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

Okay. Good morning, afternoon and evening. Welcome to TAQA's Earnings Call for the First Quarter of 2022. 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 webinar today. [Operator Instructions] Please be aware that we will be recording this webinar to offer a replay through our website afterwards on the website at www.taqa.com in the Investors section. Lastly, I would like to draw everyone's attention to the disclaimer on the next page of the presentation, 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 quarterly results. Please turn to Slide 3, and over to you, Steve.

Thank you, Shadi, and welcome, everyone, to this call on TAQA's earnings update for the first quarter of 2022. TAQA reported today another set of very strong 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 & Distribution. Oil and gas production was also higher compared to the prior year period. Our financial outperformance this quarter was driven by the Oil & Gas segment, whilst the results of our utility businesses were slightly lower for reasons we will outline in the coming slides covering segmental performance. Commodity prices continued to climb during the quarter, particularly against the backdrop of conflicts in Europe, with TAQA's realized crude oil prices up 59% year-on-year to $91 a barrel. As a result, both revenues and adjusted EBITDA for the group improved significantly. Group revenues were up 20% to AED 12.4 billion in the first quarter of 2022, largely reflecting higher realized prices in our Oil and Gas segment as well as higher revenues in Transmission & Distribution and Generation segments. Adjusted EBITDA, which we define in the footnote on this slide was AED 5.6 billion, 20% higher year-on-year, reflecting higher revenues and income from associates, only partially offset by higher mostly pass-through expenses. TAQA share of net income was AED 2 billion, 37% higher than the prior year. Net income was also supported by lower finance costs on reduced gross debt. And we have a slide later covering our leverage and liquidity profile. Group capital expenditure during the first quarter of 2022 reached AED 868 million, a reduction versus the prior year, which has seen an acceleration of Transmission & Distribution projects following subdued CapEx spending in 2020 due to the onset of the COVID-19 pandemic. 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 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 those businesses. Breaking down our revenues and using the last full year -- last 2 full years of results to smooth the impact of oil and gas price volatility, 56% of group 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%, 45% 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 to briefly go through the performance of each of our business lines. Our largest segment, Transmission & Distribution continued 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 10% higher than the prior year, primarily due to higher pass-through costs incurred related to bulk supply tariffs paid by the Distribution businesses. Bulk supply tariffs are the cost borne by the distribution companies for the procurement of power and water. They include system fuel costs and capacity payments to the generation plants. This in turn also increased operating expenses by an almost identical amount. Our regulated asset base fell 3% since the year-end, reflecting regulatory depreciation outpacing additions. Together, this saw adjusted EBITDA around 3% lower. Net income contribution to the group was AED 993 million, 10% lower than the first quarter of 2021, reflecting the lower adjusted EBITDA and the fact that one-off gains were booked in the prior year period upon disposal of obsolete inventory items. CapEx in the segment fell by 37% as a result of accelerated spend in the comparative 2021 period. The increased spend last year followed project cancellations and deferrals in 2020 due to the onset of 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 resilient operational and financial performance. Overall, power commercial availability across the global contracted fleet and for which we received capacity-based revenues averaged 95% for the period slightly lower than the level of 97% in the prior year period. This reflected unplanned outages within the UAE fleet of plants offset by higher availability international assets, such as those in Morocco. Revenues for the segment were higher at AED 2.9 billion, mainly due to higher pass-through fuel revenues in our international assets, particularly in Morocco. Adjusted EBITDA of AED 1.7 billion, 7% lower versus last year reflected the lower capacity availabilities, lower profitability at our sole merchant asset, Red Oak, as well as the retirement late last year, Taweelah A2, one of our 11 operational IWPPs in the UAE owned by TAQA. These impacts were partially offset by significantly higher associate income from Sohar Aluminum due to the improved sales and higher aluminum prices. Net income for the segment was AED 58 million, supported by lower finance costs on project debt amortization. Lastly, reduced CapEx in 2022 reflected higher spend in the first quarter of 2021 on maintenance projects undertaken for Taweelah B in the UAE. Please turn to Slide 7. Oil and Gas revenue for the quarter were AED 3.1 billion, 85% higher than 2021 and largely tracking significantly higher realized prices. For oil, this increased by 59% to reach $91 a barrel, whilst gas prices more than doubled to nearly $9 per Mcf. Average production was 126,900 barrels of oil equivalent per day, up 5% on the same period in 2021. This reflected higher production in all of TAQA's assets, but particularly in Europe. Oil & Gas adjusted EBITDA more than doubled to AED 1.9 billion for the period, largely reflecting higher revenues. Net income contributed to the group by the segment was AED 1.1 billion. CapEx reduced to AED 254 million, a reduction of 12% year-on-year, led by our European assets as we start the shift into decommissioning on certain late life assets. On to Slide 8, where we present our liquidity and debt profile. TAQA's liquidity position continues to be very robust at AED 19.3 billion or $5.3 billion, slightly lower than the level at the end of last year. This reflects the repayment upon maturity of a Malaysian ringgit denominated Islamic corporate loan as well as the payment of AED 3.4 billion in final and special dividends for the year 2021. Free cash flow generation for the period reached AED 3.3 billion, 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 on dividend payouts and on maintaining the investment-grade credit ratings on a stand-alone basis. Gross debt was 2% lower at AED 63.9 billion, reflecting the corporate loan repayment as well as the amortization of project debt at consolidated generation subsidiaries. Due to stronger earnings, our net debt levels did increase slightly. Our leverage improved to 2.8x adjusted EBITDA, down from 2.9x at the end of 2021. We have presented on this slide our full debt maturity profile. It is worth mentioning that interest rates, 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 Q1 2022, and accounting for interest rate swaps, approximately 95% of the group's borrowings are at a fixed rate of interest, the same level as at the end of the year -- of last year. Please turn to the next slide. We continue to deliver on our dividend policy. Last year, we paid AED 3.1 billion or AED 2.75 per share in dividends with an additional special cash dividend to AED 2.3 billion or AED 2 per share. This implied a payout ratio of 90% of our net income, reflecting the strong performance last year. In addition to approving full year financials, TAQA's Board has now approved the first interim dividend for 2022. This is again in line with our shareholder approved dividend policy and amounts to AED 60 per share or approximately AED 675 million in total. Based on our dividend policy, we expect to pay a minimum total dividend of AED 3 per share or AED 3.4 billion in total this year. As was the case last year, dividends will remain subject to final shareholder approval at the Annual General Assembly. We remain the only UAE listed company to pay dividends on a quarterly basis. This showcases the financial discipline that 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 factors, including capital expenditure plans to fund growth as well as credit rating considerations. We remain committed to maintaining investment-grade stand-alone credit metrics. Turning to the last slide, where we can open the floor to questions.

Great. Thank you, Steve. [Operator Instructions] There are currently no questions. Maybe I'll just give it another half minute or 30 seconds to see if anyone wishes to ask a question. Seems all is clear. No. There is one question. Anjali is asking, what are your funding plans for this year?

Thank you, Anjali. We are looking to potentially come to the market for an issue later in the year. And the reason for that is that we have a significant bond maturity in the first quarter of 2023, January 2023, actually. So we will be looking to refinance that. Exactly when we do that and exactly how much we will seek to raise, needs to be determined, and we're thinking about that. It certainly won't be before the summer. I think it will be later in the year and of course, will be subject to market conditions.

Great. Another follow-up question from Anjali. Can you discuss TAQA's strategy for renewables? What are the projects in the pipeline?

Okay. Well, our strategy, we laid out just over a year ago now, I think, or maybe 2 years ago, as -- almost 2 years ago, in which we set out our new strategy in which ESG is very central to our thinking. We're aiming to be the low-power low-carbon power and water champion for Abu Dhabi and beyond. And we set out some fairly ambitious targets for generation growth domestically adding another 30 gigawatts, internationally increasing by 15 gigawatts and also CapEx plans for our Transmission & Distribution businesses. Within that generation growth, we aim to move up the share of renewables in our total capacity from the current -- just over 5% to 30%. So we have an ambitious plan. We have some ambitious targets. And in terms of the projects that are in the pipeline in renewables, I would say the first and most obvious thing to say would be Masdar. So as we announced in December last year, we, along with ADNOC, are going to become investors in the Masdar renewable company, which is currently owned 100% by Mubadala, so we will be buying in and so will be ADNOC. TAQA will be the largest and controlling shareholder with a 43% stake in the -- in that renewables business. So that will immediately give us access to the current capacity and pipeline of Masdar and will significantly deliver on our targets towards 2030. So once we've acquired Masdar, we will use that as our exclusive vehicle and a pipeline of opportunities will follow through the Masdar vehicle.

And another follow-up question on that from Anjali, the opportunities internationally.

Yes. Well, Masdar opportunities that -- Masdar -- most of its investments are international. It participates in 1 or 2 projects here in the UAE, but -- most of its capacity today is international and most of its growth will be international, too. So that will be very much the focus through Masdar. We will, of course, have -- I know the question was international, but particularly, we will also have access to the Abu Dhabi's pipeline of solar projects here as we have a guaranteed right to a minimum 40% share of every generation project that is undertaken by Abu Dhabi until 2030. So we'll be participating in those projects as well through Masdar.

Okay. Thank you, Steve. Another question from [ Sameer ] asking whether we can explain the nature of bulk supply tariffs. Yes. Okay. I'll happily take that one, [ Sameer ]. So as you mentioned, the bulk supply tariffs are really the -- the billings that are collected by our distribution companies and which go to Ewec, really their pass-through costs that are paid to Ewec for the supply of power and water in Abu Dhabi and Ewec is the sole [ procurer ] of power and water from our plants here in the UAE. And these bulk supply tariffs will cover both the capacity payments, which Ewec makes to our IWPPs, as well as the fuel costs, which are a significant portion and which are covered by Ewec. So fuel is provided to the IWPPs free of cost. We're not exposed to energy input costs. But obviously, these need to be paid for by Ewec. And so the bulk supply tariff includes that cost to fund all basically between fuel costs and capacity payments, that funds all the generation part of the -- of our value chain in the UAE. So hopefully, that answers the question. So there really just pass-through costs there on the revenue line and in the OpEx line within the T&D segment in our financials. Okay. We'll just give maybe a few more seconds, if anybody wanted to ask further questions before we end the call. Okay. If there are no further questions, then this concludes our presentation. Of course, if you do have any further follow-on questions, by all means do contact us and the Investor Relations team, and we'll be more than happy to answer them and get back to you. Thank you very much for attending, and goodbye. Have a good afternoon or evening.

Thank you.