Credit Opinion: Abu Dhabi National Energy Company

Global Credit Research - 05 Mar 2010

Abu Dhabi, United Arab Emirates

Ratings

Category Moody's Rating

Outlook Stable
Issuer Rating A3
Senior Unsecured A3
Commercial Paper P-2
ST Issuer Rating P-2

Contacts

Analyst Phone
Philipp L. Lotter/DIFC 971.44.01.9536
Martin Kohlhase/DIFC
David G. Staples/London 44.20.7772.5454

Key Indicators

Abu Dhabi National Energy Company

(in AEDm)[1]
FY2005 FY2006 FY2007 FY2008 LTM Sep-09
EBIT Margin 54.30% 44.20% 45.50% 40.00% 23.20%
Funds from Operations / Net Debt 10.20% 6.00% 4.90% 10.20% 7.50%
Funds from Operations Interest Coverage 3.0x 2.0x 1.8x 2.6x 2.4x
EBITDA Interest Expense 2.5x 2.0x 1.9x 2.9x 2.3x
Debt to EBITDA 9.1x 13.5x 10.0x 5.9x 8.3x
Debt to Capitalisation 75.90% 84.80% 82.60% 83.20% 80.30%

[1] Based on "As Adjusted" financial statements. Details in "Moody's Approach to Global Standard Adjustments in the Analysis of Financial
Statements for Non-Financial Corporations - Part II, Rating Methodology, Feb-06 (#96729).

Note: For definitions of Moody's most common ratio terms please see the accompanying User's Guide.

Opinion

Company Profile
The Abu Dhabi National Energy Company, which is also known under the Arabic word for energy, TAQA, was established in 2005 as the
government-controlled entity tasked with holding the majority of the Emirate's power generation and water desalination plants. TAQA is the
holding company of majority stakes in six of the Emirate's 8 independent water and power producers (IWPP), which together make up around
80% of Abu Dhabi's power generation and over 90% of its water desalination capacity, thus performing a vital role in what is a harsh desert
climate with hot temperatures and few natural water supplies. Minority stakes in the IWPP's are held by Abu Dhabi Water and Electricity Authority
(ADWEA), which is an independent government authority entrusted with Abu Dhabi's water and electricity sector, and by a number of private
international sponsors.
TAQA has grown into a diversified energy holding company following a number of international acquisitions in the past two years. The company
has acquired power generation assets in Morocco, India, Ghana and Saudi Arabia, which have increased its total installed capacity by 4,300
Megawatts (MW) to now 12,909 MW. In Q3 2009, power and water generation activities accounted for 52% of total revenues. It has also
expanded in the upstream and midstream oil and gas sectors by acquiring several assets in Europe and Canada, which have since been
grouped under 3 operating subsidiaries, TAQA North (Canada), TAQA Bratani and TAQA Energy (both Europe). Together they make up 622
million barrels of oil equivalent (mmboe) in reserves and in Q3 2009 produced 136.5 mboe per day.
TAQA is 72.1% owned by the government of Abu Dhabi, which is one of seven united Emirates and by far the largest. The stake is held through
ADWEA (51.1%) and through the government-affiliated Farmers' Fund (21%). The remaining shares are held by local private shareholders
(27.9%) limited to citizens of the United Arab Emirates (UAE) and traded on the Abu Dhabi Securities Exchange. Accordingly, TAQA qualifies as a
Government-Related Issuer (GRI) under Moody's methodology for such entities.
Rating Rationale
TAQA's A3 rating reflects both its fundamental credit profile of Ba1, and the credit enhancement that can be derived from its public sector
ownership in the unlikely event that an extraordinary bailout be required. TAQA does not have a formal, explicit government guarantee, though
Moody's has regarded the implicit support relationship between the government of Abu Dhabi and TAQA as strong, and has thus assumed a high
level of credit support from the sovereign in TAQA's ratings. Therefore, TAQA's A3 final ratings benefit from uplift from the company's
fundamental credit profile of Ba1, the latter of which is largely constrained by high leverage. The rating is supported by TAQA's low risk regulated
domestic power generation assets with long term power and water purchase agreements (PWPA) as well as favourable plant feedstock
arrangements. Its 52% revenues from lower-risk utility business thus balances TAQA's business risk and provides a good cushion for its more
volatile, commodity price driven upstream operations.
Moody's considers TAQA's international upstream activities relatively higher risk compared to its domestic and/or regulated generation activities.
The acquisitions that the company has executed worldwide have progressively increased the contribution from upstream and midstream
activities thus increasing TAQA's exposure to more volatile and riskier markets. Moody's also highlights that TAQA has acquired operationally
challenging assets, which may require sustained higher oil prices and significant investments in order to be profitable. We believe that TAQA's
upstream business requires break-even prices of more than 40 $/bbl to be profitable, and even higher at TAQA North. However, we recognise
that recent acquisitions have also contributed to a significant growth in cash flows, both generally and as regards for debt service at the holding
company, given the still significant project finance debt located at its domestic subsidiaries.
TAQA's recent decision to move its strategy away from further large acquisitions and focus on consolidation and restoration of its balance sheet
is viewed positively by Moody's, as it reduces event risk and, over time, should lead to improvements in TAQA's currently aggressive capital
structure. Indeed Moody's believes that TAQA's fundamental credit profile is likely to improve over the medium term, which in turn could also
strengthen its final rating.
Moody's expects TAQA's overall financial performance to weaken in 2009 compared to 2008, as the upstream business will be negatively
impacted by a full year of lower oil prices. This is likely to particularly affect TAQA North, whose operations are more reliant on higher oil prices
than TAQA's other upstream businesses. TAQA North is by far the largest contributor to TAQA's daily production. At the same time, Moody's
takes comfort from the stability afforded by TAQA's power generation business, which is expected to remain relatively unaffected by the current
challenging economic conditions.
Rating Outlook
TAQA's ratings have a stable outlook and assume gradual debt reductions over the medium term.
Liquidity
TAQA's liquidity profile is strong and Moody's believes that the expected deterioration of cash flows resulting from the decline in oil prices will be
adequately supported by available cash and AED 8.4 billion (USD 2.3 billion) of funds that could be potentially drawn under the company's
committed credit facilities to fulfill capex requirements and debt repayments. Furthermore, we expect TAQA to produce positive free cash flow
from 2010, which will support debt reductions. TAQA will need to refinance a USD 1.0 billion drawn revolving credit facility in July 2010, which is
well covered by its own internal cash and cash generation.
Drivers of Rating Change
TAQA's fundamental credit profile currently assumes that retained cash flow (RCF) to net debt is maintained between 5% and 8%, funds from
operations are able to cover interest costs at least 2.5 times, debt to EBITDA is below 7 times and debt to capital is below 80%. TAQA is
currently at the very low end or marginally beyond these financial parameters. Prolonged weaaker operating conditions in 2009 and 2010 may
result in deteriorating financial metrics, which could see its baseline credit assessment lowered. However, Moody's assumes that TAQA's
fundamental profile should improve as it steps up efforts to reduce its leverage. Indeed ratings could be upgraded, if TAQA achieves RCF to net
debt above 10-15%, FFO Interest Cover of 4 times and above, and debt to EBITDA below 4 times.

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