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

So good morning, afternoon and evening. Welcome to TAQA's earnings call for the third 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'll also be hosting this webcast today. [Operator Instructions] Please be aware that this session 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, particularly 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 the third quarter results for 2021. Please turn over to Slide 3. And over to you, Steve.

Thanks, Shadi. Welcome, everybody, to this earnings update for the first 9 months of the year. TAQA delivered another quarter of robust operational and financial results. 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 also 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 as if the acquisition of ADPower assets had closed on the 1st of January 2020. This is to enable meaningful year-on-year comparisons. Our financial results were underpinned by our stable utilities businesses and boosted by our upstream oil and gas operations. We continue to benefit from a strong recovery in commodity prices to prepandemic levels. For example, TAQA's realized crude oil prices were up 76% to $62 a barrel compared to $35 a barrel last year. Both our revenues and EBITDA improved significantly as a result. Group revenues were up 11% to AED 34.3 billion in the first 9 months of the year, largely reflecting stronger realized prices in our oil and gas business segment as well as higher revenues in transmission and distribution. We reported AED 14.4 billion of EBITDA, 20% higher year-on-year, reflecting higher revenues, that will be partially offset by higher mostly pass-through expenses and boosted by a higher income from associates. This resulted in net income of AED 4.3 billion, significantly higher than the prior year period, which was impacted by a AED 1.5 billion post-tax impairment charge taken in the first quarter of 2020 within the oil and gas segment. Net income was also supported by a lower finance costs on significant debt reduction on the back of very strong free cash flows of AED 11.4 billion, and we will cover this further later in the presentation. Group capital expenditure during the first 9 months of 2021 was AED 3.5 billion, a 25% increase versus the same period of 2020, driven mainly by resumed spend within transmission and distribution, our largest segment. Turning 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 even during times of higher energy prices. We continue to 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 input 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 months' revenues, 58% of group revenues fell within the Abu Dhabi regulatory framework and 27% within contracted generation. At the EBITDA level, the total rises slightly to 87%, 46% regulated and 41% contracted. Within our contracted businesses, the weighted average residual life of our offtake agreements was 12 years. This was -- this will increase as we add significant new capacities, which will be covered by a 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. Our largest segment, transmission and distribution, continue to achieve high network availability rates, comfortably above the minimum regulatory requirements for these metrics, 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 9-month period, primarily due to higher pass-through costs incurred related to bulk supply tariffs collected by the distribution business. Bulk supply tariffs are the cost borne by the distribution companies for the procurement of power and water from Ewec. They cover system fuel costs and capacity payments to the generation plants. This, in turn, also increased operating expenses by an almost identical amount. Revenues are also increased on recently approved additions to regulatory asset base related to battery storage projects previously carried out by the distribution companies. Our regulated asset base fell 3% during the period, reflecting the deflationary economic environment this year in the UAE, to which it is indexed as well as regulatory depreciation temporarily outpacing additions. EBITDA, up 10%, reflecting the higher revenues, only partially offset by the increased pass-through expenses. Net income contribution to the group was AED 3.4 billion, 16% higher than last year, feeding through the higher EBITDA as well as one-off gains from the disposal of fully depreciated noncore assets and obsolete inventory items. CapEx in the segment increased by 35% 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 93.4% for the period, slightly lower than last year's level of 94.9%, reflecting a planned and unplanned outages within the UAE fleet of plants. Revenues for the segment were broadly flat at AED 9.1 billion, with EBITDA of AED 5.7 billion, down 1% compared to the same 9-month period last year. Reduced revenues within the UAE subsegments were offset by increased fuel revenues at TAQA Morocco as coal prices increased during the period. Higher operating expenses reflected one-off inventory provisions to backup fuel across the UAE fleet and were offset by significantly higher associate income from Sohar Aluminium due to improved sales and higher aluminum prices. Net income for the segment was AED 633 million, supported by lower finance costs on project cut amortization, offset by FX losses from unfavorable movements in the Moroccan Dirham to U.S. dollar exchange rate during the period. Lastly, reduced CapEx in 2021, reflected higher spend in the first quarter of 2020 on lifetime extension projects on turbines within our Shuweihat S1 one plant. Please turn to Page 7. Oil and gas revenues for the 9-month period were AED 5.2 billion, 75% higher than last year and largely tracking significantly higher realized prices. Average production was 121,500 barrels of oil equivalent per day, up 3%. This reflected lower entitlement production in the Atrush field in Iraq, offset by European gains. Higher volumes reflected improved reliability and TAQA's acquisition of additional working interest in certain fields in the U.K. North Sea following a partner default. Oil and gas EBITDA increased by AED 2 billion for the period, reflecting higher revenues, only partially offset by higher operating costs, reflecting a move from an underlooked position in the prior year period to an overlift position this year. Net income contributed to the group by the segment was AED 1.1 billion. Additional asset retirement obligations that were booked through the net income statement as a result of the U.K. North Sea Partner default were partially offset by related tax relief assets. All in all, net income was almost $2.6 billion higher for the period, reflecting the comparative period post-tax impairment charge of AED 1.5 billion taken in Q1 2020. On to Slide 8, where we present our liquidity and debt profile. TAQA's liquidity position continues to be very robust at AED 24 point billion or USD 5.6 billion, notably higher than the level at the end of last year and also last quarter end. We repaid $250 million of our $3.5 billion RCF 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 a very strong free cash flow generation, operational investment -- operational cash flow, less investment cash flow, which reached AED 11.4 billion for the 9-month period. Underpinned by our stable and predictable utility businesses, the strong cash flow profile allowed us to comfortably service our debt and debt maturities whilst meeting our financial policy commitments related to dividend payouts and credit ratings. This year, TAQA has 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 '21 and '23 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 of the same amount in 2051. 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 $650 million of face value of the December 2021 and January 2023 bonds. Gross debt was 10% lower at AED 68.3 billion, reflecting the RCF repayment as well as amortization of project debt, a consolidated generation subsidiaries. Our leverage improved as a result to 3.3x last 12 months 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 rates when utilized. At the end of September 2021 and taking into account the effect of interest rate swaps, approximately 94% of the group's borrowings are at a fixed rate of interest compared to 87% at the end of last year. This again reflects the paydown of the floating rate evolving credit facility. Please turn to the next slide, Slide 9. In addition to approving Q3 financials, TAQA's Board has also approved the payment of the third 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 in dividends for 2020 and AED 1.2 billion 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 for 20% each, and a final payment of 40% as laid out on the graph on this slide. This translates to AED 618 million dividend declared by the Board this week of 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 command on the back of stable, predictable and long-term cash flows generated by our utility businesses, our regulated transmission and distribution businesses and 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. Overall, it is a strong year so far, shaping up with good operating performance, higher profitability and cash flows, enabling a deep reduction in debt and a consequent improvement in credit profile while continuing to deliver on our dividends. Let's turn next to Q&A.

Great. Thank you, Steve. [Operator Instructions] Okay. [ Rakesh ], please go ahead.

Just a couple of questions from my end. One was regarding any refinancing plans that you might have considering the -- considering that you also continually look to pay down debt and deleverage. So in that context, how do you see a refinancing for any of the upcoming maturity, either next year or '23? That's one. And secondly, if you could just give us an update on where we are in terms of progress for release of the sustainability report. I think it was likely to be released around the end of this year. So I just wanted to check on that.

Thank you, [ Rakesh ], and nice to speak to you again. The sustainability report, let's address that one quickly first. That is due by the end of this year. And we're on schedule to achieve that. So you can expect that in the next several weeks next month or 2. In terms of refinancing plans, we don't have any near-term refinancing plans for our corporate bonds. As you know, we have paid down our revolving credit facility, and we have actually paid off -- we had one long-term bank loan or short-term bank loan of $200 million. That's been repaid as well in October, actually. And we are still generating sufficient cash. So there is certainly no need to consider any financing activity at this point in time. We have very light maturities in 2021 in the corporate space, as you can see on the chart on Page 8. Much more significant maturities basically in 2023. Sorry, I should have said light maturities in 2022, not 2021, but more significant maturities in January of 2023. So currently, we're thinking against that backdrop that we will be approaching the markets for a bond issue and a refinancing of those light 2022 and heavier '23 maturities sometime during the course of next year. Timing for that is yet to be determined. Obviously, it will depend on market conditions as they develop through the course of next year. So we have that in mind. So watch this space?

Yes. Just one thing. I mean, if I can go ahead with this one last question.

Sure, please. Go ahead.

Yes. Just on the oil and gas segment, if there is any update, I think the last we heard from you was that you continue to operate the segment. And if there is an attractive opportunity to divest maybe then you would think about that. So are we basically at the same stage as of now? So no updates in that regard?

Yes. I think, [ Rakesh ], that's exactly right. Yes, as we said, we continue to operate the businesses. We've committed, we're not going to expand the business or buy the oil and gas businesses. We have a strategic review ongoing, and we'll provide updates as and when we have something material to report, but nothing further at this time.

[Operator Instructions]

Well, I think it looks, Shadi, doesn't it like...

It's all clear.

It looks all clear and it's Thursday afternoon here in Abu Dhabi. So I think we'll call it. We'll leave it there this time. So thank you very much for your attendance. And Shadi, I'm sure if there are additional questions, they can be -- people...

By all means, they get in touch, and we'll be more than happy to answer them. So thank you again for attending, and have a good -- well, weekend for those in the UAE and a good rest of the week for the rest. Thank you. Thanks again.

Thank you.