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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Ladies and gentlemen, good morning, and welcome to Sembcorp Industries Full Year 2018 Results Presentation. A warm welcome too to viewers tuning in via the webcast. I'm Lay San from Group Strategic Communications and Sustainability. The members of the panel for today's presentation are Group President and CEO, Neil McGregor; Group CFO, Graham Cockroft.
Before we begin, we would like to request for all mobile telephones to be turned off or switched to silent mode. Thank you. [Operator Instructions] Without further delay, I will now hand over to Neil to begin the results presentation. Neil, please.
Thank you, Lay San. Good morning, and thank you once again for attending Sembcorp's results briefing.
Now turn to Slide 4, FY 2018 group performance roundup. For the full year 2018, the group delivered a credible set of results. The good performance of the Utilities and Urban Development businesses mitigated a weak performance from the Marine business, which continues to face difficult environment.
Group turnover improved 30% to $11.7 billion from $9 billion in FY 2017. Profit from operations was $841 million. Group net profit was $347 million. Earnings per share for the period was $0.17, and group return on equity was 5.1%. For 2018, the board is proposing a final dividend of $0.02 per share subject to shareholders' approval. Together with the interim dividend of $0.02 per share, this brings our total dividend for the year to $0.04. The next slide is a snapshot of the performance of our 3 businesses. So Slide 5. For FY 2018, the Utilities business more than doubled its net profit to $312 million from $140 million in FY 2017. The improved performance was underpinned by the India energy business, which turned around to profitability. Amid difficult conditions for the offshore and marine industry, the Marine business turned in a loss of $48 million. Meanwhile, the Urban Development business posted a record net profit of $86 million, delivering growth over its previous record net profit of $83 million in FY 2017, with a strong contribution from Vietnam and China. While we are confident that the Marine business is well positioned for the market's eventual recovery, we recognize that as a group, we will need to ride out this protracted sectorial downturn. In this context, the good performance of our 2 engines, the Utilities and Urban Development businesses, is not only timely but also a testament to our strength and resilience as a group and to the robustness of our new strategic direction. We continue to focus on managing our portfolio for performance, prioritizing sustainability and building a dynamic organization.
Let me now take you through the progress we have made since February 2018, when we announced our strategy. Our focus continues to be on lifting performance and returns -- we're on Slide 6, by the way. Two of our key businesses, Utilities and Urban Development, delivered good net profit growth, mitigating weak Marine performance. Work volume for Sembcorp Marine continues to be significantly below peak levels, and competition remains intense. During the year, we made progress in reshaping our portfolio and performance. In the Utilities business, we deepened our presence and strengthened our integrated energy platforms in our key markets. We also built our capabilities to maintain our market leadership and sharpen our competitive edge.
In Singapore, we extended our gas business to include liquefied natural gas importation under the government's newly introduced spot import policy. This complements our established pipe natural gas operations and diversifies our gas portfolio. In line with our strategy to move our business closer to our customers, we entered the country's recently launched open electricity market as a power retailer. We also made strides in growing our solar capacity to over 120 megawatts to become a leading solar player in Singapore.
In India, we consolidated all of our thermal and renewable energy businesses in the country under one single entity, Sembcorp Energy India Limited. We also grew our renewables portfolio in the country, adding 300 megawatts of capacity.
Meanwhile, in the U.K., we acquired UK Power Reserve, the U.K.'s largest flexible distributed energy player. With the acquisition, we have transformed our U.K. business from a niche centralized utility play on a single industrial site into a nationwide business with a mix of capabilities and technologies that are highly relevant in today's market.
On the Marine front, even as the business faces a very challenging environment, efforts continued in retooling and shifting Sembcorp Marine's portfolio and capabilities up the value chain. Meanwhile, we continue to build on the strong brand name and market position of our Urban Development business, pursuing adjacencies and offering new business models, such as specialized business hubs and smart developments. In 2018, the business launched and sold our first residential development, Nanjing Riverside Grandeur in China. We recognize the need to strengthen our balance sheet. To this end, we maintained a disciplined approach to capital management, optimizing our portfolio and undertaking systematic capital recycling. To date, we have completed a number of divestments of peripheral assets in Singapore, China, Oman and South Africa, unlocking cash proceeds of just under $200 million. This is close to 40% of the $500 million divestments we target to achieve by 2020. Now move to Slide 7. In our new strategy announced last year, we articulated our commitment to make sustainability an integral part of how we carry out our business. In 2018, which was Singapore's year of climate action, we launched our climate change strategy, laying out targets to reduce greenhouse gas emissions intensity and grow our renewables capacity to approximately 4,000 megawatts by 2022. To date, our renewables portfolio in operation and under development has increased around 20% to 2,600 megawatts.
To reflect our commitment to sustainability, we have also embedded environmental, social and governance components, this is ESG for short, as part of our KPI framework within the organization.
Now turning to organization and dynamics. The execution of our strategy and our future success rests on having a dynamic organization that is supported by the right people and capabilities. In 2018, we reorganized our company to better drive a strong presence in key markets and grow our business lines. We focused on deepening our leadership bench strength, promoting internally as well as bringing on board new expertise in areas targeted for accelerated development. We invested in -- we invested to augment capabilities in merchant and retail, digital and technology and strengthened our risk management and compliance functions. Technology developments are disrupting most industries, including ours. We recognize that it is critical to continue to innovate. We are embracing digital technologies to create competitive advantage and are actively broadening and deepening our digital capabilities. In summary, we have made good progress in the past year in repositioning Sembcorp to be successful and sustainable in a rapidly changing world. We recognize that our strategic initiatives will take time and take time to be a fruit, especially given the prolonged offshore and marine downturn. However, we are determined to stay the course and are confident that the actions that we are taking will put us in good stead as an integrated energy and urban company of the future.
Now let me hand you over to our Group CFO, Graham, who's on my right, to take you through the group financial review. Thank you.
Thank you very much, Neil. Good morning, and let me add my welcome to today's presentation. This is my first full year results presentation, and I'm looking forward to it, as you can see. The -- I had the pleasure of meeting many of you already, some over the Chinese New Year period. But clearly, there are a number of people I have yet to meet, particularly those on the line around the world that hopefully, we'll meet during the coming year.
So we'll now go through the group financial review. So if we turn to Slide 9 of the pack, which has the group profit and loss. You can see there that Sembcorp Industries posted a turnover of $11.7 billion for the full year of 2018, an increase of 30% over FY '17. The group recorded an EBITDA of $1.3 billion in FY '18, which was 16% lower than the prior year. Profit from operations of $841 million was 22% lower than last year due mainly to the Marine segment, which turned in a full year operating loss. Finance costs were lower in FY '18 because of the refinancing of the India loan to a lower rate. Higher finance income arose mainly due to higher interest income from a customer on deferred payment arrangements in the Marine business.
The group's effective tax rate of 36% for the year was higher mainly because there's no group relief on current taxes in certain countries, and the deferred tax assets and -- on unusualized tax losses were recognized only to the extent that it is probable that the related tax benefit will be realized.
Net profit after tax and noncontrolling interests was 9% lower at $347 million, and earnings per share also fell in line with that, to $0.17 per share.
Turning to Slide 10, group turnover. So during the year, the group posted total turnover of $11.7 billion compared to $9.0 billion in FY '17. The Utilities business recorded a 15% increase in turnover due mainly to higher fuel oil prices in Singapore, higher generation in both India and the U.K. and full year contribution from the Changzhi water treatment plant in China, which commenced commercial operation in September 2017. And we've also consolidated UK Power Reserve, our newly acquired business from June of 2018. Turnover for Marines were 61% increase due mainly to high revenue recognition for rigs and floaters upon the delivery of 8 jack-up rigs, the sales of -- sale of a semisubmersible rig and revenue recognition for newly secured projects. Excluding the effects of the delivery and sale of rigs and revenue adjustment in FY '17 due to termination of 5 rig contracts with customers, turnover of Marine would have been $2.5 billion in FY '18, comparable to the $2.6 billion in FY '17. The Urban Development businesses comprise mainly associates or joint ventures which are accounted for under the equity method. The turnover reflected here was derived from providing services to these associates or joint ventures. Moving on to Slide 11. This is the group net profit by division. You can see there that the group net profit of -- was $347 million for FY '18, 9% lower than FY '17. Within that, Utilities business recorded a net profit of 312 million, an increase of 123% compared to the FY '17 profit of $140 million. More details on that on the next slide.
Amid difficult conditions for the offshore and marine industry, Marine's FY '18 net loss was $48 million compared to a net profit of $157 million in FY '17. 2017 net profit was restated to $157 million from $7 million due to the effects of SFRS(I)15, following the group's adoption of Singapore Financial Reporting Standards (International) and International Financial Reporting Standards frameworks. The FY '18 loss was due mainly to the loss upon sale of a semisubmersible rig and the continued low overall business volume. This was offset by margin recognition from newly secured production floater projects and the delivery of rigs. In comparison, 2017 had a net positive effect from the entitlement to down payments on the termination of 5 rig contracts and a one-off gain on disposal of [ extraneous ] and equity interest in the Cosco Shipyard Group.
Urban Development continued to perform well, achieving record net profits of $86 million in FY '18. Slide 12, we have a breakdown there of Utilities' net profit. As we saw before, Utilities' net profit more than doubled to $312 million compared to $140 million in FY '17. Underlying net profit before exceptional items was $321 million, a 23% increase from $261 million in FY '17. Singapore's net profit of $155 million in FY '18 was 5% lower than FY '17. The centralized utilities and gas business continued to perform well, while the power business continued to face intense competition, which led to lower blended spark spreads. China's net profit of $87 million was an increase of 10% compared to FY '17. This was mainly due to high generation from Songzao, the full year contribution from the new water facility at Changzhi and higher contribution from renewable energy with increased capacity in 2018. Our India operations turned around to profitability in FY '18. Net profit was $47 million compared to a loss of $58 million the year before. This was despite the shutdown of 1 unit of the first thermal power plant in October 2018. Sembcorp Energy India, or SEIL, Project 1, which is formerly known as TPCIL, registered a profit of $52 million in 2018. This included a $17 million reduction in operation and tax costs following the merger of SGPL into SEIL recognized in the fourth quarter of 2018. SEIL Project 2, formerly SGPL, narrowed its losses to $57 million from $107 million on higher plant load factors and improved spreads. SGI reported full year net profit of $49 million. This included $26 million of other income recognized on settlement with O&M contractors for loss of revenue. In the Rest of Asia segment, contribution was lower mainly due to the lower percentage of completion for Myanmar power plant and S4 power plant in Bangladesh. As the 2 power plants were completed or near completion, lower construction service concession revenue was recognized. In the Middle East and Africa, net profit for FY '18 was comparable to FY '17. And the U.K. and Americas had a -- delivered a lower net profit in FY '18 compared to 2017, mainly attributable to losses from UKPR, which reported a loss of $24 million for FY '18. In the fourth quarter of 2018, we incurred some restructuring costs for UKPR that had a negative impact of about $4 million. Post acquisition, we reviewed the portfolio and wrote off some site development and other costs as we decided not to pursue some developments. There was also a $3 million negative impact in the fourth quarter from the temporary suspension of the capacity market.
In November 2018, a European court of justice ruling had the effect of introducing a standstill period for the capacity market scheme in the U.K. We believe this is a temporary suspension as the U.K. government is committed to the scheme and is working closely with the EU to reinstate the capacity as soon as possible.
For corporate, the FY '18 cost was higher than FY '17 due to higher interest costs and as we continue to invest in developing further capabilities in the group.
The exceptional items. FY '18 exceptional loss of $9 million comprised of a $23 million gain from divestments offset by a $25 million provision for potential fines and claims and a noncash $7 million expensing of capitalized cost in UKPR upon refinancing. To lower UKPR's cost of borrowing, we undertook a refinancing of its existing loans in December. In the quarter, we also recognized a gain of $8 million from the divestment of the South Africa municipal water operations. Turning to Slide 13 on group CapEx and equity investment. Group CapEx in FY '18 was $1.2 billion, and equity investment was $842 million. The Utilities equity investment mainly related to the acquisition of a 77% stake in Vellocet Clean Energy in the third quarter, UKPR in the second quarter of 2018 and capital injection into SEIL for the payment of legal title to the remaining Sembcorp Green Infra shares in the first quarter of 2018. Marine's equity investment was mainly for the acquisition of interest and titles to all intellectual property rights of Sevan Marine and HiLoad LNG in the third quarter of '18. Turning to Slide 14 on group cash flow. Cash flow from operating activities before changes in working capital is $1.25 billion in FY '18. Cash outflow from changes in working capital is mainly attributed to Marine's working capital changes and a $191 million increase in service concession receivables from Myanmar and Bangladesh power projects as the 2 projects are accounted for as service concession contracts. The receivables will be collected over the period of the concession contract when the plants commence operations. Net cash used in investing activities for FY '18 was $1.2 billion, mainly for equity investment and CapEx as detailed on the prior slide.
If we turn to page -- Slide 15 on group borrowings, you can see there that the group's net debt was $8.8 billion at the end of 2018, higher than it was at the end of 2017, mainly due to the UKPR acquisition and incorporating those debts and the increase in Marine's debts.
Slide 16. There's a few financial indicators. With the decline in net profit in 2018's -- 2018 earnings per share and return on equity for the group was $0.17 and 5.1%, respectively, down from FY '18 -- FY '17. Return on tangible -- on total assets was 3.6%. Interest cover was 2.5x, and net asset value per share was $3.80.
And with that, I'll hand you back to Neil.
Thank you, Graham. Now let me take you through our outlook for 2019. We expect Utilities to deliver a steady performance in 2019. In Singapore, our integrated energy business spans power generation, power retail, gas impartation and retail as well as the provision of centralized utilities and resource management.
In the power sector, we continue to face a challenging environment, with competition remaining intense in a market with overcapacity. The vesting contract regime is also being phased out this year. The Open Electricity Market will be extended nationwide by May 2019. The liberalization of the power market allows us to shift our business closest -- closer to customers, giving us opportunities to service our retail customers with more value-added services. We are pleased to have emerged as one of the top retailers in this market.
As announced in 2017, we expect to complete the sale of utility assets on Jurong Island, formerly serving Jurong Aromatics Corporation, to ExxonMobil by 2020. In India, Unit 1 of SEIL Project 1 is expected to be back online by the end of February, meaning the end of this month. We're also making progress in firming up long-term power sales for our second thermal power project. Our supply of power cross-border to Bangladesh commenced in February 2019. This month, we also received a letter of award, subject to regulatory approval, to supply 500 megawatts of power to Andhra Pradesh for 8 years. 550 megawatts of renewable capacity is expected to come onstream in 2019 in the country, and I'm talking about India. As we grow our renewables portfolio, we are also moving towards self-operations and maintenance for tighter operational controls. In 2018, we initiated the process for a potential initial public offering of Sembcorp Energy India, with the filing of a draft red herring prospectus. We will continue to monitor market developments on this front. In the near term, there may be potential volatility in the market with upcoming India elections. However, the long-term outlook for the power market remains positive. The current situation of peak surplus is expected to reverse by fiscal year 2020. This is according to CRISIL, an independent research house that is part of S&P Group.
Over in the U.K., we are expecting the first full year of operations and contribution from UK Power Reserve. The U.K. energy market is currently undergoing a period of transition and uncertainty. Against the backdrop of Brexit, policy and regulations in the energy market are also undergoing transition. Current challenges include the temporary suspension of the capacity market, as mentioned by Graham. The national grid is also in the midst of updating its own strategies and frameworks in an effort to address the challenges of the balancing of the Great Britain market. Such volatility and regulatory disruption, together with increasing competition, may have a negative impact on UKPR performance in the short term. However, in the long term, we believe these developments point to the recognition of the need for flexibility generation. This is especially pertinent given increasing renewables penetration and the expected closure of coal capacity in the U.K. by 2025. We believe there is significant value in UKPR's highly flexible fleet. We will continue to actively explore options to extract further value from these assets and to enhance recurring income through other markets that require flexibility.
We now move to Slide 19. Overall business volume and activity for the Marine business, while stabilizing, is expected to remain relatively low. While offshore drilling activities have increased, offshore rig orders will take some time to recover as the market remains oversupplied. Offshore production units are expected to dominate orders and the pipeline, and Sembcorp Marine is responding to increasing inquiries and tenders for innovative engineering solutions. Further new orders for business may have increased working capital needs as the business and the industry continues to adjust to challenging business models and constrained capital availability. The Marine business is taking steps to manage cost, cash flows and gearing to address the balance sheet and to capitalize on new business opportunities.
Now staying with Slide 19, we move to Urban Development. Urban Development's growth is expected to continue in 2019. We expect recognition of income from the sale of Riverside Grandeur in Nanjing, our residential development in China, as we progressively hand over the sold units in 2019. The International Water Hub, which is a wholly developed -- which is wholly developed by Sembcorp, is slated for completion in late 2019. Net order book for the business is at a record high of 425 hectares, a 69% increase from 2017. This will be recognized as land sales over the next 2 to 3 years. We will also continue to look for opportunities to leverage synergies with our energy business to provide sustainable solutions. As a group, we will continue to remain focused on executing strategy, improving performance and strengthening our balance sheet.
Thank you very much, and I'll hand you back over to Lay San.
Thank you, Neil. Thank you, Graham. We have now come to our Q&A session. For the benefit of the audience who's viewing this via the webcast, please use the microphones for questions. Kindly also identify yourself by name and company. Please raise your hands, and a microphone will be brought over to you. Cheryl?
Cheryl from UBS. Could I just get some clarification on the India contributions again? I think I missed the numbers, so the split of the net profit between TPCIL, SGPL and SGI. And then also, I note that you mentioned that there was a settlement from a vendor as well as lower taxes for the India business. So what was the value of this? And which sort of segment was it booked under? And then thirdly, just the plant load factors for the 3 plants.
So I can take the first part of those, I think, Cheryl. So the split of net profit between the 3 Indian parts of the business. So SEIL Project 1, which is formerly TPCIL, was a profit of $52 million in 2018. That included a -- I mentioned a one-off -- probably one-off benefit of $17 million relating to operation and tax costs. So as we put SEIL and SGPL together, we've been able to take some cost out, and we also got some tax benefit from doing that. And that contributed $17 million in the fourth quarter. For SEIL Project 2, which is formerly SGPL, I'd narrow the losses to $57 million from $107 million the prior year. And then SGI, the full year net profit was $49 million. Included within that is a recognition of $26 million of other income on a settlement with some contractors. Part of that was a recognition of loss of revenue. So it's -- not all of it is a one-off. Some of it one would expect to see continue in 2019.
And the $26 million was taken in the fourth quarter or part of it was in the third quarter as well, I think.
I think it was fourth quarter.
It was $17 million in the third quarter and then $9 million in the fourth quarter.
And the plant load factors.
Do you want this for full year or 4Q?
For the quarter, please.
For the quarter, so the project 1, thermal project 1, it was 52%; project 2 was 82%; and SGI was 13% because it's the low wind season.
Okay. And then just one follow-up from me on SGPL. So there is a narrowing of the loss on a q-on-q basis from about $24 million in 3Q to $16 million. Could we just understand what was driving this?
So what it is, I think we had higher prices, net realized prices, leading to improved tax spread. That would be the main source.
Do we have other questions?
Jason from Goldman. Can you talk about the competitive environment for PPAs in India and what helped you get to 500-megawatt PPA?
Yes, I'll take that. Well, I think what you've got to look at is GDP growth is going up at 7%, so electricity pretty much follows that. So you've got increasing demand, 7% per year. There is no new thermal plants being built in India and the last on record renewables growth for last year was between 3% to 4%. So that means you've got the differential, which is about, let's say, 3% to 4% in growth that is being unserved, which is the reason why electricity prices are tightening. Now everybody knows that the electricity sector, particularly the thermal of sector in India, is quite challenged. But it's challenged for a number of reasons, partly it's fleet and the emphasis on sustainability and financing for coal is much more difficult. But the biggest problem is access to coal, that the domestic realizations for coal have not been up to the government's forecast. And so that has meant whilst there is more than enough capacity in the thermal sector to meet the needs of India for the next couple of years, it can't get fuel. And we've partly been impacted by that. But because of our location, being on the coast and having access to a good port, we were able to bring in international coal. But international coal has a higher price than domestic coal. So therefore, it affects the dark spread. But the main issue there is that we're able to supply when others are not. And that comes into the last part of your question, which is why do we think we've been able to be a little more successful. Remember, it's not a slam dunk yet, it's subject to regulatory approval for Andhra Pradesh. But I think it's reliability, the fact that when the government calls upon us to deliver coal -- deliver power to the state, they can rely on it.
Can I just follow up with a question on renewables. Which markets do you see are attractive? And can you give us a sense of the returns and competition in those markets?
Okay. India continues to remain quite competitive, but we have a change in strategy there. We're not looking to add more capacity, like we have in the past through private developments. What we are now looking for is an infill strategy. We actually have a very significant portfolio, which its rates of returns can be enhanced by infilling with solar, especially in the south. So we have -- remember these are very large areas that are covered by wind turbines and there's nothing in between. So we have the opportunity here to selectively high-grade the portfolio. So we're looking at this very carefully. We're going through the design. Generally, we would look at something like 1% to 2% enhancement on internal rate of return, but that's yet to be proven within the market. But you'll see smaller investments in the likes of India. Now new frontiers? Vietnam looks quite interesting. So we already have a significant business in power and in urban, and we're looking at the combination of those assets. We're a significant landlord through VSIP, in partnership with our Vietnamese partner, but there are also developments in Vietnam that allow us to put capacity onto the grid through EVN. So this is something that we are pursuing. This will bring another dimension to our renewables portfolio. So that's Vietnam. We're not looking to do too much more in China at this stage. U.K., if assets come up at the right price, we have some interest there on diversifying our portfolio. And we put a beachhead into Australia, and that beachhead is primarily targeted at retail sector first, so customer aggregation, and then being able to net off or to supply customers directly with solar solutions at their installations. So that's the Vellocet Energy. That's why we sort of put a beachhead in there. It's only a toe in the water approach, to see if we can aggregate on that market and build demand or build supply, I should say, in behind that vehicle, but it's too early to say. That's the -- that's our main focus. Thank you.
Mayank from Morgan Stanley. Couple of questions from my side. Focusing on the Singapore market, you talked a lot about the entire gas business and how you're thinking about it for the future. Can we just get a sense of how the start was this year on the LNG business and how you're thinking about 2019, 2020 in terms of volumes, LNG and contribution to your Singapore utility business?
Sure. Well, let's look at the overview. We're a conversion business, right? So as a power business, your main cost is fuel. So whatever we can do to get our fuel -- average fuel price down goes straight to the bottom line, right? So we have 2 different contracts, right? So what is this -- what we're doing is index arbitration. So we have a fuel index on pipe natural gas, which is HSFO. And then on the LNG that we bring in, that's Brent. So there is a difference in terms of whether they're backwardated, whether they're contango in approach. So what we look at is what the landed price of both pipe natural gas and LNG would be over a period of 1 to 2 months. And in looking at that, we determine how much demand we need. Now most of that demand is self-directed back to our facilities being vertically integrated, meaning that we burn what we bring in. But there is some opportunity for us to back off our pipe natural gas, right, when it's more expensive and bring in LNG and sell it to our customers at the pipe natural gas price even though we've got a lower LNG price. So that's the mechanics of what we're trying to do. Each cargo has -- we don't give the specific numbers, but it's been accretive. Each cargo has been quite profitable. But we've got to look at how much we can bring in each year because this is a very tight market. So having proved the model, having proved the -- that the business works and it's profitable, we're looking for a few more cargoes over the next couple of years. So we're not going to expand rapidly. Two cargoes is -- that's about 300,000 cubic meters of LNG, which, in totality, is probably something like about $60 million in actual cost and let's say the margins on that probably is somewhere in the order of 5% and very little assets involved. So it's a way of expending our margin within the business, which we could do a lot more, but the market is not big in Singapore. And if we put too much supply onto the market, we end up hurting our electricity business as well.
So just to follow up on that was like you -- there's a lot of talk about IMO regulations starting 1st of January 2020, which impacts the fuel oil prices negatively. So now your pricing in the customer side is obviously linked to fuel oil as you were referring to. How are you kind of thinking of derisking that part of your business for next year?
Well, having alternative gas supply is good, right, ultimately because IMO doesn't affect Brent, but it does affect HSFO. So where our competitors are not vertically integrated, they're not gas wholesales, right, we do and we understand that business, so we're able to diversify our gas portfolio. So the view here is, look, our pipe natural gas contracts start expiring from -- or tapering off from 2021 to 2023. This is the Indonesia contracts. We are out in the market. We are having discussions with Indonesia, Malaysia in terms of securing new pipe natural gas contracts with new terms and maybe more flexibility within the market, and we're looking to be a significant LNG player within the market as well. So from a strategy perspective, we're looking to make sure that we have access to enough fuel and enough flexibility to be able to switch or to swing between various contracts for gas over time. And that will flow into the future where we're looking at a -- the possibility of refurbishing or repowering Sakra, which is reaching the end of its economic life. Still profitable, but there's newer technology out there within the market that can operate at greater efficiencies than current. This equipment is already 20 years -- well, pretty close to 20 years old, and that, in the power market, is pretty close to end of economic life.
[ Jeffrey ] from The Edge. Could you give us some color on what's holding you back from an IPO of your India business?
Yes, [ Jeffrey ], the market. We're not going to sell India at a loss or where the market just won't give us value. We're not here to destroy value. So we got ready last year. We're ready by June. Unfortunately, if we'd been ready by March, we may well have been able to do it. But we didn't have regulatory approval then. So we went through the process. We now have that regulatory approval. It is still something that we're willing to consider, but obviously, it's a timing issue. So that's one side, the market side. The other side is that, look, we've been recently successful in ramping up that business. Now it's not what we expected 5 years ago. But because the market is firming and because prices are firming in India, that means more value is likely to come through, providing we can maintain reliability of those assets. And we saw last year that we had a problem with one unit, where we had a fault, and we've been basically down for 3 months, but still remain profitable. Now we're seeing encouraging signs on the second project, that we will get more contracted. So if we add in sort of currently almost 100% contracted on project 1 and we're not contracted -- or we're contracted 25% if we take in the 500 megawatts, so you look at the 2, we'd be -- we'd move from 50% contracted to 75% contracted, which means that we should see a significant improvement in performance and outlook for the company. But we can't count our chickens yet, because as I say, it's encouraging, we've got a letter of award, but there's not a contract yet. Until that contract's signed, we can't rely on it and neither can the market. So that value has potential, but it's not realized potential yet. So timing is important for us in terms of looking at value to all of our shareholders in the way that we would lay off some of our ownership into the market. So we're willing, but only when conditions are right. There's one behind you.
It's [ Tim ] from Natixis. Coming back to your comment about [ syndicate ] LNG player, can you give us a bit more color on that, what your thoughts, has something been planned, strategy, and what part of the value chain do you intend to go into?
Well, I can't give you all my thoughts on it, but you know my history, and we've also got some significant capability in LNG in the company, having started and built Singapore LNG from scratch, which is now a very good business for Singapore. What we're focusing on is the wholesaling. But there could be possibilities in the future. We see marine moving into the sector with design capabilities to put in place LNG facilities, which complement power operations. So we could have an integrated approach. But first, we have to find the right solution, the right application to build both LNG facilities and power blocks together. Indonesia is one of those areas, but the challenge there is fractionation. They're too small. The demand is over multiple islands as opposed to one large centralized unit. And because of the expense of LNG, you really need centralization. The cost of redistribution of LNG is quite large. So we're focusing currently just on the downstream end, which is the -- growing the gas business, gas wholesale business. That's as much as I can say.
Do we have further questions? Right in front or maybe at the side first.
David O'Sullivan here from Lloyds Bank. I was just inquiring. In terms of the assets that you already hold, where do you see the true growth opportunities? Do you feel assets in India, in terms of their contribution for this year, have pretty much plateaued? Or do you see there's further uplift there? And also, any other cost to us, [ both ] cost rationalization that you could -- that you can drive to the business where you can then improve your earnings and your margins to go with it?
Good question. Thank you. David, India, it's all about India. As long as the other parts of the business perform well, the real growth is -- and opportunity is in India. And I think we expect that to follow through. Even if we don't end up with the 500 megawatts coming to PPA, the fact that the merchant market in India is actually solidifying and prices at or around our contract PPA prices, that is also encouraging for us. Things could change the election could create some instability there in the market or a reduction in GDP, and the economy could also be a spoiler for that. But our expectation is that India will continue to perform and to firm up for the next couple of years, at least. As for other areas of growth, well, we've got Myanmar that's come onboard, 225 megawatts there. We've got Bangladesh that's coming in the middle of the year. So we'll start to see an uptick, not for the full year there. So we expect those projects to run well. But remember, new plants always have, let's say, hidden costs, where you have to iron out problems. Every new plant is like that for the first 1 to 2 years. UKPR is actually no exception as well. It's no secret we would like to rebalance our portfolio, protect our home market here in Singapore, and to also expand where we can, where opportunities are in the U.K. And the reason for that is just that in order to carry a developing -- a growing business in a developing world, collections are a problem. It means you've got more working capital there that you have to supply. So what we're trying to do is improve quality of earnings by shifting part of our emphasis on to Singapore and the U.K. and, perhaps, Australia, Vietnam sort of comes in that -- into that sort of gamut as well, where we can solidify a greater base rather than expanding too far, too fast into developing economies, where working capital needs just blow out, especially when we've got a very tricky balance sheet with marine -- supporting marine right the way through. The gearing is quite high. Ours is okay on a consolidated basis, but we wouldn't want it to get much higher than it is, which is why we're undertaking the -- some of the initiatives on capital recycling and trying to reduce interest cost by refinancing all the way through. But you ask me again, India; Singapore will happen on -- in time. It's still our main engine for profit; and in time, the U.K. as we add experience and capability in there.
This is Pei Hwa from DBS. Just a follow-up question on the India. Mentioned about the congress on the secure of the second of the PPA, the 500 megawatts for 8 years. Can we get a bit more color on the expected commencement, the tariff pricing mechanism? And what is the plan for the remaining contract capacity?
Short answer is no. No. Why? Because it's just not solidified yet. A letter of award doesn't tie in. There are -- we do know the price, but it's commercially sensitive. And you can imagine if other competitors out there who want to sell capacity on -- knows straight off what sort of power price we're getting, that would be very commercially sensitive. So I don't want to be drawn on that area. But when we come to a PPA and sign, and we will come out with those figures, but I think it's premature for us to do it at this time. I know it's significant. So that's a challenge for us. Sorry.
Any further questions? Perhaps we can have one last question. Okay. Right in front, Zhiwei.
Zhiwei from UOB. I just like to take a bit of what you commented earlier about growth just now. You said you want to kind of like solidify your base in Singapore, U.K. and Australia. So when you talk about that, right, what exactly do you mean by solidifying, especially in the U.K.? Because I know that you actually had a site visit in the U.K. for a particular project, and I think regulatory approvals for that project is going ahead.
No. Okay, look, I'll explain. U.K., given the challenges that are there and the regulatory uncertainty with Brexit. Now we expected some of this, but what has happened is that the Ofgem, the regulator in the U.K., has accelerated some changes in the market, which may affect us in the way we expand under our private wire network system. And private wire network, just to let -- sort of it allows us to direct supply customers at a better cost to our competitors because we avoid transmission charges. Now it is possible that the U.K. may try and bring in a level playing field that everybody pays transmission charges no matter whether you're direct supplier or not. Until we see some certainty on that, there is some delay on whether we do a large block in the U.K. This is TPL2 we're talking about. This is about 600-megawatt block that we were planning to build in the U.K. There are smaller developments. But given the uncertainty -- even in UKPR, we have canceled 200 megawatts of newbuild capacity. Because we think that until we see what the regulator is actually planning and how the market rules will change, it just becomes a little bit more difficult to underpin the rate of return within the market. Because remember, we -- this is a merchant market, right? And our thesis was based on around 50% of our capacity -- newbuild capacity would go to customers that are direct supplied, therefore, underpinning the CapEx for the investment. Of which the other 50% then would be merchant-based on that market. Now if we're not able to have a value proposition in the future for our direct supply customers, this is sort of post any sort of regulatory change the U.K. would make, then their investment's at risk. So that's why we just postponed it there. So the concentration now is on getting our investment, UKPR, getting that right. You've seen that we've had integration cost, we've had restructuring costs and, therefore, refinancing the company. There have been some changes to the national grid approach to the balancing market, and there's been a withdrawal of the capacity market. It's still under contract but because of a European ruling that the capacity market is some form of state aid that we are not able to be paid. There is an obligation, but we're not being paid for that capacity. So what we are doing with that business is we are retooling it, to make sure that we can play across not only the distribution into the -- remember, there's 2 markets here in the U.K.: there's a grid capacity market; and there's a distribution, a low-voltage market, which energy suppliers use UKPR to reduce their overall peak. So it reduces their use of system charges to the grid. And so we come in at the distribution low-voltage end, and when called upon, we put capacity on to reduce their peak charges from the grid. Now there is some rebalancing between the capacity market and the grid services market. Overall, the same capacity is still there and the same market is there, but what markets you can trade in have changed. So we're having to retool some of our -- some of UKPR so that we can get its capacity, not only in the low-voltage end but we can also put it into the high-voltage end, and that means that we have to develop some new systems for aggregation. So instead of each one of our 35 sites is around 20 megawatts to 30 megawatts capacity, instead of bidding each of one -- each of those individually or on small blocks, we're looking at aggregating a block. So -- or several blocks, which means instead of trying to put on 10 or 20 megawatts, we're looking to put on one aggregate 100 megawatts, right. And -- but that 100 megawatts is then focused to the grid but different -- it's a different market. In order for us to approach that market, we have to build systems to aggregate it, make sure that it start -- all of that starts synchronously so that we can dispatch it and get paid on a different market entry, right. So I don't know if I have confused you. But okay, well, let's go back to distribution market. There are 4 markets within the distribution market. One of those was the capacity market. That has been withdrawn. So now you've only got 3 with the same capacity, which means that all of that capacity is now spread across fewer markets, which means that depresses prices, right. If we stay in that market, all we're going to get is depressed prices for the next 1 or 2 years. So what we have to do is to shift into a new market, and the new market is the high-voltage grid. But in order to dispatch into the grid, you can't dispatch 10 megawatts into the grid, it has to be over 50 megawatt or so blocks or even up to 100-megawatt blocks. So what we got to do is to create systems such that we can dispatch and are approved by the national grid for us to be dispatched into the market, so that's what we are doing currently, so that we ensure there's another route to market for our existing capacity. Until the capacity market comes back in, the government can start the contracts again for their market. The reason why it's withdrawn is that the European Union have said that it's ultra vires, means that it's against European Union law and regulations, and that's being challenged by the U.K. government. Now the Brexit happens, right? The European Union's decision is no longer valid. But it's going to -- if they stay in and they don't move out of the European Union, they've got to live with the European Union ruling until it's changed. So they're appealing it. So it's going to take a couple of years. In the meantime, they can't pay their obligations. Contracts stay in place. They can't pay their obligations to all of the market players, like ourselves. So we're having to shift our position so that we can get our capacity dispatched and get our income up within the market. Okay?
Okay. So if I understand it correctly, basically, you're trying to reposition UKPR to cater to a different market.
Yes, you got it.
Nothing else.
You mean, why didn't I say that in the first place?
Okay. Thank you very much, everyone. We've come to the end of today's briefing. Thank you, once again, for joining us.
Thank you.
Thank you.