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

Good morning, afternoon and evening. Welcome to TAQA's earnings call for the full financial year 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, and I'll also be hosting this webinar today. [Operator Instructions] Please be aware that this session is being recorded so that we offer a replay of the webinar on our website at www.taqa.com in the Investors section. Lastly, I'd like to draw your attention to the disclaimer on the next page of the presentation, particularly to the forward-looking statements that we may make in the presentation. With that, allow me to hand over to Steve Ridlington, TAQA's Group Chief Financial Officer, to walk through the full year results for TAQA. Please turn over to Slide 3, and over to you, Steve.

Thank you, Shadi, and good morning, good afternoon and good evening to everybody who's joining us today. Welcome to the 2021 full year earnings update. TAQA reported today another set of very strong financial and operating 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 higher compared to the prior year. For our financial results, our usual clarifying disclosures are applied one last time. Figures for 2020 are prepared on a pro forma basis. This is to enable meaningful year-on-year comparisons. We will no longer need to reference pro forma prior year comparatives for future results' releases going forward. Our financial performance continues to be driven by stable utility businesses and was significantly boosted by our upstream oil and gas operations. Commodity prices staged a strong recovery in 2021 with TAQA's realized crude oil prices up around 80% year-on-year to USD 64 per barrel. As a result, both revenues and adjusted EBITDA improved significantly. Group revenues were up 11% to AED 45.7 billion in 2021, largely reflecting stronger realized prices in our Oil and Gas segments as well as higher revenues in Transmission and Distribution. Adjusted EBITDA, which we define throughout this presentation as earnings before finance costs, FX gains or losses, interest income, income tax and depreciation, depletion and amortization and other income was AED 19.7 billion, 23% higher year-on-year, reflecting higher revenues and income from associates, only partially offset by higher mostly pass-through expenses. TAQA's share of net income was AED 6 billion, more than double the prior year, 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 lower finance costs on significant debt reduction on the back of very strong free cash flows of AED 17.7 billion in 2021, and we will cover this further later in the presentation. Group capital expenditure during 2021 reached 7.4 -- sorry, AED 4.7 billion, a 26% increase versus 2020, driven mainly by resumed spend within Transmission & Distribution, our largest segment as well as higher spend in Oil and Gas. Turning to Slide 4. This slide continues to highlight the strength of TAQA's business model underpinned by the utility businesses. We continue to derive 80% or more of our revenues and adjusted EBITDA from long-term contracted and regulated businesses. Contracted businesses are substantially all of our generation assets, which benefit from long-term contract agreements that protect TAQA from any volatility and input on 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 revenues and using the average of the past 2 years to smooth the impacts of oil and gas price volatility, 56% of TAQA's revenues fell within our regulated networks business and 27% within contracted generation, a total of 83%. At the adjusted EBITDA level, the total is higher at 88% of which 45% is regulated and 43% contracted. Within our contracted businesses, the weighted average residual life of our offtake agreements was 12 years. Turning to the next slide, briefly go through the performance of each of our business lines. Our largest segment, Transmission & 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 5% higher than the prior year, primarily due to higher pass-through costs incurred relating to bulk supply tariffs paid by the distribution businesses. Bulk supply tariffs are the costs borne by the distribution companies to the procurement of power and water. They cover systems' fuels costs and capacity payments to the generation plants. This, in turn, also increases operating expenses by an almost identical amount. Revenues also increased on recently approved additions to the regulatory asset base related to battery storage projects that were previously carried out by the distribution companies. Our regulated asset base fell 3% during 2021, reflecting regulatory depreciation outpacing additions. Adjusted EBITDA, up 6% reflected the higher revenues only partly offset by the increased pass-through costs. Net income contributed to the group was AED 4.5 billion, 13% higher than 2020, reflecting the higher adjusted EBITDA and one-off gains from the disposal of obsolete inventory items. CapEx in the segment increased by 30% 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 92.3% for the period, slightly lower than last year's level of 93.9%, reflecting planned and unplanned outages within the UAE fleet of [indiscernible] offset by higher availability international assets, such as Ghana and India. Revenues for the segment were broadly flat at AED 12.3 billion with adjusted EBITDA of AED 7.7 billion, unchanged versus 2020. Reduced revenues within the UAE were offset by increased fuel revenues at TAQA, Morocco as fuel 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, and this was due to improved sales of higher aluminum prices. Net income for the segment was AED 643 million, supported by lower finance costs on project debt amortization, but offset by adverse foreign exchange impacts from international assets as compared to foreign gain -- foreign exchange gains realized in the prior year. Lastly, reduced CapEx in 2021 reflected higher spend in the first quarter of 2020 on lifetime extension projects on turbines within our Shuweihat S1 plant. Please turn to Slide 7. Oil and Gas revenue for the year was AED 7.4 billion, 78% higher than 2020 and largely tracking significantly higher realized prices and offset by lower revenues in the midstream gas storage business in the Netherlands. Average production was 122.4 thousand barrels of oil equivalent per day, up 4%. This reflected lower entitlement production in the Atrush field in Iraq, offset by European gains. Higher volumes in Europe reflected improved operational performance as well as TAQA's acquisition of additional interest in certain fields in the U.K. North Sea following a partner default. Oil and gas adjusted EBITDA increased by over fivefold to AED 4.2 billion for the period, largely reflecting higher revenues. Net income contributed to the group by the segment was AED 2.2 billion. Additional asset retirement obligations that were booked through the 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 AED 3.7 billion higher for the period, in part reflecting the post-tax impairment charge of AED 1.5 billion taken in the first quarter of 2020. CapEx increased to AED 1 billion, up 46% year-on-year as a result of higher spending in Iraq and North America, partially offset by lower CapEx in our European assets as we start the shift into decommissioning on certain late life assets. Moving on to Slide 8, where we will present our liquidity and debt profile. TAQA's liquidity position continues to be very robust at AED 21.9 billion or $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 revolving credit facility in the first quarter of 2021 and fully repaid the outstanding balance of $1.2 billion in the second quarter. This was done on the back of very strong free cash flow generation, which reached AED 17.7 billion for the full year. Underpinned by our stable and predictable utility businesses, this strong cash flow profile allows us to comfortably service our debt and debt maturities, whilst meeting our commitments to dividend payouts and maintaining investment-grade credit ratings on a stand-alone basis. Gross debt was 15% lower at AED 65 billion, reflecting the RCF revolving credit facility repayment as well as the amortization of project debt at consolidated generation subsidiaries. Combined with strong earnings, our leverage improved as a result to 2.9x adjusted EBITDA down from 4.2x at the end of 2020. We 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 2021, and taking into account the effect of interest rate swaps, approximately 95% 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 revolving credit facility during 2021. Turning to the next slide, which covers our quarterly dividend policy. In addition to approving full year financials, TAQA's board has proposed the payment of the final cash dividend for the year 2021 that is in line with our dividend policy. Should this be approved by shareholders at the upcoming Annual General Assembly, TAQA would have paid a total of AED 3.1 billion or a payout ratio of just over 50% of earnings. We remain the only UAE-listed company to pay dividends on a quarterly basis, and this showcases the financial discipline we can command on the back of stable, predictable and long-term cash flows generated by our utility businesses. TAQA's dividend policy considers several key factors, including capital expenditure plans to fund growth, as well as credit rating considerations, and we remain committed to maintaining investment-grade stand-alone credit metrics. Turning to the last slide, we would like to provide a recap of progress made in delivering our 2030 strategy. We have presented here some progress milestones bucketed into the 4 main themes of our strategy, which are to be a leader in low-carbon power and water, pursue domestic and international growth, drive efficiency and protect our financial strength. Within the imperative to be a low-carbon power and water champion, I'll just draw attention to 2 or 3 things. We undertook an in-depth GHG emissions baseline exercise and published TAQA's first sustainability report as a fully integrated utility. The report announced a new TAQA commitment to net 0 emissions by 2050 for TAQA's global portfolio, and we aim to set interim 2030 targets in the near future. We established Abu Dhabi Energy Services Company, or ADES, as a Super ESCO to pursue demand-side management initiatives through energy-efficient solutions or the retrofitting of facilities. ADES has already signed several memorandum of understanding with significant real estate owners, including the UAE University and Abu Dhabi Health Services Company, or SEHA. We initiated a strategic rule of our Oil and Gas businesses to explore various options from retention to divestment in whole or in part. Moving on to the second bucket, growth. We want a tender to develop a gas-fired generation plant for Saudi Aramco, producing almost 1 gigawatt of power and over 1,000 tonnes of steam per hour. This will include a material stake in the O&M company as we look to further build up our operatorship and maintenance capabilities, also part of our 2030 strategy. We were awarded a $3.6 billion strategic project to link ADNOC's offshore production operations to TAQA's onshore grid through the development and operation of a high-voltage direct current subsea transmission system. This will be a first of its kind network in the region and is expected to significantly reduce the carbon footprint to ADNOC's offshore operations. We announced the transaction to acquire 43% controlling stake in Masdar. The transaction will crown Masdar as the exclusive vehicle of Abu Dhabi for all renewables and green hydrogen projects. The renewables platform would launch with 23 gigawatts in current committed and exclusive renewable energy capacity with an ambition to grow this to at least 50 gigawatts by 2030. Regarding protecting our financial strength, our successful dual-tranche debt refinancing exercise in April and the subsequent reaffirmation of TAQA's credit ratings by Moody's and Fitch demonstrate our commitment to maintaining current leverage levels in support of our growth aspiration and dividend policy commitments. We mentioned earlier on at the debt and liquidity slide, the 2021 was a very strong year that saw us significantly reduce our debt levels. Timing for driving efficiency, we recently awarded a digital transformation project for our Transmission & Distribution businesses to help them become a true digital utility. Finally, we completed the Brae Bravo topside removal, one of the U.K. North Sea's largest decommissioning projects safely whilst recycling more than 95% of the materials. That ends the presentation for today. So we can turn to Q&As. Thank you.

Great. Thank you, Steve. [Operator Instructions] Yes. So I think it's either very clear or it's just a Friday effect. But in case there are no further questions, this then concludes our presentation. Of course, if you do have any further follow-up questions, do contact us and the Investor Relations team, and we'll be more than happy to answer them. Thank you very much for attending, and goodbye. Have a good weekend.

Thank you.