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

Hello, everyone. Welcome to our Q1 2025 Earnings Call. My name is Asjad, and I head Investor Relations at TAQA. I am joined by our CFO, Steve Ridlington. Please note that this session is being recorded. [Operator Instructions] Steve and I will walk you through the operating highlights and the financial performance of the period. We will then open the floor for a Q&A session. I will now pass it over to Steve, who will guide you through the key highlights of the quarter.

Thank you, Asjad, and good morning, good afternoon, good evening to everybody, wherever you are. And thank you very much for joining us again today. Turning to the results overview. The first quarter of 2025 was marked by an unusual level of global macroeconomic uncertainty. However, the predictable nature of our Utilities businesses translates into resilient financial performance during the quarter as reflected by the limited year-on-year variation in net income. Revenues grew 4% in the first quarter of the year on the back of a positive contribution from Transmission & Distribution and TAQA Water Solutions in particular. The Oil and Gas business on the other hand exerted downward pressure on revenues and profitability. This led to the 7% year-on-year decline in EBITDA while net income fell by a more modest 2% year-on-year. CapEx continued to be at healthy levels as we invest in our Transmission & Distribution and Generation businesses in particular. Despite a 30% year-on-year increase in CapEx, free cash flow generation jumped significantly on the back of working capital movements. For the first quarter of 2025, the Board has proposed an interim dividend of 0.75 fils per share. This is consistent with our declared dividend policy for the years 2023 to 2025. The quarter also witnessed a continuation of business development activity with both TAQA and Masdar announcing projects to support the UAE's AI strategy 2031. We will cover these exciting initiatives in more detail later in the presentation. Taking a closer look at financial performance for the quarter. Transmission & Distribution proved to be the largest contributor to the top line growth. The 12% year-on-year increase in Transmission & Distribution, in turn, was driven by an increase in bulk supply tariff pass-through costs. Generation revenues remained in line with the levels seen last year. Meanwhile, revenues in Water Solutions grew 3% year-on-year thanks to the regulated nature of the business. Oil and Gas proved to be the only business to record a decline in revenues on the back of weaker oil prices, and a further decline in production as we progress the U.K. North Sea decommissioning program. Moving to EBITDA. Oil and the Gas again proved to be the main factor driving lower profitability. Transmission & Distribution EBITDA was 2% lower year-on-year due to one-off post-merger integration activities at TAQA distribution. As a reminder, Abu Dhabi Distribution Company and Al Ain Distribution Company were recently merged into a single entity with the aim of achieving significant efficiencies and improving customer service. The 10% year-on-year decline in generation EBITDA was led by a lower contribution from associates and joint ventures. In our Water Solutions business, remediation work following the exceptional weather events of 2024, drove operating expenses higher. This, in turn, translated into a 13% year-on-year fall in EBITDA of the business. The combination of Oil & Gas prices and the decline in production resulted in a 39% year-on-year reduction in Oil & Gas EBITDA. Lastly, Corporate EBITDA was supported by AED 313 million dividend income from ADNOC Gas, while there was no comparable contribution in the first quarter last year. Moving to P&L items below the EBITDA line. The decline in net income was limited to 2% year-on-year. The most notable factor that supported the bottom line was a lower effective tax rate in the U.K. on the back of our decommissioning activities. Depreciation, depletion and amortization charges also decreased due to a revision of useful life estimates of assets within the UAE. Moving to the balance sheet, a AED 63.7 billion total debt was marginally lower compared to year-end 2024. Average interest cost across the portfolio remained unchanged, while average maturity also remained largely in line with the levels seen at the end of last year. Meanwhile, liquidity improved on the back of higher cash generation in the first quarter. However, our leverage ratio did edge up compared to December 2024 due to the year-on-year decline in EBITDA on the first quarter that we've already talked about. Overall, I remain very comfortable with the strength of our balance sheet, continue to benefit from a mix of ample liquidity, controlled leverage and attractive cost of debt largely locked across the portfolio. This continues to offer a solid foundation to build on for continued growth. Our 2023-2025 dividend policy will continue to guide us through this year. Based on the utility segment, the fixed dividend per year is set at 3.75 fils per share for 2025. Consistent with this, the Board approved the first quarter interim dividend of 0.75 fils per share. I will now pass back to Asjad, who will lead us through an overview of the segmental performance.

Thank you Steve. Network availability remains strong at 98.7% for the Transmission & Distribution business, a marginal improvement over Q1 last year. CapEx increase is driven by timing and phasing of project execution relating to water and electricity network construction, announcements and upgrades. Our RAB increased marginally to AED 77.2 billion as well. As mentioned previously, Transmission & Distribution revenues increased 12% year-over-year, driven by an increase in BST pass-through costs. EBITDA on the other hand, was impacted by higher expenses related to post-merger integration activities, which are nonrecurrent in nature. Moving to the Generation segment. From an operational standpoint, commercial visibility was lower at 95.6% because of planned and unplanned outages across our UAE plants. The surge in CapEx was driven by the accelerated construction of Al Dhafra OCGT plant with a 1 gigawatt capacity, which is being developed in support of the UAE AI strategy 2031. Steve will provide more details later in this presentation on the role TAQA and Masdar are playing to support UAE's ambitions to become a global leader on the AI. Moving to financial performance. Generation revenues were stable year-over-year. Meanwhile, EBITDA was impacted by 2 factors. Firstly, our associates and joint ventures had a lower contribution this quarter. Secondly, G&A increased due to a reallocation of costs from corporate segment, post the corporate restructuring that we saw. Moving to TAQA Water Solutions. Commercial availability in the business declined to 93.7% during the quarter. This was driven by remediation work following an exceptional weather event in April last year. The increase in CapEx was driven by development of new networks as well as rehabilitation, replacement and upgrades to existing infrastructure. In terms of financial performance, revenue grew 3% year-over-year as we benefit from the regulated nature of the business. EBITDA, however, was impacted by higher operating expenses, which in turn were primarily linked to the extreme weather event of last year. Moving to last segment, Oil and Gas. In this business, production continued to trend downwards in Q1 on the back of cessation of production of four U.K. assets in late 2024. The transition to safe and efficient decommissioning in U.K. also contributed to the 50% year -- 52% year-over-year decline in CapEx spend. The combination of 11% decline in production and 12% fall in realized oil price resulted in a 24% and 39% year-over-year drop in revenues and EBITDA for the business, respectively. I will now hand back to Steve for his concluding remarks, after which we will open the floor for Q&A.

Thank you, Asjad. Our performance in 2024 put us on a strong trajectory to achieve our long-term goals and 2025 is on track to work this continuation of the same. On the M&A front, we announced the acquisition of Transmission Investments in April. A leading U.K.-based energy and utility investment platform, Transmission Investments specializes in offshore transmission. It operates 11 assets connecting offshore wind farms to the U.K. grid. The strategic acquisition strengthens TAQA's position in the offshore electricity transmission sector, reinforcing our commitment to supporting energy transmission, pursuing international expansion. Masdar is also building on its strong momentum from last year and continue to add solution to its renewable portfolio via acquisitions. As the largest shareholder of the company, we continue to support its global ambitions. We are also delivering on our promise of continuing improving transparency and disclosure. In particular, our recent published 2024 integrated report as a wealth of ESG-related disclosures, including Scope 3 emissions data. I invite you to explore the report, which covers multiple facets beyond ESG. I have started this presentation by pointing out the macro uncertainty the world faced in Q1. If the past few weeks were any indicator, this uncertainty is here to stay. In this environment, the defensive nature for our business model provides a shield for our investors. As a reminder, contracted and regulated revenues account 90% of TAQA's top line, providing stability and predictability for the business. In terms of DCM activity, we repaid maturing corporate bonds worth $750 million in April from cash resources. The strong cash flow generation from our business means we did not need to tap the capital markets ahead of the bond repayment, and we will continue to keep issue plans under review for the time being. Let me finish with a few words on the UAE's AI Strategy 2031. The UAE has made it clear that it plans to be one of the global leaders on the AI front. This places significant additional demand on the power sector, which is translating into new growth opportunities for TAQA. The 1-gigawatt Al Dhafra OCGT project is a clear example of this. Masdar is similarly capitalizing this opportunity by developing the world's first 1-gigawatt around-the-clock renewable project. We will also need to invest significantly in our power transmission networks to connect these power sources to the data centers. We just view the future even more optimistically with our home market of the UAE, adding to the wealth opportunities available to TAQA for continued growth. Thank you.

Thank you, Steve. [Operator Instructions] Luke, could you please introduce yourself and ask your question?

Hi, this is Luke from Barclays. I've got 2 questions. So yes, firstly, as you highlighted, there was a fairly large working capital inflow in Q1. So I was just wondering would you expect that for the rest of the year? And then quickly on the Oil and Gas segment. Obviously, it's a small part of the business, but it would be great if you could remind us of the cost structure there and what you expect in terms of profitability closer to spot prices?

Okay. I heard the first question well. I didn't quite get the second question, Luke, but let me answer the first one first. And then if you could repeat your question on Oil & Gas. So the working capital inflow, we do have a very strong positive contribution within our Transmission & Distribution businesses, particularly. I don't think we will expect that to continue. It may normalize through the rest of the year. So I think that could, as I say, normalize as the year progresses. What was the question on Oil and Gas?

Yes, I was just wondering if you could remind us what the cost structure of the operations is? And in terms of profitability, given the decline in prices we've seen so far in Q2, what you would expect there?

Right. Well, the cost structure for -- I mean, the primary focus for this discussion really needs to be on Canada because that's the lion's share of our production. It's around 75,000 barrels a day of the 90-odd thousand that we now have. And our portfolio is a mix of Oil & Gas. At current oil prices, current gas prices, we will remain profitable. I'm pretty confident in that. But the level of profitability is not going to be as it was last year, I think, given the current outlook. And therefore, we may invest a little bit less than we might have otherwise done in new developments to maintain production in the Canadian portfolio. So continuing profitability, but probably not at the levels that we saw last year.

[Operator Instructions] Luke do you have any other questions or is this from the first time run?

Yes, that's all for me.

[ Jocelyn ], you could introduce yourself and you can ask questions.

Apologies, I joined a little bit late. Can I understand if you have talked about it about your CapEx plan? If you can talk about the guidance for the next 1 to 2 years? And if you could break it down into the investment in your T&D as well as the investment for the Oil & Gas that you mentioned earlier and as well as the investment in Masdar?

Okay. Well, look, I think for the first quarter, you've seen a pretty strong pickup in capital investments. But that really is -- most of our investments -- CapEx investments is in our regulated businesses here in the UAE and Abu Dhabi, so our Transmission & Distribution and Water Solutions business. And that is definitely picking up year-on-year, a very strong pickup. In terms of our investments in Oil and Gas, our CapEx is focused very much on Canada. And as I just mentioned, with weaker oil prices, particularly, and the gas prices as well, we may cut back a little bit on capital investment into the Oil & Gas business. We're not really investing CapEx in any other Oil & Gas jurisdiction, particularly as the U.K. is moving towards decommissioning and therefore, abandonment expenditure. In terms of Masdar, we had a pretty heavy investments in Masdar last year because it was -- Masdar had a very successful year, acquiring platforms in the U.S. and Europe particularly, and we don't expect that to continue at the rate that it was last year because a lot of the effort, I think, from Masdar for this year will focus on integrating these new platforms that had been acquired and adding to them in investments. I -- we don't give CapEx guidance, [ Jocelyn ], I'm afraid. So -- but I think the trend that you're going to be seeing which I've just sort of outlined and which I'll just summarize has been some increase in capital expenditure in our Regulated Networks business, less investment in Masdar than we saw in '24, I think, and capital spending, which is not a major part of what our total CapEx in any event, probably slightly lower in the Oil & Gas business that we saw last year.

[Operator Instructions] [ Jamie ] to introduce yourself and then -- and ask your questions.

[indiscernible] from Kepler Cheuvreux. Just a quick question regarding your progress on M&A plans. Can you clarify whether this reflects the recent achievements from Masdar, whether you alluded to other considerations. In particular, there have been reports in Q1 from Bloomberg saying that TAQA has renewed interest for purchasing potential stake in Naturgy. What can you say about that? And could you remind us the potential strategic rationale for such a move?

Yes. So in terms of the M&A activity that has taken place, you're quite right to say that most of that in '24 and somewhat in '25 is Masdar. That has been the main focus of our M&A activity so far and it's resulted in a very significant increase in the number of gigawatts that Masdar has, which is an important contributor to our 100 gigawatts 2030 target. In terms of TAQA's M&A activity, we did announce one investment in a company called Transmission Investments in the U.K. That was not a very significant investment in terms of scale. It is a company that is involved in offshore transmission. So it operates and maintains and develops the transmission lines from the offshore wind farms in the U.K. to the national grid onshore U.K. It is an asset manager and operator rather than an investor. So it's an important business for us to make an initial step out into the transmission into the U.K. and to acquire a company that has significant skills in offshore transmission, which is an important part of our business today here in Abu Dhabi as well as elsewhere. So we see that as a good acquisition of skills and potential in that area, but not a significant investment. Naturgy, there are no ongoing discussions on Naturgy. That is not something that we're -- was something that we looked at last year. It didn't work out and there are no current plans to reactivate those discussions. So I know there's big press speculation, but it's not based on anything that we are actually doing.

Thank you, [ Jamie ]. [Operator Instructions] Okay. It looks like there's no more questions. Thank you very much for joining us for the call. And we look forward to meeting you -- to having you on the next call and meeting in between as well. Thank you.

Thank you.