Annual Report to Shareholders

For the financial year 2005

AL GHUBRAH POWER &

DESALINATION COMPANY SAOC
ANNUAL REPORT
2005

ANNUAL REPORT
2005
Annual Report to Shareholders
For the financial year 2005

His Majesty Sultan Qaboos Bin Said

Annual Report to Shareholders
For the financial year 2005

Table of Contents

Foreword by the Chairman of the Board of Directors

History of the Company

Corporate Governance Report

Management Discussion and Analysis Report

Report of the Auditors

Income Statement

Balance Sheet

Statement of Changes in Equity

Cash Flow Statement

Notes
Annual Report to Shareholders
For the financial year 2005

Board of Directors

Foreword by the Chairman of the Board of Directors

Annual Report to Shareholders
For the financial year 2005

Dear Shareholders,

On behalf of the board of directors, I have pleasure in presenting the annual report for the
period 1st May 2005 to end of December 2005, together with the audited statement of
accounts for Al Gubrah Power and Desalination Company SAOC.

Operation Management
The company has successfully managed the assets transferred to it according to the
transfer scheme within the policy laid down by Royal Decree No. (78/2004), the law for
regulation and privatization of the electricity and related water sector, the “Sector Law”.

Financial performance
The company owns assets of R.O 132 Million as at the balance sheet date. The gross
profit margin was 19% and net profit was 14% giving a return of R.O 10 per share.

Plant Performance
The company produced a generation total of 1.95 Million MWH during the period 1st of
May to end of December 2005, with an increase of 26% over the same period of the year
2004. A total production figure of 36.3 million cubic meters of distillate water was also
achieved during the period 1st of May to end of December 2005, with an increase of 8.3%
over the same period of the year 2004.

The average availability values of the units in the plant were 78.7% for electrical power,
compared with 75.1% in the year 2004, and 89.6% for the desalination units compared
with 85.7% in the year 2004. Due to the efforts exerted by the management, the
procurement and delivery of spare parts was expedited, resulting in the annual
maintenance programme being suceesfully completed by the O&M contractor according
to its schedule.

The management of the company generally followed the generation and desalination
license granted by Oman’s Electricity Regulatory Authority in all its terms and
conditions, eg. compliance with Grid Codes, Distribution Codes, Health & Safety
policies, Environmental Matters etc.
Annual Report to Shareholders
For the financial year 2005

To perform its duties according to the Sector Law, the company entered into several
agreements, i.e.:
1. Power and Water Purchase Agreement (PWPA) with Oman Power & Water
Procurement Company for the sale of power and water capacities at Al Ghubrah
Power & Desalination Plant.
2. Usufruct agreement for grant of usufruct rights.
3. Natural Gas Sales agreement with the Ministry of Oil &Gas (MOG)
4. Connection agreement with Oman Electricity Transmission Company.
5. Connection agreement with Muscat Electricity Distribution Company.
6. Operation records agreement with the successor companies.
7. Extension of the O&M agreement with M/S SOGEX OMAN for the period Jan
2006 to March 2007.

Company Establishment
The establishment of the company was facilitated according to the Commercial
Companies Law and in this respect, all necessary actions like commercial registration,
Memorandum & Articles of Association, banking arrangements and importation licensing
were finalized and the necessary approvals were taken from the concerned Government
Authorities.

Further establishment procedures were also undertaken, which included the selection of a
company logo, the preparation of the structure and organization charts and the occupation
of vacant positions. A training plan was compiled for the eight month period reviewed by
this report and some staff members attended training courses in both Oman and the UAE.

A Tender Committee and Internal Audit Committee were formed by the BOD. The two
committees started their work and functioned effectively in coordination with the
Management.

The BOD studied and approved the Financial Delegation of Authority, the Accounting
Policy and the Human Resources Manual and also appointed an internal auditing firm.

The management also prepared the Operation Budget for the period 1st of May to end of
December 2005 and obtained the necessary approvals from the BOD, EHC and the MOF.
Annual Report to Shareholders
For the financial year 2005

Thanks and Appreciation

The BOD appreciates the support and trust of the shareholders and also appreciates the
hard work and dedication of the management and employees who contributed to the
establishment and enhancement of the company.

I also would like to thank H.E. The Chairman of the BOD and the EHC for their support
and guidance.

Finally, I would like to convey our extreme thanks and appreciation to His Majesty
Sultan Qaboos Bin Said and his Government for their untiring commitment and support
to the development of the electricity sector in Oman.

Omar bin Khalfan Al-Wehaibi

Chairman
Annual Report to Shareholders
For the financial year 2005

History of the Company

In December 1999 the Council of Ministers approved a process of restructuring the

electricity and related water sector (the Sector) to facilitate further private sector
participation in the generation, transmission, distribution and supply of electricity in the
Sultanate.

The policy required the implementation of a new market structure and regulatory
framework for the Sector and further required that these be implemented through
comprehensive sector specific legislation.

The new regulatory framework was implemented and a timetable was set for the
implementation of the new market structure through the Law for the Regulation and
Privatisation of the Electricity and Related Water Sector (the Sector Law) promulgated
by Royal Decree 78/2004. The Sector Law came into effect on 1 August 2004 and the
deadline for implementing the new market structure was set as 1 May 2005.

As required by the Sector Law, a Transfer Scheme was implemented by a Decision of the
Minister of National Economy on 1 May 2005. The Transfer Scheme transferred the
operational assets and liabilities of the Government and in respect of the generation,
transmission, distribution and supply of electricity (and related water) to a holding
company and nine subsidiaries.

Coincidentally, the responsibilities of the Government for undertaking the activities of

generation, transmission, distribution and supply of electricity previously undertaken by
the Ministry of Housing Electricity and Water were allocated to the subsidiary companies
under the supervision of new regulatory legislation embodied in the Sector Law and
administered by the Authority for Electricity Regulation, Oman.

The nine subsidiary companies have, from 1 May 2005, undertaken specific regulated
activities in a new market structure alongside and on the same terms as existing private
sector companies.

The Successor Companies and associated regulated activities are shown below:
Annual Report to Shareholders
For the financial year 2005

The Electricity Holding Company is 100 per cent owned by the Ministry of Finance and
each of the subsidiary companies is 0.01 per cent owned by the Ministry of Finance and
99.99 per cent by the Electricity Holding Company.

Of the nine subsidiary companies, all but two (Oman Power and Water Procurement
Company and Rural Areas Electricity Company) will be privatised in the near future.

The Oman Power and Water Procurement Company undertake the regulated activity of
power and water procurement under a licence granted to it by the Authority for
Electricity Regulation, Oman.
Annual Report to Shareholders
For the financial year 2005

Corporate Governance Report

Company Philosophy on Code of Governance
The company has adopted a set of business principles and corporate conduct based on
best practice. Good governance is reflected in the leadership, management and day to
day operations of the company by the Board of Directors, the management and the
employees of the company.

Board of Directors
The company’s Board of Directors consists of five non executive members appointed by
the Council of Ministers. The Chairman of the Board and three members represent
Electricity Holding Company, and one member represents the Ministry of Finance. The
Board and its committees are responsible for establishing the general policies of the
company, supervising the execution of its activities, the approval of budgets and the
appointment of top management positions.

Five meetings of the board of directors were held during the year on the following dates:
- 17 April 2005
- 9 July 2005
- 31 July 2005
- 26 September 2005
- 24 October 2005

These meetings were convened by issuing notices along with agenda and relevant work
papers, were presided over by the chairman of the board and in his absence by the deputy
chairman. The minutes of the meetings were appropriately recorded and circulated.

The below table indicates the attendance figures of the Board meetings.

Name of Director Designation Board Membership in

Meetings board of other
attended companies
Omar Khalfan Al Wahaibi Chairman – 5
Representing EHC
Nabeel Abdullah Al Ghassani Vice Chairman – 5 2
Representing EHC
Dr Ali Hamed Al Ghafri Member representing 5 4
EHC
Hamed Jaber Al Mahrooqi Member representing 5 3
EHC
Abulaziz Mohammed Al Member representing 4 2
Kharousi MOF
Annual Report to Shareholders
For the financial year 2005

The Board has formed the following two committees:

The Internal Audit Committee:

An internal audit committee of the Board was constituted on 17 April 2005 and has three
members. The committee supports the Board in fulfilling its review and oversight
functions. The committee reviews the company’s adherence to policies, procedures,
practices and its compliance with laws and regulations. The committee also ensures that
the financial statements are prepared in accordance with applicable rules. Periodic
internal audit reports submitted by George Mathew & Co. are reviewed by the
committee.

The below table shows the attendance figures of the committee meetings.

Name of Director Designation Meetings

held /
attended
Dr Ali Hamed Al Ghafri Chairman 3/3
Mr. Hamed Jaber Al Mahrooqi Member 3/3
Abulaziz Mohammed Al Kharousi Member 3/3

The Internal Tender Committee:

An internal tender committee of the Board was constituted with three members to oversee
the procurement and contracting requirements of values between RO 15,000 to
RO 250,000. Five meetings were held in 2005.

Remuneration of directors
The remuneration of the Directors was as follows:

Name of Director Board Audit Tender Total

Meeting Committee Committee
Oman Khalfan Al Wahaibi 5,500 5,500
Nabeel Abdullah Al Ghassani 3,600 600 4,200
Dr Ali Hamed Al Ghafri 3,600 450 600 4,650
Mr. Hamed Jaber Al 3,600 450 750 4,800
Mahrooqi
Abulaziz Mohammed Al 3,400 450 750 4,800
Kharousi
Total 19,700 1,350 2,700 23,950

Executive management
During the year there was a change in the company’s top management position when the
decision was taken to separate Rural Area Electricity Company management from
Ghubrah Power Company SAOC. As a result, Deputy General Manager, Zaher Al Bahri
was appointed as the General Manager of the company.
Annual Report to Shareholders
For the financial year 2005

The Organisation

Board of Directors

Internal Audit
Committee Tender Committee

General Manager

Section Head
Technical Affairs Stores Section Head RAECO Services

Finance Administration Information Human

Technology Resources

The company shares the support services of Finance, Human Resource administration, IT
and public relations with Rural Area Electricity Co. SAOC.

During the period reviewed in this report, the company had 23 staff of which 22 were
Omanis; achieving 96% Omanisation. The operation and maintenance contractor
employed 276 staff of which 212 were technical staff and 64 were administrative. The
contractor therefore achieved an Omanisation level of 50%. The following table indicates
the company’s Omanisation levels.
Management Omani
Staff

Contractor Technical
Omani Staff

Contractor Technical
Expat Staff

Contractor
Management Expat Staff Adminstration Omani
Staff
Annual Report to Shareholders
For the financial year 2005

Management Discussion and Analysis Report

Operational & Organisational Highlights

The eight month reviewed in this report, which concluded December 31, 2005 was one of
transition and success by any measure. The company’s shift from public sector
undertaking to a commercial entity required high level of personal dedication and
commitment, business knowledge, diligence and hard work and resulted in efficient
production and reliability of both power and water.

Power Generation
Al Ghubrah proved to be a reliable provider of service to its customers. At the year end,
the contract reliability was in excess of 84%. Al Ghubrah plant generated 1956.7 GWh
during the eight month period of 2005. Net power exported during the period was 1876
GWH.

During the critical summer season of 2005, the business performed at a typical maximum
capacity, providing reliable power to the national grid achieving in excess of 87%
availability during the peak season.
Generation Statistics Year-2005
Power
300 100
Electrical Energy Gen
Electrical Energy Delivered 90
250 Load Factor
80

70
200
60

150 50

40
100
30

20
50
10

0 0
M ay-05 Jun-05 Jul-05 August - 05 Sep-05 Oct-05 Nov-05 Dec-05
Annual Report to Shareholders
For the financial year 2005

Illustration of a typical day during high demand and during low demand

Generation Profile for Maximum & Minimum Generation Days

Day of Max Gen
600
Day Of Min Gen

500
31 July 05

400
MWH

300

200

100
28 Nov 05
0
0

0
.0

.0

.0

.0

.0

.0

.0

.0

.0

.0

.0

.0
01

03

05

07

09

11

13

15

17

19

21

23
The highest power generation figure was recorded on 31 July 2005 at 483MW with the
lowest generation figure being recorded on 28 November 2005 at 208MW.

Water production

Al Ghubrah, as the first water producer in the country, continues to fulfil the high
expectations of reliable, safe and high quality potable water. The delivered potable water
amounted to 35.013 million cubic meters.

Water Cap Available

Generation Staticstics Year-2005 Water Delivered
Water Load Factor

6 91

90
5
89

88
4
87

3 86

85
2
84

83
1
82

0 81
M ay-05 Jun-05 Jul-05 August - 05 Sep-05 Oct-05 Nov-05 Dec-05
Annual Report to Shareholders
For the financial year 2005

Plant Maintenance Philosophy

Power Block
Ghubrah Power & Desalination Plant has been serving the people of Oman since 1976.
The plant facilities were built in seven phases with each phase consisting of a power
block as well as desalination units.

Each power block has a total capacity of 523.3 MW and consists of following equipment:

- Nine Frame 9 Gas Turbines

- Two Frame 6 Gas Turbines
- Two Frame 9 Gas Turbines
- Five Steam Turbines

Annual maintenance was carried out for all the steam turbines as per the OEM guidelines
except for Steam Turbine # 2. The maintenance requirement of these units was evaluated
based on the availability of the spare parts. The gas turbine maintenance schedule was
based on the OEM (Alstom) recommended guidelines.

Desalination Block
The desalination block has a total capacity of 7756 M3/hrs and consists of the following:

- Seven Desalination Plants

- Ten Fired boilers.
- Two HRSGs

The heat requirement of the desalination plant is supplied from the fired boilers. This
makes desalination units independent of the power generation.

Annual maintenance of all the distillation plants and boilers was planned as per OEM
recommendations and where required, maintenance was carried out in presence of OEM
representatives. A hydraulic test was carried out for all the boilers as deemed necessary at
the request of a third party.

Other Equipment
The annual maintenance philosophy has been followed for all rotating equipment,
compressors, electrical switchgears and transformers.

Performance Test
The annual performance test (APT) as per contractual obligation was carried out in the
month of April. APT demonstrates the net power and water capacity on natural gas as
well as the liquid fuel . Plant net overall efficiency was maintained.
Annual Report to Shareholders
For the financial year 2005
Safety Training / Housekeeping and safety audits
Safety training was provided to all newly hired employees. Proactive and routine safety
walks and audits were performed on monthly basis and safety points raised were
rectified. During the year all leading safety indicators such as attendance at safety
meetings, routine daily inspections, periodic reviews of safety guidelines and disciplinary
actions against offenders were achieved. Seawater intake areas were cleared of marine
debris on a regular basis.

Financial highlights

Revenue
Gubrah Power & Desalination Co. SAOC was formed on 1 May 2005 as a direct
consequence of the restructuring of the power sector of the MHEW. No statistics can be
made available to compare company’s performance prior to May 2005. During the
period from 1st May 2005 to December 31st 2005 the company earned total revenue of
RO36.83M with electricity contributing 43% of that figure and water 57%.

The power purchase agreement was formulated based on the existing energy metering
system. The sale and purchase agreement requires the company to make available and
sell the guaranteed contracted power capacity of each power and desalination unit to
Oman Power and Water Procurement Co. SAOC.

The company receives payment for:

• Power capacity charge and water capacity charge

• Electrical energy charge and water output charge
• Fuel charge

The capacity charge consists of investment charge and fixed operations and maintenance
charge while the energy charge consists of variable operation and maintenance charge
and start up charge. The natural gas fuel charge is a pass through cost and is calculated
on an hourly basis for each unit, based on the contracted heat rates of the relevant units.
Annual Report to Shareholders
For the financial year 2005

Revenue distribution between Power,Water & Fuel

6,000,000

5,000,000

4,000,000 Revenue from Pow er

Revenue from Water
RO

3,000,000
Fuel Charges
2,000,000 Total Revenue

1,000,000

0
5
05

05

05

5
5
05
l-0

-0

-0
-0
p-
-

n-

ov

ec
ay

ct
-
Ju
Ju

Se
st

D
M

gu
Au

Net profit and EPS

The total revenue of the Company was RO 36.8M, with 43.3% contributed by electricity
activities and 56.7% contributed by desalination activities. The company earned a net
profit of RO 5.14M giving a basic earnings per share of RO10.282 on a share capital of
RO500,000. The net profit ratio was 13.9%. The company operations are financed by an
interest free loan from the Electricity Holding Company SAOC.

Of the total operating costs, natural gas constitutes 62%.

Other costs-3%

Depreciation-
25%

Staff costs-0%

Spares-3%
Gas costs-62%

O&M-7%

Gas costs O&M Spares Staf f costs Depreciat ion Ot her costs
Annual Report to Shareholders
For the financial year 2005

MOG
Gas Cost VS Gas cost recovery
PPA Recovery

3000000

2500000

2000000
RO

1500000

1000000

500000

05 05 l-0
5 05 05 05 05 05
ay
- n- t- p- ct- v- c-
M J u Ju us Se O N o D e
g
Au

Gas cost recovery is a pass through cost but due to inefficiencies of plant and meters
there is a shortfall in the recovery. The company will undertake a study to improve this
cost recovery.

History of the Company

On 1 May 2005, the Government of the Sultanate of Oman concluded the restructuring of
Ministry of Housing, Electricity and Water (“MHEW”). The sector restructuring has
resulted in the creation of nine new entities comprising of one holding company, three
Power generation companies, three distribution Companies, one transportation company
and one power Purchase Company.

Al Ghubrah Power & Desalination Co. SAOC (GPDC) is a 100% government owned
entity owning, operating and maintaining the plant located at Ghubrah. 99.99% of the
shares are owned by Electricity Holding Co. SAOC (which in turn is a 100% government
owned entity) and 0.01% of the shares are held by Ministry of Finance.

The 523.3 MW gas fired power plant and 7,756 cubic meters per hour desalination plant
is situated on the Omani coast at Ghubrah in Muscat. The site has connection to the main
gas transmission system and electricity grid network. The land for the plant is owned by
the Government and is leased to the company under a Usufruct agreement. The plot of
land measures about 513,119 sq. m. The first phase of the plant was constructed in 1975
and since then 6 other phases have been added.