Abu Dhabi National Energy Company PJSC (TAQA) Q2 FY2025 Earnings Call Transcript & Summary

Hello, everyone. Welcome to TAQA's Q2 2025 Earnings Call. My name is Asjad Yahya, and I head Investor Relations at TAQA. 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 our usual format. Steve and I will walk you through the operating highlights and financial performance for this period. We will then open the floor for a Q&A session. I will now hand over to Steve, who will take you through the key highlights for the quarter.

Thank you, Asjad, and welcome, everybody, to today's call. Starting on Slide 5, results overview. The second quarter of this year proves to be another strong stepping stone in our journey to reinforce our position as a leading utility player and furthering our local and global ambitions. Group revenues increased by 5% year-on-year to AED 14.2 billion, primarily driven by strong contribution from our Transmission & Distribution segment. EBITDA for the quarter was AED 5 billion, representing a 15% decline year-on-year. While net income stood at AED 1.6 billion, down 33% year-on-year. I'd like to take a moment here to unpack these headline figures, which match the continued underlying strength of our business. Three key items impacted profitability in Q2 2025. The largest impact was due to the timing of dividend from our ADNOC. The dividend income was recorded in Q1 this year versus Q2 last year. This was followed by the oil and gas business, where we are implementing a well-articulated decommissioning process in our North Sea assets. This naturally has led to an expected decline in production as well as a greater shift in mix towards gas compared to work. Combined with the fall in realized oil price, the business saw a decline in EBITDA and net income. Lastly, we have taken an impairments on our investment in Xlinks following the withdrawal of support by the U.K. government. Our core utility businesses, meanwhile, continue to perform in line with expectations. Excluding nonrecurring items, such as the Xlink impairments, the underlying financial performance of the utility businesses remained healthy. We will expand on this further in the presentation. Capital expenditure rose significantly by 28% year-on-year to AED 3 billion as we continue to invest in expanding and upgrading our transmission, distribution and generation assets. Despite the higher CapEx, free cash flow remained healthy at AED 2.2 billion. The lower year-on-year comparison is mainly attributable to working capital changes. [ Board ] has also proposed an interim dividend of 0.75 fils per share for Q2 2025, in line with our stated dividend policy. The second quarter of the year also saw notable developments across our local and international portfolios. TAQA Morocco signed MOUs for a very sizable plan to diversify into low-carbon power and water generation and transmission with the total investment associated with these projects estimated at around AED 52 billion. A new power purchase agreement was signed to extend Shuweihat 1, one of our local power and water facilities for 15 years to provide flexible reserve power supply. We extended the reach of our Transmission & Distribution business outside the UAE through the strategic acquisition of Transmission International, a leading operator of offshore transmission assets in the U.K. We also completed the acquisition of an 875-megawatt power plants in Uzbekistan, along with our partner, Mubadala, where each company holds a 40% stake in the plant. We'll discuss these developments in more detail as we move through the presentation. Turning to Slide 6, revenue and EBITDA. Taking a look at the financial performance for the quarter. Group revenues benefited from a continued top line growth in the utilities business with Transmission & Distribution leading the way. This was partially offset by a reduction in oil and gas revenues. Transmission & Distribution revenues increased by 14% year-on-year, largely reflecting higher bulk supply tariff pass-through costs. Generation revenues were broadly in line with the same period last year. TAQA Water Solutions posted a 6% year-on-year increase, underpinned by the regulated nature of the business. Lastly, as I explained earlier, the expected decline in production on the back of decommissioning activity, combined with lower realized oil prices led to a decline in oil and gas revenues by 41% year-on-year. Moving to EBITDA. The following factors shaped our results. Group EBITDA declined by 15% year-on-year in Q2 2025, primarily due to lower contributions from the timing of the ADNOC Gas dividend, oil and gas business and nonrecurring items across the business. Transmission & Distribution EBITDA declined by 5% year-on-year, mainly due to the impairments of our investments in the [indiscernible] projects. Generation EBITDA was 3% lower year-on-year, reflecting reduced contributions from associates and joint ventures as well as a decrease in other income. TAQA Water Solutions EBITDA increased by 3% year-on-year. Oil and Gas EBITDA fell by 34% year-on-year, driven by the expected decline in production and lower oil prices. Lastly, income from the ADNOC Gas dividend fell in the first quarter of 2025, as I've already stated. Taking a step back, group EBITDA declined AED 0.9 billion year-on-year in Q2 2025. Timing of the ADNOC Gas dividend accounted AED 0.3 billion of this. Oil and gas contributed a further AED 0.3 billion and the inclusion of the impairment of Xlinks largely accounts for the remaining year-on-year decline in EBITDA. Accordingly, the underlying performance of our utility business remains strong. Turning to nonoperating P&L items on Slide 7. Depreciation -- Depreciation and amortization was broadly unchanged from the same period last year. Net finance costs rose by 11% year-on-year on the back of a 9% increase in net debt compared to the second quarter of 2024. Note, we utilized our cash balance for a bond repayment earlier this year as well as for ongoing CapEx. This translates into a 17% year-on-year decline in interest income. Tax expense decreased by 54% year-on-year, primarily due to lower profits and the phasing of tax loss utilization in the oil and gas business. Turning to liquidity and the debt profile. We continue to benefit from ample liquidity, controlled leverage and an attractive cost of debt, providing a solid foundation for future growth. Total debt decreased by 4% from AED 64.1 billion at the end of 2024 to AED 61.7 billion at the end of June 2025. This mainly reflects the repayment of bonds worth $750 million during the quarter. The average debt maturity was 10.4 years, up slightly from 10.3 years at December 2024, primarily reflecting the repayment of bonds, as mentioned above. Liquidity levels were also impacted by the bond repayment and higher capital expenditure, standing at AED 20 billion at the end of the quarter. Average interest rates remain unchanged at 4.8% across the portfolio with fixed rate debt accounting for most of our debt. Net leverage increased slightly to 2.7x, reflecting the decline in EBITDA this year. This continues to provide a significant headroom for additional funding to support growth whilst maintaining a stand-alone investment-grade rating. Turning to dividend policy. In line with our declared policy, the Board has proposed a fixed dividend of 0.75 fils per share for Q2 2025. Variable payout for the Oil and Gas business will be determined as a discretionary percentage of net income to be decided at the 2026 Annual General Assembly. Moreover, following the completion of our current 3-year dividend policy this year, the Board will consider a new dividend policy for 2026 to 2029 for discussion at next year's Annual General Assembly. I'll now pass over to Asjad, who will lead us through the overall segment segmentation performance.

Thank you, Steve. As Steve mentioned earlier, our core utility business remains strong and the underlying performance of the Transmission & Distribution business is a reflection of this. Network availability improved marginally to 98.9% in Q2 2025, up from 98.6% in the same period last year. Capital expenditure increased significantly, driven by the timing and phasing of project execution, sector upgrades and the continued rollout of key special projects. The regulated asset base grew to AED 77.9 billion, supported by healthy CapEx levels. Notably, the strategic acquisition of Transmission Investment marks our first expansion of the Transmission & Distribution business outside the UAE. Transmission Investment is one of the largest players in U.K.'s offshore electricity transmission market, where it develops and operates but does not own 11 transmission lines, bringing electricity from the U.K.'s significant and growing offshore wind assets to the Mainland. Transmission Investment is also a prominent player in the country's interconnector sector. As mentioned earlier, the 14% revenue growth was primarily driven by higher PST pass-through costs. Moreover, EBITDA was affected by the impairment of our investment in Xlinks project. Adjusting for this nonrecurring item, EBITDA recorded marginal growth in Q2 2025. Moving to generation. The portfolio saw notable expansion both locally and internationally. From an operational standpoint, commercial availability increased to 98.6%, supported by higher fleet availability. The 49% surge in CapEx was mainly driven by the development of the Al Dhafra OCGT project. Steve had highlighted earlier the significant growth plans TAQA Morocco has announced. The MOU signed by the company entailed 2.7 gigawatts of gas and renewable capacity, including a 400-megawatt CCGT plant acquisition. Additionally transmission infrastructure and over 540 MIGD of desalination capacity are planned. The 15-year execution -- sorry, 15-year extension of Shuwelhat will enable Ewec to maintain security of supply and system stability while continuing the transition to net zero in part through the introduction of more solar plants. With regards to Uzbekistan, the acquisition of the 875-megawatt gas-fired CCGT plant by TAQA, along with Mubadala supports investments into the privatization of Uzbekistan's power sector. This follows a strategic partnership between the government of Uzbekistan and UAE. On the financial side, revenues increased by 2% year-on-year for generation, remaining broadly in line with the comparative period. EBITDA, on the other hand, was impacted by 2 factors: firstly, lower contribution from associates and JVs and secondly, a decline in other income. Moving to TAQA Water Solutions. Our remedial works to our infrastructure following the exceptional weather events last year have progressed well. This has translated into improved commercial availability, which stood at 94.8% in Q2 2024 and 93.7% in Q1 2025. CapEx decreased compared to the prior year, reflecting higher investments required last year in response to the weather event. On the financial front, TAQA Water Solutions saw revenues increase by 6% year-on-year, reflecting the regulated nature of the business. EBITDA, on the other hand, increased by 3%. The slower growth in EBITDA compared to top line is attributable to elevated expenses related to the remedial efforts. Moving to Oil and Gas. This business continues to be driven by the impact of ongoing decommissioning activities and commodity price volatility. Production declined by 11% year-on-year in Q2 2025, mainly due to the cessation of production at 4 U.K. assets in late 2024 as the U.K. business transitions to safe and efficient decommissioning. CapEx remained broadly unchanged with spending focused on drilling and completions activity in North America. Revenues fell by 41% year-on-year, reflecting both lower realized oil prices and reduced production volumes. The average realized oil price from continuing operations decreased 8% year-over-year from $71.04 per barrel in Q2 2024 to $65.57 per barrel in Q2 2025. On the other hand, average realized gas price increased by 8% to $2.56 per MMBtu. EBITDA was down 34% year-on-year, impacted by the combined effects of the decline in production and to a lesser extent, lower oil prices. Looking at the first half of 2025 as a whole, overall profitability was affected by the oil and gas business and nonrecurring items. Revenue for the first half of 2025 grew by 5% year-on-year, driven by continued strength in the utilities business, particularly T&D. EBITDA declined by 11% year-on-year, reflecting lower contributions from the Oil and Gas segment and the impact of nonrecurring items across the business. Net profit attributable to TAQA shares was also affected by higher -- in addition to the above-mentioned factors, the net profit is affected by higher net finance costs. Free cash flow for H1 2025 was 62% higher compared to the prior year, reflecting favorable working capital movements. I'll now hand back to Steve for his concluding remarks, after which we will open the floor for Q&A.

Thank you, Asjad. TAQA's year-to-date performance demonstrates the resilience of our business model and our ability to deliver on our strategic objectives. Q2 saw us make significant strides in strategic growth, be it within the UAE or externally investments strengthened our portfolio, extending our global reach and reaffirm TAQA's positioning at the heart of the energy transition. TAQA Morocco's ambitious growth plans for a testament to the latter. Capital expenditure in our utilities business is ramping up, driven by the expansion and upgrade of transmission, distribution and generation assets. On the financial side, we repaid $750 million in bonds, entirely from our operating cash, demonstrating the strength of our balance sheet. Overall, we are steadily building a broad utilities footprint, both in our home markets and abroad, positioning TAQA for sustainable long-term growth.

Thanks, Steve. So please feel free to raise your hand on zoom, and we'll open up the call for you for your questions. JP, would you please introduce yourself and ask your question.

[ Jean-Pierre ] from Kepler Cheuvreux. Just a couple of quick questions to clarify your production in the oil and gas business. In the Netherlands, you recently accomplished [indiscernible] associated assets. Could you clarify whether you still own any producing oil and gas assets in that country following that transaction? And if possible, the production of the remaining assets? And in the same vein in the U.K., what's the average production after you've stopped production from your -- from 4 assets?

Okay. Thank you, JP. Well, first of all, on the Netherlands, yes, we do still have production there, mainly gas, it's around 3, barrels a day, 3,000 barrels a day equivalent. The Porthos project, which you mentioned was -- is a project to inject gas into a gas field that was discontinued its operations some time ago. So yes, we still have ongoing production. In the U.K., production sits at about -- I think it's about 15,000 barrels a day. Asjad can confirm that figure afterwards, but it's around that figure. But on the decline, as you can well see.

Again, if you have any questions, please feel free to raise your hands, and we'll open up the mic to you. Luke, if you can please introduce yourself and ask your question.

This is Luke from Barclays. I just wanted to quickly touch on M&A whether there's any inorganic opportunities you're currently evaluating. I also recall seeing a piece a few months back stating that TAQA was actively looking at opportunities in the U.S. So I was wondering, yes, if looking at that market, what sort of assets you would potentially consider acquiring?

Yes. Thanks for the question, Luke. We don't comment on M&A opportunities until they are firm and need to be disclosed because we don't want to induce some unnecessary speculation. So there's not really very much I can say about that. Certainly, the U.S. is a country of interest, though, to your second question. And the areas that we are typically looking to grow our business are -- we've published targets for [indiscernible] gigawatt capacity increases, are in conventional gas-fired generation and through Masdar renewables. And you saw Masdar make a number of acquisitions last year. So those are the kind of business segments that we're looking at. And certainly, the U.S. is a country of interest.

Thank you. Again, if you have any questions, please feel free to raise your hand. JP again. Please go ahead.

Yes. Just 2 other quick questions. You announced an impairment on one of your investments, namely Xlinks. I wonder whether you had other potential investments within your portfolio where there could be similar impairments? And the second one is about your share of results of joint venture and associates in the generation business. So that includes Masdar. It's been relatively soft in the last 2 quarters. I wonder whether you could elaborate on the reason of this relatively soft contribution and whether there is a chance it could pick up in the future in coming quarters?

Sure. First of all, and again, thanks for those additional questions, JP. On impairments, Xlinks is a very specific type of investment. It was an early stage, relatively small investment in a project that hasn't got approval to proceed, and we thought it was of interest. And so we invested in that. As it didn't go ahead, it's clearly sensible to impair it. But we haven't really done any other investments of that relatively early-stage speculative type, if you like. So I'm not anticipating any further impairments along those lines. Now of course, we always do at the end of the year and we'll do at the end of this year, our usual impairment test with the auditors, but I'm not expecting anything to come out of that, but that's something we always do at the year-end anyway as any other company does. In terms of associates and joint ventures in generation, the main 2 companies in this elements are our aluminum plant in Oman and of course, our investments in Masdar and what I would say there is that the Sohar project is a mature producing asset. And obviously, its performance moves up and down with commodity prices very much like the oil and gas business. So whether that will be stronger or less strong in future quarters will depend on pricing in that business. And Masdar is -- it's a company that is making significant investments, as you have seen and has a big growth potential, which will over time lead to growing net income and stronger performance. But it's still at a relatively early stage, and therefore, quarterly performance is a little difficult to predict. But I would think over the longer term, we would expect that business to improve its performance and make a bigger contribution to overall net income.

Again, if you have any questions, please feel free to raise your hand and we'll open up the mic to you. Again, if anyone has any questions, please feel free to raise your hand. All right. It looks like we're done with the Q&A as well. Thank you, everyone, for joining us on the call. Looking forward to speaking to you before the next call and having you join us again in the next call. Thank you very much.

Thank you.