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

Hello, everyone. Welcome to TAQA's Q2 2024 Results Call. My name is Asjad Yahya, the Head of Investor Relations, and 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 the recording. This presentation will follow the usual script. Steve and I will walk through you through the operating highlights and the financial performance of this period, and we will then open the floor for Q&A session. I'll now pass over to Steve, who will guide you through the key highlights of Q2 2024.

Thank you, Asjad, and thanks all for being with us today. So turning to Slide 5, which shows the results overview. Q2 were proved to be another healthy quarter for TAQA. Our utility segment continued to perform well with the consolidation of SWS Holding, enhancing the underlying performance of the business. This helped to offset pressure from the oil and gas segment, which was impacted by lower commodity prices and production. Overall, revenues declined slightly compared to Q2 2023, mainly due to the oil and gas and generation segments. Adjusted EBITDA, on the other hand, was up 2% year-on-year, driven by transmission and distribution and SWS. Net profit recorded an even sharper 18% increase as the oil and gas segment also contributed to this growth. We are making good progress on various projects, particularly within the transmission distribution and generation, which translates into more than doubling of CapEx to AED 2.1 billion in the second quarter. Despite this increase, free cash flow also nearly doubled year-on-year to AED 4 billion. This sharp rise is supported by positive impact of working capital changes. TAQA's Board has also approved an interim dividend of 0.7 fils per share for the second quarter of '24, in line with our declared dividend policy. Last but not least, we continue to improve our disclosure standards on the ESG front by its reporting on Scope 3 emissions as part of our lead sustainability reports. Turning to Slide 6. Group revenue and adjusted EBITDA. Taking a closer look at revenues. The group's top line fell by about 1% due to a lower contribution from oil and gas and generation. T&D, Transmission and Distribution remains our largest revenue generator. This segment's top line grew 4% year-on-year, primarily due to 2 things -- to several things, sorry. Higher pass-through BST, a recovery of corporate income tax which is reimbursed by the sector. Increase in MA as determined by the RC2 framework. And fourth, inflation. Generation on the other hand, recorded a 6% year-on-year decline in revenues, mainly due to lower pass-through fuel revenue in Morocco. The Oil & Gas segment also saw a 39% year-on-year decrease in revenues, mainly impacted by lower average realized commodity prices and a reduction in volumes due to plan cessation of production in several U.K. North Sea fields. As to the U.S., the latest addition to our business also contributed a healthy AED 593 million the quarter. In terms of adjusted EBITDA, the group saw a 2.4% year-on-year rise to AED 5.4 billion in the second quarter of 2024. With regard to the individual business segments, first, T&D recorded a 3% year-on-year improvement. This slightly lagged its top line growth translating into a 20 basis point decline in the EBITDA margin. Second, the Generation segment's adjusted EBITDA was 5% lower year-on-year due to a decline in contribution from the associates and joint ventures and higher G&A expense. Third, oil and gas experienced 23% fall in net adjusted EBITDA, primarily due to lower commodity prices reduced production. And fourth, lastly, SWS added AED 383 million to adjusted EBITDA for the quarter, which equates to a healthy 65% EBITDA margin. Turning to Slide 7, on operating P&L items. Movements in P&L items to low the EBITDA line were as follows: TAQA share of net profit increased 18% year-on-year to AED 2.3 billion as we benefited from the consolidation of SWS and AED 298 million dividend from ADNOC Gas in the second quarter of 2024. As a reminder, in January 2024, we announced the planned sale of the Atrush oilfield in Iraq and as such full contribution from the assets has been classified as profit from discontinued operations. We also announced the completion of this transaction earlier this month. Turning to liquidity and debt profile. Within our balance sheet, leverage as well as liquidity declined slightly in the second quarter 2024 as we repaid about $1 billion worth of outstanding corporate bonds during the quarter. That said, we continue to benefit from a mix of ample liquidity, controlled leverage and an attractive cost of debt, largely locked in across full year. Total outstanding debt decreased by 5% compared to the year-end 2023, while the net debt-to-EBITDA ratio also trended down slightly to 2.3x. The group-wide average interest cost increased slightly to 4.8%, mainly impacted by the repayment of the corporate bonds, which were associated with a lower interest rate. Almost all of the debt portfolio is characterized by fixed interest rates and has an average maturity of over 10 years. I'll now pass over to Asjad, who will lead us through an overview of the segmental performance.

Thank you, Steve. Starting with our Transmission & Distribution business. The segment delivered strong operational and financial results in the second quarter of the year. Network availability stood at 98.6%, slightly higher than 98.3% in the corresponding period of the previous year. CapEx increased by 79% year-over-year, driven by timing and the phasing of project implementation across the sector, while the T&D regulated asset base decline -- decreased slightly to AED 78 billion. We also announced financial growth of the AED 1.5 billion strategic reservoir project in Makkah region during the quarter. As Steve mentioned earlier, T&D revenues increased by 4%, driven by a combination of increase in pass-through revenues, reimbursement of corporate income tax, increase in MAR and higher inflation. Meanwhile, adjusted EBITDA grew by 3%, benefiting from the impact of inflation and increase in MAR. Going to Slide 11. The Generation segment from an operational standpoint, commercial availability saw a slight decrease to 98.1% compared to 98.8% last year. This was due to planned and unplanned outages in plants within the UAE and the international fleet. CapEx surged to AED 470 million, driven by continued spending on the Mirfa 2 and S4 Reverse Osmosis desalination projects. On the portfolio development front, Taweelah RO, which is one of the world's largest independent water plants began full commercial operations, while Masdar also announced a number of acquisitions during the quarter, including stakes in Terna Energy and Terra-Gen. On the financial front, Generation revenues decreased by 6% year-over-year, mainly due to the lower pass-through fuel revenue in Morocco. This was partially offset by higher revenues across the UAE assets, reflecting recognition of UAE corporate income tax recovery. Meanwhile, adjusted EBITDA decreased by 4.5% year-over-year, backed by lower contributions from associates and JVs and higher G&A expenses. Within the associates and JV segment, Masdar in particular, contributed a loss of AED 22 million for the quarter. Moving to SWS. As we highlighted during the first quarter of the year, economic contributions from SWS were assumed by TAQA from the 1st of January 2024, hence, consolidation in our financials from start of the year. Meanwhile, we expect legal completion of transaction later this year. In terms of Q2 2024, SWS accounted from 4% of group revenues and 7% of adjusted EBITDA. This translated into a very healthy 64.6% EBITDA margin. Moving to our fourth business line. The oil and gas segment saw a continuation of the trend seen in recent quarters, with a 10% year-over-year decline in production in Q2 2024. This is mainly driven by the cessation of production in several North Sea fields. Meanwhile, CapEx in the segment increased 24% year-over-year due to higher drilling, completion and tie-in costs. Also, as Steve highlighted earlier, we completed the sale of our interest in Atrush field last week. The oil and gas segment's financial results were impacted by a combination of lower commodity prices and a decrease in production. Average realized oil price was down 6% year-over-year, while the realized gas prices fell 51% year-over-year. This translated into a 39% decline in revenues and a 23% decline in EBITDA for the business. Taking a look at the performance of the first half of 2024, as a whole, our revenues grew 2%. This growth was largely driven by the consolidation of SWS and growth in our T&D business. Adjusted EBITDA grew at a faster 4% year-over-year, led by the healthy performance of our utilities business, which offset a decline in the oil and gas segment. The net income comparison between the first half of 2024 and the first half of 2023 was distorted by the presence of one-off items in the previous year. Excluding these one-off items, our bottom line grew by 12.3% in the first half. Last but not least, free cash flow stood at AED 4.3 billion for the first half, and the decline compared with corresponding period of the previous year is explained by higher CapEx, greater investment in Masdar and working capital. I now hand back over to use for concluding remarks.

Thank you, Asjad. So to wrap up, our utility businesses, in particular, continue to move from strength to strength. As I've stated before, the addition of SWS further solidifies our position as a truly integrated utility with a growing footprint. We also remain committed to our position as a responsible leader in the industry. As such, we commenced Scope 3 disclosure as part of our latest sustainability report published earlier this year. Fitch recently upgraded our rating to AA in line with Sovereign, reflecting our close ties to the Abu Dhabi government as well as the resilience of our business model. As I highlighted earlier in the presentation, we paid about $1 billion worth of bonds in Q2 2024, and our ample liquidity allows us to wait for the opportune time to tap the debt markets. Finally, TAQA remains an ambitious company, and we continue to evaluate organic, inorganic growth options to drive further growth. In short, we are pleased with the overall focus of the company to date in 2024 and remain optimistic about the opportunities available to us in the future.

Thank you, Sim. We now open the floor to questions. If you please raise your hands and then I'll call out your name and you can ask for questions or you can type the questions, if you want. Please introduce yourself and then ask your question.

Luke here from Barclays. I was just wondering on the oil and gas segment, I noted your comment in the release saying that the another cessation of production from one of your assets in September. So I'm just wondering how much of a production impact you would expect from that? And if you expect production to be less volatile following the decommissionings that you've had in the U.K. assets?

Yes. Okay. Thank you. Well, we -- the production decline that we've seen in the second quarter this year compared to last year is almost all as a result of cessation of production in some of the Northern -- North Sea fields in the U.K. And that will continue and there will be further -- cessation of production in all of our North Sea fields Northern -- North Sea fields in the coming months and year. And so I think you can expect that decline that we've seen to continue into next year.

Again, if you have any questions, please feel free to raise your hands, and we'll open up your mic. Luke, do you have any other questions or...

Yes. I mean maybe just going back to, yes, your potential force in the bond market. Obviously, we've seen rates come down quite a bit in the last couple of months. So any updated thinking on potentially returning to the bond market would be helpful.

Thanks, Luke. Well, yes, I mean, I agree with you. It has been a very helpful development as far as we're concerned. We did update our filings in the middle of the year. I'm sure you would have seen that. So we remain ready to approach the markets as of when we need. We haven't needed to so far, and we still have sufficient liquidity in our revolving credit facility to fund what we need to do through the rest of the year as far as we can see it. But that doesn't mean that we won't go to market. It's something we'll keep an eye on. And I think potentially, if we have favorable market conditions in the fourth -- the end of the third quarter to fourth quarter, we may well approach the markets at that point in time. But it's a decision we haven't yet finally taken.

Right -- if you could just remove the [indiscernible] because still there so I wasn't sure if you had more. I apologize. I don't know how to pronounce your first name. So yang, if I could ask you to come up with your question.

Can you hear me?

Yes, please.

Okay. Great. Yes. Yi Shi here. So I have 2 quick questions. One is you mentioned some unplanned closures in the generation assets this quarter, I believe. So I just wanted to see if there's -- if we can get a little more color on what that is and maybe the size of that impact? And then also, you mentioned Masdar had, I think, negative EBITDA this quarter. So also, I guess, wondering maybe what caused that?

Okay, I'll start with the Masdar one. So Masdar, it's not EBITDA. So to be clear, it comes in as we take the contribution of our associates and JVs as part of adjusted EBITDA, as you've seen consistently. So it's their share of income coming to us. That was negative for the quarter, mainly because there were some legacy assets from before the transaction will be entered, which had some asset price readjustments served to them. This is more on the North African side of the business. So none of the newer businesses. This is more legacy portfolio cleanup, which is having an accounting impact, so to speak, on that. So that's that. On the closures -- sorry, unplanned closures, I'll get back to you. I don't -- we don't have -- we haven't shared the details of the breakup. I just need to check if I'm allowed to, and I can get back to you on that with it. The site was with the planned ones which were more significant, the unplanned ones were to be less significant.

Again, if anyone has any questions, please feel free to raise your hand, and we'll open up for mic.

That looks like we've done with the questions.

Thank you. That's fine. Thanks very much. If there are no further questions, we will end the call then. Thank you very much for joining and looking forward to speaking to you guys either in person or on the next call. Thank you.

Thank you.