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

All right. Good morning, afternoon and evening. Welcome to TAQA's earnings call for the first quarter of 2021. We're very happy to have you with us today. My name is Shadi Salman, and I'm the Investor Relations Manager at TAQA. I will also be managing this webcast today. [Operator Instructions] Please be aware that we will be recording this webcast to offer a replay through our website afterwards at www.taqa.com in the Investors section. Lastly, I would 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, to walk us through our first quarter results. Please turn to Slide 3, and over to you, Steve.

Thank you, Shadi, and welcome, everybody. It's good to be talking to you again today. And as Shadi said, let's gets right into the numbers here on Slide 3. In the first quarter of 2021, we delivered robust operating and financial performance. Operationally, we continue to ensure 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 largely in line with the prior year period. For our financial results, I will start by pointing out that any comparative results that we are referred to are prepared on a pro forma basis, restating last year's financials as if the transaction with ADPower that closed on the first of January 2020. This enables a year-on-year comparisons. Our financial results demonstrate stability of our utilities businesses and were boosted by our upstream oil and gas operations, which benefited from a recovery in commodity energy prices to pre-pandemic levels. Both our revenues and EBITDA improved as a result. Group revenues were up 3% to 10 billion AED -- AED 10.3 billion, largely reflecting higher realized prices in our oil and gas segment as well as slightly higher revenues in transmission and distribution. We booked AED 4.7 billion of EBITDA, 12% higher year-on-year, reflecting higher revenues, lower operating expenses and higher income from associates. This resulted in net income of AED 1.4 billion, significantly higher than the prior year period, which was impacted by a AED 1.5 billion post-tax impairment charge taken in 1Q 2020 within the oil and gas segment. Net income was also supported by lower finance costs, both due to our floating rate, revolving credit facility borrowings and lower interest rate environment, as well as project debt amortization within our generation subsidiaries. Group capital expenditure during Q1 2021 was AED 1.3 billion, an 18% increase versus the same period of 2020, which saw deferral and postponement of CapEx at the onset of the COVID-19 pandemic. Finally, free cash flow for the quarter was AED 3.4 billion. Turning to Slide 4. This is a slide we have shown you before, and we have updated it to show numbers for the last 12 months to highlight the strength of TAQA's business model underpinned by the utility businesses. We derived close to 90% of or more of our revenues and EBITDA from long-term contracted and regulated businesses. Contracted businesses are substantially our generation assets, which benefit from long-term contractual agreements that Protect tucker from any volatility in input energy costs and output volume risk or demand. Regulated businesses are 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 last 12 month results, 60% of group revenues fell within the Abu Dhabi regulatory framework and 29% within contracted generation. At the EBITDA level, this rises to 93%, 47% regulated and 46% contracted. Within our contracted businesses, the weighted average residual life of our offtake agreements is currently 12 years. This will increase as we add significant new capacities, which will be covered by new 25 or 30-year PPA or WPPA agreements. Turning to the next slide to briefly go through performance of each of our business lines. So Slide 5 concentrates on transmission and distribution. This is our largest segment and it continued to achieve high network availability rates, delivering on our core mandate to the reliably supply power and water in Abu Dhabi and across the UAE. Revenues were 2% higher than the prior year period, primarily due to higher pass-through costs incurred related to bulk supply tariffs collected by the distribution businesses. This, in turn, also increased operating expenses by almost an identical amount. EBITDA, up 2%, also benefited from lower administrative expenses. One-off gains were also booked resulting from the disposal of fully depreciated noncore assets of obsolete inventory items. Net income contribution to the group was AED 1.1 billion, 3% lower than last year. CapEx in the segment increased by 59% as a result of accelerated spend following prior period project cancellations and deferrals driven by the COVID-19 pandemic. On to the next business line, generation, please turn to Page 6. Our power and water generation business, by and large, fully contracted with long-term offtake agreements, continues to deliver stable operating and financial performance. Overall, technical availability across the global fleet averaged 88.7% for the period, slightly lower than last year's level of 89.2%, reflecting a planned major outage within the Jorf Lasfar power complex in Morocco. This was offset by strong performance for the UAE fleet and Ghana. Revenues for the segment were AED 2.8 billion with EBITDA of AED 1.9 billion, down 2% and up 8%, respectively, compared to the same period, last year. The decline in revenues was due to the aforementioned outage at our power plant in Morocco, which also resulted in lower fuel revenues on lower fuel consumption. Morocco's reduced profitability was mostly offset by the continued strong performance in the UAE, Ghana and North American generation fleet. Net income for the segment was AED 133 million, supported by lower finance costs on project debt amortization as well as higher associate income from Sohar Aluminium, due to improved sales and higher aluminium prices. Lastly, a comment on CapEx, which was lower in 2021, reflecting higher spend in the first quarter of 2020, as turbines were refurbished at our Shuweihat S1 plant. Please turn to Slide 7 for an overview of oil and gas. Revenues from oil and gas for the period were AED 1.7 billion, 22% higher than last year, largely tracking significantly higher realized oil and gas prices. Average production was 120.7 thousand barrels per day, down 1%. This reflected lower production in North America and the Atrush field in Iraq, offset by European gains. Oil and gas EBITDA increased 86% to AED 883 million, reflecting the higher revenues as well as lower operating costs, following cost reduction initiatives taken last year. The net income contribution to the group was AED 0.4 billion. All in all, net income was almost AED 1.8 billion higher for the period, reflecting the comparative period post-tax impairment charge of AED 1.5 billion taken in Q1 2020. Let's move on to Slide 8, we will present our liquidity and debt profile. TAQA's liquidity position continues to be very robust at AED 17.1 billion or $4.7 billion, slightly higher than the level at the end of last year. We repaid $250 million of our $3.5 billion revolving credit facility in the first quarter. And we have since paid another $250 million in April 2021, following the end of the quarterly reporting period. Gross debt was 3% lower at AED 74.1 billion, reflecting the RCF repayment as well as the amortization of project debt at generation subsidiaries. We have presented on this slide, our corporate debt maturity profile. As at the end of March, TAQA had $1.5 billion of corporate bonds maturing in 2021. In April, we undertook a refinancing exercise, whereby 2 bonds were issued, and a buyback of existing 2021 and 2023 corporate bonds was initiated. I will revisit this transaction in more detail later on, but suffice it to say that these transactions are not reflected in the maturity profile here. Turning to Slide 9 on our quarterly dividend policy. In addition to improving -- approving quarter 1 financials, TAQA's Board has also approved the payment with the first interim cash dividend for the financial year 2021. This is in line with our 3 year dividend policy previously approved by shareholders, and in accordance with that, we have already paid AED 2.8 billion dividends in 2020. Total dividends for 2021 will be AED 3.1 billion or AED 2.75 per share. And this will be split across 3 interim payments for 20% each, and a final payment of 40% as laid out in this slide. This translates to the AED 680 million dividend declared by the Board yesterday or AED 0.55 per share to be paid in respect of the first quarter. We remain the only UAE listed company to pay dividends on a quarterly basis, and this reflects the financial discipline we can command on the back of stable, predictable and long-term cash flows generated by our utility businesses. It is important to reiterate here that the dividend policy explicitly includes our commitment to maintain an investment-grade stand-alone rating as a primary consideration for the Board's determination support of dividend payouts. Turning to the next section. I'd like to take an opportunity in this section to go through some recent and important developments on our strategy and long-term journey ahead. So turning to Slide 11. In late March, we announced our new 2030 strategy with ESG and sustainability at its heart. The strategy is focused on TAQA becoming a low-carbon power and water champion for the UAE. We also communicated specific 2030 targets. First, we will spend AED 40 billion in maintaining and expanding our regulated asset base within the transmission and distribution segment. Second, we will increase the install capacity of our UAE-based generation fleet to 30 gigawatts of capacity up from 18 gigawatts at the end of 2020. Third, we will seek to add up to 15 gigawatts of international generation capacity up from the current 4.9 gigawatts at the end of 2020. And much of this will be through very efficient and cost-effective renewable power generation as well as reverse osmosis water desalination. This will see the proportion of renewables generation capacity in our portfolio exceed 30% of the total by 2030, and the proportion of reverse osmosis to reach 2/3 of total desalination capacity, up from 5% and 14%, respectively, at the end of 2020. We will also pursue significant digitation and optimization projects across our generation and transmission and distribution assets to capture further operational efficiencies. Our strategy in the UAE is instrumental to the overall UAE National Energy Strategy 2050. We have lifted some of the UAE targets in the bottom right section of the slide, including reaching 50% clean energy in the UAE's capacity mix by 2050 as well as other efficiency and cost saving targets. Lastly, we will implement our own strategy while maintaining prudent financial policies, not least of which is our continued commitment to maintaining strong investment-grade credit teams on a stand-alone basis. Turning to Slide 12. This gives us an overview of our current growth projects. Over the last year or so, we have been awarded significant new projects in the UAE, which demonstrates our commitment to growth in new renewable energy. There are approved points of our new strategy and we can expect more projects like these going forward. The projects include Taweelah Reverse Osmosis, the largest seawater reverse osmosis plants, the Al Dhafra PV, the world's largest solar photovoltaic power plant, and for Fujairah F3, UAE's largest gas-fired independent power project. These projects are sizable from a production capacity standpoint, but critically, they demonstrate significant cost efficiencies, too. Fujairah F3 is being around $1.1 billion for 2.4 gigawatts of capacity and Al Dhafra PV achieved a world record of $0.0132 per kilowatt hour following financial close. Taweelah RO will also be our first standalone reverse osmosis water desalination plant. The technology is almost twice as efficient as existing thermal gas-fired desalination plants, requiring half as much energy to produce the same volume of water. 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. Moving on to Slide 13, where we'll show how this feeds through to our generation energy and technology mix. The first takeaway on this slide is that the ADPower transaction immediately increased the share of renewables in our generation portfolio from 1% to 5%, and the development projects transferred from ADPower will also see this double to 11% by the end of 2023. Likewise, the transaction increased the share of reverse osmosis in the total desalination portfolio from 11% to 14%, and the completion of Taweelah RO will more than double this share to 29% in short order by the end of 2023. This trajectory will see our exposure to coal to fall to less than 10% by 2023, and much further to about 5% by 2013. We have a clear path towards clean energy, and we are starting from a strong base when it comes to GHG emissions intensities, given our largely gas-fired fleet today. Our new strategy will see us target over 30% of total power generation capacity coming from renewables, and 2/3 of water desalination capacity from more efficient reversals osmosis. Let's turn to Slide 14. On this last slide, we wanted to present some highlights of our recent bond refinancing exercise, which represents our first return to the debt capital markets following the transaction with ADPower. The transaction involved raising $1.5 billion across 7-year and 30-year tranches, primarily to refinance the 2021 corporate bond maturities and fund the buyback of the 2023 bonds in order to slightly reduce the maturity wall for that year. On the first day of the 2-day process, we launched the buyback of the 2021 and 2023 corporate maturities and proceeded to undertake a full day roadshow across Asia and European, MENA and U.S. accounts. With order books peaking at USD 6.5 billion and our $1.5 billion fundraising target, therefore, over 4x oversubscribed, bonds were at new issue yields inside our secondary curve. So the new 7-year bonds carried a coupon of 2%, TAQA's lowest ever bond coupon. And a function of both the tight pricing achieved, are credit ratings post-transaction and the current interest rate environment. The new 30-year bond priced at a yield and a coupon of 3.4%, and favorably compares with that last 30-year bond that TAQA issued in September 2019 at a yield and coupon of 4%. The financing will have the following impacts on corporate debt average cost and life. It will reduce the average cost of debt by 33 basis points from just over 4%, saving AED 100 million a year. It will also increase the weighted average remaining term of our corporate bond portfolio from 6 years to almost 9 years. The market response represents a strong vote of confidence in TAQA's new financial profile and business model as well as future strategy and financial policies. We also recently concluded the buyback of the 2021 notes, of which 700 million -- USD 712 million in face value were tendered. The cap buyback of the 2023 notes continues at the time of this presentation. Thank you for your patience this far. Let's now open up for questions. Please, Shadi.

Thank you, Steve. [Operator Instructions] Okay. Well, it seems like there are no questions. That's probably up. Having just said that, we have a question just coming.

Or a comment actually.

A comment and appreciation for holding our conference calls in more friendly U.S. hours. That was an intention, actually. So we're pleased that that went over well.

Yes well, thanks for that comment. Very well received, and we'll continue to do that. So look, I think...

A question, last minute question. Is there any CapEx guidance for 2021?

Okay. No specific guidance for 2021. But what I can say as part of our strategy, we said, we were going to add AED 40 billion to our T&D networks over the next 10 years. So that's AED 40 billion of CapEx. And then the generation additions, we think we'll probably add another 25%. So that takes the total to around AED 50 billion, which is, on average, AED 5 billion a year. And that's been more or less what we've been spending in the recent past. That's probably not a bad guide for the next 10 years. Of course, the annual numbers may vary, but it's probably not a bad guide, so around AED 5 billion a year. Okay. Thank you, Paul. Well, look, I think it seems like there are not too many questions today. And that's probably a reflection of the fact that we have been in front of you several times, our annual results, our strategy and then, of course, the bond road show that we undertook just a week or so ago. So hopefully, all of this is very clear, but if anything is not clear, please do get in touch with Shadi. You have his details, and we've been more than happy to answer any questions that you have. But for now, thank you, and have a good day.

Thank you, everyone.