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

Hello, everyone. Welcome to TAQA's 2022 Results Call. My name is Asjad, and I'm the Head of Investor Relations for TAQA. I'm joined by Stephen Ridlington today, our CFO. For today's presentation, we will run you through prepared remarks followed by Q&A. Now just a quick note, this call is being recorded [indiscernible] for your information. And with that, I hand over to Steve.

Thank you, Asjad, and hello, everybody. Good to talk to you again on the occasion of our full year results for TAQA. So turning to Slide 5. Let's start there, gives us an overview of our results. So 2022 overall, was a very strong year for TAQA, driven by elevated commodity prices and robust operating performance. This is reflected by robust earnings metrics. Revenues up 10%, adjusted EBITDA up 6.7% and net income up 35%. Revenue growth was driven primarily by the Oil & Gas business on the back of strong oil and gas prices. Meanwhile, our more predictable and stable utilities business continue to perform in line with expectations. Adjusted EBITDA growth was dampened by noncash items, which I will discuss shortly, whilst net income benefited from normalized D&A expense. Free cash flow declined and is mainly as a result of the $1 billion payment the company made for its investments in Masdar. In continued strength of the business, particularly in the form of stable cash flows, the Board has proposed a final dividend of 3.3 fils per share. This is comprised of a final quarterly dividend of 1.2 fils per share, in line with our dividend policy and a special dividend of 2.1 fils per share. Combined with the quarterly dividends of 0.6 fils per share that had already been paid for each of the first, second and third quarters, the total dividend for the year stands at 5.1 fils per share, representing a payout ratio of 72%. The proposed final dividend is subject to shareholder approval in the upcoming AGA in March. Turning to Slide 6. This just gives us an overview of performance highlights beyond the financial results for the full year. 2022 was a major step for TAQA in setting the stage for an expanded clean energy footprint. As I outlined in the previous slide, we delivered robust financial performance, allowing to maintain our stand-alone investment-grade credit rating while enhancing our positioning and ability to fund growth. We announced a new ESG strategy with ambitious greenhouse gas emissions reduction targets for 2030 and clear targets on reverse osmosis, water preservation and gender diversity. These new targets and our ongoing achievements have been recognized by external counterparts and particularly ESG rating agencies. The year also saw us completing the acquisition of our stake in Masdar, which is firmly positioned as Abu Dhabi's flagship clean energy company. This transaction brings TAQA's aggregate generation capacity to just under 30 gigawatts and cleaner energy accounts for about 28% of aggregate generation capacity. As a reminder, our 2021 corporate strategy targets, 50 gigawatts of capacity by 2030 and clean energy to account for at least 30% of the total portfolio. Our Board also took a strategic decision to retain the Oil & Gas business. Our primary focus will be to sustain production capacity across Canada and Iraq, while decommissioning assets in the North Sea in an environmentally friendly manner. Moreover, future growth will be driven by organic and inorganic initiatives. Al Dhafra, our second solar project and the world's single largest solar PV farm, successfully supplied early generation to the network in 2022. Taweelah RO was also -- reverse osmosis was also successfully tested, and we announced financial close for the $3.8 billion project to decarbonize ADNOC's offshore production operations. We also increased activity on the M&A front, signing a binding agreement to acquire 40% of the Talimarjan power complex in Uzbekistan and selling 100% ownership in the upstream Oil & Gas business in the Netherlands to Waldorf Energy. We have also announced the intention to acquire a 50% stake in EGA's 6.4-gigawatt power generation assets. Last but not least, we saw significant developments on the financing side, including successful pricing with a $700 million green bond by Sweihan, a $1 billion refinancing for the Mirfa plant and refinancing our $3.5 billion group RCF, revolving credit facility that is, which resulted in an extension of its tenor while reducing its cost. Turning to Slide 7. Let's take a closer look at the growth drivers of the top line and the EBITDA for the year. Revenue growth was largely driven by the Oil & Gas business, with additional support from generation. Oil & Gas benefited primarily from higher commodity prices, where realized oil prices increased 37% and gas benefited from an even higher jump of 72%. Production -- Oil & Gas production also increased 1% over the same period. Generation on the other hand benefited from higher pass-through fuel revenues and grew 12%. T&D revenue remained broadly stable year-on-year, despite a higher comparable base in 2021 linked to catch-up revenue with battery projects in ADDC. EBITDA growth was entirely driven by the Oil & Gas business' operating leverage impact. In contrast, T&D and generation saw a drop in EBITDA during 2022. The former declined primarily because of the absence of catch-up revenues in 2022, whilst generation dropped due to the noncash charges to cover expected credit losses and project costs. The results -- this results in a 140 basis point decline in EBITDA margin to 41.5% in 2022, albeit still above the average for the last 3 years. Slide 8 takes a look at nonoperating P&L items. As I mentioned, we delivered 36% growth in net profit for 2022 and strong margin accretion. Growth was supported by 14% decline in depreciation in 2022 as the expense returns to a more normalized run rate. The elevated depreciation level seen last year was linked to a one-off asset retirement obligation in Europe. Financial expense also continued to decline as our total debt declined to around AED 62 billion. In contrast, 2022 recorded AED 89 million of losses versus a near AED 1 billion gain last year in other gains and losses. This is largely explained by the recognition of one-off relief in 2021 against future decommissioning costs in the North Sea and lower contribution from the sale of noncore assets that we registered in 2021 in Canada. Lastly, as a reminder, the upstream Oil & Gas business assets in Netherlands earmarked for sale have been reclassified as discontinued operations. Turning to Slide 9, look at -- take a look at our balance sheet, where our focus remains to remain investment-grade credit rating on a stand-alone basis while preserving our ability to grow the business. We've increased the proportion of fixed rate debt to 98% and refinancing of Sweihan and MIPCO slightly extended the average debt maturity to 10.4 years by the end of 2022. Average interest rates also increased slightly on the back of the refinancing exercises. Available liquidity remains robust, representing 13% of total assets. Our net debt-to-EBITDA declined to 2.5x as regular debt repayments continued, and we did not tap the debt market beyond the refinance given our healthy cash position. Lastly, I want to mention a technical loan covenant breach within FATCA, one of our [ IWPs ] here in the UAE, which has resulted in the debt temporarily being recognized as a short-term liability. This issue is expected to be resolved in the first quarter of 2023, and when there is no material impact from this technicality. Turning to Slide 10. In 2021, the combination of strong profitability and healthy cash flows has allowed the Board to propose a special dividend of 2.1 fils per share. This is above and beyond the final dividend of 1.2 fils per share based on our existing dividend policy. Taking 2022 as a whole, combining these with 0.6 fils per share, dividend previously announced for each of the first 3 quarters, total dividend for 2022 will stand at 5.1 fils per share. Moreover, given that our existing dividend policy expires with the 2022 payout, the Board is proposing a new policy for the 2023 to 2025 period. The new dividend policy is based on a combination of a fixed and variable dividend. The fixed part relates to the utilities business. And [ is set at 3.25 ] fils per share, 3.5 fills per share and 3.75 fils per share for each of 2023, 2024 and 2025. These dividends will continue to be paid quarterly and align with the existing policy. The variable component on the other hand will be discretionary and based on a percentage of annual net profit of the Oil & Gas business, and it will be paid annually. We believe this new policy is better suited to our portfolio of businesses and the best guarantee of value generation for our shareholders in the years to come. The proposal will be submitted for shareholders' approval at the Annual General Assembly in March. I'll now hand back over to Asjad to take us through the segment performance.

Thank you, Steve. So as Steve said, we'll now look at -- take a closer look at the 3 business lines, starting with T&D. So the Transmission & Distribution business operationally speaking continued to do well. And we had a network availability of 98.6% in 2022, a marginal improvement over the previous year. Our regulated asset base decreased 2.9% to AED 71.5 billion in 2022, due to the rate of depreciation outpacing new additions. In terms of CapEx, delays in execution of new projects have led to a 26% year-over-year drop to tie back into the decrease in the regulated asset base. Top line for the business remained steady at AED 26 billion, due to rise in pass-through bulk supply tariffs, partially offset by the absence of battery project revenues recognized in 2021. The absence of these battery project revenues also had a much bigger impact on EBITDA, which largely explained the 5.6% decline in EBITDA in 2022 as well as the 200 basis points decline in margin -- EBITDA margin to 30.3%. With regards to the Generation business, we completed the most prominent event of the year with the completion of the 43% stake in Masdar, which has set the stage for more rapid clean energy expansion for the group. We also entered an agreement for privatization and acquisition of a thermal power plant in Uzbekistan. Other notable activities during the year included the pricing of the $700 million green bond that Steve alluded to as well as the $1 billion refinancing from Mirfa. Commercial availability forms the basis of payment for the Generation business remained strong at 97.8%, while CapEx declined 22% during the year. In terms of financial performance, higher pass-through fuel revenues explained the bulk of the 12% year-over-year growth that we saw for the business, while contribution from UAE declined as Taweelah A2 was decommissioned. Adjusted EBITDA, on the other hand, was negatively impacted by noncash items, primarily to cover expected credit loss and project costs. The O&G business -- the Oil & Gas business performed strongly, with improved profits in margins due to favorable commodity prices. As highlighted earlier, TAQA's Board took a strategic decision during 2022 to retain the Oil & Gas business with operational activity to focus on Canada and Iraq. Production for the year stood at [ 13.8 ] thousand barrels per day, up 1.1% year-over-year. Among notable operational achievements during the year, we played a significant role in securing Europe's energy supply by ensuring that the capacity was filled at our Bergermeer asset in Netherlands. As in the case with the wider group, the Oil & Gas business is also actively implementing key projects to reduce GHG emissions. Notable projects in this regard include the Crossfield acid gas injection in Canada, gas solutions project in Iraq and the off-gas compressor project in Britain. Moving to the financial performance of the business side. Revenues stood at AED 10.1 billion, up a strong 43% year-over-year. Adjusted EBITDA similarly jumped 60%, while net income from the business accounted for over 50% of the group's net income. Average realized oil prices stood at 87.79 barrels in 2022, up 37%, while average realized gas prices stood at 8.21 mmbtu -- per mmbtu, up 72%. Before we wrap up this presentation, I'd like to take a moment to quickly drill into the q4 quarterly results as well. In terms of -- during the quarter, positive aspects of the quarter were offset by noncash items. Revenues remained stable year-over-year with limited variation across the business lines. Adjusted EBITDA, however, declined 17%. The drop was driven by the Generation business and can be explained largely by the noncash items that I alluded to earlier. As is the case for the full year, net income for the quarter benefited from normalization of depreciation, while the $1.02 billion payment for our 43% stake in Masdar was the key item for -- leading to the decrease in free cash flow. That being said, we remain very confident about the outlook for our business and remain well positioned for growth. As I indicated on the previous slide, there was no significant movement on the top line within the business lines. Revenues for T&D were largely flat, despite the absence of catch-up revenues associated with the battery project in the previous year, while Generation similarly recorded a little change during the year. In contrast, Oil & Gas rose by 4%, mainly on the back of favorable commodity prices. In terms of adjusted EBITDA, T&D saw a marginal decline due to the absence of recognition of catch-up revenues. Generation meanwhile explains the bulk of the decline in EBITDA seen during Q4 2022. Key items of note include AED 400 million noncash item to cover credit loss exposure and project costs and AED 257 million impact in contribution from associates and JVs. Decommissioning of Red Oak, which contributed AED 88 million in Q4 2021 and of course, no contribution in Q4 2022. And lastly, lower contribution from Morocco due to planned outages in the quarter. Now I'll hand back to Steve to wrap up the presentation.

Thank you, Asjad. So overall, a very successful year paving the way for more growth for TAQA, I think. Newly announced -- our newly announced ESG strategy emphasizes greenhouse gas reduction targets by 2030, making TAQA a regional leader in terms of ambitions. Closing the Masdar transaction advances TAQA towards our 50-gigawatt capacity goal by 2030. Our utility business remains stable, forming a solid foundation for the company. Strong cash flows and balance sheet support significant growth opportunities. Overall, TAQA is well poised to take advantage of any growth opportunities. With that, I think we close the presentation, Asjad.

And we'll open to any Q&A. [Operator Instructions] Rakesh, please go ahead?

Thank you for the presentation. Congratulations on a good set of results. I had one question basically, if you could help us understand -- this is more from an ESG standpoint. First of all, could you be able to give us kind of a sense of what percentage of your total revenues are derived from coal?

Sorry, say that again, you broke up a little bit.

Let me repeat. My question is what percentage of your total revenues are derived from thermal coal? So basically, power plant activities that are coal-based. I have a rough sense, but just want to confirm the number with you.

Okay. Thanks, Rakesh. We can get precise numbers to you. I mean it does vary year-by-year depending on the Oil & Gas business. But it's around 5%, I think, at the moment for 2022, something of that order of magnitude.