TAQA’s underlying revenues, cash flow and earnings all saw an improvement in a year of resilient operational performance. Underlying revenues grew 3% year-on-year to Dhs21.1bn, and the business continued to generate strong operational cash flows, with EBITDA rising 1% to Dhs13.4bn.
The net result was affected by a one-off, non-cash impairment related to the value of the company’s North American oil and gas assets. The company continues to enjoy a strong financial position, with high levels of liquidity, and has planned capital expenditure in excess of $2bn in 2014.
The power and water segment, the bedrock of TAQA’s business, continued to produce a strong revenue and earnings stream, while oil and gas recovered from a setback in the UK early in the year to end the year on a high note with record production levels. The company hit key milestones on its large construction and growth projects, with several new facilities poised to come on stream over the next 18 months in the Netherlands, Morocco, Ghana and Iraq.
In the UK North Sea, TAQA successfully integrated the Harding platform and associated assets, which provides the company with a development portfolio across three fields that will extend the life and sustainability of the existing business in the UK. In Q4, UK production levels were a record 68,400 barrels of oil equivalent per day (boed), compared with 39,500 boed during the same period in 2012, an increase of 73%. In North America, TAQA effected a turnaround. The business was restructured, reducing headcount by 162, disposing of non-core acreage and creating a simpler organisation. A more focused capital spending programme centred around the company’s highest-value prospects has already started to generate higher production, while maintaining an industry-leading safety performance.
In Iraq, TAQA secured regulatory approval for the development plan of the Atrush field, with the first oil production expected in 2015. In the power and water segment, underlying revenues grew by 5% to Dhs9.0bn, led by a strong performance of TAQA’s majority ownership of the UAE power and water fleet. TAQA made great progress in its largest growth and construction projects. The first of two new units at the Jorf Lasfar Energy Company power plant in Morocco, where TAQA already provides about 40% of the country’s power, synchronised to the grid in October, and the second unit is due for commissioning in the first half of 2014. The successful IPO of the Moroccan business on the Casablanca stock exchange in December raised significant funds for TAQA and added a critical new stakeholder base for the company.
In Ghana, the company passed the half way mark in its expansion of the Takoradi 2 power plant, which is set to increase electricity production by 50% with a highly efficient combined cycle unit. Construction of the Bergermeer gas storage plant in the Netherlands reached an advanced stage, with the start of preliminary operations on schedule for April 2014. When this project is complete in 2015, it will be the largest open access gas storage facility in Europe, significantly contributing to Europe’s energy security. TAQA’s financing operations continued to set a benchmark for the region, with the refinancing of the Shuweihat S2 power and water plant in the UAE setting a precedent for future non-recourse financing of UAE power stations. The company made significant disposals over the period, including non-core acreage in North America and the non-operated Noordgastransport B.V. pipeline business in the Netherlands.
The company reported a net loss of Dhs2.5bn, affected by a one-off, non-cash impairment of Dhs3.2bn, mostly relating to the value of oil and gas holdings in North America. The impairment was realised as a result of a reduction in the long-term assumptions for natural gas prices in North America and is in line with recent write-downs by other natural gas producers in the region. The impairment does not affect the company’s ability to continue operations or service its debt obligations. As a consequence of the net loss, the company will not pay a dividend for 2013.
Carl Sheldon, Chief Executive Officer, said, “TAQA has grown into Abu Dhabi’s leading international operator of strategic national energy infrastructure. We achieved record levels of oil and gas production, while underlying revenues from our power and water business rose strongly. The company is well positioned to take advantage of the unique opportunities ahead.”
Stephen Kersley, Chief Financial Officer, said, “Underlying revenues and cash flow rose year-on-year, while the net result was affected by a one-off, non-cash accounting entry. Our strong levels of liquidity enable us to continue to fund operations and service our debt obligations on favourable terms.”
Financial summary: FY 2013 versus FY 2012
Revenues and costs
Total revenues for 2013 were Dhs25.8bn, 7% lower year-on-year, compared with total revenues of Dhs27.8bn for the same period in 2012. However, this does not accurately reflect the underlying performance of the business, due to the effect of construction and backup fuel revenues which have compensating expenses in cost of sales.
On an underlying basis, revenues grew by 3% to Dhs21.1bn in 2013 from Dhs20.6bn in 2012. This reflected a particularly strong performance from the power and water segment, which grew by 5% to Dhs9.0bn, from Dhs8.5bn in 2012, while the oil and gas segment grew by 1% to Dhs12.2bn in 2013. Cost of sales, excluding the impairment, was Dhs17.9bn in 2013, a decrease of 8% over last year. This was caused by lower construction costs and backup fuel costs corresponding to the fall in total revenue per accounts. Overall Gross Margin, excluding DD&A, dry hole expenses and impairment, was 56%, an increase from 51% in 2012, reflecting the stronger underlying performance of the business.
Power & Water
Power & Water’s performance was driven by 6% higher production within the domestic operation, despite the maintenance shutdown at Shuweihat S1 in H1. The international fleet also performed well, with Jorf Lasfar returning to production following an outage in the first half, achieving technical availability of 97% in Q4.
Fuel revenue decreased 12% year-on-year to Dhs3.2bn, reflecting lower usage of back-up fuel in the domestic power plants. This revenue is the payment received from the off-taker and has a corresponding offset expense in fuel costs. Operating expenses for the power and water segment (excluding fuel costs) were Dhs3.4bn in 2013, compared to Dhs5.5bn in 2012. Depreciation, depletion and amortisation (DD&A) expense for the period was essentially flat at Dhs1.8bn. Net profit for the period amounted to Dhs2.4bn, compared to Dhs2.2bn in the prior year.
Oil & Gas
Total oil and gas revenues (including gas storage and other income) increased by 1% to Dhs12.2bn for 2013. This was despite the shut-in of production at the Cormorant Alpha platform in the North Sea at the beginning of the year and lower UK prices. These factors were offset by the additional capacity acquired in the UK at the end of June, and higher production and higher prices in North America and the Netherlands. Operating expenses increased year-on-year to Dhs5.0bn, as costs rose in the North Sea due to the Cormorant Alpha shutdown, the Central North Sea asset acquisition and one-off projects, offset by lower operating expenses in the Netherlands and North America. In line with the increasing production during the second half, in particular at the UK operations as a result of the acquisition of Central North Sea assets, the DD&A expense increased to Dhs4.4bn. Net loss for the period was Dhs2.1bn, compared to a profit of Dhs394m in 2012.
EBITDA grew by 1% to Dhs13.4bn in 2013 reflecting the strong underlying cash flows of the business and ensuring the company has more than sufficient liquidity to meet its financing needs.
Financing costs were broadly consistent year-on-year at Dhs5.1bn.
The Loss Before Tax was Dhs1.1bn in 2013, compared to a Dhs3.5bn Profit Before Tax in 2012. This was due to the effect of an impairment of TAQA’s North American assets described below.
The annual assessment of the assumptions on which TAQA’s asset base is booked on the balance sheet, resulted in a pre-tax, non-cash impairment of Dhs3.2bn against TAQA’s North American assets. Post-tax this is Dhs2.7bn. This was due to reserve revisions and lower anticipated production resulting from a better understanding of our holdings in North America, which has given us an enhanced view of economic recoverability, in the context of continued, industry-wide, low gas price environment. The impairment charge is non-cash and has no impact on TAQA’s ability to meet its obligations, including the service of its ongoing debt obligations.
In line with the overall reduction in profitability, TAQA reported a lower income tax expense of Dhs661m compared to Dhs2.2bn in 2012. Note that the impairment charge discussed above includes a goodwill impairment of Dhs1.6bn that is not deductible for tax purposes. Adjusted for this, the overall income tax expense for 2013 resulted in an effective tax rate of 135% (62% in 2012). The effective tax rate increased primarily as a result of the fact that our overall loss on the Oil and Gas segment consists of larger losses in North America with a statutory tax rate between 25% and 35%, and profits in the Netherlands and UK with statutory tax rates between 50% up to 81%.
Net loss and dividend
TAQA reported a net loss of Dhs2.5bn attributable to equity holders in 2013, compared to Dhs649m profit in 2012. On this basis, basic and diluted loss per share attributable to equity holders was Dhs0.42, compared to Dhs0.11 profit in the prior period. As a consequence of this loss, TAQA will not pay a dividend for 2013.
Overall total debt was Dhs79.7bn, comprising non-recourse project finance debt tied to assets of Dhs43bn and corporate debt of Dhs36.7bn. This is a marginal decrease of Dhs95.5m from 31 December 2012. This equates to a Net Debt /EBITDA ratio of 5.6x, a decrease from 5.8x in 2012. In July, a $825m project bond was successfully issued to refinance the Shuweihat S2 plant. This bond carries a final maturity of 2036 and an attractive coupon of 6%. Consolidated cash on hand, as at 31 December 2013, was Dhs3.9bn, compared to Dhs3.8bn in December 2012. As with previous periods, liquidity remains very strong with unused credit lines available to TAQA of Dhs11.0bn, resulting in overall liquidity of Dhs14.9bn.
Power & Water
In 2013, TAQA produced 76,712 Gigawatt hours (GWh) of electricity, a 2% increase over 2012, and 253.4bn imperial gallons of water, a 5% increase over the prior year.
Domestic power generation remained strong, increasing by 6% to 58,627 GWh of electricity and 525.4m imperial gallons (MIG) of water during the twelve months to 31 December 2013. Domestic availability was 92.2%, compared to 95.2% the prior year. Technical availability was reduced due to a forced outage at Shuweihat S1, which affected one of the turbines in February. The affected turbine resumed operations at the end of June. The Fujairah 2 facility was also affected by a forced outage with one of its turbines affecting production in September. This was subsequently brought back online in October. These outages were significantly offset by the very strong performance of the rest of the UAE fleet, half of which reported an Equivalent Forced Outage Rate (EFOR) of less than 1%.
In June, TAQA broke ground on the $200m expansion of Fujairah 1’s desalination capacity. The expansion, which uses reverse osmosis technology, will increase the facility’s capacity by 30 MIG per day. In October, TAQA inaugurated a major new power and water plant in the Western Region of Abu Dhabi. Shuweihat S2 added 1,510 megawatts to the Emirate’s generation capacity, enough to power more than 300,000 homes. The plant will also produce up to 100 MIG of potable water each day, representing 15 % of Abu Dhabi’s water desalination capacity.
TAQA’s international power portfolio, which comprises assets in Morocco, Ghana, India, Saudi Arabia, Oman and the United States, generated 18,085 GWh of power during 2013. Overall technical availability fell during the period to 89.3%, compared to 91.4% last year. This was due to a steam turbine rotor failure at Red Oak, a transformer failure at Jorf Lasfar during the first half of the year, as well as a planned 28 day maintenance shut down at Neyveli. These issues were quickly addressed and all operations have now returned to normal. Indeed, downtime at Jorf Lasfar was used to bring forward significant maintenance and in the second half, the plant out-performed, achieving record availability of 97% – a level of performance equivalent to that of a gas-fired power plant.
The expansion project in Morocco continued to progress well, with the first of the two new units, Unit 5, successfully commissioned in December and Unit 6 expected to be commissioned in April 2014. The 700 MW expansion will bring the gross capacity of the Jorf Lasfar plant to 2,056 MW. Jorf Lasfar also successfully completed its Initial Public Offering of Shares (IPO) on the Casablanca Stock Exchange, selling a 14.21% stake and raising proceeds of Dhs673m for TAQA. The expansion project at the Takoradi 2 plant in Ghana is also making good progress and is now 70% complete. This expansion will increase the installed capacity of Takoradi 2 to 330 MW and is expected to be commissioned in early 2015.
Oil & Gas
TAQA’s oil and gas business comprises a portfolio of assets across North America, the UK North Sea, the Netherlands and Kurdistan region of Iraq.
Total oil and gas revenues, including gas storage and other operating revenues, increased by 1% in 2013 to Dhs12.2bn, notwithstanding the unplanned shut-down of Cormorant Alpha in January 2013. Operating expenses increased by 3% to Dhs5.0bn, again due to repair work to address the Cormorant Alpha shutdown, coupled with additional operating expenses associated with the acquisition of the Central North Sea assets and maintenance at the Tern and Eider platforms. Offsetting the increase, other expenses were down, such as gas entry capacity and movement charges in the Netherlands operations. Total average daily production for 2013 increased to 142,400 boed, compared with 135,700 boed in the same period last year. TAQA exited the year with record levels of production during Q4 2013 of 161.8 mboed.
In August, TAQA and its partners announced that they had drilled an additional test well at Atrush and were conducting an analysis of core samples, including appraisal of oil/water contact definition, oil gravity/viscosity variations, extent of quality reservoir, permeability and porosity data. In October, TAQA received approval from the Kurdistan Regional Government for the first phase in the development of the Atrush Block in the Kurdistan region of Iraq. The block, which is located 85 km northwest of Erbil, is expected to initially produce approximately 30,000 boed, with first oil by early 2015. The approval covers a 25 year period to maximise recovery of the oil resources. In total, TAQA is expecting to invest more than $300m in the initial phase which will consist of three production wells and a central processing facility.
Commodity price environment
Global oil prices strengthened during the course of 2013, as. WTI averaged $98.04 per barrel (bbl), 4% above the average of $94.15/bbl a year earlier. The WTI/Brent pricing differential continued, although narrowing, with Brent averaging $108.70/bbl in 2013 versus $111.68/bbl in 2012. NYMEX gas prices for 2013 averaged $3.73 (mmbtu), versus $2.83 for the equivalent period in 2012. During Q3, the Alberta AECO differential to NYMEX gas widened as the TransCanada mainline pipeline toll increase discouraged gas flows from leaving Alberta. This basis is expected to narrow as the winter gas firm contracting season begins in the fall. Longer term, the North American natural gas price environment is expected to continue to improve, as infrastructure to transport gas comes on stream and as the price differential between gas and other energy sources is arbitraged.
In March 2014, a consortium led by TAQA agreed to acquire the Baspa Stage II and Karcham Wangtoo hydroelectric plants in the northern Indian state of Himachal Pradesh, from Jaiprakash Power Ventures Limited. The two plants have a combined power generation capacity of 1,391 megawatts (MW). TAQA, holds a 51% stake in the consortium and will have control of operations and management of both facilities under the proposed deal. Following the completion of the transaction, TAQA’s gross operational power generation capacity in India will be 1,741 MW, comprising one lignite power plant and three hydroelectric plants, making TAQA the largest private operator of hydroelectric plants in India. The acquisition is expected to close in 2014 and is subject to regulatory and third party approvals.
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