A financial asset (or, where applicable a part of a financial asset or part of a Company of similar financial assets) is derecognised where:
■ the rights to receive cash flows from the asset have expired; or
■ the Company has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a ‘pass-through’ arrangement; and
■ Either (a) the Company has transferred substantially all the risks and rewards of the asset, or (b) the Company has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.
II. Financial liabilities
A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires. Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognised in profit or loss.
III. Offsetting of financial instruments
Financial assets and financial liabilities are offset and the net amount reported in the statement of financial position if, and only if:
■ There is a currently enforceable legal right to offset the recognised amounts and;
■ There is an intention to settle on a net basis, or to realise the assets and settle the liabilities simultaneously
4.5 impairment and un-collectability of financial assets
An assessment is made at each reporting date to determine whether there is objective evidence that a specific financial asset may be impaired. Individually significant financial assets are tested for impairment on an individual basis. The remaining financial assets are assessed collectively in groups that share similar credit risk characteristics.
All impairment losses are recognised in the statement of comprehensive income. An impairment loss is reversed if the reversal can be related objectively to an event occurring after the impairment loss was recognised.
Impairment is determined as follows:
■ For assets carried at fair value, impairment is the difference between cost and fair value, less any impairment loss previously recognised in the profit or loss;
■ For assets carried at cost, impairment is the difference between carrying value and the present value of future cash flows discounted at the current market rate of return for a similar financial asset;
■ For assets carried at amortised cost, impairment is the difference between carrying amount and the present value of future cash flows discounted at the original effective interest rate.
4.6 impairment of non financial asset:
At each reporting date, the Company reviews the carrying amounts of its assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount
of the asset is estimated in order to determine the extent of the impairment loss, if any.
If the recoverable amount of an asset is estimated to be less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount. Impairment is recognised immediately in profit or loss. Where an impairment loss subsequently reverses, the carrying amount of the asset is increased to the revised estimate of its recoverable amount and the increase is recognised as income immediately, provided that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised earlier.
4.7 Fair values
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either:
■ In the principal market for the asset or liability, or
■ In the absence of a principal market, in the most advantageous market for the asset or liability. The principal or the most advantageous market must be accessible to by the Company.
The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest.
A fair value measurement of a non-financial asset takes into account a market participant’s ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use.
The Company uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximising the use of relevant observable inputs and minimising the use of unobservable inputs.
The fair value of interest-bearing items is estimated based on discounted cash flows using interest rates for items with similar terms and risk characteristics. The fair value of unquoted derivatives is determined by reference to broker/dealer price.
All assets and liabilities for which fair value is measured or disclosed in the financial statements are categorised within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement as a whole:
NOTES
6564
level 1: Quoted (unadjusted) market prices in active markets for identical assets or liabilities.
level 2: Valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly observable.
level 3: Valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable quotations.
For assets and liabilities that are recognised in the financial statements on a recurring basis, the Company determines whether transfers have occurred between Levels in the hierarchy by re-assessing categorization (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period.
4.8 Employees’ end of service benefits
Contributions to a defined contribution retirement plan for Omani employees, made in accordance with the Oman Social Insurance Law, are recognised as an expense in the statement of profit or loss and other as incurred. The Company’s obligation in respect of non-Omani terminal benefits, which is an unfunded defined benefit retirement plan, is the amount of future benefit that such employees have earned in return for their service in the current and prior periods.
4.9 Trade and other payable
Liabilities are recognised for amounts to be paid in the future for goods or services received, whether billed by the supplier or not.
4.10 provisions
A provision is recognised in the statement of financial position when the Company has a legal or constructive obligation as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation. If the effect is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability.
4.11 Finance charges
Finance charges comprise interest payable on term loan, hedging charges and similar expenses. Finance charges are recognised in the statement of comprehensive income in the period in which they are incurred. Finance income is recognized in the statement of profit or loss and other comprehensive income as it accrues. For finance income in respect of finance asset receivable refer note 4.4 above.
4.12 income tax
Taxation is provided for in accordance with Omani fiscal regulations. Income tax on the profit or loss for the year comprises current and deferred tax. Income tax is recognised in the statement of profit or loss and other comprehensive income except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantially enacted at the statement of financial position date, and any adjustment to tax payable in respect of previous years.
Deferred tax is calculated using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantially enacted at the statement of financial position date.
A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the unused tax losses and credits can be utilised. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realised.
4.13 directors’ remuneration
The Directors’ remuneration is governed as set out by the Commercial Companies Law and the rules prescribed by the Capital Market Authority.
The annual general meeting shall approve the remuneration and the sitting fees for the Board of Directors provided that such fees shall not exceed 5% of the annual net profit after deduction of the legal reserve and the optional reserve and the distribution of dividends to the shareholders. Such fees shall not exceed RO 200,000 in one year. The sitting fees for each Director shall not exceed RO 10,000 in one year.
4.14 Segment information
Operating segments are reported in a manner consistent with the internal reporting provided to the chief executive officer. The chief executive officer, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the strategic decisions maker. The Company’s operating activities are disclosed in note 1 to the financial statements. The strategic business unit offers similar products and services and is managed as one segment. Performance is measured based on the profit before income tax, as included in the internal management reports. The management considers the business of the Company as one operating segment and monitors accordingly.
4.15 dividend
The Board of Directors takes into account appropriate parameters including the requirements of the Capital Market Authority while recommending the dividend. Dividends on ordinary shares are recognised when they are approved for payment.
5. rEVENUE2017 2016
rO rO
Water capacity operation and maintenance charges 3,354,802 2,788,625Water output operation and maintenance charges 1,008,321 791,261Electricity charges 2,854,799 2,256,618Interest income on finance lease 6,486,721 3,900,974Water capacity investment charge 286,532 1,174,996Desalination licence fee – recoverable from OPWP 23,452 -Disputed revenues related to OPWP (412,591) (2,010,415)Liquidated damages recoverable from EPC - 1,500,000Loss of revenue recoverable from EPC - 1,266,258Disputed revenues related to EPC - (1,195,801)
_________ _________13,602,036 10,472,516
═══════ ═══════
6. COST OF SALES2017 2016
rO rO
Operation and maintenance fixed charges 4,177,010 2,146,802Operation and maintenance variable charges 980,968 725,486Electricity charges 2,859,959 2,067,832Desalination licence fee 23,452 -Operation and maintenance – recoverable from BVW (14,522) (413,947)Disputed revenues related to EPC 402,330 -Liquidated damages by OPWP - 1,500,000Plant related operating costs 134,045 284,804
_________ _________8,563,242 6,310,977
═══════ ═══════
7. AdMiNiSTrATiVE ANd GENErAL ExpENSES2017 2016
rO rO
Employee related costs (see below) 332,496 346,890Depreciation 31,253 21,081Legal and professional expenses 146,613 35,750Directors’ sitting fee 27,200 20,800Travelling expenses 17,873 16,841Insurance 66,214 40,296Others 74,659 124,097
_________ _________696,308 605,755
═══════ ═══════employee related expenses are as follows:Salaries, wages and other benefits 312,996 327,765Contributions to Omani Social Insurance Scheme 4,596 4,242Increase in obligation for defined benefit plan 14,904 14,883
_________ _________332,496 346,890
═══════ ═══════
6766
NOTES
8. FiNANCE ChArGES - NET2017 2016
rO rO
Interest on long term loans 1,963,761 1,123,155Hedging charges 1,369,340 1,666,717Withholding tax on interest – gross up 165,373 -Agency fee and role fee 31,681 36,044Performance bond commission and guarantee 28,720 9,205Interest on short term loan 10,163 -Commitment fee - 11,360Amortisation of deferred finance cost 113,490 -Others 6,477 6,709
_________ _________3,689,005 2,853,190
═══════ ═══════
9. prOpErTy ANd EQUipMENT
Buildings plant and equipment
Officeequipment
Furniture& fixtures
Computer& accessories Total
rO rO rO rO rO rO
Cost1 January 2017 66,285 7,020 22,338 49,247 50,125 195,015Addition 32,325 6,955 53,678 4,200 3,141 100,299
_________ _________ _________ _________ _________ _________31 December 2017 98,610 13,975 76,016 53,447 53,266 295,314
_________ _________ _________ _________ _________ _________depreciation1 January 2017 30,410 1,404 15,687 47,966 30,146 125,613Charge for the year 12,373 1,922 9,541 1,967 5,450 31,253
_________ _________ _________ _________ _________ _________31 December 2017 42,783 3,326 25,228 49,933 35,596 156,866
_________ _________ _________ _________ _________ _________Net book value 31 december 2017 55,827 10,649 50,788 3,514 17,670 138,448
═══════ ═══════ ═══════ ═══════ ═══════ ═══════31 December 2016 35,877 5,616 6,651 1,281 19,978 69,403
═══════ ═══════ ═══════ ═══════ ═══════ ═══════
10. FiNANCE ASSET rECEiVABLE2017 2016
rO rO
At 1 January 45,241,516 48,665,623Add: transfer from plant expansion – WIP 34,105,087 -Less: amortisation (3,990,581) (3,424,107)
_________ _________75,356,022 45,241,516
═══════ ═══════
The Company received COD confirmation for the new plant from OPWP and accordingly ro 34,105,087 was transferred from plant expansion WIP to finance asset receivable on 7 February 2017 and amortisation is done based on revised amortisation schedule.
The Company has entered in to the Amended and Restated Water Purchase Agreement (“AWPA”) with Oman Power and Water Procurement Company SAOC (“OPWP”). As per the terms of the agreement, the water generation is dependent on the Company’s plant and OPWP, being the sole procurer of water generation in Oman, obtains entire amount of
the water generated by the Company’s plant. Accordingly, management has concluded that the agreement satisfies the requirements of IFRIC 4, Determining Whether an Arrangement Contains a Lease. Further, management has assessed the lease classification as per the requirements of International Accounting Standard 17 “Lease” (IAS 17) and has concluded that the arrangement is a finance lease, as the term of agreement is for the major part of the remaining economic life of the Company’s plant. Accordingly, a finance lease receivable has been recognised in the financial statements.
2017 2016rO rO
Non-current 71,052,171 41,942,074 Current 4,303,851 3,299,442
_________ _________75,356,022 45,241,516
═══════ ═══════
The following table shows the maturity analysis of finance lease receivables:
Less than 1 year
Between 1 & 2 years
Between 2 & 5 years
More than 5 years Total
rO rO rO rO rO
31 december 2017Gross finance lease receivables 10,770,365 9,147,432 25,848,874 92,899,554 138,666,225Less: unearned finance income (6,466,514) (6,107,368) (16,844,537) (33,891,784) (63,310,203)
_________ _________ _________ _________ _________4,303,851 3,040,064 9,004,337 59,007,770 75,356,022
═══════ ═══════ ═══════ ═══════ ═══════31 december 2016Gross finance lease receivables 6,907,870 5,738,033 17,055,387 42,851,304 72,552,594 Less: unearned finance income (3,608,428) (3,389,287) (8,776,373) (11,536,990) (27,311,078)
_________ _________ _________ _________ _________ 3,299,442 2,348,746 8,279,014 31,314,314 45,241,516 ═══════ ═══════ ═══════ ═══════ ═══════
NOTES
6968
11. TrAdE ANd OThEr rECEiVABLES2017 2016
rO rO
Receivable from OPWP 1,478,039 1,091,863Prepayments 51,326 119,276Other receivables 255,187 85,124Advance to supplier 93,192 34,863Less: provision (165,373) -
_________ _________1,712,371 1,331,126
═══════ ═══════
The Company has adopted a common share cost principle and, accordingly, other receivables include common share cost receivable from related parties amounting to ro 83,036 (31 December 2016: RO 84,502), being estimated costs that will be recharged to related parties.
Other receivable also includes ro 165,373 (31 December
2016: nil) as reimbursement of withholding tax paid by the Company on behalf of lenders of the Company. A provision of ro 165,373 (31 December 2016: nil) is recognised against this balance.
None of the Company’s trade receivable balances were past due or impaired (31 December 2016: Nil).
12. CASh ANd CASh EQUiVALENTS2017 2016
rO rO
Cash in hand 1,131 1,766Bank balances 1,829,230 686,795
_________ _________1,830,361 688,561
═══════ ═══════
13. ShArE CApiTAL ANd rESErVES
Share capital
Authorised share capital comprises 10,500,000 ordinary shares of ro 1 each.
Issued and fully-paid share capital of the Company is ro 9,780,216 (2016: ro 9,780,216) as follows:
2017 2016No of shares % No of shares %
Veolia Eau-Compagnie Generale des Eaux 1 - 1 -National Power and Water Co. LLC 2,860,713 29.25% 2,860,713 29.25%Veolia Middle East SAS 3,496,425 35.75% 3,496,425 35.75%Civil Services Employees’ Pension Fund 1,415,486 14.47% 1,415,486 14.47%Public 2,007,591 20.53% 2,007,591 20.53%
_________ _________ _________ _________9,780,216 100% 9,780,216 100%
═══════ ═══════ ═══════ ═══════
Legal Reserve
As required by the Commercial Companies Law of the Sultanate of Oman, 10% of annual profit of the Company is required to be transferred to legal reserve until the reserve equal to one third of the Company’s issued share capital. The reserve is not available for distribution.
14. dEriVATiVE FiNANCiAL iNSTrUMENTS
The long-term loan facilities of the Company bear interest at US LIBOR plus applicable margins. In accordance with
the facilities agreement, the Company has fixed the rate of interest with four hedge providers through an International Swap Dealers Association Inc. Master Agreement (‘ISDA’- Hedge Agreement) at: (i) during the period prior to the first anniversary of the Scheduled Commercial Operation Date, for no less than 75 percent of the utilised amounts under the Term Facilities as at the last day of each Interest Period; and (ii) at all times on and after the first anniversary of the Scheduled Commercial Operation Date until the End Date, for no less than 90 percent of the utilised amounts under the Term Facilities of the amended and restated agreement.
The corresponding maximum hedged notional amount is approximately:
■ ro 24.2 million (usd 62.9 million) at a fixed interest rate of 5.55% per annum and
■ In the range of 2.645% to 2.675% for the top-up swaps amounting to ro 26.9 million (usd 70 million).
At 31 December 2017, 6 month US LIBOR was approximately 1.83707% (31 december 2016: 1.31767%), whereas the Company has fixed interest on its borrowings as described above. Based on the interest rates gap, over the life of the ISDA, the indicative losses were assessed at approximately ro 4.69 million (31 december 2016: ro 5.40 million) by the counter parties to the ISDA. In case the Company terminates the ISDA at 31 December 2017, it may incur losses to the extent of approximately ro 4.69 million (usd 12.18 million). However, under the term of facilities agreements, the Company is not permitted to terminate the ISDA agreements.
In order to comply with International Financial Reporting Standard 39 “Financial Instruments: Recognition and Measurement” this hedge is being tested at least quarterly for its effectiveness and, consequently, effective and ineffective portions are being recognised in equity or statement of profit or loss and other comprehensive income, respectively. The fair value of the hedge instruments’ indicative losses at 31 December 2017 in the amount of approximately ro 3.99 million (31 december 2016: ro 4.76 million), net of deferred tax asset, has been recorded within equity and the gross deficit in the amount of ro 4.69 million (31 december 2016: ro 5.40 million) is recorded under liabilities.
The table below shows the negative fair value of the derivative financial instrument relating to secured term loan agreements, which is equivalent to the market values, together with the notional amounts analysed by the term to maturity. The notional amount is the amount of a derivative’s underlying asset, reference rate or index and is the basis upon which changes in the value of derivatives are measured.
31 dECEMBEr 2017 NATiONAL AMOUNTS By TErM TO MATUriTyFair value of
derivativesNational amount 1 - 12 Months More than 1
up to 5 years Over 5 years
rO’000 rO’000 rO’000 rO’000 rO’000
Interest rate swaps 4,693 49,344 5,771 18,411 25,162═══════ ═══════ ═══════ ═══════ ═══════
31 dECEMBEr 2016 NATiONAL AMOUNTS By TErM TO MATUriTyFair value of
derivativesNational amount 1 - 12 Months More than 1
up to 5 years Over 5 years
rO’000 rO’000 rO’000 rO’000 rO’000
Interest rate swaps 5,405 46,951 5,213 16,251 25,487═══════ ═══════ ═══════ ═══════ ═══════
All of these interest rate swaps are designated as effective cash flow hedges and the fair value thereof has been dealt with in equity.
15. LONG TErM LOANUnaudited
31 december 2017Audited
31 december 2016rO rO
Term loan (syndicated) 58,350,699 62,549,330Less: deferred finance cost (1,577,237) (1,690,727)
_________ _________31 December 56,773,462 60,858,603
═══════ ═══════Current 3,935,213 4,085,141Non - Current 52,838,249 56,773,462
_________ _________56,773,462 60,858,603
═══════ ═══════
NOTES
7170
Loan agreement dated 15 May 2007
The Company entered into an agreement dated 15 May 2007 to obtain term loan facilities up to RO 65.47 million (US$ 170 million) through a facility agent, Royal Bank of Scotland PLC and four mandated lead arrangers (“the Agreement”). The loan is repayable in 40 semi-annual equal instalments commencing from 31 December 2009. The loan facilities bear interest at US LIBOR plus applicable margins ranging between 0.75% and 4.00%.
Loan agreement dated 26 March 2015
An amended and restated agreement was entered into on 26 March 2015 with various banks and financial institutions through four mandated lead arrangers: KFW, Natixis, Sumitomo Mitsui Banking Corporation (“SMBC”) and The Bank of Tokyo – Mitsubishi UFJ Ltd, to obtain term and contingency loan facilities up to ro 64.2 million (us$ 166.71 million), for the purpose of refinancing the existing debt and financing the expansion activities. Consequently, the previous loan agreement is no longer in force. The loan
facilities bear interest at 6 month US LIBOR plus applicable margin of 1.75% for term facility and 1.85% for contingency facility.
The credit facilities are secured by comprehensive legal and commercial mortgages on all the assets and project insurances of the Company, together with any other assets which are subject to the security constituted by any of the Security Documents (as defined in amended and restated facilities agreement). As per the amended and restated facilities agreement, the loan repayment commenced from 31 December 2016.
16. ShOrT TErM LOAN
The Company entered into an agreement dated 11 June 2017 with Veolia Middle East to obtain short term loan facilities of ro 0.80 million. The loan is repayable in full by 30 June 2018. The loan facilities bear interest at GBP LIBOR 3M plus applicable margins of 0.6% per annum. Interest shall be paid on quarterly basis.
17. TrAdE ANd OThEr pAyABLES 2017 2016
rO rO
Trade payables 1,362,428 594,732Accruals 266,229 117,318Payables towards capital expenditure - 4,796Liquidated damages payable to OPWP - 1,500,000
_________ _________1,628,657 2,216,846
═══════ ═══════
Related parties balances are set out in note 20.
18. iNCOME TAxThe taxation charge for the year comprises:
2017 2016rO rO
Current taxation charge:Current year - 133,775Prior year - 16,197
_________ _________- 149,972
_________ _________deferred taxation:Current year (430,582) (51,807)Prior year (effect of change in tax rate from 12% to 15%) (379,893) -
_________ _________(810,475) (51,807)
_________ _________(810,475) 98,165
═══════ ═══════
The Company is liable to income tax at 15% of taxable income; this is in accordance with Royal Decree No. 9/2017 which was published in the Official Gazette on 26 February 2017. The tax rate applicable to the Company is 15% (2016: 12%). For the purpose of determining the taxable results for the year, the accounting profit has been adjusted for tax purposes. Adjustments for tax purposes include items relating to both income and expense. The adjustments are based on the current understanding of the existing tax laws, regulations and practices.
The adjustments to accounting profit for the year has resulted in a taxable loss. Therefore, the applicable tax rate is nil (2016: 12%). The average effective tax rate cannot be determined in view of the taxable loss (2016: 21.05%).
Deferred income taxes are calculated on all temporary differences under the liability method using a principal tax rate of 15% (2016: 12%). Deferred tax (assets) and liabilities and deferred tax charge / (credit) in the statement of comprehensive income are attributable to the following items:
1 january2017
recognisedin income
recognised in equity
31 december 2017
rO rO rO rO
Financial asset receivable 1,519,567 810,475 - 2,330,042Fair value of derivative financial instruments (648,572) - (55,435) (704,007)
_________ _________ _________ _________Net deferred tax liability 870,995 810,475 (55,435) 1,626,035
═══════ ═══════ ═══════ ═══════
19. COMMiTMENTS ANd CONTiNGENCiES2017 2016
rO rO
Usufruct right fee 15,000 16,000Usufruct right fee – related to expansion - 12,615
=========== ===========
20. rELATEd pArTy TrANSACTiONS ANd BALANCES
The Company has a related party relationship with its Board and shareholders, its Senior Management and entities over which the Board and Shareholders are able to exercise significant influence. In the ordinary course of business, such related parties provide goods and render services to the Company at agreed terms and conditions. Balances and transactions with related parties are as follows:
2017 2016rO rO
Amounts due from related parties
Nature of relationship
Bahwan Veolia Water LLC Other related party 17,811 4,326Veolia LLC Other related party 2,758 13,083Veolia Eau – Oman Branch Other related party 2,950 29,921Seureca Muscat LLC Other related party 6,961 7,889OTV SA & Partners LLC Other related party - 1,824National Power and Water LLC Other related party - 1,040SIDEM Other related party 1,437,443 1,898,810
_________ _________1,467,923 1,956,893
═══════ ═══════Amounts due to related parties Nature of relationshipVeolia Arabia Company Ltd Other related party 1,662 -Veolia Eau Compagnie Generale des Eaux Other related party 3,099 49,327
Veolia Eau – Oman Branch Other related party - 38,379Veolia LLC Other related party 15,230 2,895Seureca Muscat LLC Other related party - 19,646National Power and Water LLC Other related party 2,683 -
NOTES
7372
Bahwan Veolia Water LLC Other related party 1,024,152 495,195_________ _________
1,046,826 605,442═══════ ═══════
TRANSACTIONS WITH RELATED PARTIES DURING THE YEAR ARE AS UNDER:Veolia Eau Compagnie Générale des EauxServices incurred 3,022 49,327Payments made to them (49,250) (55,164)
Bahwan Veolia water LLCOperation & Maintenance services incurred 5,501,061 3,065,532Other services incurred 16,866 35,712Payments made to them (4,974,448) (3,440,568)Recoverable against OPWP dispute (14,522) (413,947)Services rendered (74,721) (77,289)Cash received from them 61,236 73,394
Veolia Arabia Company LtdServices incurred 1,662 -
National power & water Co. LLC Services incurred 21,524 1,545Payments made to them (18,841) (2,585)Cash received from them 1,040
SidEMServices incurred - 2,312,526Payments made to them - (2,890,176)Services rendered - reclassed to OTV SA & Partner 322,153 (322,153)Liquidated damages - 1,500,000Accrual for chemical cost 6,200 (6,200)Loss of revenue recoverable - 70,457Loss of revenue - doubtful 133,014 -
OTV SA & partners LLCServices incurred 15,444 1,491,870Payments made to them (15,444) (1,876,970)Services rendered (92,423) (11,917)Services rendered - reclassed from SIDEM (322,153) -Cash received from them 147,083 17,669Loss of revenue - doubtful 269,317
Veolia LLCServices incurred 19,180 2,895Payments made to them (6,845) -Services rendered (7,643) (19,773)Cash received from them 17,968 11,581
Veolia EAU – Oman BranchServices incurred - 133,919Payments made to them (38,379) (170,877)Services rendered (25,094) (35,932)Cash received from them 52,065 13,996
Seureca Muscat LLCServices incurred - 99,431
Payments made to them (19,646) (79,785)Services rendered (27,843) (36,735)Cash received from them 28,771 28,846
Board of Directors sitting fees 18,000 16,000Audit committee sitting fees 5,600 4,800Remuneration committee sitting fees 3,600 -Key management remuneration 182,873 178,859
═══════ ═══════
21. FiNANCiAL iNSTrUMENTS ANd FiNANCiAL riSk MANAGEMENT
The Company has exposure to the following risks from its use of financial instruments:
■ Credit risk■ Liquidity risk■ Market risk
Risk management activities are based on the management rules detailed in an internal manual “Rules governing financing / treasury management and related risks”. These
rules are based on the principles of security, transparency and effectiveness.
I. Credit risk
Credit risk results from the potential inability of customers to respect their payment obligations. The Company has only one domestic customer and debtor, OPWP, which is a government owned entity. The Company limits its credit risk with regard to bank balances by only dealing with reputed banks. Maximum credit exposure is considered to be equal to the nominal value of unimpaired financial assets at the reporting date, not yet due, as under:
2017 2016rO rO
Finance asset receivable 75,356,022 45,241,516Trade and other receivables 1,712,371 1,331,126Amount due from related parties 1,467,923 1,956,893Cash and bank balances 1,830,361 688,561
_________ _________80,366,677 49,218,096
═══════ ═══════
II. Liquidity risk
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. A liquidity report is prepared monthly and reviewed by the Executive Management. Sufficient bank facilities are in place to meet the Company’s liquidity needs for the foreseeable future, the Company’s bankers will continue to meet their obligations and provide facilities (see note 15) and OPWP will meet its obligations under the WPA to purchase water from the Company at prices determined therein.
The management’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Company’s reputation.
The following table presents undiscounted contractual flows of financial liabilities, comprising principal payments excluding interest flows:
Carryingamount
Contractualcash flows
Upto 1 year
1 year and above
rO rO rO rO
31 dECEMBEr 2017Non-derivative financial liabilitiesTerm loan (refer note 15) 58,350,699 (74,525,212) (6,149,222) (68,375,990)Trade and other payables 1,628,657 (1,628,657) (1,628,657) -Amounts due to related parties 1,046,826 (1,046,826) (1,046,826) -Short term loan 801,008 (819,919) (819,919) -
_________ _________ _________ _________61,827,190 (78,020,614) (9,644,624) (68,375,990)
═══════ ═══════ ═══════ ═══════
NOTES
7574
derivative-financial instrumentCash flow hedging deficit (refer note 14)
4,693,382 4,693,382 548,931 4,144,451
═══════ ═══════ ═══════ ═══════31 dECEMBEr 2016Non-derivative financial liabilitiesTerm loan (refer note 15) 62,549,330 (78,801,840) (6,095,542) (72,706,298)Trade and other payables 2,216,846 (2,216,846) (2,216,846) -Amounts due to related parties 605,442 (605,442) (605,442) -
_________ _________ _________ _________65,371,618 (81,624,128) (8,917,830) (72,706,298)
═══════ ═══════ ═══════ ═══════derivative-financial instrumentCash flow hedging deficit(refer note 14) 5,404,771 5,404,771 600,091 4,804,680
═══════ ═══════ ═══════ ═══════
III. Market risk
Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rate and equity price will affect the Company’s income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimizing the return on risk.
Interest rate risk The Management has managed its exposure to interest rate risk on the term loan by entering into an interest rate swap (note 14).
Currency riskThe Company is exposed to foreign currency risk mainly on borrowings that is denominated in a currency other than Rial Omani. The currency giving rise to this risk is primarily US Dollar which is effectively pegged to the Omani Rial and, therefore, Management believes that the Company is not significantly exposed to foreign currency risk.
Equity price riskThe Company does not have investments in securities and is not exposed to market price risk.
IV. Fair value estimation
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction in the principal (or most advantageous) market at the measurement date under current market conditions (ie an exit price) regardless of whether that price is directly observable or estimated using another valuation technique.
Financial instruments comprise financial asset, financial liabilities and derivatives. The carrying amount of the financial assets and liabilities reflected in the financial statements approximate their fair values.”
The Company uses the following hierarchy for determining and disclosing the fair value of financial instruments by valuation technique:
level 1: quoted (unadjusted) prices in active markets for identical assets or liabilities.
level 2: other techniques for which all inputs which have a significant effect on the recorded fair value are observable, either directly or indirectly.
level 3: techniques which use inputs which have a significant effect on the recorded fair value that are not based on observable market data.
As at 31 December 2017, the Company held interest rate swap derivatives instruments measured at fair value. The fair values of the interest rate swaps arrangements are worked out using level 2 valuation technique and related details are included in note 14.
The fair values of other financial assets and liabilities carried at amortised cost approximate their carrying value and would qualify for level 2 classification in these financial statements.
V. Capital management
The capital of the Company comprises paid-up capital, retained earnings and hedging deficit. The primary objective of the Company’s capital management is to ensure that it maintains a strong credit rating and healthy capital ratios in order to support future development of the business and maximize shareholder value. Capital requirements are prescribed by the Commercial Companies Law of 1974, as amended, the Capital Market Authority and the loan agreement dated 26 March 2015 (refer note 15).
22. NET ASSETS VALUE pEr ShArE
The calculation of net asset value per share is based on net assets and the number of ordinary shares at the end of the period as follows:
2017 2016
Net assets (RO) 13,830,843 13,206,286Number of outstanding shares at the end of the year (Nos.) 9,780,216 9,780,216
_________ _________Net asset value per share (RO) 1.414 1.350
═══════ ═══════
23. (LOSS) / BASiC EArNiNGS pEr ShArE
The calculation of (loss)/ basic earnings per share is based on (loss)/profit attributable to ordinary shareholders and the weighted average ordinary number of shares outstanding as follows:
2017 2016
(Loss)/profit for the year (RO) (142,266) 614,276Weighted average number of shares (nos.) 9,780,216 9,780,216
_________ _________(Loss)/basic earnings per share (RO) (0.015) 0.062
═══════ ═══════
24. COMpArATiVES
The comparative figures for the previous year have been reclassified, where necessary, in order to conform to the current year’s presentation.
This document was prepared by Sharqiyah Desalination Company & Veolia’s Communication Department. Februrary 2017. Editing: Aiman Al Zadjali, Emad Moustafa, Kate Clark, Alec Oghassabian, Philippe Paulissen, Helene Coulon Photos by Philippe Paulissen. Creation and production: Paris Tokyo Design
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