Financial Review

Financial highlights 2023

Strong financial results to back a record year

Supported by strong operational performance, ACWA Power delivered robust financial results during 2023 to cap a record year for growth, demonstrating the strength of our business model and the resilience of our balance sheet against high interest rates and inflation environment.

Operating income – before impairment, loss and other expenses – at SAR 2,984 million for the full year of 2023 was 14% higher compared to the previous year mainly due to higher plant availability in our existing assets and contributions from new projects achieving commercial operations. The higher operating income in addition to lower zakat & tax charges and partially offset by lower capital recycling gains, resulted in an 8% increase in the net profit – attributable to equity holders of the Parent – which stood at SAR 1,662 million. The following MD&A will cover the variances in more detail.

Management’s Discussion and Analysis of the Financial Results for the Year Ended 31 December 2023

Introduction

This section provides an analytical review of the financial results of ACWA Power for the three‑months and full year ended 31 December 2023, and it should be read in conjunction with the Company’s Audited Consolidated Financial Statements and Independent Auditor’s Review Report for the year Ended 31 December 2023 issued by KPMG Professional Services (Certified Public Accountants) (the ‘Audited Financial Statements’).

All amounts are in SAR million, rounded up to one decimal point, unless stated herein otherwise. Percentages have also been rounded up to the available number of digits presented in the tables, when applicable. A calculation of the percentage increase/decrease based on the amounts presented in the tables may not therefore be precisely equal to the corresponding percentages as stated.

‘2023’ or ‘2022’ corresponds to the full year ended 31 December of the year mentioned. ‘Current year’ or ‘Current period’ corresponds to 2023 whereas ‘previous year’ corresponds to 2022. ‘Prior periods’ corresponds to one or more years before the current year.

In the Audited Financial Statements, certain figures for the prior periods have been reclassified to conform to the Presentation in the current period.

Please refer to Note 40 of the Audited Financial Statements.

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

See full disclaimer.

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

Although the Company’s business model of Develop, Invest, Operate, and Optimise allows it to generate and capture returns over the full lifecycle of a project, these returns may differ from one reporting period to another, depending on the number of projects in the Company’s portfolio and where these projects are in their project lifecycles (i.e., in advanced development, under construction or in operation). Projects achieving financial close (‘FC’) and projects achieving either initial or project commercial operation dates (‘ICOD’ or ‘PCOD’ respectively) are typical examples that may lead to such variances in the values presented on the financial statements from one period to another, potentially rendering analysis of these variations unreasonable without additional information. The Company considers this or similar type of transactions as ‘ordinary course of business.’ Accordingly, the financial value of these transactions does not lead to any financial adjustment to the Company’s reported consolidated net profit for the period attributable to equity holders of the Parent (‘Reported Net Profit’). For a summary of these transactions, if any, please refer to Material ordinary‑course‑of‑business transactions that did not result in adjustment to the Reported Net Profit for the year ended 2023.

In addition to the above, there may be transactions that the management would consider as non‑routine or non‑operational as they are either one‑off and not expected to recur in the future or are unusual in nature. The impact of such transactions on the Reported Net Profit are adjusted in the respective period of their realisations to arrive at adjusted net profit attributable to equity holders of the Parent (‘Adjusted Net Profit’) for the concerned period. For a summary of these transactions, if any, please refer to Material transactions that resulted in adjustment to the Reported Net Profit for the year ended 31 December 2023.

Material ordinary‑course‑of‑business transactions that did not result in adjustment to the Reported Net Profit for the year ended 31 December 2023

Typically, a project company achieves its FC when the financing documents between the project company and the lenders are signed, and the project company has access to funding from its lenders. At this point, the Company normally becomes entitled to recognise development fees from the project company, if any, and recover the project development and bidding costs incurred to date, including reversal of any related provisions. Moreover, the Company typically earns additional service fees such as project and construction management fees, which are recognised during the construction period of the project based on pre‑determined milestones.

The following table lists all projects that achieved their respective FCs in the past 24 months to 31 December 2023.

A project starts providing power and/or water, partially or fully, under its Offtake agreement in the period it achieves either ICOD or PCOD and subsequently begins recognising revenue and charging costs into the profit or loss statement. It is typically at this stage that NOMAC starts recognising its stable and visible O&M fees too. When the project company becomes eligible to distribute dividends and when such dividends are declared, the Company additionally receives dividends in proportion to its effective share in the project.

Depending on its effective ownership and control relationship in the project, the Company either consolidates the financial results of the project (subsidiary) or recognises its share of net income in the project (equity accounted investee) on the Company’s consolidated financial statements.

The following table lists all projects that achieved their respective ICOD or PCOD and thus have begun contributing to the Company’s results in the past 24 months to 31 December 2023.

Details for the Company’s entire portfolio of projects can be found on the Company’s website.

Dividends

On 28 February 2024, the Board of Directors approved a dividend payment of SAR 329 million (SAR 0.45 per share) for the year 2023, payable in 2024. The proposed dividends are subject to approval of the shareholders at the extraordinary General Assembly meeting.

Bonus shares

The Board of Directors, through circulation on 28 February 2024, recommended to increase the Company’s capital by granting bonus shares to the Company’s shareholders through capitalisation of SR 14.6 million from the retained earnings by granting 1 share for every 500 shares owned.

The bonus share issuance is subject to approval of the shareholders at the ordinary General Assembly meeting.

Given the growth focus, the Company would like to optimise the cash distribution by retaining earnings to support the visible pipeline of new projects.

Capital recycling is a core element of the Company’s business model that provides us with an opportunity to improve our returns as well as to recycle our invested capital.

Below is a list of this type of transactions the Company has initiated or closed during the year ended 31 December 2023.

• Divestment of Vinh Hao 6 Power Joint Stock Company – completed.
• Divestment of Al Shuaibah PV 1 & 2 – completed.
• Divestment of Bash Wind & Dzhankeldy – in progress.
• Divestment of Oasis Holding Company and the Layla and Ar Rass Holding Company LLC – completed.
• Disposal of Shuaa Energy 3 P.S.C. – in progress.

In addition to the above, there were several other transactions that were comprehensively covered in the quarterly investor reports published by the Company during 2023. Below is a list for the major material ones.

• Issuance of second tranche of Sukuk SAR 1,800 million (for more details refer Consolidated Financial Statements, Note 16.1).
• Approval of the long‑term incentive plan (LTIP) and share buy‑back programme. (For more details refer Consolidated Financial Statements, Note 24.3).
• Hassyan IPP tripartite coal settlement agreement (for more details refer Consolidated Financial Statements, Note 24.4).

Material transactions that resulted in adjustment to the Reported Net Profit for the year ended 31 December 2023

There was no transaction that resulted in adjustment to the Reported Net Profit for the year ended 31 December 2023. There were several adjustments for the year 2022, which are covered in detail in the Company’s investor reports for the periods concerned.

Discussion and analysis of management’s key financial indicators

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

Operating income before impairment loss and other expenses

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

Operating income before impairment loss and other expenses for 2023 was SAR 2,984 million and 14.1%, or SAR 369 million, higher than SAR 2,615 million of 2022.

At SAR 609 million and comprising mainly both operating income of the subsidiaries including NOMAC and share in net income of the equity accounted investees; net higher contribution in aggregate from existing projects mainly due to better plant availability, and net new contribution in aggregate from projects that began billing during 2022 were the main drivers behind the increase. Higher development and construction management fees net of development cost provisions or write‑offs have contributed an additional SAR 106 million favourable variance.

These favourable variances were partially offset by lower performance liquidated damage and insurance recoveries and higher corporate general and administration expenses primarily driven by staff costs in addition to professional consultation, digitalisation and communication expenses, the increase in general and administration expenses reflects both existing and anticipated business growth and geographic expansion in line with the Company’s new Strategy 2.0.

Consolidated Profit Attributable to Equity Holders of the Parent ‘Reported Net Profit’ for 2023 was SAR 1,662 million and 7.9%, or SAR 122 million, higher than SAR 1,540 million of 2022.

Higher operating income before impairment loss and other expenses (please refer to Operating income before impairment loss and other expenses) and lower zakat and tax charge (please refer Zakat & tax expenses) were main drivers behind the increase in Reported Net Profit (aggregate SAR 548 million). This increase was partially offset by:

• Higher net financial charges (net of finance income) including exchange loss by SAR 93 million, mainly due to additional debt including the Sukuk tranche two and higher finance costs on account of higher market rates partially offset by higher finance income due to better cash management.
• Lower capital recycling gains by SAR 227 million, mainly on account of the gain recognised on sale of 49% stake in Sirdarya in 2022 (please refer to note 34 of the audited financial statements).
• Others, net, by SAR 106 million, comprising following positive and (negative) variances:
  • lower other income by (SAR 184 million), on account of lower gain on change in fair value of derivatives, recognition of income in relation to early settlement of long‑term financing and funding facilities and termination of hedging instruments and sale of strategic fuel inventory in previous year,
  • higher share of non‑controlling interest by (SAR 173 million), and
  • lower impairment loss and other expenses in 2023 by SAR 251 million.

Adjusted profit attributable to equity holders of the Parent (‘Adjusted Net Profit’) represents profit after adjusting the Reported Net Profit for the financial impact of non‑routine, unusual or non‑operational items.

There was no transaction that the management considered for adjustment in 2023, and Adjusted Net Profit was the same as the Reported Net Profit (see above Consolidated Profit Attributable to Equity Holders of the Parent (‘Reported Net Profit’)). In 2022, there was an aggregate of SAR 35 million adjustment to the Reported Net Profit.

The Company has recorded Zakat and tax charge of SAR 54 million in 2023, 76.9% less than the Zakat and tax charge of SAR 233 million in 2022, largely as a result of SAR 87 million Deferred tax credit in 2023 versus a Deferred tax charge of SAR 111 million in 2022. Zakat and tax charge at SAR 141 million in 2023 versus SAR 122 million in 2022 is higher by SAR 18 million, or 15%, mainly due to higher revenues and unsettled long‑term Sukuk liability of the Company in the current period.

Morocco Deferred tax impact:

The favourable variance in Deferred tax (credit)/charge was mainly on account of the fluctuation of the Moroccan Dirham (MAD) against the USD such that the MAD has appreciated by 5.3% in the year ended 31 December 2023 (as compared to the 31 December 2022 rate), whereas it depreciated by 12.6% in the year ended 31 December 2022 (as compared to the 31 December 2021 rate).

The Plant in Morocco is recorded as finance lease under IFRS books as opposed to being recorded as PPE as per MGAAP (Moroccan GAAP) books for local Moroccan tax purposes. Accounted as such, temporary taxable differences occur between the IFRS and local books. Such differences give rise to depreciation or appreciation of the carrying value/tax base of the asset from period to period.

Due to the appreciation of the Moroccan Dirham as explained above, the tax base has increased in December 2023, resulting in the reversal of the existing deferred tax liability. Deferred tax liabilities are further reduced as the impact of carry forward losses (higher deferred tax asset) was set‑off against Deferred tax liability in December 2023.

Parent operating cash flow (‘POCF’)

POCF represents Parent level, or corporate, operating cash and comprises 1) distributions from the project companies and NOMAC; 2) development, construction management and other fee revenues; 3) cash generated by financial optimisation activities including partial and/or full divestments of the Company’s investments, and by refinancings. These cash flows are then reduced by corporate general, administrative expenses, Zakat and tax expenses and capital expenditures as well as the financial expenses related to the ACWA39 non‑recourse bond.

POCF for 2023 was SAR 2,453 million and 41.1%, or SAR 1,710 million, lower than SAR 4,163 million of 2022, mainly on account of lower cash inflows by SAR 1,560 million and higher cash outflows by SAR 150 million.

Despite remarkable increase in distributions and development and construction management fees from the project companies and NOMAC (SAR 778 million), higher capital recycling, refinancing and divestment proceeds in 2022 from RAWEC and SQWEC projects resulted in a negative variance in total cash inflows.

Higher cash outflow was mainly due to higher corporate general and administrative expenses Zakat & tax payment (see above analyses in corresponding sections), which was partially offset by lower financial expenses pertaining to the non‑recourse ACWA39 bond on account of lower principal amount following partial buyback in the last quarter of 2022.

Total Discretionary Cash comprises the corporate opening cash for the current year, the POCF and new equity or debt capital raised by the Company, if any, and represents the cash available for the Company’s investment commitments, corporate debt servicing and dividends.Marginally higher than 2022, TDC for 2023 was SAR 9,089 million owing to the proceeds from Sukuk issued in 2023 in addition to other drawdowns, which more than offset the negative variance in POCF (see below).

During 2023, the Company used SAR 4,376 million of its available TDC for:

1. the debt service of SAR 468 million (including service of both tranches of Sukuk);
2. dividend payment of SAR 606 million for the year 2022;
3. cash investments in its projects at an aggregate amount of SAR 2,729 million including SAR 1,022 million of EBL repayments for the Company’s equity shares in the project companies; and
4. aggregate net cash outflows for limited notices to proceed, other advances and project development costs, net of any advances collected, of SAR 557 million.

Total year‑end corporate or Parent‑level cash on 31 December 2023 stood at SAR 4,713 million and was 9.7%, or SAR 416 million, higher than the year‑end cash balance on 31 December 2022.

Parent level leverage

Parent level, or corporate, leverage consists of 1) borrowings with recourse to the Parent (the Company); 2) off‑balance sheet guarantees in relation to the Equity Bridge Loans (EBLs) and other equity‑related commitments including Equity Letters of Credit; and 3) options entered with lenders of mezzanine debt facilities by the Company’s JVs or subsidiaries. Parent level net leverage represents Parent level leverage net of the Parent total year‑end cash balance.

Parent Net Leverage stood at SAR 13,491 million as of 31 December 2023 and was 53%, or SAR 4,672 million, higher than SAR 8,819 million as of 31 December 2022, driven by higher on‑ and off‑balance sheet indebtedness, partially offset by higher year‑end corporate cash balance.

Total on‑balance sheet leverage stood at SAR 10,336 million and was 57.7%, or SAR 3,782 million, higher than SAR 6,554 million as of 31 December 2022.

• Corporate borrowings at SAR 4,588 million, mainly comprised of Sukuk, were higher by 64.3% or SAR 1,796 million, mainly due to issuance of the SAR 1,800 million (before transaction costs) of the second tranche of Sukuk during 2023.
• Project recourse borrowings – borrowings by the Company’s projects with recourse to the Company – at SAR 4,976 million were higher by 69.2% mainly on account of new debt by several projects in Saudi Arabia, Uzbekistan, Azerbaijan and UAE.
• Other financial liabilities at SAR 772 million decreased by 5.9% mainly because of the reduction in coal supply derivative liability on account of Hassyan IPP tripartite Coal settlement agreement (refer note 24 of consolidated financial statement), partially offset by interest unwinding on the PIF loan for the current year.

Total off‑balance sheet leverage stood at SAR 7,869 million and was 19.9%, or SAR 1,307 million, higher than SAR 6,562 million as of 31 December 2022, owing to the Company’s higher EBL or other equity‑related commitments in parallel with the increased equity investment levels for projects mainly in Saudi Arabia, partially offset by settlement of certain EBLs during the year 2023.

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

Due to higher Parent net leverage and lower POCF, the Parent Net Leverage to POCF ratio at 5.5x (times) as of 31 December 2023 was 3.4x higher than the ratio as of 31 December 2022. Notwithstanding, it is worthwhile mentioning that 5.5x times is well‑below the Company’s short‑term target ratio guideline of between 6 to 7x, and within the Company’s long‑term target ratio guidance of below 6x.

Due to higher Parent net leverage, the Parent Net Leverage to Net Tangible Equity ratio at 0.92x (times) as of 31 December 2023 was 0.28x higher than the ratio as of 31 December 2022.

Equity Commitments

In line with our earlier guidance, equity commitments during 2023 at SAR 5.8 billion was 30% higher than the year 2022. The higher commitments are a reflection of our increased business development activity and the record number of financial closes during 2023. We expect the growth pipeline under strategy 2.0 will see us exceed the historical figures and the IPO guidance to be over USD 2.2 billion/year on average between 2024–2030.

Growth pipeline indicates to increased levels of equity commitments.

Significant Subsequent Events

On 5 January 2024, an arbitration tribunal of International Centre for Settlement of Investment Disputes (‘ICSID’) issued an award letter (the ‘Award’) in relation to ongoing arbitration between ACF Renewable Energy Limited (a 42.0% owned‑subsidiary of ACWA Power) and Republic of Bulgaria. Pursuant to the Award, ACF Renewable Energy Limited is entitled to compensation of EUR 43.0 million (equivalent to SAR 176.30 million) net of legal cost. The Group’s share in the net compensation is EUR 18.06 million (equivalent to SAR 74.05 million) and it will be recognised in the consolidated statement of profit or loss once the settlement formalities are completed.