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“We are seven digits”

Ahmad Bin Shafar, the CEO of Empower, in conversation with B Surendar

| | Feb 8, 2014 | 3:42 pm
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Empower on January 19 announced that it had acquired Palm Utilities, including its district cooling service entity, Palm District Cooling (PDC), from Istithmar World, in one of the largest ever acquisitions in the District Cooling industry, reportedly propelling the company into the one million TR capacity bracket. Ahmad Bin Shafar, the CEO of Empower, in conversation with B Surendar on the ramifications of the deal and on broader issues related to finance, human resources, spare capacity, customer profile, operational efficiency and growth plans …


What was the thought process behind the acquisition of Palm District Cooling?

Dubai does not need more than one District Cooling company, because District Cooling is about a unified way of building plant rooms. If we opened it up for everybody, we won’t get significant savings. Now, with the volume of work, we will be able to receive special rates from contractors and suppliers. Also, if you look at it from a technical point of view, 10 engineers will give 10 different answers. They are not wrong, but we prefer to club all the activities. And the savings that add up will help all the players.

The acquisition has a number of synergy points. Empower has excelled at saving money in operating the plant rooms in the most efficient and cost-effective manner possible. Likewise, we have excelled at getting finance from banks in a cost-effective manner. We have also done well to manage overheads and staffing.

As a business, we will be saving AED 45 million for Empower and PDC in 2014.

Could you take us through the behind-the-scenes activities leading to the acquisition announcement?

Ahmad Bin Shafar collects the first IDEA Innovation Award for the company's use of Treated Sewage Effluent technology for District Cooling

Ahmad Bin Shafar collects the first IDEA Innovation Award for the company’s use of Treated Sewage Effluent technology for District Cooling

We have done the acquisition based on heavy and intensive studies over the past one year. Before any acquisition, there is financial, commercial and operational due diligence to be done. If took us one year to take PDC. We have done the due diligence.

We have noticed the good progress in trade, hotel, real estate and other sectors. Also, the next eight years are going to be a busy schedule, owing to the World Expo 2020.

They definitely will go with District Cooling for the Expo. In fact, we are in negotiations to serve the Expo site, near the new Dubai World Central – Al Maktoum International Airport. The Expo halls will be ready in 2018, and we will go in, but not before 2016. Also, don’t forget, the site will be used even after the Expo, so there will be continuous service.

So overall, Empower took the decision at the right time to take over PDC.

I have always been enthusiastic about consolidation. As early as 2008, I spoke about consolidating the companies to pass the benefit to the end-users. Now that we have acquired PDC, people will see the benefits, such as no discontinuity of service, no wrong billing. In 12 months’ time from now, it will be very efficient. I don’t have a magic wand to sort out the billing-related problems. I would need at least six months for that.

What is the financial structure of the acquisition?

The deal is around USD 500 million. It is fully financed through a syndicated loan with two local and two international banks. It is funded through debt, equity and internal accruals, owing to the strong financial position and credibility that Empower enjoys. The banks’ faith in us is based on our strong track record, technically, operationally and financially.

Speaking of which, what is the value of the overall loans Empower has taken?

We have USD 750 million in loans, of which USD 600 million is from Citibank, Standard Chartered Bank, Mashreq Bank and Emirates NBD. We have an additional loan of USD 150 million from Doha Bank. Empower will have a debt repayment obligation of about AED 400 million a year.

Once the final formalities of the acquisition are complete, will Palm Utilities and Palm District Cooling eventually come under the Empower brand name?

The merger and acquisition will take us at least two years, but we are trying to expedite the process. The two-entity flagship will be carried over the next two years, because merging them will pose a challenge to contractors, suppliers, etc. We will run in parallel, and the acquisition will be done.

The two entities are being taken in as subsidiaries of Empower. All their business operations will be run by Empower. We will eventually dissolve the two names in two years’ time.

Palm Utilities and Palm District Cooling are maturing entities. The market-speak is that they are struggling entities. How will you be ringing in operational efficiencies and plugging other aspects?

A lot of business practices for Palm Utilities and PDC are outsourced, while in our case, we have our own team, whom we have trained to raise their level of performance. We have 46 plants at Empower, and PDC has 11. So as I see it, we will be adding only 11 to our existing profile. We are confident we can operate the 11 as well as we operate the 46. We have the system and the knowhow. You don’t need two operating teams. A central command team will run both.

Do you have redundancies as a cost-savings strategy? Have you begun making cuts?

By combining, there definitely will be some redundancies. We have to look at how we can give benefit to our shareholders, so there will be redundancies. If we keep the same number, there will be no synergy to business operations. In fact, redundancies have already started since November.

You have taken the liability of loans of two companies? How will that impact the acquisition?

When you speak of the liability of loans, there are two parts – equity and debt. We have assumed the liability of PDC, which was USD 212 million, and that has been fully settled. We are now starting with a clean slate.

As Empower, how much of spare capacity do you have?

At Empower, we have zero spare capacity. We are highly diversified, and so we absolutely don’t have any spare capacity.

And now with the acquisition, how much of spare capacity do you have?

PDC has a spare capacity of about 30%, and all of this is in the Crescent, in Palm Jumierah. In the Crescent, out of the installed capacity of 120,000 TR, about 65,000 TR are in operation. And about 40,000 TR will be absorbed this year by four hotel projects coming there. So that will leave us with approximately 15,000 TR in spare capacity.

As for other PDC plants, Discovery Gardens is running to full capacity, as are Jumeirah Lake Towers and the Trunk in Palm Jumeirah.

Coming back to the Crescent, with the about 40,000 TR that will go operational this year, we will just be connecting. We are not going to be investing anything. So, we will be getting returns without any investment.

By the end of 2015, most of the spare capacity will be drastically reduced.

The hospitality industry is a substantial portion of your customer base. Are we going to see a change in the customer profile?

Dubai hotels have whole-year occupancy, and they are part of our core revenue as customers. The hospitality industry is about 20% of our customer base, I would say. Now, that’s about 20% of the 715 buildings that are receiving our services, including those of PDC.

Empower has a diversified customer base of banks, hospitals, hotels, financial centres and shopping malls. We are serving diversity. And we are individually monitoring different customer clusters. For instance, we are monitoring shopping malls in a bid to raise efficiencies.

Our customer base will increase. Business Bay is still not fully developed. There is a strong likelihood of a 20-30% increase in occupancy in Business Bay.

Would you look to include more industries to your customer base? For instance, DUBAL is going for a huge captive power plant and could offer a stable revenue model. In comparison, some sectors probably have a saw-tooth demand of seasonal highs and troughs? And would you be considering DEWA?

If your father is a contractor and if you are building a house, would you go to another contractor? The answer is ‘no’, correct? I will be working with DEWA. Broadly speaking, I am open to industries as customers. Absolutely! If DEWA wants the service, we will offer it. Currently, in IMPZ, we are providing chilled water to the industry sector in the nature of factories. We do not follow an approach of restricting ourselves to hospitals or the residential sector, say. Wherever there is money, whoever is paying money, we will go.

What is your financial performance looking like? What can we hope to hear from you in February? (Readers, please note: This interview was conducted on January 28)

On the 15th of February, we will announce our figures. I cannot reveal much, but it will be double-digit growth. The numbers will be much better than last year. And to give you an idea of our performance in 2014, we estimate a combined (including PDC) turnover of AED 1.5 billion and the profit to be AED 400 million.

As a business, are you looking to expand beyond Dubai’s shores? For instance, would you explore possibilities in North America, the Subcontinent or, closer to home, in other GCC entities?

After the acquisition of Palm Utilities and PDC, we have 57 plant rooms and a total of 45,000 customers. We have AED 8.5 billion in total assets and AED 3 billion in debts. If you were to bring an external auditor, our assets value may be in double digits, so what I have said is a conservative figure. Today, we have almost one million TR of District Cooling. These are all massive numbers. To put things in perspective, USA, Canada and Mexico combined have 700,000 TR of District Cooling. And they have been doing District Cooling for several decades. The International District Energy Association (IDEA), for instance, is over 100 years old. What we have achieved in 10 years is remarkable. And there are new projects coming up, which we shall soon be announcing. In the next two to three years alone, you will see five to six plants coming up.

The point of my saying all this is that we are content with being in Dubai, which to me, is the hub of transport, finance and health. I firmly believe that Dubai is going to be the star of the entire continent for the next 15 years. I am proud I am operating out of Dubai.

During the Arab Spring, a large number of businesses moved to Dubai. There are plenty of opportunities here for contractors and other stakeholders to build, improve and supply spare parts, etc.

I like the way Dubai operates. Decision-making abroad is slow compared to Dubai. Here, we received a mandate from the Government, and so we went ahead. Saudi Arabia is not in my radar. Our strength is Dubai.

To give you a specific example, we recently got instructions that they need a large District Cooling plant in Jadaf. I am talking big numbers here, about 150,000 TR. Also, there is something happening in the airport area.

Once Jadaf is a reality, I would want to connect Healthcare City with Jadaf and Business Bay. That way, if there is a shutdown anywhere, it will be one network, and there will be no disruption of services. And such a network will be one of the largest in the Middle East.

You said you like the way Dubai operates. Many in the District Cooling industry have been waiting for better power tariffs for a long time now. Is there anything on the anvil? What is DEWA saying?

Why all this talk about reducing the tariff? We don’t want to subsidise the rate. Let District Cooling providers run their plants in an efficient manner instead of complaining that there are no subsidies. We should be thankful to the Government that there is no taxation. We should be very robust in our approach, accept the tariff as such and focus on the full picture. We should aim for energy efficiency through R&D.

What is the ambition of Ahmad Bin Shafar?

I dream to have one big District Cooling company in Dubai. We need to be like Etisalat. We need to be one among the Top 10 brands. I would like to see us as a blue chip company.

You are a member of the Board at IDEA. What does that mean to the region, to Dubai?

As a Board Member, I would like to spread knowledge and transfer technology from North America to the MENA region and to India, etc. At this point in time, the challenge is to make people travel from here to North America, so we need to bring a team from the United States to Dubai. We will build an association for District Cooling, and it will be part of IDEA. It will be operated from there. We want to bring them here to lecture to people in Dubai. To be effective, we would like to bring all the District Cooling companies here to the table and to jointly examine the challenges and issues we face as an industry.

You sponsored the ASHRAE District Cooling Design Manual. Is there any action towards a second edition?

We respect ASHRAE a lot. We are working on Phase 2 of the Design Guide. It is my aim to bring the two competitors to one table. It would be ideal to bring IDEA and ASHRAE together to do the design manual.

I will be travelling to the United States in February and hope to bring this topic up.

The equipment in your oldest plant is, what, eight years old. So, what are your service plans? For instance, for every 40,000 hours of operation, a chiller has to go for service, yes? What is your overall maintenance strategy?

For the last 10 years, have you heard of any customer complaints on service? You wouldn’t have. And that’s because we believe in preventive maintenance. We are always preventing any hits. We need to be like Rolex and always offer reliable service.

We follow a strategy of preventive maintenance and regular maintenance. It is our aim to stretch the life of our plant rooms to 50 years.

We pay attention to all components and equipment, from strainers to filters and from cooling towers to chillers. It is important to keep them in good condition, because they are linked to energy efficiency. Most of our plant rooms operate at 0.95kW/TR. Even in the case of air cooled, we achieve efficiencies of 1.3 to 1.4.

We do regular maintenance in winter. In Healthcare City, if 20 chillers, we run two and shut down 18. The diversity of winter and summer allows us a proper maintenance schedule. Our maintenance team is very busy from October to May – so much so that they can’t go on leave in this period. We prepare for summer by identifying and rectifying in winter.

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