UTILITIES REVIEW

Competitive Edge

OPERATIONS AND FINANCIAL REVIEW

Underpinned by contribution from its overseas operations, the Utilities business delivered profit growth from its underlying operations despite intense competition in Singapore’s power market. The business’ turnover was S$4.9 billion in 2014 compared to S$5.1 billion in 2013, while net profit was S$408.0 million, compared to S$449.9 million last year. Excluding significant items in 2013¹, net profit grew by 7% in 2014.

Profit from operations (PFO) stood at S$521.9 million, a 15% decline from last year’s S$612.9 million. Excluding 2013’s significant items, PFO decreased by 6% in 2014.

¹ Significant items in 2013 amounted to S$68.6 million, comprising the gain from the IPO of Sembcorp Salalah Power and Water
   Company, partially offset by an impairment for Teesside operations in the UK.

Singapore operations accounted for 53% of total PFO, while overseas operations accounted for 47%.

In 2014, PFO from operations in Singapore decreased 6% to S$285.7 million, reflecting intense competition in the local power market. The Uniform Singapore Energy Price continued to slide, averaging S$137 per megawatt for the year compared to S$173 per megawatt in 2013. New income streams from the Banyan facilities, short-term merchant income and improved contractual rates in the solid waste management business helped to mitigate the decline in PFO.

The business’ PFO from the Rest of ASEAN, Australia & India grew 36% to S$62.5 million. In Vietnam, we raised our effective stake in Phu My 3 power plant to 66.7% and commenced recognition of our additional 33.3% stake in September. Arising from this transaction, a S$10.3 million one-off net gain was recognised. Meanwhile, our solid waste management associate in Australia, the other major contributor within this region, delivered a comparable performance to last year’s.

PFO contribution from our business in China stood at S$86.4 million in 2014, comparable to S$85.7 million in 2013. Our Yangcheng coal-fired power plant and Shanghai Cao Jing cogeneration plant delivered a better performance in 2014, but this was offset by weaker performance by our wind power assets and water operations. In the fourth quarter, an increase in the natural gas tariff was implemented by the government, affecting the performance of the gas-fired Shanghai Cao Jing plant for the quarter.

Our Middle East and Africa operations registered a PFO of S$46.4 million in 2014 compared to S$111.5 million in 2013, due to the deconsolidation of Sembcorp Salalah Power and Water Company after its initial public offering in September 2013. Meanwhile, operations in the UK recorded a PFO of S$46.4 million, backed by an improved performance on Teesside. As part of our strategy to restructure our business on Teesside and develop the Wilton International site into a green hub, we divested our asset protection business and de-commissioned two ageing coal-fired boilers on the site. During the year, we also successfully extended contracts with two on-site customers. Meanwhile, our businesses in the Americas spanning Chile, Panama and the Caribbean registered a combined PFO of S$9.3 million, compared to S$3.1 million in 2013, on the back of an improved operating performance.

BUILDING A STRONG DEVELOPMENT PIPELINE TO DRIVE LONG-TERM GROWTH

In 2014, we remained focused on sowing the seeds for future growth. In 2015 and 2016, we will add over 3,400 megawatts of power and 1.6 million cubic metres per day of water and wastewater treatment capacity to our operating portfolio, bringing our gross power and water capacity to almost 7,900 megawatts and over 9.5 million cubic metres per day.



ASEAN and the Middle East

Besides securing new projects to build up our project pipeline, we have also maintained a strong focus on the execution of projects under development. During the year, we added 400 megawatts of gross power and 200 tonnes per hour of steam to our total operating capacity with the completion and operation of Sembcorp Cogen @ Banyan, our second cogeneration plant in Singapore’s Jurong Island petrochemical hub. This investment reinforces our position as the preferred supplier of energy, water and on-site logistics to companies on Jurong Island. Meanwhile in the UAE, our 30 million imperial gallons per day expansion to the desalination capacity of the Fujairah 1 Independent Water and Power Plant is progressing well and is expected to come onstream in the third quarter of 2015.

China

In 2014, we continued efforts to extend the reach of our industrial water and wastewater treatment business in China, particularly in the industrial and petrochemical sectors. We made good progress in the construction for an upcoming 120,000 cubic metres per day expansion to our Nanjing industrial water facilities, as well as an upcoming total water management plant to serve a major coal-to-chemicals customer in Changzhi. As at end 2014, these plants were respectively 70% and 37% complete, with the Nanjing expansion on track for completion in the first half of 2015, and partial operations for the Changzhi project expected in 2015. In addition, in response to customer feedback that a higher demand was expected, we increased the planned cooling water capacity of the Changzhi plant by a further 144,000 cubic metres per day. This brings the project’s total water capacity to 1.3 million cubic metres per day. The project has been selected by the governments of China and Singapore as a joint showcase for integrated water management.

In June, we signed a joint venture agreement to acquire and upgrade an existing wastewater treatment facility at the Lianyungang Lingang Chemical Industrial Park. We will equip the facility to effectively treat high concentration wastewater and increase its capacity to 20,000 cubic metres per day. This project is significant as it kicks off a new collaboration with the Jiangsu Environment Protection Department, which has chosen Sembcorp as their partner to improve industrial wastewater management at Jiangsu’s industrial parks. If successful, this could provide a model that can be replicated at industrial parks across Jiangsu and other provinces.

On the energy front, we inked a conditional joint venture agreement for a mine-mouth coal-fired power project in Chongqing. Sembcorp will hold 49% in the joint venture, which will own an existing 300-megawatt coal-fired power plant and develop an adjacent 1,320-megawatt coal-fired power plant targeted for completion in 2017. The entire project will cost approximately RMB6 billion (approximately S$1.2 billion). The plants’ strategic mine-mouth location offers significant savings in logistics costs and will enable the production of power at a lower cost.

India

Construction of our two supercritical coal-fired projects in Nellore, Andhra Pradesh is progressing well, and the plants are on track to be completed in 2015 and 2016 respectively.

The first of these 1,320-megawatt power plants will commence commercial operation of its initial 660-megawatt unit in the first quarter of 2015. The plant’s second 660-megawatt unit is expected to undergo commissioning soon and begin commercial operation in the third quarter of the year. During the year, we increased our stake in this US$1.5 billion project from 49% to 65%, giving us majority control. To maintain flexibility, the plant’s load will be sold through a mixture of long-term, medium-term and short-term contracts. To date, we have secured power purchase agreements for the sale of 900 megawatts of power, including a long-term agreement to supply 500 megawatts to the states of Andhra Pradesh and Telangana.

We embarked on our second coal-fired power project in the country early in the year, with the acquisition of a 49% stake in a 1,320-megawatt facility being built on an adjacent site. This acquisition doubled our thermal power capacity in India to 2,640 megawatts. The proximity of both plants will enable us to benefit from operational synergies, such as shared coal importation and logistics infrastructure and a common management team. The total investment for our 49% stake amounts to Rs 923.4 crores (approximately S$190.7 million), and we intend to increase our share to 65% upon receipt of relevant approvals.




Expanding our renewable energy capabilities and capacity as part of having a balanced portfolio of
high-efficiency thermal and renewable energy assets is a key element in our strategy for building a sustainable power portfolio. To this end, we have made meaningful progress. From 5% of our total power capacity in 2014, renewable energy now comprises 14% of our total power portfolio on a gross capacity basis.



In China, our 48-megawatt wind power capacity expansion in Huanghua, Hebei province, was completed in February 2015. Meanwhile, construction of our energy-from-waste (EfW) facilities in Singapore and the UK is 38% and 48% complete respectively. Our upcoming 140 tonnes of steam per hour EfW facility on Singapore’s Jurong Island will be our largest in the country, and both it and our 49-megawatt EfW facility on Wilton International in the UK are targeted for completion in 2016.

In February 2015, we marked our entry into India’s fast-growing renewable energy market with the acquisition of a 60% stake in Green Infra, a leading renewable energy group with wind and solar power assets in six states across the southern, western and central regions of the country. The addition of Green Infra will add approximately 700 megawatts of operating assets to Sembcorp’s renewable energy portfolio in 2015. The acquisition almost triples Sembcorp’s total renewable energy capacity to over 1,000 megawatts globally. With gas-fired and coal-fired thermal power plants, as well as a global renewable portfolio that encompasses wind, solar, energy-from-waste and biomass assets, Sembcorp is now well-positioned for growth in both the thermal and renewable energy sectors.




In October, we officially opened the new Sembcorp Technology & Innovation Centre on Jurong Island in Singapore. Comprising laboratories and applied research and development facilities, it is a centre for the development and integration of innovative processes and the commercialisation of emerging technologies.

It also houses an advanced global asset management system to centrally manage our international utilities operations from Singapore. Currently in development, the Sembcorp Global Asset Management System will allow us to better harness our collective global expertise, drive operational excellence and optimise asset performance for enhanced reliability, availability and cost effectiveness.

OUTLOOK

In 2015, the world’s economy is expected to face strong and complex cross-currents, leading to a mixed economic outlook. According to the World Bank’s Global Economic Prospects, while the global economy is expected to grow by a moderate 3% in 2015 against a lower-than-expected 2.6% in 2014, low oil prices are expected to contribute to diverging prospects for oil-exporting and oil-importing countries.

In Singapore, the Ministry of Trade and Industry forecasts the economy to grow between 2% and 4% in 2015, compared to 2.9% in 2014. Meanwhile, the Economic Development Board has lowered its fixed asset investments forecast for 2015 to a range of between S$9 billion to S$11 billion, from S$10 billion to S$12 billion in 2014. The lower forecast reflects factors such as a sharper focus on attracting projects that are in line with Singapore’s stage of economic development, as well as greater uncertainty in the outlook for the global economy. The Utilities business environment in Singapore is expected to be challenging in 2015, with continued intense competition in the power market as well as low oil prices.

According to the World Bank, China’s economy is expected to grow at a moderate 7.1% in 2015, down from its estimated 7.4% growth in 2014. The government is expected to continue with its pursuit of structural reforms to make the economy more market driven and maintain its strong promotion of greater environmental protection.

Meanwhile, the World Bank forecasts that India’s economy will grow by an estimated 6.4% in 2015, up from an estimated 5.6% in 2014. This signals regained economic momentum and continued recovery from two years of modest growth between 2012 and 2013, to growth levels that are more in line with the country’s high long-term potential. The new government continues to push ahead with measures to reform the power sector, including efforts to resolve coal issues and encourage greater growth in renewable energy. The first of our 1,320-megawatt power plants in India will commence operation in phases in 2015, followed by our second 1,320-megawatt power plant in 2016. Together with our recent acquisition of Green Infra, this will bring our gross power capacity in India to over 3,300 megawatts, comprising both thermal and renewable energy assets.

Despite the mixed global economic outlook, essential energy and water solutions will continue to remain relevant, particularly in emerging growth markets. Sembcorp has built up a successful track record in developing large-scale greenfield projects and is well-positioned to secure opportunities. Our Utilities business remains focused on operational excellence and efficiency, as well as the execution of our significant pipeline of projects and the pursuit of new growth opportunities to deliver long-term growth.