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

Hello, everyone. Welcome to TAQA's Q3 2023 Earnings Call. My name is Asjad Yahya, I'm the Head of Investor Relations. Today, I'm joined by our CFO, Steve Ridlington. Please note that this session is being recorded, and by participating in this meeting, you consent to being recorded. This presentation will follow the usual script. Steve and I will walk you through the operating highlights and the financial performance for this period, and then we'll then open up the floor for Q&A. Steve, over to you.

Thank you, Asjad, and good morning, good afternoon and good evening to everybody on the call today for the Q3 highlights and results. Turning to Slide 5. This is the usual overview. So as with earlier quarters this year, Q3 witnessed a challenging operating environment on the back of lower oil and gas prices. Now this affected our results for the quarter. Our Generation business was also impacted in particular by the absence of a contribution from Red Oak, the tolling agreement for which ended last year. On the other hand, the T&D segment remained a bright spot with healthy top and bottom line growth. Project development and execution has also picked up pace within T&D. This resulted in a strong increase in CapEx and feeds directly to our regulated asset base. You would have seen that we also announced updated targets for 2030 along with the quarterly results today. The significant revision reflects our ambitious growth strategy. I will cover the updated targets in depth later in the presentation. Last but not least, TAQA continues to gain recognition for progress on ESG initiatives in the form of upgrades by the ESG rating agencies. Let's move to the next slide. Our revenues for the third quarter of 2023 declined 9% year-on-year because of the performance of the Oil & Gas and Generation segments, as I mentioned earlier. The former was impacted by lower commodity prices as well as reduced production. The decline in production was driven by continued shutdown in Iraq and the natural decline in late-life U.K. assets. For the Generation business, in addition to the absence of the contribution from Red Oak, which stood at about AED 500 million in Q3 2022, revenues were also impacted by unplanned outages in some of the UAE-based IWPPs. Transmission & Distribution segment in contrast saw an 11% increase topped by on the back of an increase in pass-through revenues as well as positive impact from the RC2 regulatory period and inflation. The factors explaining the decline in revenues for the quarter also are largely responsible for the drop in the group's adjusted EBITDA. Realized oil prices in Q3 declined 14%, while realized gas prices fell an even more aggressive 45% year-on-year. This, along with the 19% reduction in production, accounts for the lion's share of the 50% fall in adjusted EBITDA for the segment. This negative impact was partially offset by a higher contribution from our midstream business in the Netherlands. With regards to Generation, in addition to the impact from Red Oak and unplanned outages in the UAE, associates and JVs contributed a AED 42 million loss in Q3 versus AED 105 million gain last year. In the meantime, Transmission & Distribution recorded an 11% increase in EBITDA, benefiting from higher inflation and RC2 revisions. Turning to Slide 7. Our net profit for the quarter was AED 1.7 billion, a 29% decrease over Q3 2022, again largely explained by the performance in the Oil & Gas and Generation segments. This decline was driven by a lower EBITDA and a higher tax charge. Our tax charge increased from AED 282 million to AED 358 million because of the U.K. energy levy, which was increased to 35% at the beginning of the year, but also the absence of deferred tax credits this quarter. Also note that our interest income tripled this quarter thanks to higher interest rates, while our finance costs remained stable at 98% of our debt -- sorry, as 98% of our debt is fixed. I'll hand over to Asjad now to take you through the business line performance.

Thank you, Steve. Starting with Transmission & Distribution, the segment continued to deliver strong revenue and operational growth. The top line increase is attributable to larger pass-through revenues, higher inflation and a positive impact of RC2. Likewise, adjusted EBITDA improved thanks to higher WACC and inflation impact. CapEx wrapped up significantly on the back of good project investment and execution in T&D, contributing positively to RAB. I'd also like to take this opportunity to flag again that the SWS acquisition that we had announced last quarter was completed and the significant amount of RAB to the tune of AED 16 billion or almost 20%. We also announced the financial close of AED 2.2 billion project to provide sustainable water supply to ADNOC's onshore operations. This project is another example of TAQA acting as the partner of choice to other corporates in the UAE to help reduce their carbon emissions. With regards to Generation, from an operational standpoint, our generation assets had 95.9% commercial availability in Q3 compared to 98.5% last year. The decline is the result of unplanned outages at 3 IWPPs in the UAE. We also saw, on TAQA, one of the largest single solar PV projects in the world announced commercial operations during the third quarter. Meanwhile, CapEx for the segment remains subdued due to shifting of maintenance activities on the back of lower production. Looking at the financial performance, revenue reported a year-over-year decline principally due to the end of Red Oak tolling agreement in the U.S. in Q3 2022. This entity contributed AED 508 million last year in Q3 versus 0 this year. The unplanned outages in the UAE also contributed to this decline. These 2 factors also impacted adjusted EBITDA negatively. In addition, associates and JVs contributed a AED 42 million loss, as Steve mentioned, against a AED 105 million gain last year. This can mainly be explained by the fact that Sohar Aluminum was impacted by lower aluminum prices, while Masdar recorded market losses on FX and interest rate exposures along with higher development costs. Moving to the Oil & Gas division. Production in Q3 2023 declined 19% year-over-year, with the negative impact coming from a combination of production shutdown in Iraq from 25th March and the natural decline in production from our late-life UK assets. This reduction, combined with the decline in realized oil and gas prices, has the biggest impact on the financial performance of the segment. Consequently, revenues were down 39% year-over-year, while adjusted EBITDA fell by 50% in Q3 2023. We, however, did see healthy performance in our midstream business, with gas storage at Bergermeer filled at 96% of capacity at the end of September. Lastly, CapEx for the segment increased 8%, driven by increased drilling, completion and tie-in costs with our North American assets. Taking a step back to look at the 9-month financials versus the quarter, the revenue was same year-over-year as higher pass-through revenues related to T&D have offset any negative impact from the other segments. Meanwhile, the group adjusted EBITDA was impacted most significantly by the performance of our Oil & Gas business as oil production and realized commodity prices declined. It is worth noting that though the T&D segment recorded a 10% decrease in adjusted EBITDA on the back of high inflation and RC2 changes, net income for the first 9 months more than doubled to AED 15 billion, mainly due to a one-off nearly AED 11 billion gain on recognition of our investment, ADNOC gas. gain was partially offset by a AED 1.2 billion deferred tax charge related to the implementation of the UAE corporate tax. Lastly, free cash flow also declined year-over-year, mainly due to the performance of the Oil & Gas segment and adjustments to related party balances from previous years. I will hand back to Steve -- sorry, I apologize, [ there's the delivery slide ]. Moving to our balance sheet. We continue to benefit from strong liquidity and significant borrowing headroom, with a central focus on maintaining our standard investment-grade rate. Our portfolio-wide interest cost is locked in at an attractive level with a weighted average debt maturity standing at net leverage. Our leverage remains comfortable as we remain stable -- as net debt-to-EBITDA remained stable at 2.5x. We also have AED 26 billion in available liquidity, which equates to about 13.3% of total assets. Last but not least, we continue to deliver on our stated dividend policy, with the Board declaring an interim dividend of AED 0.60 per share for Q3. I'll now hand over the presentation back to Steve to take us through the outlook of the company.

Thank you, Asjad. So turning to the next slide. This is where we'll introduce our new growth targets that we announced alongside the results earlier today. Originally set under the 2021 strategy, there was a need to refresh our guidance on growth targets to reflect key subsequent developments, the most notable of which was TAQA's acquisition of 43% stake in Masdar. The new 2030 target for gross capacity stands at 150 gigawatts, triple the previous target of 50 gigawatts. This target is consistent with and includes Masdar's stated target of reaching 100 gigawatts by 2030. The targeted share of renewable energy has also been revised, 30% of the portfolio to 65%. In fact, following the Masdar acquisition, renewable energy already accounts for over 40% of the existing power generation portfolio, which means we have already exceeded the previous target of reaching over 30% by 2030. In order to improve visibility and disclosure, we have also introduced a net capacity target of 50 gigawatts for 2030 against our current net capacity of 17 gigawatts. Furthermore, water generation capacity is set to increase from 1,180 million imperial gallons per day today to 1.3 billion gallons -- imperial gallons per day by 2030, with 2/3 of the capacity coming from planning efficiency and low-carbon reverse osmosis desalination. We envisage that these ambitious power and water generation targets set for 2030 will require a total spend of around AED 35 billion by TAQA by 2030. In addition, we continue to project that we will spend AED 40 billion on Transmission & Distribution CapEx between 2021 and 2030. This is in line with the target we previously announced in 2021. We are also looking to expand our T&D, Transmission & Distribution business beyond the UAE through organic and inorganic opportunities. However, these are not reflected in the AED 35 billion figure that I mentioned earlier. Turning finally to the wrap up. Despite a challenging quarter, TAQA continues to set the stage for sustained long-term growth with the ambitious revised 2030 target a testament to that. Moreover, ESG remains embedded in the way we do business, and this continues to gain recognition in the market. We also received recognition in the form of industry awards, including being ranked #1 in the Forbes Middle East Sustainable 100 List. We also achieved common success in the 2023 Gulf Sustainability Awards, winning gold in each of the 4 categories the company was nominated in. TAQA continues to benefit from a well-defined stable regulatory environment. The changes implemented in the second regulatory trial phase, in particular, bode well for our future outlook. We're also working towards the closing of the SWS acquisition, the completion of which will boost our regulated asset base in addition to opening a new corridor of growth for TAQA. Our strong balance sheet remains a cornerstone for our financial strength, underpinned by our strategy of maintaining stand-alone investment-grade ratings. This, combined with our continued strong cash flow generation, provides us with the flexibility to choose when we tap the market for additional CapEx. This is of particular value in the current uncertain times. Finally, our unwavering commitment to value creation remains a fundamental principle in assessing all growth opportunities, whether organic or inorganic. The accretive nature of the recently announced SWS acquisition is again a testament to that fact. Thank you.

Thank you, Steve. So now we'll open up the floor to Q&A. Feel free to ask a question. Raise your hand if you have any questions and we'll get to them. Again, if you have any questions, please feel to raise your hand, and we'll gladly take any questions you may have. All right, well, it looks like there's no questions. Thank you very much for joining the call. And we look forward to updating you guys again on the next quarter. And good day.

Thank you.