Liquidity crunch hits power and water firms in Oman

Muscat: Publicly traded power and water companies in the Sultanate say they are weighing the implications of a decision by Oman Power and Water Procurement Company (OPWP) – the monopoly state-run offtaker of electricity and related water output – to temporarily curtail payments in light of the constrained fiscal environment.

Three listed power producers – SMN Power (which owns and operates the Barka and Rusayl utilities), Al Suwadi Power, and Al Batinah Power – said in separate filings to the Capital Market Authority (CMA) on Tuesday that OPWP – part of Nama Group (formerly The Electricity Holding Company) – will begin a “hold back” of the Power Capacity Investment Charge payable to utilities under their respective Power Purchase Agreements.

SMN Power, which also operates a co-located water desalination plant, has been notified that the ‘hold back’ includes a Water Capacity Investment Charge as well.

Industry experts contacted by the Observer stressed that OPWP’s action will have no impact on the continuing operation of power and water projects in the short term, noting that the move is designed to enable the state-run offtaker to manage current liquidity challenges attributable to recent budgetary pressures.

It comes against a slew of measures announced by the Ministry of Finance aimed at reducing budgetary spending by ministries and government enterprises, which includes OPWP, by at least 10 per cent during 2020.  That follows a dramatic decline in international oil prices, a sizable cut in oil exports, and a general downturn in the economy – developments that have impacted state revenues.

Announcing the move by OPWP, SMN Power’s Chief Financial Officer stated in the filing: “Oman Power and Water Company SAOC (OPWP) notified the affiliates of SMN Power (SMN Barka Power Company SAOC and Al Rusail Power Company SAOC) in its letters dated 17th May 2020 that starting from April 2020 invoices, it will hold back the Power Capacity Investment Charge and Water Capacity Investment Charge, over and above holding back of the fuel charge payment. OPWP has committed, as far as the liquidity situation allows, to pay at least the Power Capacity Fixed Operation and Maintenance Charge, Electricity Energy Charge, Water Capacity Fixed Operation and Maintenance Charge, and Water Output Charge under the Power and Water Purchase Agreement.”

According to a power industry executive, the “hold back” will not result in significant cash-flow problems for the affected power and water companies – at least not in the short term. This is because of OPWP’s commitment to continuing payments that cover, among other things, operating costs, plant maintenance, and staff salaries.

However, should the “hold back” of the Fixed Investment Charge – which typically includes the capital cost, return on capital, loan instalment, return on loan, and interests thereof – continue for an indefinite period, then the likelihood of a default in debt payments arises, the executive noted.

It is understood that Oman’s power and water companies were given a heads-up by authorities of the “hold back” move in light of budgetary pressures and the government’s increasing challenging fiscal situation.