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

Hello, everyone. Welcome to TAQA's Q1 2024 Earnings Call. My name is Asjad, I'm the Head of Investor Relations at the company. I'm joined by our CFO, Steve Ridlington. Please note that this session is being recorded, and by participating in this meeting, you consent send to the recording. This presentation will follow the usual script, Steve and I will walk you through operating highlights and the financial performance of this period. We will then open the floor for Q&A. I'll now pass over to Steve, who will guide you through the key highlights of the group in Q1 2024.

Thank you, as Asjad. And it's good to be here again for our Q1 results. So hello, everybody. Let's go to Slide 5 first, which gives a results overview. First, utilities business continued to perform strongly in the first quarter of 2024 with the addition of SWS Holding and adding to this underlying performance. This helped offset pressure from the oil and gas segment, which in turn resulted mainly from lower commodity prices. Both revenues and adjusted EBITDA were up 5% year-on-year, driven by the utilities business. Our reported net income recorded a drop as the comparative period last year benefited from one-off items, in particular, the recognition of the value of our stake in our oil and gas. Excluding these, clean net income was up 7% year-on-year. CapEx for Q1 2020 reached AED 1.7 billion, translating into a 60% year-on-year increase. This was led by higher spending in T&D and generation segments. Free cash flow generation also declined in the quarter on the back of the combination, higher CapEx, further investments in [indiscernible] and changes in working capital. On the project development front, we continue to make inroads into the Saudi market. As part of this, we announced the first of its kind, AED 1.5 billion independent strategic water reservoir project on Makkah and a steam and electricity cogeneration plant for a joint venture company between Saudi Aramco and TotalEnergies. Last but not least, the Board has proposed a dividend of AED 70 per share for the first quarter of 2024, consistent with our declared dividend policy. Turning for a moment to SWS Holding. This is the acquisition of the sewage business and recycled water business in Abu Dhabi that we announced last year by this company from Abu Dhabi Power Corporation. The transaction is near completion with only certain receivable steps remaining for legal completion to occur. Under the terms of the agreement, economic contributions from SWS are to be assumed by TAQA from the 1st of January 2024. As such, SWS's financial performance is included as part of TAQA's Q1 results. As a reminder, SWS is responsible for wastewater collection treatment and reuse in Abu Dhabi. The addition of SWS expands takes production portfolio and further enhances the company's position as Abu Dhabi is fully integrated utility. SWS is compensated under the RC2 framework and up AED 16 billion to our regulated asset base. In terms of the first quarter of 2024, SWS contributed AED 620 million of revenues, AED 457 million to adjusted EBITDA and AED 186 million to net income. Turning to Slide 7. Group revenue and adjusted EBITDA. Taking a closer look at revenue for the first quarter. Transmission & Distribution proved to be the largest contributor to the group's top line growth. The business recorded 9% year-on-year increase on the back of higher [indiscernible], recovery of corporate income tax and increased revenue from supply and distribution of power walls to customers. Conversely, generation revenues witnessed a 6% decline, primarily due to lower pass-through fuel revenue in Morocco. The oil and gas segment also saw a 17% year-on-year decrease in revenues, mainly impacted by declines in average realized commodity prices and a reduction in volumes due to plan cessation of production in several North Sea fields. Moreover, SWS made a healthy contribution to the top line, supporting overall growth. In terms of adjusted EBITDA, the T&D segment recorded 11% year-over-year improvement, driven by higher revenues and an improved EBITDA margin. Generation adjusted EBITDA increased by 7% year-on-year on the back of improved commercial availability in India and a higher contribution from associates in join ventures. Meanwhile, oil and gas experienced a 39% year-on-year decline primarily due to lower commodity prices and reduced production. Lastly, as mentioned earlier, SWS added AED 457 million EBITDA for the quarter, along with a healthy 74 profit EBITDA margin. Turning to Slide 8, nonoperating P&L items. These are the items below the EBITDA line, where TAQA continues to be a net beneficiary of the rising global interest rates as net interest expense declined 5% year-on-year in the first quarter of 2024. Gross debt increased by about 1% to AED 62.5 billion compared to the end of December 2023. This was driven in part by the addition of AED 1.5 billion of new debt recognized upon consolidation of SWS. You may recall the first quarter 2023 have benefited from the recognition of the value of our 5% sales [indiscernible] oil gas. The absence of this AED 10 billion one-off item led to a sharp decline in other gains. Similarly, we recognized AED 1.2 billion one-off charge in the first quarter of 2023 on recognition of the deferred tax liabilities on the enactment of UAE corporate tax. The absence of these led to a considerable drop in overall tax challenges for the quarter. Excluding the aforementioned one-off items, clean net income increased 7% year-on-year. This was driven by an improvement in the bottom line in the utility segment, which was further boosted by the addition of SWS. Earlier in the year, we also announced that we have entered a definitive agreement to sell our interest in a trough oil field in the Kurdistan region Iraq. Dividend sale is expected to be completed this year. These assets have been reclassified to discontinued operations. Turning to Slide 9, liquidity and debt profile. Moving to the balance sheet. We continue to benefit from the mix of ample liquidity, controlled leverage and an attractive cost of debt, largely locked across the portfolio. Totaling debt increased by 1% compared to the year-end 2023 on the back of consolidation of AED 0.5 billion of debt related to SWS. AED 0.3 billion of debt related to construction of the M2 RO and S4 plants. And AED 0.4 billion reclassification in debt. Our net debt-to-EBITDA ratio remains largely unchanged compared to December 2023. Please note that we utilized with a trading 12-month EBITDA to calculate this ratio, and as a result, have included Q2 to Q4 2023 EBITDA for SWS purely for the purposes of this calculation. We remain comfortable with the strength of our balance sheet, and this continues to offer a solid foundation to build on combination operated growth. I'll now pass back to Asjad who will lead us through an overview of the segmental performance. Asjad?

Thank you, Steve. Starting with the Transmission & Distribution business. The business posted strong operational and financial performance in the first quarter of the year. Network availability remained healthy at 98.3%, while CapEx increased 10% on the back of timing and phasing of project implementation throughout the sector. Our regulated asset base also increased 3.6% to AED 78 billion. We also announced AED 1.5 billion strategic reservoir project in Makkah, as Steve has just mentioned, which extends our T&D reach in the region. As Steve indicated earlier also, T&D revenues increased 9% year-over-year, driven by a combination of increase in pass-through revenues, reimbursement of corporate income tax and higher revenue from supplier distribution -- supply and distribution of power and water customers. Meanwhile, adjusted EBITDA increased by 11% year-over-year, benefiting from the impact of inflation and RC2 framework. Moving to generation. From an operational perspective, commercial availability experienced a slight decline to 97.4% on the previous year's 98.8%. This resulted mainly from unplanned outages in plants in UAE and [indiscernible]. CapEx jumped to AED 557 million on the back of construction progress on Mirfa 2 and Shuweihat 4 Reverse Osmosis desalination plants. We also announced during the quarter that TAQA with JERA, will develop an industrial steam and electricity cogen plant for a joint venture between Aramco and TotalEnergies. On the financial front, generation revenues declined 6.5% year-over-year, mainly due to lower pass-through fuel revenue in Morocco. Adjusted EBITDA on the other hand increased 7% year-over-year, supported by a higher contribution from associates and JVs. Contribution from Masdar in particular stood at AED 99 million for the first quarter of 2024. Moving to our third business line, oil and gas. Continuing with the trend seen in recent quarters, Production declined in Q1 2024 compared to the corresponding period of the previous year. This resulted from natural decline in production and decommissioning in our U.K. late life assets. Meanwhile, CapEx in the segment declined 25% year-over-year due to lower drilling completion -- sorry, lower drilling completion and tie-in costs. The year-over-year margin is also impacted by a major facility expansion project that was undertaken in 2023 in North America. We also announced earlier in the year that we have reached a definitive agreement to sell our interest in [indiscernible]. We expect this transaction to be completed later year pending regulatory [ prudence ]. Finally, the financial performance of the oil and gas segment was impacted by a combination of lower commodity prices and decrease in production. This resulted in 17% and 39% year-over-year decline in revenues and EBITDA, respectively, with the business segment. I now hand over back to Steve for wrap up.

Thank you, Asjad. So in summary, the acquisition of SWS represents an attractive addition to TAQA's portfolio. The benefits of which have been reflected in our first quarter 2024 results. From an ESG perspective, we obtained third-party assurance for Scope 1 and to the GHG emissions for the 2019 to 2023 period. This is reflected in our continued drive to improve the depth and quality of the ESG related closures. Given the availability of ample liquidity, the bond maturities this month, thus May, we repay from our free cash balances. We continue to assess the market and will tap it when we feel the additions are favorable. Finally, as I indicated earlier, our solid balance sheet remains one of our biggest strengths and allows us to continue to evaluate inorganic growth actions drive further growth. As such, we continue to see TAQA's future filled with optimism.

Thank you. I will now open the floor to Q&A. Feel free to either raise your hands or type in the questions. Luke, If you could introduce yourself and start with your question.

Yes. Luke from Barclays. I was just wondering if you could provide any comments on the stage on the discussions in relation to [indiscernible] and the potential acquisition of the state given the fairly large size of gas deal relative to TAQA? So any color there on how it could fit into your expansion plans? I mean potential strategic rationale would be helpful as to how you might look at funding and what this could look like if this goes through?

Thank you, Luke, for that question. I'm afraid I can't really answer your questions in any detail. We made a statement some time ago to the ADX and to the [indiscernible] in Spain, the local regulator, saying that we were in early-stage discussions with 2 funds to buy that shares with the Spanish shareholder with regard to partnership. Those discussions are ongoing, but they are not yet complete. And until they are and if they are and as when they are, we'll make a further announcement. But at this stage, it's too early to speculate about what may happen if as and when we complete our transaction.

[Operator Instructions] [indiscernible] sorry, I don't -- apologize if I'm on pronouncing your name incorrectly.

It's [indiscernible] from [indiscernible] Asset Management. I had a question regarding the recent extreme weather events that we've seen in the region over the past few weeks ago, I think. And I was just wondering how you do manage that? And does that mean you will have to do additional CapEx to prevent as an impact on your infrastructure?

Yes. Okay. Thanks. Look, I mean, the weather events most [indiscernible] certainly was one of the most extreme, I think, which was 75 years or something in the UAE, and it certainly had an impact. So it's -- it did lead to some interruption of service, understandably, I think, given the scale of the store water and the flooding. However, everything is working fine, as I say, there were some interruptions caused by that. There may be some capital cost implications of some remedial work that needs to be done. I don't think they're going to be hugely significant that everything is working well today. And therefore, we'll see how that develops as some of the estimates there every [indiscernible]. Overall, I would say, yes, some interruption. Everything is now working very well and potentially some increment cost that we'll have to [indiscernible].