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

All right. Good morning, afternoon and evening, everyone. Welcome to TAQA's Earnings Call for the First Half of 2022. We're very happy to have you with us today. My name is Shadi Salman, and I'm heading Investor Relations at TAQA. I'll also be hosting this webinar today, which will be my last one at TAQA as well. [Operator Instructions] Please be aware that we will be recording this webinar 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 disclaimer on the next page, particularly when it comes to forward-looking statements. With that, allow me to hand over to Steve Ridlington, TAQA's Group Chief Financial Officer, to walk us through our half year results. Please turn over to Slide 3.

Thank you, Shadi, and welcome, everybody, to the call on TAQA's Earnings Update for the First Half of 2022. Let me start with the usual results summary here on Slide 3. 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 and distribution. Oil & Gas production was unchanged on the prior year period. Our financial performance year-to-date and for this quarter continued to be driven by the Oil & Gas segment, whilst the results of our utility businesses were slightly lower for reasons we will outline shortly in the coming slides. Commodity prices continued to climb during this quarter, particularly against the backdrop of conflict in Europe, with TAQA's realized crude oil prices increasing 50% year-on-year to USD 91 per barrel from $60 per barrel in the prior period. As a result, revenues, adjusted EBITDA and net income for the Group improved significantly. Group revenues were up 15% to AED 25.4 billion in the first half of 2022, largely reflecting higher realized prices in our Oil & Gas segment as well as higher revenues in the Transmission & Distribution and Generation segments. Adjusted EBITDA, defined in the footnote on this slide, was AED 11.3 billion, also 50% higher on a year earlier, reflecting higher revenues and increased associate income, only partially offset by higher mostly pass-through expenses. TAQA's share of net income was AED 4.3 billion, 50% higher than the prior year. Net income was also supported by reduced depreciation and lower finance costs. Group capital expenditure during the first half of 2022 reached AED 1.8 billion, a reduction versus the prior year, which has seen an acceleration of Transmission & Distribution projects, but was also due to some delay in the execution of new projects this year. Turning to the next slide. This slide continues to highlight the strength of TAQA's business model underpinned by the utility businesses and supported increasingly as of late by the Oil & Gas segment. It is worth noting that we recently announced the conclusion of the strategic review of the Oil & Gas segment, which explored the potential for sale or retention in whole or in part of our various oil and gas businesses. The review resulted in a decision by TAQA and its Board of Directors to retain the large majority of our portfolio, except the upstream assets in the Netherlands. This is in part due to the strong contribution made by these businesses to our revenues and earnings in 2021 and in 2022, the trend for which has continued this year. The figures presented on these slides prove the impact of oil and gas price volatility by using the last 2 full year's results. During that period, we derived 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 these businesses. Breaking down these figures, 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 slightly higher at 88%, 45% regulated and 43% contracted. Within our contracted businesses, the weighted average residual life of our offtake agreements was approximately 11 years at the end of June. Turning to the next slide to briefly go through the performance of each of our business lines. First, Transmission & Distribution. This is our largest segment and continues 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 3% higher than the prior year, primarily due to higher pass-through costs incurred related to both supply tariffs paid by the distribution businesses. Bulk supply tariffs at the cost borne by the distribution companies for the procurement of power and water. They include system fuel costs and capacity payments to generation plants within the system, which sit both within TAQA's portfolio and outside of it. Revenue growth was partially offset by nonrecurring revenues related to battery storage projects booked in 2021 and a fall in the regulated asset base by 1% since year-end. All in all, this saw adjusted EBITDA reduced by around 8% versus the prior year. Net income contribution to the Group was AED 2 billion, 14% lower than the first half 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 15% 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. The CapEx figure also reflects some delay in the execution of new projects in this segment. 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 and water commercial availability across the global contracted fleet and for which we receive capacity-based revenues, averaged 97.5% in the period, slightly lower than the level of 97.7% in the prior year period. This reflected unplanned outages within the UAE fleet plants, offset by higher availability in international assets, such as those in Morocco. Revenues for the segment were higher at [ AED 3.8 billion ], mainly due to higher pass-through fuel costs in our international assets, particularly Morocco. Adjusted EBITDA of AED 3.8 billion, 4% lower versus last year, reflected the lower capacity availabilities as well as the retirement late last year of Taweelah A2, 1 of our 11 operational IWPPs in the UAE owned by TAQA. These impacts were partially offset by significantly higher associate income from Sohar Aluminium due to improved sales and higher aluminum prices. Net income for the segment was AED 314 million, supported by reduced depreciation and lower finance costs on project debt amortization. Lastly, slightly reduced CapEx in 2022 reflected higher spend in the first quarter of 2021 on maintenance projects undertaken by Taweelah B in the UAE. Turning to the Oil & Gas business. Oil & Gas revenues for the period were AED 5.7 billion, 65% higher than 2021 and largely tracking significantly higher realized prices. Oil prices increased by 50% to reach $91 a barrel, while gas prices more than doubled to USD 8 per 1,000 cubic feet. Average production was [ 124,100 ] barrels of oil equivalent per day, flat to the same period last year. This reflected higher production in Europe offsetting slightly lower production in Canada and Iraq. Net income contributed to the Group by this segment was AED 2.3 billion, significantly higher than the prior year. This reflected higher taxes on increased profits, but does not include any further tax expected to be paid as part of the U.K. windfall levy being imposed on U.K. oil and gas companies, the law for which was passed in July 2022. CapEx increased slightly to AED 465 million, 4% up year-on-year, led by our North American business as European operations continue to shift into decommissioning of certain late-life assets. On to Slide 8, that represents our liquidity and debt profile. TAQA's liquidity position continues to be very robust at AED 22.3 billion or $6.1 billion, slightly higher than the level at the end of last year. Free cash flow generation for the period of AED 8.3 billion enabled the repayment upon maturity of 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. 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 investment-grade credit ratings on a stand-alone basis. Gross debt was 3% lower at AED 63.1 billion, reflecting the corporate loan repayment just mentioned as well as the amortization of project debt at consolidated generation subsidiaries. Due to stronger earnings and lower net debt levels, our leverage improved to 2.6x adjusted last 12 months EBITDA, down from 2.9x at the end of 2021 and 2.8x at the end of March. 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 the first half of 2022 and accounting for interest rate swaps, approximately 9% -- 95% of the Group's borrowing are at a fixed rate of interest, at the same level as at the end of last year. The average maturity of our debt stands at 10.4 years with an average interest rate of 4.6%, both slightly higher versus year-end. Turning to the next slide. We continue to deliver on our dividend policy. For the first quarter, we paid an interim dividend equivalent to 20% of the total dividend expected to be paid out under TAQA's dividend policy. TAQA's Board has now approved a second interim dividend for 2022, up an equal amount of AED 0.6 fils per share or approximately AED 675 million. Based on our dividend policy, we expect to pay a minimum total dividend of 3 fils per share or AED 3.4 billion in total. 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, and this showcases the financial discipline we 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. That concludes the presentation. So turning to the next slide for questions.

Great. Thank you, Steve. [Operator Instructions] Okay. We've got a question from Ahmed. I'll just open the line for you. You should be able to pose your question now. Okay. Sorry, Ahmed seems to have an issue with his microphone. Maybe Ahmed, if you wish you could ask it in writing in the Q&A. And I'll read it out. [Operator Instructions] Okay. So we have one question from Ahmed at EFG, a question about regulated WACC. Have there been any further developments so far?

Thanks, Ahmed, for that question. Yes. As you probably -- I'm sure you're aware, the regulated period 1 -- RC1 runs until the end of this year, at which point we will move over to RC2. Now there's nothing yet we can disclose on the outcome of discussions with RC2. We are still in discussion with the Department of Energy on the terms of RC2. We are consulting with them regularly. We've had several rounds of exchange. It's a very collaborative and core deal set of discussions. But I'm afraid we are not yet able to disclose any of the terms because they haven't yet been agreed. What I can say is that the overall framework for RC2, the building block approach looks like it will remain as in RC1 as we would expect it to. But the details of that will be finalized towards the end of this year, and there will be an announcement. But until then, I'm afraid there's not much more -- nothing more we can add.

Great. We have another question from [ Ashwinder ]. I will pass the floor over to you to pose your question verbally.

My question was more on your debt stack. I appreciate the market, of course, is dislocated at the minute. But generally, broadly, assuming market normalizes, over, call it, next 6, 12 months, what is your debt strategy? What is the expectation in terms of how much net debt-to-capital or net debt-to-EBITDA that you intend to maintain?

Thanks very much, [ Ashwinder]. So yes, I mean, you're quite right to mention the volatile markets that we live in today. You see there the debt stack, as you mentioned, we've got a significant maturity of our corporate bonds of around $1 billion in January 2023. So we're currently looking at that. I have to say, yes, we haven't yet determined whether we will refinance it this year. We normally like to refinance our bonds prior to maturity. But the reality is that our cash flows are so strong that we may not need to do that this year. And we do, of course, have the revolving credit facility of $3.5 billion available to us in the event of need. So our strategy remains to essentially refinance the corporate bond portfolio as and when it matures. But the timing of that is always open to question. So we'll consider that later this year. We don't have a specific sort of debt target, if you like. We want to maintain our stand-alone credit metrics, as we have said on a number of occasions. We're clearly well within that kind of territory today at 2.6x EBITDA. So we certainly have more debt capacity, which we would use in the event of the CapEx program or the growth program requiring it. So I think it's -- that's more or less where we are. So we will be refinancing. I think just not quite clear when.