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

Welcome, everyone, to TAQA's Q1 2023 results conference call. My name is Asjad Yahya, and I'm the Head of Investor Relations at TAQA. I am joined today by our CFO, Steve Ridlington. We posted our first quarter results earlier today, which are available on our website as well as the ADX website. Today's call will start with prepared remarks by management followed by Q&A. With that, I ask Steve to officially kick off the call.

Thank you, Asjad, and good morning, good afternoon, good evening to everybody on the call today. It's good to be with you again. Let's turn to Slide 5 for a summary of the results. Thank you. So overall, the first quarter of 2023 saw solid underlying financial performance for TAQA, but with net income significantly boosted through TAQA's acquisition of 5% of ADNOC Gas. In summary, revenues grew 6%, largely reflecting higher pass-through costs in our T&D and generation businesses. We'll return to that later. As such, this revenue improvement does not impact profitability. EBITDA declined 5%, mainly reflecting lower commodity prices in our oil and gas and aluminum business. Net income saw a very significant increase to AED 11.6 billion, and this was driven by a AED 10.8 billion one-off gain from the recognition of the value of our investment in ADNOC Gas. This gain, however, was partially offset by a AED 1.2 billion deferred income tax charge related to the UAE corporate income tax enactment, a gain a one-off noncash item. Free cash flow recorded a strong 31% year-on-year year increase, supported by working capital improvements. Finally, the Board of Directors also announced a cash dividend of 0.65 fils per share for the first quarter of 2023. This is the first interim payment under the new dividend policy approved by the Board for the period -- sorry, approved by shareholders, the period 2023 to 2025. Turning to Slide 6. This shows more details on group revenue and EBITDA. As I've already mentioned, group revenue increased by 6%, and this was largely driven by T&D pass-through costs, which in turn increased 16% year-on-year, and accounted for 57% of total revenues for the quarter. Generation also saw higher pass-through fuel revenues, which made up the bulk of the 9% year-on-year increase in revenues to the business line. The 19% year-on-year decline in oil and gas revenues is, as I've said, mainly due to less favorable commodity prices and a natural decline in production as decommissioning activity in the U.K. [ continue ]. EBITDA, on the other hand, saw a 5% decline mainly due to a AED 371 million decline in the oil and gas segment. T&D's EBITDA saw a 7% jump benefiting from an increase in revenues, while our generation EBITDA remained largely stable year-on-year. Turning next to the non-operated P&L items. As I mentioned earlier, reported net income increased almost 5x with one-off noncash items, largely explaining the unusual variance. The decline in finance costs during the quarter is largely attributable to the company's payment -- repayment of USD 1 billion bond in January of this year. Depreciation and amortization also declined slightly year-on-year, mainly on the back of reassessments and increase in useful life of certain fixed assets at TRANSCO. Lastly, the key one-off items impacting net income in first quarter of 2023 included a AED 10.8 million gain on the recognition of our 5% interest in ADNOC Gas and a AED 1.2 billion deferred income tax charge related to the UAE corporate income taxes enactment. Next slide. We brought you a slide here to talk a little bit about ADNOC Gas as it was such a significant impact on net income this quarter. As we've already said, we received a 5% stake in ADNOC Gas from ADNOC. This was in recognition of our long-standing partnership with ADNOC and how we've been working together to benefit gas savings for the UAE. Listed on the ADX, ADNOC Gas represents a significant financial investment for TAQA. No consideration was paid for the transaction. As such, the recognition of our stake in ADNOC Gas resulted in a one-off gain of AED 10.8 billion first quarter. Going forward, the change in the value of the stake will be recognized through other comprehensive income and post quarter call in 2023, only dividends will impact the P&L and cash flow statements. Based on the dividend policy disclosed by ADNOC Gas, we expect to receive dividends of AED 298 million for the second half of 2023 in this year and next year, AED 611 million, should bring significant value for our shareholders. Turning next to liquidity and debt profile. First of all, it's important to say that movements to the movements -- the key items impacting debt and liquidity metrics during quarter 1 2023 were, first of all, the USD 1 billion or AED 3.7 billion in bond repayment in January. The final dividend payment of a similar amount approved by shareholders at the AGA March have paid in the same month. And finally, utilization of the revolving credit facility in March through which we borrowed an additional $750 million or AED 2.8 billion. These 3 factors together led to a decline in liquidity levels, a decrease in the proportion of fixed rate debt in the TAQA and an increase in the average interest rate on our portfolio. Liquidity did, however, remain strong at about 10% of total assets. Our net leverage remains stable at 2.5x EBITDA, and we continue to be focused on maintaining stand-alone investment-grade ratings. Finally, TAQA's new dividend policy came into effect, for the 2023 2025 period following recent shareholder approval. In accordance with the new policy, we will pay the first quarter interim dividend of 0.65 fils per share, an 8% year-on-year increase over the dividend announcement the current [ spending period ] than last year. I'll now hand over to ask Asjad to talk about segment performance, Asjad.

So as Steve mentioned, I will starting with transmission and distribution, as Steve mentioned, our business recorded strong operational and financial performance in the first quarter, serving as the largest positive contributor to the group's revenue and EBITDA line. Network availability remained healthy at 98.1%, in line with the level seen in Q1 of 2022. Meanwhile, CapEx increased by 17% as the pace of project execution improved. Our regulated asset base also increased slightly year-over-year on the back of additional CapEx and higher inflation. Furthermore, digital transformation initiatives are being implemented by the T&D team to enhance operational efficiency. This accounted for the bulk of the 18% year-over-year increase we saw in transmission and distribution G&A. In terms of financial performance, the 16% year-over-year revenue growth was largely driven by higher pass-through revenues. Again, as Steve mentioned earlier in the presentation, in the form of bulk supply tariffs and TUOS or transmission use of system. EBITDA also benefited from the rise in revenues, although increased by a slower 7%. This led to a slight decline in EBITDA margin compared to the previous year. Lastly, transmission and distribution net income saw a 24% year-over-year increase, benefiting from lower depreciation due to a reassessment and increase in the U.S. -- useful life of certain TRANSCO assets. Moving on to generation. The business entered -- we saw some notable developments on the business side in the quarter. To begin with, TAQA entered O&M of its Taweelah B IWPP, in addition to acquiring a further 10% stake in the UAE based plant. This represents significant progress on the company's strategic goal of developing O&M capabilities. We also signed a water purchase agreement with Engie for a 120 MIGD a reverse osmosis plant in Abu Dhabi with financial close to follow shortly. Meanwhile, our operational performance remained very strong with commercial availability improving to 98.8%. In terms of financial performance, higher pass-through fuel revenue from Morocco largely explain the 9% year-over-year increase in top line. On the other hand, the company's share of results of associates and JVs declined 44% year-over-year, mainly due to lower contribution from Sohar Aluminium. Adjusted EBITDA remained largely unchanged as pass-through revenues do not impact profitability. On to our third business line. As Steve mentioned, the oil and gas segment was impacted most significantly by the fall in commodity prices. Our realized oil prices declined 19%, while realized gas prices declined 31% year-over-year during Q1 2023. Production also decreased during the quarter by 6% due to natural decline in production and decommissioning activity in the U.K. CapEx, on the other hand, increased by 58%, primarily driven by drilling, completion and tie-in costs on North American assets. The falling commodity prices combined with lower production had a significant impact on revenues. Consequently, top line for the business fell 19% year-over-year. EBITDA fell by a slightly bigger 20%, resulting in EBITDA margin decline to 61.4%. Moreover, although EBITDA recorded a fall of operating expenses also declined 18% year-over-year due to overlift reduction and lower carbon credit costs for compliance with emission trading schemes within our European business. Moving on to the ESG front, which, as you all know, is a significant value at TAQA, we saw significant improvements coming through on our various ESG metrics in 2022. Notably, we recently published our third sustainability report, which highlights several of the metrics that I've mentioned -- about to mention over here. Most notably, GHG emissions were lower by 8% in 2022 compared to the previous year, and 11% compared to the baseline of 2019. GHG intensity based on revenue was similarly lower by 16% compared to 2021. The share of renewables and TAQA's generation portfolio stood at 28% by the end of last year compared to our 2030 target of at least 30%. On the social front, health and safety remain a key priority with zero fatalities reported. Notable improvements were made on safety metrics as well, such as spills and recordable injuries. Local community engagement spending increased by over 139%, supporting 60 projects across 7 countries. These projects focus on a variety of areas, including youth, women empowerment and environmental education, name a few. TAQA's efforts continue to be recognized by ESG agencies with significant upgrades by MSCI and Sustainalytics. In fact, we received a second upgrade by CSR Hub at the start of 2023, bringing the rating to 80%, up from 60% recently. We also continue to focus on governance framework with the board composition witnessing substantial progress during the recent election process. Independent members now account for 82% of the board, up from 67%. Furthermore, e-mail members have joined the Board for first time accounting for 27%. Now I ask Steve to wrap up the presentation with an overall look on the quarter.

Thank you, Asjad. Slide 17 here just gives us an overall summary to wrap up. I think I'll start by saying that, the first quarter of this year was despite lower commodity prices affecting our oil and gas business was a record quarter for net income for TAQA. And this, of course, was driven by the profit on the gain on ADNOC Gas the shares that were receiving ADNOC Gas. The utilities business continues to perform extremely well, robust performance, continuing to generate strong performance and strong capital of the business. On the sustainability front, as Asjad has outlined, we've made significant improvements. In particular, our Scope 1 & 2 emissions fell 8% and our greenhouse gas intensity based on revenues declined by 11% compared to the 2019 baseline. As a reminder, we intend to reduce our emissions by 25% by 2030 compared to the 2019 baseline. Lastly, but not the least, the first half of 2023 has already witnessed several developments that will pave the way for continued growth. Beyond the key announcements for our quarter 1 2023 developments already mentioned during the presentation, I'd like to touch on some additional notable recent announcements. First of all, we published our Green Finance framework, which was followed by our inaugural green bond is part of our Dual Tranche $1.5 billion issuance earlier this quarter. This represents a key step in delivering our commitment to becoming a leader in the clean energy space. We also announced our investment in Xlinks, the first of its kind renewable energy project that is expected to supply 8% of the U.K.'s electricity needs from renewable sources in Morocco by 2030. In conclusion, we expect TAQA to continue to move from strength to strength. We now welcome any questions prepared from the artists...

Please feel free to raise your hand on Zoom. And we'll take the question from you. Again, if anyone has a question, please feel free to raise your hands on Zoom, and we'll open the mic to you. All right. It looks like there's no questions today. Thank you, everyone, for joining the call. We look forward to speaking to you again on the next call.