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

Good morning, afternoon and evening. Welcome to TAQA's earnings call for the second 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 hosting this webinar today. [Operator Instructions] Please be aware that this webinar will be recorded to offer a replay through our website afterwards at www.taqa.com, in the Investors section. Lastly, I'd like to draw everyone's attention to the disclaimer on the next page of the presentation, in particular to the section on the forward-looking statements. With that, allow me to hand over to Steve Ridlington, TAQA's Group Chief Financial Officer, to walk us through our second quarter results. Please turn to Slide 3, and over to you, Steve.

Thank you, Shadi. And good morning, good afternoon, good evening to everybody who's joining us today. Great to be with you once again. And this, I think, will be a fairly light summer earnings update. So we've got a few slides here that we will run through. So overall results summary. TAQA continued to deliver robust operating and financial performance during the second quarter. 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 slightly higher compared to the prior year period. For our financial results, our usual clarifying disclosures apply. Any prior year comparative figures used are prepared on a pro forma basis, and those are the numbers that we will focus on today as if the acquisition of ADPower assets had closed on the 1st of January 2020. This is to enable meaningful year-on-year comparisons. Turning to the results themselves. They demonstrate the stability of our utility business and were boosted by our upstream Oil & Gas operations. We benefited from a recovery in commodity energy prices to prepandemic levels with TAQA realized prices for BRENT, for example, up 76% to $60 a barrel versus $34 per barrel last year. Both our revenues and EBITDA improved significantly as a result. Group revenues were up 11% to AED 22.2 billion in the first half of the year, largely reflecting stronger realized prices in our Oil & Gas segment as well as higher revenues in transmission and distribution. We reported AED 9.9 billion of EBITDA, 19% higher year-on-year, reflecting higher revenues, only partially offset by higher mostly pass-through expenses and boosted by higher income from associates. This resulted in net income of AED 2.9 billion, significantly higher than the prior year period, which was impacted by AED 1.5 billion post-tax impairment charge taken in the first quarter of 2020 within the Oil & Gas segment. Net income was also supported by lower finance costs due to several factors, which we'll cover a bit later in the presentation. Group capital expenditure during the first half of 2021 was AED 2 billion, a 3% drop versus the same period of 2020, with lower spend in generation and Oil & Gas. Turning next to Slide 4. We have again updated this slide for pro forma last 12 month numbers to highlight the strength of TAQA's business model underpinned by the utility businesses. We currently derive 85% or more of our revenues and EBITDA from 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 energy costs and output volume risk or demand. Regulated businesses are our networks, which are regulated to guarantee our returns from these businesses. Breaking down our pro forma last 12-month revenues, 59% of group revenues fell within the Abu Dhabi regulatory framework and 27% within contracted generation. At the EBITDA level, the total rise is to 88%, 45% regulated and 43% contracted. If oil and gas commodity prices remain at current levels, we can expect to see higher contributions from our upstream energy businesses, but our regulated and contracted businesses would remain above 80% of the total. Within our contracted businesses, the weighted average residual life of our offtake agreements remains at 12 years. This will increase slightly 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 the business lines. First of all, Transmission & Distribution, which is our largest segment. This business continued to achieve high network availability rates, delivering on our core mandate to reliably supply power and water in Abu Dhabi and across the UAE. Revenues were 6% higher than the prior year 6-month period, primarily due to a higher pass-through costs incurred related to bulk supply tariffs collected from by the distribution businesses. Bulk supplied tariffs are the cost borne by the distribution companies for the procurement of power and water from Ewec and cover system fuel costs and capacity payments to the generation plants. This, in turn, also increased operating expenses by an almost identical amount. Revenues also increased on recently approved additions to the regulatory asset base related to battery storage projects previously carried out by the distribution companies. EBITDA, up 4%, reflected the higher revenues only partially offset by the increased pass-through expenses. Net income contribution to the group was AED 2.4 billion, 8% higher than last year feeding through the higher EBITDA as well as one-off gains for the disposal of fully depreciated noncore assets and obsolete inventory items. CapEx in the segment increased by 13% 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 operational and financial performance. Overall technical availability across the global contracted fleet averaged 92.6% for the period, slightly lower than last year's level of 93.3%, reflecting a major planned outage within the Jorf Lasfar power complex in Morocco, which took place in the first quarter. Revenues for the segment were broadly flat at AED 5.9 billion with EBITDA of AED 4 billion, up 7% compared to the same half year period last year. Morocco's reduced profitability was mostly offset by the continued strong performance in the UAE generation fleet, Ghana and North America. Net income for the segment was AED 561 million, supported by lower finance costs on project debt amortization as well as significantly higher associate income from Sohar Aluminium due to improved sales and higher aluminum prices. Lastly, regarding reduced CapEx in 2021. This reflected higher spend in the first quarter of 2020 on lifetime extension projects on turbines within our Shuweihat S1 plant. Turning to Slide 7, the oil and gas business. Oil & Gas revenues for the 6-month period were AED 3.4 billion, 76% higher than last year and largely tracking significantly higher realized prices. Average production was 124.2 thousand barrels per day, up 1%. This reflected lower production in North America and the Atrush field in Iraq, offset by European gains. Higher volumes reflect in Europe reflected improved reliability and TAQA's acquisition of an additional work interest in the Brae fields assets in the U.K. Central North Sea following a partner default. Oil & Gas EBITDA increased by AED 1.3 billion for the period, reflecting the higher revenues as well as lower operating costs, following cost reduction initiatives taken last year. Net income contributed to the group by the segment was AED 500 million. Additional asset retirement obligations that were booked through the income statement as a result of the U.K. North Sea Partner forfeiture were partially offset by related tax relief assets. All in all, net income was almost AED 2.1 billion higher for the period, reflecting the comparative period, post-tax impairment charge of AED 1.5 billion taken in Q1 2020. Let's turn to Slide 8, where we present our liquidity and debt profile. TAQA's liquidity position continues to be very robust at AED 18.9 billion or $5.2 billion, notably 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 fully repaid the outstanding balance of $1.15 billion in the second quarter. This was done on the back of very strong free cash flow generation, operational less investment cash flows, which reached AED 7.4 billion for the first 6-month period. Underpinned by our stable and predictable utility businesses, this strong cash flow profile allows us to comfortably service our debt and debt maturities while meeting our financial policy commitments relating to dividend payouts and credit ratings. 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 undertaken. This is reflected in the debt maturity profile on this slide with a new $750 million corporate bond maturing in 2028 and another in 2051. The USD 1.5 billion dual tranche issue, financed the buyback and maturity of the $750 million June 2021 bond as well as the repurchase of $651 million in face value of the December 2021 and January 2023 bonds. Gross debt was 9% lower at AED 69.3 billion, reflecting the revolving credit facility repayment as well as the amortization of project debt at consolidated generation subsidiaries. Our leverage improved as a result to 3.6x EBITDA from 4.2x. We have presented on this slide our full debt maturity profile. It is worth mentioning that interest rates for the group's project debt, bonds and loans are largely fixed, either contractually or through interest rate hedging arrangements. The main exception is TAQA's revolving credit facility, which attracts floating interest when utilized. And at the end of June 2021, and taking into account the effect of interest rate swaps, approximately 95% of the group's borrowing are at a fixed rate of interest compared to 87% at the end of last year. This increase, again, reflects the pay down of the floating rate revolving credit facility. Turning to the next slide. Let's talk about our dividends. In addition to approving quarter 2 financials, TAQA's Board has also approved the payment of the second 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 which we have already paid AED 2.8 billion of dividends for 2020 and AED 680 million earlier this year. Total dividends for 2021 are expected to reach AED 3.1 billion or AED 2.75 per share, and this will be split across 3 interim payments of 20% each and a final payment of 40% as laid out on the graph in this slide. This translates to the AED 618 million dividend declared by the Board yesterday or AED 0.55 per share. 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 business, our regulated Transmission & Distribution businesses and our contracted generation businesses. 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. That concludes the presentation today, but I just want to finish by saying this was a very strong first half with good operational performance, higher profitability and cash flow, enabling a deep reduction in debt and a consequent improvement in credit profile, which continues to deliver on our dividends. Thank you.

Great. Thank you, Steve. [Operator Instructions] So I think we've got one question from Divye from Daman Investments.

I have a few questions. So the first one is linked to -- I'll go one by one. So the first one is linked to any color on the -- that the news that we heard in the media regarding the sale of Dubal power assets? And there was one more along with that? So if you can give us any color on when do you foresee this getting completed?

Do you want to list your questions and I'll -- I can decide how and when to answer that. I will be wary, if you don't mind.

Yes, sure. So this is number one. The number 2 is linked to the sale of the Oil & Gas assets. So we just saw in the press recently that you're looking to sell some of your Canadian assets. So I just want to understand the strategy. Is it very clear to you that given the current oil price environment, do you think this is the right time to offload these assets? If this is not part of the long-term strategy of the company, given the focus is more on the power generation and transmission distribution side and the water side. So do you think this is the right time you should be able to sell all these assets within the next 6 months? And if that happens, then would the asset sale will be enough to offset the liability that we see on the balance sheet against those assets? And as a shareholder for us, there is no cash release, right? That's second question. And third question is linked to the dividend policy of the company. So we have seen that the cash flow generation is very strong in the -- if you look at the first half and we try to analyze that number. We are talking about around 7% to 8% free cash flow yield and the dividend yield is only 2.5%. So we are just trying to understand that why not to increase these dividends? Even if we offset the Oil & Gas impact, even if we exclude the Oil & Gas part, the free cash flow generation from the power business and the transmission distribution business is very, very strong. So why not to increase the free cash flow? And the fourth is linked to that increase in the free float. Where are we on that?

Okay. 4 very interesting and good questions, if I may say so. So let me take these one at a time. And so first of all, in relation to, I think, you said Dubal assets. Look, I mean, if -- we have said before that we are very interested in expanding our UAE presence in the generation business. We have published in our strategy, some very ambitious targets for additions to that largely through renewables, but it could include the acquisition of other power generation assets already in place in the UAE. So we certainly wouldn't rule that out. But there is nothing we have to say on that at this point in time. There is nothing imminent. And to the extent that we do close a transaction like that, we would, of course, disclose that to the market at the appropriate time. But there's nothing imminent there. I think these assets, I'm not quite sure which assets that you're talking about. If it's the coal -- I think it might be coal. That wouldn't be -- if it was, that wouldn't be of interest to us, but because we are focused very much on green, renewables type of technologies. But as I say, it's certainly something that we will be very interested in doing more of. In terms of the Oil & Gas business, I think it's very important just to clarify this -- the...

Sorry, can I just go back into the -- so it's basically Emirates Global Aluminium, which is basically now the merger of the 2. So these guys -- I mean, EGA -- yes, EGA. It was not Dubal. It was EGA assets that's what we read in the media, and they're looking to do an IPO next year. So our guess was that maybe they just want to offload these assets before they go for an IPO next year.

Yes. Well, I think the answer remains the same regardless of which assets they are. So if and when we've got something to say, there's nothing imminent there. But if and when we've got something to say, we will certainly say it.

Okay. And any of these acquisitions will be funded through a mix of equity and debt. And if that is the case, then what sort of a capital structure we are talking about?

As I say, I think it's far too early to have those kind of discussions because there is nothing imminent there and no specific deals in place. So there's nothing really to say on that -- on what kind of capital structure we might or might not employ in the event of something proceeding. So that would be something that we would -- we need to turn to if and when we have something to say on such an acquisition. So turning to the Oil & Gas, and Canada in particular, I think it's important to understand what is currently going on within Canada is that we are looking to dispose off certain properties within the Canadian portfolio, but they're really immaterial. They're very small. They are properties within a vast expensive resource in our Canadian business, which are remote from our core infrastructure. And therefore, it is about tidying up and trimming the portfolio to make sure it's really focused in the areas that we can add most value to in the Canadian Oil & Gas business being more concentrated geographically or closer to our infrastructure. So yes, we are looking at this. There are 2 or 3 parcels that we're looking at. But they're going to be very immaterial, if and when they close. I think one of them may have already closed, but they're going to be really immaterial in terms of the impact on the business. So this is not a move in relation to our overall Oil & Gas business. Where our position is unchanged, we have said that we want to reduce our exposure to the Oil & Gas business. And the primary way we're looking at that at the moment is to limit capital spending on certainly not buying any new fields but also limiting the amount of money we spend on developing existing fields. We're not ruling it out completely, but most of our capital spending is going to be directed towards the utilities, the power water business, domestically and internationally where we have said that we want to add AED 40 billion of infrastructure in the T&D businesses in Abu Dhabi over the next 10 years, and we want to increase our domestic generation from the current 18 gigawatts to 30 gigawatts. And we want to add 15 gigawatts of generation capacity internationally, largely through the renewables business. So it's that focus that drives to be a low-carbon player, that will limit and reduce the size our exposure to the Oil & Gas business over time. Not to say that if we had some interesting offers for the remaining part of the Oil & Gas business, we would certainly look at that. But the Canadian initiative, as I say, is really about trimming and tidying up and optimizing the existing portfolio with very little impact on the total level of production in Canada or on our financial results.

And just a follow-up here. So the value that we see on the balance sheet as of June of Oil & Gas assets, can we understand what sort of an Oil & Gas price assumption being taken over here to value these assets at the current level? Because you have taken a lot of impairments last year. So the -- what sort of an oil price these assets are valued at?

It's about $55 to $60 a barrel, declining slightly from there. So something a bit below current market, but in the $50 to $60 range.

Okay. And the liability, which is against that is around AED 17 billion. So can we assume that when these assets are sold, most of this money is going to offset this liability?