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

Hello, everyone, and welcome to TAQA's Q3 Earnings Call. My name is Asjad Yahya, and I'm the Head of Investor Relations at TAQA. I will be hosting today's webinar. [Operator Instructions] Please note that this webinar is being recorded and will be made available on TAQA's website. With that, I invite our CFO, Stephen Ridlington, to walk us through TAQA's results.

Thank you, Asjad, and good afternoon, everybody. Good morning, wherever you are. And I'd like to also welcome Asjad to TAQA. He's been with us for a few weeks now, and we'll be interacting with you over time, I'm sure. Let's turn to Slide 5 to just give you an overview of the highlights. Thanks. We're pleased with the sustained growth trajectory in the quarter, with strong profit growth for the period after a good first half to 2022. This included delivering strong EBITDA growth in the quarter, outperforming revenue growth resulted in good margin accretion as we will see shortly. Earnings growth was driven primarily by a robust revenue growth in power generation and more so in oil and gas, where growth was driven by elevated commodity prices and higher production volumes year-on-year. Expenses below EBITDA level, most importantly, D&A increased very moderately, which resulted in further netting of accretion in the quarter. And as we will see later in the presentation, this very much contributed to lifting our year-to-date performance year-on-year. Importantly, outside of the results, we've disclosed our new ESG strategy earlier in October, demonstrating our clear ambition in alignment with the UAE's national agenda of 2050 in terms of greenhouse gas reduction and net zero targets. Lastly, and to reiterate, following the strategic review, we have decided to retain all of our existing oil and gas business, except our upstream business in the Netherlands. We announced this is being sold earlier in October. Turning to Slide 6. Moving to the analysis of our revenue and our adjusted EBITDA performance in Q3 year-on-year. Revenue grew 14% year-on-year, largely driven by Oil & Gas, as you can see, with more than AED 1 billion of incremental top line contribution. This was complemented by a higher revenue in current generation in line with higher pass-through coal fuel costs from Morocco. Lastly, the year-on-year decline in T&D in Q3, it was largely attributable to a high comparable base for the third quarter of 2021, which included a catch-up impact linked to a battery storage project. Switching to the right side and adjusted EBITDA, which improved even more strongly, results as you can see in the 320 basis point margin increase to 40.5% in Q3 2022. Again, this was primarily driven by Oil & Gas business, which adjusted EBITDA may be doubled year-on-year to AED 1.5 billion, translating into a [ 57% ] EBITDA margin in the segment. Meanwhile, margins for T&D as well as generation remained broadly stable year-on-year. We'll be looking to the detail of our segment performance shortly. Turning to Slide 7. It shows our non-operating items in Q3 2022, which will explain the netting margin accretion I mentioned earlier. For the record, bottom line margin accretion was 400 basis points, resulting in a net margin of 17% in Q3 2022. As you can see, that was largely driven by a stable D&A expense, while adjusted EBITDA grew 24.1%. In addition, net margin accretion in Q3 2022 resulted from lower interest expense, largely due to reduced debt levels. Lastly, another item standing out of the year-on-year comparison was the profit from discontinued operations. As a reminder, this was linked to our Oil & Gas upstream assets in the Netherlands that we agreed to dispose, and therefore, reclassified to discontinued operations. Asjad will now take you through the segment performance.

Thank you, Steve. Starting with Transmission & Distribution. We continue to deliver on our core mandate to reliably supply water and power in Abu Dhabi and across the UAE. We're in discussions with the government on RC2, and we expect to conclude these discussions within this quarter. In the meantime, we've maintained high network availability rates, again, well above minimum regulatory requirements for these metrics. During Q3, we saw T&D CapEx declined by 60% year-over-year to AED 468 million. The decline was mainly driven by slower execution of convergence. This means that at the end of September of 2022, our regulated asset-based, RAV, stood at AED 75.6 billion, down by about 2.4% from AED 77.4 billion at year-end 2021. This drop was due to depreciation outpacing new additions to RAV. Moving to the financial performance of the T&D segment. During Q3 2022, revenues dropped marginally by 2.6% year-over-year to AED 6.9 billion. The decline was driven mainly by non-recurring revenues booked in Q3 2021, which Steve referred to, in connection with battery storage projects in NEDC. Lastly, this one-off revenue recognition last year contributed to the 3.5% year-over-year drop in adjusted EBITDA. That being said, our adjusted EBITDA margin remains resilient at 27.9% with a very small 30 basis points year-over-year decline. Moving to the generation. In terms of our recent views first, there are a number of things to highlight. We joined forces with Mubadala last September and signed agreements with the government of Uzbekistan to acquire an 80% stake in gas-fired plants, with a combined capacity of 1.6 gigawatts. TAQA and Mubadala hold 40% each of the entity, while the local government body owns the remaining percent. Our tolling agreement for Red Oak in New Jersey expired in Q3 without being renewed. We also signed a decommissioning and demolition contract for Taweelah A2 power and water plant, in order to meet our asset retirement obligations. Lastly, we secured AED 4 billion in funding to refinance the debt of Mirfa Power Plant. The facility will mature in 2042. This reflects our commitment to securing competitive finance for our assets and maximize returns to shareholders. Lastly, in terms of our asset portfolio, maintenance CapEx declined from AED 42 million to AED 26 million. Internal performance during Q3, the segment continued to deliver solid returns -- sorry, solid results, both operationally and financially. Commercial availability of our assets improved by 180 basis points to 98.5%. Revenues increased by 27.5% year-over-year to AED 4.07 billion, mainly driven by higher pass-through coal prices, which contributed to an increase in revenues. International assets contributed to revenues -- sorry, international asset contribution to revenues were also higher and offset the impact of decommissioning of Taweelah A2. Lastly, a strong increase in associate income from Sohar Aluminum boosted adjusted EBITDA by a similar 27% year-over-year to AED 2.22 billion debt and that translated into a resilient 55% in adjusted EBITDA. Moving on to our third business line. The Oil & Gas segment continued to perform very strongly in Q3 on higher commodity prices and modest production expansion. With most of the production -- most of the production increase we saw came from higher reliability of mature U.K. infrastructure and is not CapEx related. In terms of operational updates, we contributed to a crucial step for the European intersector with TAQA's gas storage asset Bergermeer in the Netherlands being utilized to secure gas supply in Netherlands, ahead of the [indiscernible]. The Acid Gas Injection Project, which is competed last year and referenced in our earlier statements and conference calls in Canada, continued to help us deliver a very strong GHG emissions reduction in Canada. To give you -- to contextualize it, we've had about 54,500 tonnes per year reduction in CO2 emissions and 17% reduction in fuel. As for decommissioning obligation with Brae Bravo jacket and Brae Alpha drilling rig have been successfully and safely removed in the North Sea with 95% of the materials to be decided. Moving on to the financial performance of the segment. Q3 revenues increased by 60.7% year-over-year. That's the highest for any of our business lines to AED 2.7 billion, broadly in line with the already strong increase we had in [ A1 Green ]. The increase was led by higher commodity prices, with realized oil and gas prices up by 33% and 1.5% year-over-year. This led to substantially higher EBITDA margins as benefits of higher revenue translated into a strong volume. I hand over back to Steve to take us through the financial performance year-to-date.

Thank you, Asjad. So having on to Q3. This next couple of slides just gives us a bit of an overview of the 9-month performance. Revenue was 14% and reached AED 39 billion, again, driven by our Oil & Gas business. Importantly, our margin reached close to 43% in the first 9 months of 2022, 70 basis points above the 9-month period for 2021. Moving down to net income. That's where the margin accretion has been strongest, with a 430 basis point increase year-on-year. This largely reflects stable D&A expense, which, as indicated on the slide, largely represents a normalization of D&A expenses. Lastly, we've delivered free cash flow generation of 13% above last year, representing an accretion versus the first half of 2022, which was 11.4% year-on-year, strengthening our robust liquidity profile even further. Turning to liquidity and debt. Our liquidity and debt profile as at the end of the September '22 is shown on this slide. The key messages are: First of all, we continue to delever as free cash flow is applied to debt reduction. Our existing debt is largely fixed at attractive rates. And as a result, we have significant capacity for further borrowing without putting our stand-alone investment-grade status at risk. Looking forward, that puts us in a very good position to fund future growth. Looking at our situation in numbers, liquidity was AED 24.7 billion at the end of September, up AED 2.7 billion compared to December 2021. As a reminder, liquidity includes net cash and equivalents as well as the unused portion of our credit facilities. In terms of our net debt profile, you will see that 98% of our borrowings are locked in at fixed rates, which insulates us from interest rate increases. Loan maturities in excess of 10 years are also quite comfortable, slightly elongated versus December 2021. And in terms of leverage, net debt has reduced further its 2.3x EBITDA compared to 3.3x a year ago and 2.6x in June 2022. Lastly, we wanted to remind you about post dividend payout in 2022 at AED 3 a share -- sorry, 3 fils a share, up 10% per annum in the last 2 years. Turning now to the outlook. On Slide 16, let's just talk a little bit about the ESG strategy that we announced earlier in October, together with our interim targets. So this we see as an ambitious strategy released in October and summarized here on Slide 16. Aligned with longer-term net zero goals for 2050, our strategy focused on six crucial pillars, which are expected to allow us to ensure we meet today's energy and water needs while focusing on renewable energy alternatives, and becoming a champion of low carbon power and water. The first element of the strategy is climate change. We have set ambitious GHG reduction targets for 2030, namely reducing Scope 1 and Scope 2 in GHG emissions across the group by 25% by 2030, which translates to 33% in UAE. Moving on to water and effluents, where we commit to reduce water losses and invest in reverse osmosis technologies alongside other initiatives. Health and safety have also been a prime focus of TAQA and they will continue to be so. On diversity and equal opportunity, TAQA is committed to increasing representation across gender, age, nationality and people of determination. We will ensure that females represent 30% of its management positions by 2030. We will be increasing CSR spend in an economically responsible way to boost our local community engagement. And last but not least, our focus on corporate governance continues to be the better [indiscernible] of the board of our endeavors, bringing more transparency and accountability, KPIs will steer the strategy and we will periodically report on the ESG performance. Turning to Slide 17. Just to give a word on ESG ratings. This -- to add to our new ambitious strategy, we wanted to update you on the progress made between 2020 and now, as illustrated on this slide. Although we know there is still room for improvement, we're indeed quite happy with the progress made by the company. This was recognized by key ESG rating agencies, MSCI, Sustainalytics, and CSR. We now represent average or medium risk for MSCI and Sustainalytics as opposed to more severe risk profile a couple of years ago. Our ESG profile improvement was also noted by CSR up, as we witnessed two notch upgrade, reaching the 67% compared to 40% last year. Lastly, our commitment is not limited to improving operationally as we've also done a lot of work on disclosure front, notably by making information available on climate disclosure portal as a group for the first time in 2022, and we'll continue working hard to make available information as relevant as possible for our stakeholders. Finally, before opening the floor to questions, I would like to wrap up with a summary of this year's presentation. We continue to deliver robust financial and operational performance in Q3 2022, whilst taking the ambitious steps towards our green commitments. Our growth trajectory was further strengthened by rising oil and gas profits along with the recurring utility earnings. Our sustained job operational robustness continues to drive strong cash generation, as you can see, in turn, supporting our ability to offer attractive improvement of returns for all of our shareholders. Our sustainability ambitions are very much at the heart of our corporate strategy, and we are committed to becoming a champion of low carbon water -- power and water, while meeting the energy needs as efficiently as possible. Overall, our outlook of the company remains positive. Thank you.

[Operator Instructions] [indiscernible] to address your questions.

Okay. [indiscernible], there's a question, could you please shed light on the like-for-like change in demand for power and water Q3 '22 and 9 months '22? So I mean, I -- basically, we have been seeing growing demand for power and water across Abu Dhabi and beyond. I think it's part of a general trend of recovery from more subdued levels of 2020 and into '21. And I don't have the details on exactly what is that driving that demand. But I think it's seen across the different customer and customer segments that we have.

I think my question was more specifically. So we get for the [indiscernible] change in volume growth for power and water demand. So we're able to use it as sort of a proxy for economic activity. And I expect that you guys could provide the same for your Abu Dhabi assets so that we can just understand the growth in both capacity and demand in Abu Dhabi.

Okay. I'd say -- okay, fair enough. Well, we can certainly look into that and provide that. I think it's fair to say, Francis, that one of the reasons why we don't or haven't shown in the past is that our financial returns and revenues are not driven by demand so much. It's availability of capacity and the regulated return on our T&D business. So it doesn't tend to impact our financial performance, but we can certainly look into providing that.

Yes, yes, that's fine. It's more -- as you guys know, we deal with a huge paucity of information on the economy from Abu Dhabi. So whatever we can get information, we are trying to. Asjad, I'm sure you can understand.

Rodney, you're up next?

Sure. Can you hear me?

Yes.

Okay. I just wanted to ask just in terms of on your actual portfolio of generation. What -- do you have a specific goal for the percentage of your own portfolio that you expect to be renewables by either 2030 or some other specific date rather than the goal for the Emirate or Abu Dhabi and the UAE in general? I just wanted to see if you have -- if there's a TAQA specific goal?

Absolutely. Yes, there is, Rodney. Yes, we published a strategy back in March 2021, which gave specific 2030 targets for a number of metrics, total generation capacity we wanted to essentially double from 25 gigawatts to 50 gigawatts. And within that to have renewables at least 30% of our power generation capacity by 2030. So that was a very specific target. Since we announced the strategy and the targets, we have, of course, announced that we're going to be buying a controlling share of Masdar, the Abu Dhabi renewables entity. That will take us -- once we have completed that transaction, hopefully before the end of this year, that will take us beyond that 30% target immediately. And therefore, we will be revisiting those targets. So yes, we have clear targets for generation capacity, renewables within that for our investments in our T&D business and for our desalination projects to increase the share of reverse osmosis. That's all available. We can let you have that if you would like access to it.

That's great. And just a follow-on question and just to confirm, will Masdar essentially be the vehicle for all future development of renewables within TAQA? Or will you -- can you potentially invest in projects that Masdar has not developed or co-invested in itself?

No, no. Masdar will become our vehicle for all investment both in the UAE and internationally. So you can expect us to be channeling all of our resource through that big going forward. Of course, investments in other forms of generation or in the transmission and distribution businesses would be outside Masdar.

[Operator Instructions]

I think we have a written question from Rakesh, please advise if there are any plans to issue bonds this year or early next year. Have you considered [indiscernible] issuance? Well, none. In terms of the first part of the question, I think we are not going to issue a bond this year. We have a maturity in January '23, but we have sufficient liquidity, not to need to go into the bond markets at this time. We do expect to issue next year, not exactly clear when. We'll be thinking about that as we move into the first quarter. Again, we have further bond maturities in '24. And as I think you know, let me just reiterate, we generally refinance our existing bond maturities as and when they -- before they become due. So we will be issuing next year, I think, but not exactly clear when. And yes, we will look at -- we're looking at all forms, and we always do before we make a final decision to look at all of the instruments available to us and proceed with what we think makes most sense for us.

[Operator Instructions] All right. It looks like there's no more questions. Thank you, everyone, for attending the call. We will be happy to have a good follow-up with any questions you might have. You can get in touch with me on my e-mail [email protected], and we'll be happy to answer any questions you might have. Thank you for joining.

Thank you.