TAQA Arabia S.A.E. (TAQA) Q3 FY2025 Earnings Call Transcript & Summary

Hello, everyone. Welcome to TAQA's Q3 2025 Earnings Call. My name is Asjad Yahya. I head Investor Relations at TAQA. I am joined by our Group 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 structure. Steve and I will walk you through the operating highlights and the financial performance for the period. We will then open the floor for Q&A session. I now hand over to Steve, who will guide you through the key highlights of the quarter.

Thank you, Asjad. Good morning, good afternoon, and good evening to everyone. Thank you for joining us for this call. Our performance in Q3 -- turning to Slide 5. Our performance in Q3 demonstrates the continued stability and profitability of our utilities business. Revenue was AED [ 14.4 ] billion, which is flat year-on-year. EBITDA grew by a healthy 7% to AED 5.8 billion, supported by lower G&A costs, higher other income and unrealized FX gains. With regard to G&A costs, recent quarters have seen the elevated impact of various transformational initiatives we have undertaken at the company, including the merger of ADDC and AADC. These higher costs are now reverting to a more normalized level. Moreover, there has been a greater allocation of staff costs to direct operations, as a result of which G&A costs of the individual businesses have risen -- excuse me, or the overall expense has declined year-on-year. Net income jumped by 27% year-on-year, benefiting from lower depreciation, reflecting the reassessment of asset lines of our regulated network businesses. CapEx increased by 65% to AED 3.7 billion as we continue to invest in our utility businesses. Despite the higher CapEx, we generated positive free cash flow in the quarter. The Board has proposed an interim dividend of AED 0.75 fils per share for Q3 2025. This is in line with our stated policy and an increase from the 0.7 fils paid in Q3 last year. On the funding front, we secured AED 8.5 billion floating rate facility. This represents our first AED-denominated facility at the corporate level and diversifies our funding mix. Last but not least, M&A has been an important element in terms of expanding our international footprint as well as sharpening the focus of the portfolio. I will cover some of these key developments in the -- on this front in the next slide. The first 9 months of 2025 witnessed significant traction towards our well-articulated 2030 goals. On the conventional power generation front, we signed a PPA with EWEC for a new 1 gigawatt plant to support the UAE's national strategy for AI. We also extended the Shuweihat-1 PPA for 15 years, securing flexible reserve power. Internationally, we acquired an 875-megawatt CCGT plant in Uzbekistan alongside Mubadala. And we reached financial close on 2 plants in the Kingdom of Saudi Arabia, which accounted for a combined capacity of 3.6 gigawatts. Masdar has remained active throughout the year as well, completing the acquisition of 100% TERNA ENERGY. Other notable highlights for Masdar include reaching financial close for the 1.4 gigawatt East Anglia THREE wind farm in the U.K. and the 2 gigawatt Al Sadawi solar project in the Kingdom of Saudi Arabia, signing a PPA for a 1.5 gigawatt solar project for EWEC and another PPA with a data center developer, Soluna Holdings. On the M&A front, we signed agreements to acquire GS Inima with a deal valued at USD 1.2 billion. We also made a strategic acquisition of transmission investments in the U.K., representing the first extension of our T&D business outside the UAE. On the divestment side, we sold our 50% interest in the Lakefield Wind project in the U.S. and post quarter, completed the sale of TAQA Neyveli, a 250-megawatt lignite-fired power plant in India. We sold this for approximately USD 105 million. Last but not least, our team in TAQA Morocco is also working on ambitious growth plans and signed MoUs targeting 2.7 gigawatts of new gas and renewable capacity. On the back of the significant organic and inorganic growth being pursued by TAQA, our gross generation capacity jumped from about 58 gigawatts at the end of Q2 2025 to about 72 gigawatts in Q3 2025. Turning next to Slide 7. Let's take a look at our financial performance for the quarter. Group revenue was AED 14.4 billion, broadly in line with the comparative period for last year. Transmission and distribution remained the largest contributor to the top line with revenues increasing 2% year-on-year, mainly due to higher pass-through bulk supply tariffs. Generation revenues were largely unchanged year-on-year. TAQA Water Solutions revenues were up 2% year-on-year, benefiting from the impact of the higher regulated asset base. And oil and gas revenues declined by 21% year-on-year, reflecting lower oil prices and lower production as decommissioning work progresses in the U.K. North Sea. Moving to EBITDA. The following factors shaped our results. Group EBITDA grew by a healthy 7% to AED 5.8 billion, benefiting from a combination of lower G&A, higher other income and unrealized gains. T&D EBITDA grew 4% year-on-year, reflecting the impact of higher regulated asset base. Generation EBITDA decreased by 5%, impacted by a higher OpEx from planned maintenance and unrealized FX losses. TAQA Water Solutions EBITDA was broadly flat year-on-year. And the Oil and Gas segment recorded a 25% year-on-year fall in EBITDA due to lower production and lower oil prices. The positive contribution from corporate mainly -- primarily reflects lower G&A due to the combination of low overall expense as well as greater direct allocation of staff costs to the businesses. Moving to nonoperated items in the profit and loss statement. A 6% year-on-year decrease in DD&A played a key role in driving stronger net income growth. This reduction stems from a technical reassessment of asset lines in our regulated network businesses. Net finance costs increased 6% year-on-year, while gross finance costs actually decreased by 3%, a 56% decline in interest income was the main reason for the overall net finance cost increase. Tax expense saw a 7% reduction led by a fall in oil and gas tax expense. This in turn resulted from lower profits in the business. Let's turn to Slide 9 to discuss our liquidity and debt profile. Moving to the balance sheet. 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 2% to AED 63 billion, reflecting repayment of a bond earlier in the year and scheduled repayments of project debt within our generation companies. Average debt maturity was 10 years, slightly lower than the 10.3 years at the end of [ 2024 ]. Total available liquidity increased significantly to AED 26.5 billion. This consists of AED 7.4 billion in net cash and AED 19.1 billion in unused credit facilities. The portfolio-wide interest rate held steady at an attractive level of 4.8%. Fixed rate debt accounted for 90% -- 95% of our total borrowings compared to 99% at the end of last year. This change reflects the addition of the new AED 8.5 billion floating rate facility. Overall, we remain comfortable with the strength of our balance sheet, and it continues to offer a solid foundation for future growth. With regards to dividends, the proposed payout in Q3 2025 stands at 0.75 fils per share, up from 0.7 fils per share in Q3 2024. We will continue to be guided by the existing 2023 to 2025 dividend policy for the remainder of the year with a variable payout from the oil and gas business to be decided at the 2026 Annual General Shareholder Meeting. I'll now pass over to Asjad, who will lead us through an overview of the segmental performance.

Thank you, Steve. Our Transmission & Distribution segment reported a strong quarter with healthy top and bottom line growth. Network availability improved marginally to 99.3% in Q3 2025, up from 99% in the same period last year. Q3 CapEx surged by 70% year-over-year, driven by the phasing of business-as-usual network announcements and upgrades as well as the continued execution of key special projects. The regulated asset base grew by 2.5% to AED 78.5 billion, supported by healthy CapEx levels and the impact of inflation. Q3 revenues grew 2% year-over-year to AED 9.8 billion, primarily driven by higher bulk supply tariff pass-through costs, while EBITDA increased by 4% year-over-year, primarily benefiting from reduced G&A expenses as the temporary heightened impact of transformational initiatives subsides. Turning to generation. Capital deployment stepped up materially as projects advance through development. CapEx thus rose 118% year-on-year, primarily on the back of construction work at the 1 gigawatt Al Dhafra project. Commercial availability was down slightly by 2.9 percentage points versus last year, mainly due to planned maintenance activity. As Steve mentioned earlier, we achieved financial close on Rumah 2 and Al Nairyah in Q3, 2 of our key projects in Saudi Arabia. We also announced the sale of Neyveli in October for about $105 million. Exiting from the lignite-based power plant aligns with our transition towards cleaner energy solutions. In terms of financial performance, revenues declined slightly by 1% and EBITDA was down 3.8% year-over-year, reflecting higher maintenance spend and some unrealized FX losses. Moving to TAQA Water Solutions. Commercial availability improved by 1.8 percentage points year-on-year to 96%, benefiting from the impact of remedial works after the exceptional weather events of last year. Capital expenditures saw a significant year-on-year increase of 72% on the back of a combination of maintenance and growth projects. Revenue increased by 2% to AED 620 million, supported by inflation and improved availability. EBITDA meanwhile, also saw a 1% year-over-year increase, primarily driven by an increase in RAB, although higher staff costs allocated to direct operations partially offset this rise. With regards to oil and gas, the key factors that continue to affect the business are declining production as decommissioning progresses at our U.K. North Sea assets, which also impacts the production mix and commodity price volatility. For Q3 2025, production declined by 9% year-over-year, resulting from planned cessation at several U.K. North Sea fields. Capital expenditures saw a 27% reduction, reflecting the shift towards decommissioning activities in the U.K. and decreased investment in drilling and completions across North America. Revenues from the business saw a 21% year-over-year decline as a result of decreased production and lower realized oil prices, which fell 11% year-over-year. Average realized gas prices, on the other hand, increased 5% year-over-year. The combined impact of reduced production and lower oil prices also led to a 25% decline in EBITDA for Q3 [ 2025 ]. Looking at the first 9 months of 2025 as a whole, overall profitability was affected by the oil and gas business and nonrecurring items. Group revenue for the 9-month period reached AED 42.7 billion, an increase of 3% year-on-year. This growth was driven by higher pass-through revenue in the Transmission and Distribution segment. EBITDA was AED 16 billion, a 5% decrease compared to the prior year with the performance of the oil and gas business largely explaining the fall. Net income recorded a similar 4% year-over-year decline in the first 9 months. Free cash flow, on the other hand, recorded a very strong increase to AED 7.3 billion, benefiting from positive working capital. I'll now hand back to Steve to wrap up the presentation with concluding remarks.

Thank you, Asjad. The strong operational and financial performance for the first 9 months of 2025 has put us even more firmly on the path to achieving our ambitious 2030 targets. We continue to demonstrate significant ability to execute disciplined M&A with the agreement to acquire GS Inima, a key example. We remain leaders on the ESG front and published our second green bond report, which has been well received by investors. Our utility business remains dependable and predictable, forming the bedrock for continued growth and shareholder returns. The new AED 8.5 billion loan is a good example of management pursuing all avenues for maximizing shareholder returns, including active management of the balance sheet. And finally, with our capacity reaching 72 gigawatts by the end of Q3 2025, we continue to pursue our goal of reaching 150 gigawatts by 2030. That concludes the presentation. So we will hand over for questions. Thank you.

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

Can you hear me?

Yes, we can.

It's about your coal and decarbonization strategy. Firstly, on the sale of your 250-megawatt coal power plant in India. I think you mentioned the proceeds from disposal of $105 million. Could you also give us some color on the timing of the completion and the approximate contribution in terms of revenue and EBITDA of this asset, let's say, on a normalized basis? And secondly, following this sale, I think that TAQA retains a sizable exposure to coal with a growth capacity of roughly 2 gigawatts in Morocco. I wondered how these remaining coal assets align with your decarbonization strategy, the focus on cleaner energies that you mentioned with a target to cut emission by 25% by 2030. Is there specifically any willingness or early-stage plan to either exit these remaining coal assets, maybe deconsolidate them or possibly convert them to gas?

Okay. Thank you for those 2 questions, JP. And let's take them as you ask them. So first of all, on the sale of Neyveli for $105 million, that completed around the end of October. It was very late in the month. So you'll see that in our financial results for 4Q. In terms of the run rate from revenue and EBITDA, it was providing. It's pretty immaterial, I have to say. Asjad will get back to you with the precise numbers, but they're really small. They make no difference at all to our overall financial results. And in terms of the coal strategy more generally, Well, first thing to say is that we have no plans to dispose of our plant in Morocco. It is -- as you may well know, we have a very long-term offtake contract. It supplies a very large share of Morocco's power. So it is not a plant that we're looking to dispose of at this point in time. What we are doing in Morocco, as you have seen from our announcements, is that we are utilizing that asset and the team there to expand our activities into gas-fired generation, solar generation and into transmission. So we're looking to build that business based on the good relations that we have there. And so that will be a key area for us going forward. And those activities will, of course, reduce the share of coal in overall generation in Morocco. In terms of the impact on our targets for emissions reduction by 2030, we never assumed in those projections and in those targets that we would dispose of this plant. So it's fully baked into all of those numbers. So retaining that plan will not impact our ability to deliver on the targets. And as you know, we are progressing well towards those emission reduction targets, and we fully expect to meet them by 2030.

Luke, if I could ask you to introduce yourself and ask your question.

It's Luke from Barclays. So I've got a couple of questions. So firstly, on working capital, in Q1, you had quite a large inflow and then in Q2 and Q3, it seems like it's been broadly neutral. So I was just wondering if there's any color you can share on what your expectations are for working capital into year-end and if we could potentially see that earlier inflow reverse? And then on the oil and gas side, production still continued to decline slightly quarter-on-quarter. So I was just wondering if there are any expectations you can share there on where you expect the production to stabilize?

Yes, sure. So on working capital, working capital for us is largely determined by the timing of our subsidy for the distribution business here in Abu Dhabi. So it's dependent on the timing of those payments, which we receive very regularly on a monthly basis. But sometimes, the payments move across months, but not -- certainly not across quarters. So it's a little bit unpredictable, but -- so I don't think I could sit here and tell you today that, that will reverse. It may do, but it may not depending on the timing of future subsidy payments because that is the key factor there. In terms of oil and gas production, I think a good way to think about it is to look at our position in Canada, where we currently produce around 80,000 barrels a day of oil and gas production. We have a relatively small amount in the Netherlands. It's about 2,500 barrels a day. And then the balance, which is about 10,000 or so is in the U.K. And what will happen over the next few years is that the U.K. production will come to a finish. So it will go to 0. Netherlands will also decline perhaps a little bit more slowly. And so if you're looking at the long term, it is going to be Canada. And certainly, our aim and our target is to continue to produce profitable barrels and SCF of oil and gas at around the 80,000 barrels a day mark going into the future. So I would think about that as being the long-term target. Exactly how quickly we'll move down from where we are today, which is around 92 and 93 to that figure is a bit difficult to say, but it will happen reasonably quickly over the next few years.

[Operator Instructions] All right. Looks like there are no more questions. Thank you very much, everyone, for joining us. We look forward to staying in touch with you during the quarter and equally looking forward to speaking to you again on full year results. Thank you for joining the call.

Thank you.