Abu Dhabi National Energy Company PJSC (TAQA) Earnings Call Transcript & Summary

Good morning, good afternoon. Sorry, good morning, good afternoon, good evening. Welcome to TAQA's results call for the full year 2020. We're pleased you are joining today. My name is Shadi Salman, and I'm the Investor Relations Manager at TAQA. I'll also be managing this webcast today. [Operator Instructions] Please be aware that we will be recording this webcast to offer a replay to our website afterwards at taqa.com, in the Investors section. Lastly, I'd like to draw everyone's attention to the disclaimer slide on the next page, in particular to the section on forward-looking statements. With that, allow me to hand over to Steve Ridlington, TAQA's Group Chief Financial Officer, and he will take us through the -- through our results for the year 2020. Over to you, Steve, and please change the slide, please.

Thank you, Shadi, and good afternoon, good morning, everybody. Great to be with you again for our end year 2020 earnings call. On Slide 3, before we go through the results for the period, I'd like to just take this opportunity to remind you that TAQA's new business and financial profile following the ADPower transaction, which will give context to the pro forma results for the last 12 months and for the future. The ADPower transaction has been a historic deal on several fronts. First, the transaction consolidated most of Abu Dhabi Power's -- Abu Dhabi's power and water generation assets and all of its transmission distribution networks across the UAE under TAQA. In doing so, this has created a true national energy champion and provided private investors with further access to the full power and water sector value chain. Second, TAQA now has material scale. We are one of the largest listed companies in the region by market capitalization and among the top 10 utilities across Europe, the Middle East and Africa by regulated asset base. Our assets at the end of December 2020 are just under edition AED 190 billion, for the consolidated group and include over AED 80 billion of regulated assets. Revenues and EBITDA have more than doubled versus the old stand-alone TAQA, and 90% or more of both is now derived from contracted or regulated business. Lastly, our deleverage profile and significant cash flow generation ability have allowed us to return cash dividends to shareholders for the first time since 2012. I will revisit this point later in our presentation. Turning to Slide 4. There's quite a bit of detail on this slide, but it's useful to present a segmental overview of our business, both financially and in terms of the asset portfolio. EBITDA for the group was AED 16 billion for full year 2020. Generation contributed 47% of the total EBITDA, with 41% coming from the UAE fleet. We now supply over 95% of total Abu Dhabi power and water demand from the grid. By grid, we mean it to exclude capture generation assets in industrial complexes like EGA, the aluminium smelter and ADNOC, Abu Dhabi's national oil and gas company. It is worth noting the exclusivity rights we have to participate with a minimum 40% stake in all future power and water generation projects in Abu Dhabi over the next 10 years. This ensures significant growth prospects for this segment. Transmission and distribution contributed around 49% of group EBITDA, that is the largest segment within the group. As sole owners of Abu Dhabi's power and water grids, we undertake all maintenance, upgrade work and expansion of the grid, be it to maintain high network availability rates, improve efficiency, or in response to increased demand due to increased electrification on natural growth. The Oil & Gas segment contributed less than 5% of EBITDA, reflecting a much higher level of group EBITDA since the Abu Dhabi Power transaction, and also suppressed commodity prices. Let's turn to Slide 5. Over the last year or so, we have been awarded significant new projects in the UAE, which demonstrate our commitment to growth and renewable energy. These include: Taweelah RO, reverse osmosis, the largest seawater reverse osmosis plant; Al Dhafra PV, the world's largest solar photovoltaic power plants; and Fujairah F3, UAE's largest gasified independent power project. These projects are sizable from a production capacity standpoint, but critically, they demonstrate cost efficiencies, too. Fujairah F3 is costing about $1.1 billion or 2.4 gigawatts of capacity. And that will definitely be achieved a world record cost of only $0.0132 per kilowatt hour following financial close. The recycled water distribution projects are focused on optimizing the use of desalinated water and expanding the use of recycled water beyond municipal landscaping to include commercial and agricultural uses. Lastly, the ownership of these projects demonstrate the new exclusivity rights in action. TAQA, as sponsor, together with our local partners, [ ADPower ] and Masdar, have a combined 60% stake in these projects, while international partners are 40%. Moving on to Slide 7 to go through our financial performance. In 2020, we delivered robust operational performance in the face of the continuing pandemic. We ensured secure power and water supplies through high levels of capacity availabilities within generation and high levels of network availabilities within transmission and distribution. Oil and gas production was slightly lower than 2019, but that reflected our decision to reduce drilling in the face of depressed commodity prices. Turning to our financial results. Can I start by noting that throughout this presentation, we refer to TAQA's pro forma results, which restates our financials as if the transaction with ADPower we closed on the first of January 2019. This enables meaningful year-on-year comparisons. Our financial results, whilst resilient, reflected the more challenging economic conditions seen in energy markets on the back of the COVID-19 situation. Both our revenues and EBITDA were impacted compared to the same period last year. Revenues were down 6% to AED 41.2 billion, largely reflecting weaker realized prices in our Oil & Gas business as well as slightly lower revenues in both the transmission, distribution and generation segments. We booked AED 16 billion of EBITDA, 13% lower year-on-year, reflecting the lower revenues, mainly in oil and gas, partially offset by lower group operating and administrative expenses. This has resulted in net profit of AED 2.8 billion, significantly lower than the prior year period, including in that figure is the impact of the AED 1.5 billion post-tax impairment charge taken in Q1 2020 within the Oil & Gas segments. This impairment, together with a further AED 1.1 billion reduction in net income from the Oil & Gas segment, accounted for the full fall in the group's net income of AED 2.6 billion versus net income for the full year 2019. Turning to Slide 8. This slide highlights the strength of TAQA's business model following the ADPower transaction. We now derive 90% and -- or more of our revenues and EBITDA for long-term contracted and regulated businesses. Contracted businesses are substantially all of our generation assets, which benefit from long-term contractual agreements that protect TAQA from any volatility in import energy costs and output volume risk or demand. Regulated businesses and our networks, which are regulated to guarantee our returns from these businesses. Looking a little further into the details behind this, in our pro forma 2020 results, 60% of group revenues fall within the Abu Dhabi regulatory framework and 29% within contracted generation. At the EBITDA level, this rises to 49% regulated and 47% contracted or 96% in total. Within our contracted businesses, the weighted average residual life of our offtake agreements was 12 years. This would increase as we add significant new capacities, which will be covered by new 25- or 30-year PPA or WPA agreements. Turning to the next slide to briefly go through the performance of each of our business lines. Transmission and distribution is our largest segments by assets, equity and net income and a new business for TAQA following the transaction with ADPower. This segment continued to achieve high network availability rates and deliver on our core mandate to reliably supply power and water in Abu Dhabi and across the UAE. Revenues were 2% lower than the prior year period due to deflationary effects in the UAE. Complete -- consumable prices fell 3% in the UAE last year, which resulted in a 3% reduction in our regulated asset base on which we are paid a regulatory return. EBITDA was AED 7.9 billion, 13% lower, reflecting lower revenues with flat operating and administrative costs. Net income contribution to the group was AED 3.9 billion, 15% lower than last year. On to the next business line generation, please turn to Page 10. Our contracted power and water segment continue to display stable operating and financial performance. Overall technical availability across the global fleet have averaged 93.9% for the period, slightly lower -- sorry, slightly higher than last year's level of 93.7%. Revenues for the segment were AED 12.3 billion, with EBITDA of 8 -- of AED 7.6 billion, down 3% and 1%, respectively, compared to full year 2019. The decline in revenues was largely due to our international generation assets. First, we have reduced power production within our solar merchant power plant, Red Oak in the U.S.A. This reflected lower demand in prices due to COVID-19, as Red Oak operates in a very competitive wholesale power market. Lower revenues also reflected lower value of fuel cost reimbursement for international contracted assets, power and water. These are pass-through costs reimbursed by the offtakes and a fall in tracking low demand as well as commodity price trends, particularly for coal at TAQA Morocco. Lastly, lower technical availability of our Ghana and India power plants both relatively small assets also contributed to slightly lower revenue. The reduction in revenues was partially offset by continued strong performance in the UAE generation fleet and more than offset by lower operating and administrative costs. Net income was boosted by lower finance costs. Lastly, a comment on CapEx, which was higher in 2019, reflecting increased spending on our first independent solar PV power plant completed in 2019. Let's turn to Slide 11 for an update on Oil & Gas. Revenues from Oil & Gas for the period were AED 4.2 billion, 31% lower than last year and largely tracking significantly lower realized prices as well as lower production volumes. Average production was 118,000 barrels per day, down 5% on deferred drilling campaigns. This reflected lower production in North America and Europe, offset by strong gains at the Atrush field in Iraq. Oil & Gas EBITDA dropped 71% to AED 733 million, reflecting the previously mentioned weaker revenues, partially offset by lower operating costs. At these levels, Oil & Gas EBITDA is only 5% for the group's total EBITDA. The net loss contributed to the group was AED 1.5 billion, and includes the AED 1.5 billion post-tax impairment charge taken in Q1. All in all, net income was AED 2.6 billion lower for the period, almost the same as the group's reduction in net income for the period. Let's turn to Slide 12 where we'll present our liquidity and debt profile. TAQA's liquidity position remains very robust at AED 16.5 billion or $4.5 billion, in line with the level at the end of last year. We drew down $750 million of our AED 2.8 billion or $3.5 billion RCF in Q2 to bolster liquidity in light of COVID-19 uncertainties and resulting volatility in energy markets. We've already repaid $500 million during Q3 2020. Gross debt was largely flat at AED 67 billion compared to the beginning of the year on continued amortization of project debt offset by the net RCF drawdown of AED 0.9 billion, as just explained. It is worth mentioning this is passed to the acquisition accounting exercise. All bonds within the group were remeasured at fair values as of the 1st of July 2020. This resulted in our book value of debt being marked up by approximately AED 4.7 billion, compared to the face values. As the bonds mature, the amortization of these liability amounts will reduce our net finance costs booked through the income statement. Let's turn to the next slide. Our shareholders approved a new dividend policy at the General Assembly held in December 2020. The dividend policy targets a total dividend payout of AED 2.6 billion or 2.5 fils per share for 2020, growing 10% annually for the following 2 years. The Board also approved the payment of the interim dividends. Accordingly, we paid an interim dividend in December last year of AED 1.7 billion or 1.5 fils per share. And the Board yesterday has recommended that shareholders approved a final dividend of AED 1.1 billion or 1 fil per share to be paid after the annual general assembly, expected to be held on the 18th of March 2021. This implies a payout ratio of close to 100% of net income. Dividends for '21 and 2022 will be paid quarterly, and TAQA will be the first UAE-listed company to pay dividends on this basis. It is important to reiterate here that the dividend policy explicitly includes our commitment to maintain investment-grade, stand-alone ratings as a primary consideration for the Board's determination of dividend payouts. Building on our track record as a stable and consistent dividend payer is another important milestone and puts us in line with integrated utility peers. Turning to Slide 14. To wrap up this part of the call, I'd like to just talk a little bit about the progress in 2020. 2020 has been a year of significant progress change in achievement for TAQA, amid the unprecedented circumstances brought about by the COVID-19 pandemic. This rather busy slide shows some of these achievements. I will touch on just a few. First, the transaction with ADPower and the full due process undertaken by TAQA's Board and shareholders to close the deal was completed in just 6 months. Second, the credit rating agencies issued almost unprecedented rating upgrades in the midst of the pandemic to highlight TAQA's new financial strength. We are now rated only 1 notch below the Abu Dhabi sovereign. Third, we created a new dividend policy and began dividend distributions for the first time since 2012. Fourth, the Board enabled foreign ownership in TAQA for the first time to the maximum allowed limit of 49% of our share capital. Fifth, TAQA Morocco extended its power purchase agreement by 17 years of refinanced project debt to reduce costs by over 20%, whilst increasing the debt maturity by 11 years. Sixth, we progressed our development projects, achieving financial close on both the Fujairah F3 and Al Dhafra PV projects last year. Seventh and lastly, we continue to grow our transmission and distribution networks, including new high capacity connections to the Barakah Nuclear Plant and future work to connect to Al Dhafra PV. Ladies and gentlemen, that -- thank you for your attention, and that ends the presentation today, which we hope you have found useful. We'll now begin with Q&A session. Shadi, please go ahead.

[Operator Instructions] Right. We'll get started off with the first question in waiting. What are your CapEx plans? And what are the main investment projects going forward? Do you plan to come to the bond market soon?

Thank you for that question. Let's take the CapEx one first. So the CapEx plans that we have will include, though not registered on the balance sheet, the new growth projects that we just talked about in the presentation. So that includes the Taweelah RO, the PV and the F3 project as well as recycled water. We've included in there the cost of those projects. Now as I say, that will not be on our balance sheet, but they will be projects for us. They will be project financed, and we will make equity contributions to them. Beyond that, we're not expecting a huge amount of growth in our oil and gas businesses, and we will continue to grow the transmission and distribution businesses in line with the demand in Abu Dhabi. That's a rather long-winded answer. We don't have specific CapEx projections here. We don't give that guidance at this point in time. In terms of the bond refinancing, we have 2 bonds coming up to maturity this year, $750 million in each of June and December 2021, $1.5 billion in total. And our current thinking is that we will refinance those bonds this year. Whether we do them in 2 tranches or a single tranche is yet to be determined. That's something we're working on right now.

Thanks, Steve. We had another question pretty much along the same lines, but with a follow-on question, saying, any plans to tap the Sukuk markets?

Yes. Thanks. A possibility. When we look to refinance these bonds, we always look at all options, and the Sukuk will be part of that. However, I must say that most of our bonds have been conventional. And that's probably the way we'll go. But as I say, we will have a look at it. And if it makes sense, we can certainly do this -- certainly do that.