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

Hello, everyone. Welcome to TAQA's Q2 2023 earnings call. My name is Asjad Yahya and I'm the Head of Investor Relations at TAQA. And I'm joined by our CFO, Steve Ridlington. Before we start, please note that this session is being recorded, and by participating in this meeting, you could -- you consent to the recording. This presentation will follow the usual script. Steve and I will talk through the operating highlights and the financial performance of this period, and then we'll open the floor for Q&A. With that, I hand over to Steve.

Thank you, Asjad, and good morning, good afternoon to everybody on the call today. I'm going to start on Slide 5, as usual, to give an overview of the second quarter to get us into this. So first of all, revenues for the second quarter were up 5% and that's mainly driven by higher pass-through costs and inflation impact in our Transmission & Distribution segment. Our profitability, on the other hand, was impacted by the Oil & Gas business. This is the cumulative effect of lower commodity prices and a fall in production on the back of halting of oil production in Iraq and the natural decline of our late-life U.K. assets. However, our underlying utility businesses continue to perform strongly with both the Generation and Transmission & Distribution businesses recording an increase in EBITDA. The decline in our free cash flow is primarily attributable to lower contribution of Oil & Gas as well as adjustments to related party balances from previous years. As you may know, we also successfully raised $1.5 billion through a bond issuance in the second quarter, including TAQA's first green bond, which was very well received. And in July, we received the final decision on RC2 from the Department of Energy. That's the regulatory framework, which included a number of favorable changes such as an increase in our real regulated return to 4.9%. I will cover this in more detail in a later slide. Turning to Slide 6. Second quarter revenues grew 5% as I mentioned and with the main components as follows: First of all, Transmission & Distribution saw revenues up 19% year-on-year, benefiting from an increase in pass-through costs as well as inflation. The decline in Generation revenues is mainly due to absence of contribution from Red Oak following the conclusion of that tolling agreement in Q3 of last year. Oil & Gas revenues dropped 13% on lower commodity prices as well as a decline in production. Group adjusted EBITDA decreased 9% due to a lower profitability of our Oil & Gas business. In contrast, adjusted EBITDA of Transmission & Distribution grew by 13% year-on-year on the back of higher inflation and RC2 revisions. The impact of RC2 has been applied retroactively from the 1st of January '23. Generation also recorded a modest 2% year-on-year growth in adjusted EBITDA. Moving to Slide 7. Our net profit for the quarter was AED 1.9 billion, a 17% decrease from Q2 2022. This decline reflected mainly lower adjusted EBITDA. Other items to note below the EBITDA line include interest income, which surged in Q2 '23 on the back of increase in global interest rates. The quarter was also impacted by the recognition of a AED 40 million deferred tax charge compared to a AED 30 million deferred tax release in Q2 2022. Now I'll take you through some key strategic developments that took place in recent months. So turning to Slide 9. In April, we issued the dual tranche of $0.5 billion fixed income bond, including our inaugural green bond. The first tranche was a $500 million 5-year conventional note that pays a coupon of 4.375%. The second tranche was AED 1 billion -- $1 billion, sorry, 10-year green bond that pays a coupon of 4.696%. TAQA also announced its maiden green finance framework. The framework received a very good sustainability score from Moody's. Last but not least, the order book for the 2 tranches combined reached about $15 billion or nearly 10x oversubscribed. This demonstrates the very strong investor confidence in TAQA. Turning to Slide 10. In July, the Abu Dhabi Department of Energy finalized RC2, bringing regulation clarity for T&D business for the 2023-2026 period. The new framework is applied retroactively from 1st January 2023 and will last until the 31st of December 2026. Notable features of RC2 include a rise in real WACC from 4.6% to 4.9%, an increase in RAB to AED 47.5 billion over 2023 to 2026, a healthy increase in both OpEx and CapEx allowances and compensation for UAE corporate income tax via adjustments to OpEx allowance on an ex-post basis. On Slide 11, a reminder of our acquisition of Sustainable Water Solutions holding company or SWS. We are proceeding to -- we're in the process of expanding our business portfolio through the acquisition of SWS. On the completion of the transaction, SWS will enhance TAQA's position as Abu Dhabi's fully integrated utility company by adding wastewater collection treatment and reuse capabilities. It will also enhance our ability to further support the UAE's net zero ambitions. The terms of the transaction reflect management's strong focus on value creation while evaluating any M&A transaction. Upon closing, SWS will add AED 16 billion to our regulated asset base or a near 20% increase against an acquisition price of AED 1.7 billion. SWS will be subject to the RC2 framework, and as such it is expected to be a highly value-accretive transaction for TAQA. Moreover, the payment terms for the acquisition are highly accretive with 50% to be paid on completion and the rest 1 year after completion. I'll now hand over to Asjad to walk through the second quarter performance.

Thank you, Steve. Going through the Transmission & Distribution business first. The business continued to record strong operational performance with network availability at 98.3% in Q2. CapEx also recorded a healthy increase as project execution picked up pace in the business. As Steve mentioned, RC2 was approved and implemented, which establishes regulatory visibility for the 2023 to 2026 period, with favorable changes in areas such as WACC, CapEx and OpEx allowance. We also announced a AED 113 million investment in Xlinks First Limited, which is a major project that involves generation and transfer of clean energy from Morocco to the U.K. Moreover, as a continuation of TAQA's strategic objective to help other corporates in Abu Dhabi in reducing their carbon footprint, an AED 8.8 billion project was announced in Q2 to provide sustainable water for ADNOC's offshore operations. In terms of financial performance, the Transmission & Distribution business proved to be the strongest contributor to the group's top and bottom line in Q2. Revenue recorded a strong 19% year-over-year jump on the back of higher inflation and pass-through revenues. Adjusted EBITDA meanwhile, recorded a slightly lower 13% year-over-year growth on the back of higher inflation as well as an increase in WACC and the higher OpEx allowance under RC2. Moving to Generation. The business -- commercial viability of the business improved by 120 basis points to 98.8% in Q2. This is because last year certain UAE projects faced forced outages which have been addressed through corrective maintenance activity translating into higher availability. Maintenance CapEx was lower during Q2 compared to the previous year, mainly due to phasing of certain maintenance activities the second half of the year. This phasing is a result of lower production from our fleet, which was displaced by production from the Barakah Nuclear plant. We also invested AED 103 million in Masdar during Q2, bringing our year-to-date investment in Masdar at AED 687 million to fund further developments. Other notable developments during the quarter included financial float of the AED 2.3 billion Mirfa 2 RO plant, which is set to be the third largest reverse osmosis plant in UAE and signing up a strategic partnership with Uzbekistan. In terms of financial performance, Generation revenues declined 9% year-over-year due to the absence of contribution from Red Oak as explained earlier. These revenues accounted for about AED 282 million in Q2 of 2022 and lower pass-through revenues also contributed to the decline. Adjusted EBITDA, however, recorded a modest 2% year-over-year growth on the back of higher availability of liquidity in UAE and lower O&M costs due to the phasing of maintenance activities. TAQA share of results to associates and JVs declined sharply, mainly due to the lower returns from Sohar Aluminum and aluminum price declines. For Masdar, in particular, TAQA's share of net income in Q2 stood at AED 49 million. Moving to the Oil & Gas business. Oil & Gas production was down 6% year-over-year in Q2 due to a combination of production shutdown in Iraq from the 25th of March and natural decline in late-life UK assets. Meanwhile, our midstream business continued to perform strongly with gas storage at Bergermeer filled at 80% at the end of June. CapEx for the business increased 13% year-over-year due to drilling, completion and tie-in costs for our North American assets. The combination of lower commodity prices and a decline in production drove 13% decline in revenues. Average realized oil price declined 17%, while average realized gas price declined 26%. Last but not least, adjusted EBITDA for Oil & Gas recorded a more significant 46% decline due to the combination of lower revenues and higher operating expenses. Now taking a step back to look at the performance of the first half as a whole, revenues grew 5%. Similar to our Q2 numbers, this growth was largely driven by the impact of higher inflation and pass-through elements in our Transmission & Distribution business. In contrast, adjusted EBITDA decreased 7% with the fall mainly driven by performance of the Oil & Gas division. Net income for the first half saw a large 200% plus increase, benefiting from a gain of AED 10.8 billion on the recognition of our stake in ADNOC gas during Q1. We generated free cash flow of AED 6.4 billion during the first half. The year-over-year decline was impacted by lower contribution from the Oil & Gas division. Cash flow was also impacted by higher CapEx as execution picked up pace in Transmission & Distribution in particular. Last but not least, as mentioned earlier, we have also invested AED 687 million in Masdar during the first half. Moving to our liquidity and debt profile. Balance sheet management continues to be driven by our commitment to maintain stand-alone investment grade rating. As Steve highlighted, we completed a $1.5 billion issuance during Q2 during TAQA's first green bond. That resulted in the fixed rate debt accounting for 98% of total debt at an attractive average interest rate of 4.65%. Maturity also extended slightly to 10.5 years compared to 10.3 years at the end of 2022. We continue to benefit from availability of strong liquidity standing at 12% of total assets. Our leverage increased slightly to 2.6x, mainly as a result of the decline in EBITDA during the first half of 2023. And our Board of Directors declared an interim dividend of 0.65 fils per share for Q2 in line with the 2023 to 2025 dividend policy announced earlier this year. With that, I hand over back to Steve to wrap up the presentation.

Thank you, Asjad. And so let's just look at the Slide #20. Just a few points to make here. First of all, our acquisition of SWS will bring new expertise and capabilities to TAQA. It also constitutes another pillar of growth for us. Second, we produced our third sustainability report. This has been published and it showcases noteworthy TAQA ESG-related advancements. I invite you to review it in the Sustainability section of our website. Third, the regulatory revisions under RC2 have raised the real weighted average cost of capital from 4.6% to 4.9%. Fourth, capitalizing on growth opportunities is a key pillar across the business. TAQA has established a green finance framework to issue green bonds through [ books ] and loans under the green financing instruments umbrella. As a first step, the group also announced $1.5 billion dual tranche 5-year and 10-year bond offering under its green finance framework. Finally, our unwavering commitment to value creation remains a fundamental principle in assessing both organic and inorganic opportunities. With that, I'll hand back to you, Asjad.

The floor is now open for questions. Please feel free to raise your hand and ask a question and we'll gladly respond to it. [Operator Instructions] So we have a question from Stella. I apologize if I didn't pronounce second name correctly. What will be your first steps in use of proceeds from the green bonds? Steve?

Yes. Thank you, Stella. Well, the green bond that we issued in April was very specifically allocated to the purchasing of our shares in Masdar, which was -- obviously we completed slightly before that, but we were able to allocate on that -- to raise funds on that basis. So almost all of the proceeds were for Masdar. Going forward, we will consider new green bond issues. Again, it was very specific green bond initiatives and investments.

[Operator Instructions] It doesn't look like we have any more questions. With that, Steve, would you like to...

I think so. If there are no more questions, just give it maybe another 5 or 10 seconds in case somebody's thinking something. Otherwise, we will wrap up.

We have question from Shahrukh Salem. How does the outlook look for O&G business? Any major CapEx plan there to improve asset life?

Thank you, Shahrukh. The outlook for Oil & Gas business, it is the business that we invest least in, and that's against our commitment that we will maintain the assets that we currently have and optimize and run them for maximum value for the company. So all of our plans are invested in the existing fields. In terms of where we may invest, it's really focused on Canada, which is our largest oil and gas asset with plentiful opportunities to sustain production and maintain reserve life. So most of our effort will go there. We're currently spending of the order of a couple of hundred million dollars here on investing in Canada to maintain production. And that involves investing with our partners where we have partners in drilling new wells to sustain production. And I think that kind of figure is what we'll be looking at going forward. In Iraq, very difficult to say given we have a production shut-in. And in the U.K., again, limited investment as those assets are very late in life. So I think the focus will be on Canada and of the order of magnitude that I just mentioned.

[Operator Instructions] All right. Thanks very much. It looks like there's no more questions. Thank you very much for joining us on this results call. We really look forward to speaking to you again, both face-to-face during my interactions with you in the quarter or at the end of the quarter with our next results call. Thank you.

Thank you.