Qatar Electricity and Water: Utilities

THE COMPANY: Qatar Electricity and Water (QEWS on the Qatar Exchange) is the country’s leading listed provider of utility services. QEWS, established in 1990, owns and operates power generation and water desalination plants in Qatar. Its installed power generation and water desalination capacity is 5432 MW and 258m gallons per day (mgpd), respectively. The company supplies more than 60% of total electricity output and in excess of 70% of total water production in the country. The government has a direct holding of 42% in QEWS and an indirect holding of 10% through Qatar Petroleum (QP). QEWS has several subsidiaries and joint ventures. The Ras Laffan Power Company (RLPC) operates the Ras Laffan A project. This plant has an installed electricity generation capacity of 756 MW and a seawater desalination unit producing around 40 mgpd of potable water. The station supplies water and electricity to Qatar General Electricity & Water Corporation (Kahramaa) under a 25-year agreement. QEWS has an 80% shareholding in RLPC. Ras Laffan Operating Company (RLOC) is a 100%- owned entity and is engaged in the management, operation, maintenance and development of the Ras Laffan A plant. Another subsidiary, Q Power, operates the Ras Laffan B project with an installed capacity of 1025 MW of electricity and 60 mgpd of potable water. QEWS (55%), International Power (40%) and Chubu Electric Power Company (5%) own Q Power. The Mesaieed Power Company (MPC) operates the 2007-MW combined-cycle gas turbine power plant and supplies the output to the national grid and the Mesaieed aluminium smelter. QEWS (40%), the Marubeni Corporation (30%), QP (20%) and Chubu Electric Power Company (10%) jointly own MPC. Finally, the Ras Girtas Power Company (RGPC) was incorporated to install and operate the Ras Girtas power project, which has a capacity of 2730 MW of power and 63 mgpd of water. QEWS holds a 45% stake in RGPC, while QP owns of 15% of the company.

QEWS has three reporting segments: electricity, water and lease income. Electricity generation is the primary business segment, contributing 48% to total revenue in the second quarter of 2012. Boosted by seasonal demand, electricity generation revenue increased 43.5% during the second quarter but was down slightly by 1.1% versus the prior year. Supply of water contributed 31.7% to revenue in the second quarter of 2012. The revenue from this segment grew by 4% year-on-year (y-o-y) and 6.9% quarter-on-quarter (q-o-q). The lease segment incorporates lease rentals generated from independent plants. This is related to power and water generation but is reported separately, as the company’s new plants are classified as finance leases. Lease rentals contributed 20.3% to total revenue in the second quarter of 2012.

QEWS’s total revenue increased by 18.9% q-o-q to QR1.2bn ($329.5m). Quarterly revenue declined slightly versus 2011 due to some extended maintenance-related shutdowns at RGPC and RLPC. Total net profit increased by 19.6% q-o-q with almost flat net margins of 29.1%. The net profit margin did take a hit versus the 36.8% posted for the second quarter of 2011, due to lower gross margins, increased general and administrative expenses, higher interest costs and the absence of refunds received from engineering, procurement and construction contractors.

DEVELOPMENT STRATEGY: QEWS remains one of the more defensive ways to play the Qatar growth story given that it is essentially a capacity provider. The company is able to procure natural gas at long-term fixed-price contracts from QP and can pass on the cost of fuel to Kahramaa under long-term contracts. For this reason, the company is not affected by volatility in commodity prices or fluctuations in end-user demand for electricity and water. QEWS continues to enjoy secure earnings and cash flows. While dividend growth was muted during 2011, substantial free cash flows leave open the potential for expansion through acquisitions and/or dividend upside in the future.