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

Hello, everyone. Thank you for joining TAQA's 2023 Earnings Call. My name is Asjad, and I'm the Head of Investor Relations at TAQA. I am joined by our CFO, Steve Ridlington. During this call, Steve and I will walk you through operating highlights and the financial performance for 2023. We will then open the floor for Q&A. Please note that this session is being recorded, and by participating in this meeting, you consent to the recording. I'll now pass over to Steve, who will guide you through the key highlights of the group in 2023.

Thank you, Asjad, and good afternoon, and good morning, good evening to everyone on the call. Thank you for joining us for our full year 2023 results. So starting with the '23 overview, results for 2023 reflect the resilience of our business model with the utilities segment performing strongly and made a challenging operating environment for the Oil & Gas business. Our top line growth was led by a combination of pass-through items, impact of power inflation and positive revisions under RC2, the regulated framework governing our Transmission and Distribution business in Abu Dhabi. EBITDA, on the other hand, was impacted by the performance of the Oil & Gas segment on the back of lower commodity prices and the production. This performance was partially offset by healthy growth in Transmission and Distribution in particular, which recorded an 11% year-on-year growth in EBITDA. Our net income was [ more than ] doubled to AED 16.7 billion for the year. This bottom line was impacted by a couple of one-off items, namely, a AED 10.8 billion gain on recognition of our stake in ADNOC Gas and AED 1.2 billion (sic) [ AED 1.1 billion ] deferred tax charge associated with the introduction of UAE corporate tax from January 2024. 2023 also stands out as the year we revised our longer-term growth targets upwards to reflect TAQA's ambitious growth plans. We introduced the new 2030 targets as part of our Q3 results, and I will take you through some more of these details later in the presentation. We also strengthened our portfolio through organic and inorganic expansions to ensure we are on track for the strategic goals we have set ourselves. Our free cash flow generation remains healthy, which in turn allow us to reach our dividend commitments. The proposed full year dividend of 3.95 fils per share is comprised of a fixed available components, which, again, I will cover in detail later in the presentation. Among other notable achievements for the year, we issued a very successful dual tranche $1.5 billion bond, which was nearly 10x oversubscribed. This included our inaugural green bond. Last but not least, we remain a sector leader on the ESG front. In 2023, we further reduced Scope 1 and 2 emissions in absolute terms as well as GHG intensity based revenues. Turning to the next slide, highlights for the year. Before we get into the details of the 2023 financial results, I'd like to take you through our key business highlights from last year. Our portfolio saw a number of changes and long-term growth implications for the company. Most notably, we expect the planned acquisition of SWS Holding to bring a multitude of benefits. Apart from adding new expertise in the former water treatment services, the acquisition is expected to boost out regulated asset base by 20% and hence, cash flows for regulated revenues. TAQA also reinforced its position as the partner of choice for companies, seeking to reduce their carbon footprints. As part of this process, TAQA and ADNOC partnered up to bring sustainable water supply to ADNOC's onshore operations. We will also continue to build our reverse osmosis based capacity on the water generation front through the Mirfa 2 RO project. Furthermore, while in January 2024 event, I'd like to highlight that we have signed a definitive agreement to sell our interest in the Atrush oil field in Iraq. This represents a rationalization of our Oil & Gas portfolio, and we will remain focused on value maximization from our continued operations across Canada and Europe. On a related note, 2023 marked an active year for M&A activity at TAQA's. Notably, we acquired a stake in Xlinks, which is a unique project and upon completion, is expected to supply 8% of U.K.'s electricity needs from renewable sources in Morocco. We also increased our stake to be to Taweelah B to 70% and enter the attractive UAE O&M market through acquisition of a 25% share in the planned O&M company. We also received a 5% stake in ADNOC Gas prior to its IPO. This reflects the strong relationship between TAQA and ADNOC and the benefit we bring in the forward [indiscernible] non-gas utility infrastructure. 2023 also witnessed the announcement of RC2, which sets the regulatory framework for the 2023, 2026 period. RC2 brings a number of advantages over RC1, including an increase in WACC from 4.6% to 4.9% in real terms, an increase in CapEx and OpEx allowances. We also laid out the path to more ambitious long-term growth in the form of upgraded to 2030 targets. Notable revisions include tripled in the 2030 target gross capacity to 150 gigawatts, while targets have been introduced for the first time for water and net power generation capacities. Meanwhile, the renewable energy portfolio is expected to reach approximately 65% of power generation capacity by 2030. Moreover total spend to the execution of this plan is projected at AED 75 billion. I'll provide a more granular breakdown of this spending later in the presentation. We've had a busy year in terms of financing-related activities. Most notably, we increased our -- we issued a highly successful $1.5 billion dual tranche bond, which was nearly 10x oversubscribed. This included our inaugural green bond, which was issued under our newly established Green Finance Framework. The Green Finance Framework, in turn, received an SQS2 or very good rating from Moody's. We also achieved financial close on a number of other projects, the most prominent of which included a AED 8.1 billion sustainable water supply project to ADNOC’s onshore, a AED 2.3 billion Mirfa 2 RO project and a AED 1.6 billion [indiscernible] projects. Last but not least, we continue to make strides on the ESG front from 2023. Scope 1 and 2 emissions reduced by another 13% year-on-year in 2023 equating to a 19% decline compared to the base year of 2019. GHG intensity based on revenues also fell 16% in 2023. Our efforts on this front continue to translate into improved ESG ratings, with CDP recently assigning a rating of B for both climate change and water security categories compared to global average of C for both metrics. We also won a number of awards and accolades from the organizations, recognizing excellence on the ESG front. The most notable of these included Forbes’ ranking us at the top of his list, Sustainability Leaders in the Energy and Utilities sector. Turning to the next slide. Group revenue and adjusted EBITDA. Transmission and Distribution recorded the strongest performance, the segment rising 19% year-on-year. T&D revenues benefited from a combination of higher pass-through bulk supply tariffs, the impact of higher inflation and positive impact of changes in RC2. Both generation of Oil & Gas, on the other hand, witnessed the drop in revenues. The former declined 8% year-on-year mainly due to lower cost through fuel costs and [indiscernible] contribution from Red Oak. The tolling agreement for Red Oak came to an end in Q3 2023 and have contributed revenues of AED 833 million last year. The Oil & Gas segment recorded a 21% decline in revenues on the back of lower commodity prices and reduced production. Realized oil prices fell 13% year-on-year, while realized gas prices declined 29%. Meanwhile, production declined 7% year-on-year on the back of natural fall in late-life U.K. assets. As I mentioned earlier, we recently signed a definitive agreement with the sale of our Iraq assets. Consequently, the contribution from Iraq is excluded from production, revenue and EBITDA figures for both 2022 and 2023 and has been reclassified to discontinued operations. In terms of adjusted EBITDA, both Transmission and Distribution and Generation recorded a positive trend, which was offset by the performance in the Oil & Gas segment. The adjusted EBITDA of Transmission and Distribution improved 11% on the back of positive RC2 revisions and higher inflation. The increase in adjusted EBITDA of Generation was driven by higher contribution from the UAE fleet as well as the absence of noncash charges recorded last [ year ]. With regard to Associates and Joint Ventures, Sohar Aluminum saw a significant drop in group due to lower aluminum prices, while Masdar recorded [ AED 27 million ] loss in 2023. Profitability of the Oil & Gas segment, on the other hand, was impacted by lower commodity prices and a decline in production with adjusted EBITDA for the segment declining 35% year-on-year. Overall, adjusted EBITDA for the group declined 6% year-on-year as the performance of the Oil & Gas segment overshadowed positive underlying trends in the utility business. Turning to Slide 9. Net income, as I mentioned, was more than doubled in 2023. The most significant contributor to the bottom line in this regard was a AED 10.8 billion gain recognized against our 5% stake in ADNOC Gas. No consideration was paid by TAQA to the state. On the flip side, the company also recognized a one-off pay AED 1.1 billion deferred tax charge associated with the introduction of UAE corporate income tax from the 1st of January 2024. Adjusting for these one-off items net income for 2023 declined 13% year-on-year. I'd like to take this opportunity to bring your attention to the successful cash management of the company last year, which resulted in a 15% decline in net interest expense despite reverse debt remained largely at the same level as the year earlier. Our finance costs declined 3% year-on-year in absolute terms despite new issuances, both at the corporate and subsidiary levels. Interest income, on the other hand, jumped 190% year-on-year as we managed to capitalize on higher interest rates on bank deposits. Lastly, as I indicated earlier, the contribution from Iraq has been reclassified as discontinued operations. Net income from this source declined sharply in 2023 reflecting lower oil prices and production. Turning to the next slide. Our balance sheet remains a pillar of strength and allows us to continue to explore new growth opportunities. In order to maintain financial discipline, we continue to focus on retaining stand-alone investment-grade ratings. In this regard, our net debt-to-EBITDA ratio of 2.4x at the end of 2023, provides ample room for borrowings to finance growth, while maintaining the strategic objective. $1.5 billion bond issue also reinforced our liquidity, bringing it to 14.2% of total assets versus 13% last year. Almost the entirety of our AED 61.2 billion of debt is locked in as an attractive fixed interest cost, 4.6%. Moreover, our average debt maturity profile extended to 10.7 years by the end of 2023, slightly longer than the previous years. Lastly, we continue to deliver on our shareholder dividend policy, and TAQA remains one of the few companies in the region [indiscernible]. Turning to the dividend for last year. The Board proposes a 2023 final dividend of 2 fils per share, which is comprised of a 1.3 fils per share fixed dividend from the utilities for 4Q 2023 and a 0.7 fils per share of variable dividend from the Oil & Gas segment. This translates into a proposed full year dividend of 3.95 fils per share. The variable payout aligns with a 52% payout ratio from the 2023 net income of the Oil & Gas segment. I'll now pass the floor to Asjad, who will lead us through an overview of the segment in the quarter 4 2023 performance.

Thank you, Steve. Starting with Transformation and Distribution. This segment proved to be the strongest performer within our business lines during 2023. Network availability remains healthy at 98.4% for the year, showing only a slight dip from previous year's 98.6%. We also witnessed a notable uptick in CapEx as project development and execution picked up significant base. The increase in CapEx also supported an increase in our regulated asset base, which recorded a 2% year-over-year growth to AED 76.9 billion. In terms of financial performance, revenues increased 19% year-over-year to AED 31 billion, driven by a combination of increase in pass-through revenues, heightened inflation rate and favorable regulatory changes under RC2. Adjusted EBITDA also recorded a healthy 11% year-over-year improvement. This increase is attributable to both higher inflation rates and positive change under RC2, including the increase in WACC from 4.6% to 4.9%. Moving to Generation. At an operational level, commercial availability experienced a marginal decline to 97.9% from the previous year's 98.1%. Meanwhile, CapEx remained at a moderate level, though higher than the previous year. The 8% decline in revenues for Generation in 2023 is primarily attributable to the absence of contribution from Red Oak, which following the conclusion of its tolling agreement in Q3 2022, did not contribute anything in 2023 and of course, lower pass-through fuel costs. The 4% year-over-year increase in the adjusted EBITDA was driven by higher top line, contributed from UAE assets, resulting in improved margins and the absence of noncash charges, which stood at AED 416 million in 2022. The EBITDA margin also climbed 350 basis points to 58.3% in 2023. The Oil & Gas segment faced a challenging operating environment in 2023. Commodity prices declined significantly during the year, while our production also fell 7% due to the natural decline in late-life U.K. assets. Our midstream gas oil business, however, continued to perform very strongly and remains an important contributor to Europe's energy security. In terms of financial performance, average realized oil price fell 13% in 2023, while average realized gas prices declined by 29%. This drop, combined with the reduction in production, proved to be the primary cause for the 21% and 35% fall in revenues and adjusted EBITDA respectively during 2023. Moving to the financial performance of Q4 2023. We saw a very strong performance from T&D and Generation segments, which drove profitability during the quarter. In terms of top line, a 30% year-over-year increase in T&D revenues proved to be the biggest driver for the overall 8% increase in group revenues. The utilities business also recorded strong EBITDA growth with T&D adjusted EBITDA up 13% per year and Generation up a stronger 49% year-over-year. However, the performance within the Oil & Gas segment offset these gains with the group adjusted EBITDA largely in line with the levels seen in the previous year. Group net income improved 5% year-over-year due to a 33% increase in Transmission and Distribution, coupled with Generation recording a AED 187 million in profit versus a [ AED 214 million revenue ] loss in Q4 2022. Additionally, net income grew due to the [ AED 300 million ] dividend received from ADNOC Gas in Q4 2023. Last but not least, free cash flow saw a significant jump in Q4 2023. This can be explained by the fact that the fourth quarter saw outflow related to -- of 2022, saw an outflow related to Masdar acquisition payment. However, there was no similar outflow in Q4 2023 and hence the marked improvement in free cash flow. Moving on to the -- moving on to our -- a bit more detail on revenues and EBITDA. As I indicated earlier, the healthy 30% year-over-year growth in Transmission and Distribution revenues was the main driver for revenue growth in Q4 2023. The increase in T&D revenues was primarily attributable to higher pass-through bulk tariffs and positive RC2 changes. Meanwhile, Generation revenues fell 6% year-over-year, mainly on the back of lower pass-through costs. Oil & Gas revenues also dropped 35% due to lower gas prices and a decline in production. Lower commodity prices in production also explained the 58% year-over-year decline in adjusted EBITDA for the Oil & Gas segment. This fall offsets the positive trends seen in the utility business. The 13% growth in adjusted EBITDA for Transmission and Distribution was primarily attributable to inflation in RC2, while the sharper 49% jump in the adjusted EBITDA for Generation was driven by higher contribution from UAE fleet and absence of noncash charges recognized in Q4 2023. Now moving to the final section of this presentation. I'll now take you through some additional details of the 2030 target. As Steve mentioned earlier, we introduced our upgraded targets as part of the Q3 2023 results. Apart from a significant upward division, the upgraded goals are also designed to enhance disclosure quality through introduction of metrics such as net capacity target. As part of this process, we have provided the market further granularity on our planned AED 75 billion spend to achieve our 2030 targets. While AED 40 billion will be spent on RAB related investments with the T&D segment, the remainder has been allocated for Generation. A little over half of this AED 35 billion will be directed towards Masdar, as it progresses towards its 100-gigawatt gross capacity goal. Meanwhile, about AED 14 billion is expected to be spent on TAQA's own conventional Generation capacity expansion and the remainder on water capacity expense. Note that by the end of 2030 investment cycle, renewable energy is expected to account for over 2/3 of Generation capacity, while around 2/3 of water generation capacity will be based on highly efficient reverse osmosis technology. I will now hand over to Steve again to cover the key takeaways from this presentation.

Thank you, Asjad. To conclude, our refreshed 2030 targets have laid out the path for more ambitious longer-term growth. Our revised targets will see us accelerate the developments of new power and water generation assets, while simultaneously investing in our transmission and distribution infrastructure. We continue to be a leader on the ESG front as reflected by our improved ratings as well as recognition through the likes of Forbes. We remain committed to enhancing the quality of our disclosure, and you can expect us to continue to make strides on this front. Furthermore, a combination of organic and inorganic expansions in 2023 set TAQA on a path of firmer growth. In particular, planned acquisition of SWS Holding should bring substantial benefit in the form of new expertise as well as boosting regulated revenues. We also continue to benefit from strong liquidity and a strong balance sheet. Moreover, the successful bond issuance last year reflects our ability to tap into capital markets [indiscernible] even in difficult market conditions. Finally, our unwavering commitment to shareholder value creation remains a fundamental principle in driving any major decision making at the company. Thank you. We'll now hand over to questions.

Thank you, Steve. Floor is now open for Q&A. Please raise your hands, and I'll open up the mic to you for any questions you may have. [ Luc Roberts ]. Please introduce yourself and ask your question.

[ Luc Roberts ] from Barclays. I just had a couple of questions on the $75 billion -- sorry AED 75 billion spend planned to achieve 2030 targets. So first...

Sorry, your voice was going on a little bit. If you could speak a little louder, it might help.

Can you hear me, okay?

Slightly better, yes.

Great. Yes, I just had a couple of questions on the AED 75 billion spend planned to achieve 2030 targets. So firstly, I noticed that the AED 40 billion previously announced in 2021 is also included so was wondering if the new AED 75 billion spend includes any of [indiscernible] and also so wondering how the AED 75 billion [indiscernible]?

So first of all, the -- I think the first part of the question is AED 40 billion for T&D within the AED 75 billion as we announced in 2030 -- sorry 2021. So that components are spending on T&D, remains at AED 40 billion -- dirhams by the way, not dollars. The balance, AED 35 billion is for -- dirhams for Generation. So no change to the T&D target. In terms of how we're going to fund the AED 75 billion, well, it's going to be through a -- this is essentially our equity investment to 2030. So we will continue to fund that through ongoing cash flow from operations as well as utilizing the debt capacity that we have, given our current low level of debt relative to our EBITDA. As we said in the presentation, our net debt to EBITDA is essentially 2.4x today. We could probably go 2x higher on that, whilst maintaining our investment-grade rating, and that will give us the additional capacity so a combination of corporate funding and debt funding and internal cash flow generation.

Anna, if you could introduce yourself and ask your questions, please.

It's Anna [indiscernible]. Just to follow up on the CapEx question. Would Masdar -- cash injections into Masdar included into this figure, could provide some guidance on that. What would be the cash injections into Masdar?

Sure. So if you look at on the slide that we are on right now, if you look at the pie chart at the bottom right, which is a breakdown of AED 35 billion. As you can see, a little over half of this AED 35 billion is expected to be invested in Masdar. So it's basically a function of the business growth plans that we have outline for -- we know from Masdar and based on that projected about 55% of AED 35 billion, we go into that. In terms of time line, obviously, given the nature of the growth taking place on the company, it's difficult to really guide you exactly on when that's going to flow through. But on an aggregate basis, we're fairly comfortable with the number. Sorry, was there anything on follow up or...

Yes, there was -- so that includes Masdar. Just another question, you have obviously highlighted the disposal of Iraq O&G assets. What would be the user process? So what are the -- what is the indicative disposal price and -- if you can disclose that? And what would be the user process? And then another question is whether we should expect a general further divestment -- selective divestment from O&G segment?

Thank you, Anna. So first of all, on disposal process. They're going to be really quite immaterial. So I don't think in the context of our cash flows and so on. So we haven't disclosed the price. We can't because of the nature of the agreements that we have with the buyer, but it isn't really significant. So it's not something that I think needs to be focused on. In terms of whether this indicates a possible disposal of other Oil & Gas asset or a change, the answer is no. We conducted our strategic review a couple of years back, decided to keep the assets. The disposal of our interest in Iraq is really more tactical than strategic. It's really quite small and we have decided that we don't want to focus on that going forward. We're going to focus our attention much more on the bigger opportunities or our bigger assets in Canada and Europe.

[ Luc ], you've got your hand rise again. I just want to check if you have a follow-up question or was that from before?

Thanks, no follow-up questions.

If there are anymore questions, we're happy to take them. We'll wait a minute or so, and if then there are no questions, we wrap up.

Sorry, just another question for me. You mentioned that you expect contribution from SWS water into regulated asset base. If I understand correctly that is yet to come in full year '24, but it hasn't been taken into consideration yet?

Absolutely. You're quite right. No, there's -- that transaction hasn't closed yet. We are expecting to close certainly this year and definitely quite soon, but we're still going through the final set of approvals that we need. So no, that addition to the regulated asset base is not reflected in any of our numbers at this stage. It will be added as of when we close the transaction.

Any more questions from the audience? Looks like this is -- Deep, if you could please ask your question -- introduce yourself and ask your question.

This is Deep from JPMorgan. Can you hear me well?

Yes, we can hear you.

Sorry, there might be some network discrepancies, but I will try to be short. First of all, you mentioned that there will be AED 75 billion expected till 2030. Do you have -- I mean, will it be front loaded or it will be spread throughout for next 6 years? And how -- and also, are you planning to issue any debt in 2024 for this purpose?

Yes. Thanks for the question, Deep. I think it's -- I wouldn't like to say whether it be front loaded or not. I think as Asjad mentioned earlier, these are figures that will run -- will accumulate to 2030. Some of these numbers will include acquisitions, therefore, the timing of those and new projects and the timing of new projects, it's difficult to predict. So we will announce those as and when they happen. So I would -- firmly can't be very specific about that. I think the AED 40 billion that we have for Transmission and Distribution, you probably could expect us to be really quite linear -- linearly spread through the period, so sort of dividing that by 10 and using AED 4 billion a year is probably not a bad place to start, but for the others, a lot of that CapEx will be on new projects, for which we don't know the timing yet. So I'm afraid we'll have to be watched this space. In terms of debt issues this year, we do have a $1 billion bond maturity in May. We're currently considering how and whether -- when we're going to refinance that. So I think we may have debt issues, but the timing is yet to be determined.

Just a second question on Generation capacity. What is the total Generation capacity currently for the company and how much it's renewable energy? And also, if you can just let me know what is the coal exposure as well?

So we are about 39 gigawatts on a gross capacity basis as of the year-end. This includes both us and Masdar combined. On a net capacity basis, we're about 17 as you can see from the chart -- at the middle chart at the bottom. 17 gigawatts is basically what we are on a net capacity basis. In terms of where we sit on renewables, over 40% of our capacity on a gross basis is renewable. And obviously, this will increase 45% to be more precise. And effectively, this is going to move towards -- becoming 2/3 of the capacity as we move towards 2030. Sorry, there was one more part of the question that you asked.

What is the coal exposure? Is there any?

So yes, we do. We do have coal exposure. So from a revenue standpoint, there is 2 ways -- 2 important ways to look at it. So from our coal asset, what we have is that we have a significant amount of pass-through revenues that come through, whereas it is worth to note that we don't have pass-through fuel revenues from the UAE. So there's a little bit of an off-sided factor comes in. Excluding the pass-through revenues, we're looking at about 2% of revenues coming in from coal-related assets and on an accumulated basis for this year, it will be less than 10% or if I [ attain ] the pass-through as well.

And just last question, would you be able to provide any guidance for 2024 on revenue, EBITDA, net leverage?

No, we don't provide any guidance. We haven't done and we're not proposing to do so at this point in time. So I think it's partly because of the -- whilst our utility business is very sort of stable, Oil & Gas is not. It depends on commodity prices and so on. So we prefer to focus on the 2030 targets that we've outlined here, and we won't provide any guidance for this year.

Any more questions from the audience? Just seen one written question from Anjali. Sorry, that was covered related to Masdar spent. Anjali, just on your questions regarding return to capital markets. So as Steve mentioned, that's something that we're still considering and whether the new [indiscernible] is, again, subject to -- would be the decision we take going forward. Any more questions from the audience? Looks like we covered the questions for today. Thank you very much, everyone, for joining us on the call. We're always available, if you have any follow-up questions later on. And looking forward to speaking to you guys again both during -- before and during the next quarter's call.