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Rating Action:

Moody's upgrades TAQA's ratings to Aa3 following successful transfer of assets; stable outlook

01 Jul 2020

London, 01 July 2020 -- Moody's Investors Service, ("Moody's") has today upgraded the issuer rating of Abu Dhabi National Energy Company (TAQA) to Aa3 from A3 and its short term rating to P-1 from P-2. The outlook on all ratings is stable. This concludes the review for upgrade Moody's had initiated on 12 February 2020. A full list of the affected ratings can be found at the end of this press release.

TAQA successfully completed the transfer of certain assets from Abu Dhabi Power Corporation PJSC (ADPower), TAQA's main direct shareholder, on 1 July 2020. The transaction significantly enhances TAQA's asset portfolio, adding transmission and distribution assets to its generation assets and creating a monopoly integrated utility in the emirate of Abu Dhabi.

RATINGS RATIONALE

The upgrade reflects Moody's view that the transfer of the ADPower assets reinforces the strategic importance of TAQA for the government of Abu Dhabi (Aa2 stable). The additional assets entrench TAQA's dominance over electricity generation, transmission and distribution and water desalination in Abu Dhabi. TAQA becomes a vertically integrated utility with total assets of around AED200 billion ($54 billion) and a more diversified energy generation mix. Indirect government ownership will increase to 98.6% from 74.1%.

The new assets have a significant positive impact on TAQA's business and financial profiles and led Moody's to upgrade the company's Baseline Credit Assessment (BCA) to baa1 from b1. The assets improve the stability and predictability of TAQA's cash flow and dilute the company's exposure to its underperforming oil and gas assets. In 2019, the free cash flow generation of TAQA's oil and gas assets (after capital expenditures) remained insufficient to service the debt that was incurred to acquire them. Pro-forma for the transaction, the company's adjusted CFO Pre-WC / debt increases to around 15% from 8% in 2019 and adjusted debt / book capitalization reduces to around 45%, from 85% in 2019. The assessment assumes that TAQA will generate the majority of cash flows from regulated transmission and distribution activities in Abu Dhabi going forward.

Moody's continues to view TAQA as a government-related issuer (GRI) that benefits from credit linkages with the Government of Abu Dhabi as expressed by a very high level of default dependence with and support from the government. Moody's notes that TAQA is indirectly owned by the government through Abu Dhabi Developmental Holding Company PJSC (ADQ), a recently established intermediate holding company. It is Moody's understanding that ADQ will provide financial and strategic oversight on behalf of the Government in addition to that provided by Abu Dhabi's debt management office.

LIQUIDITY

TAQA's liquidity is excellent. As of 31 December 2019, and pro-forma for the transaction, the company had AED5.1 billion in cash and cash equivalents and AED11.5 billion available under committed credit facilities. This, coupled with expected funds from operations of around AED12.0 billion in the next 12 months, positions the company well to cover around AED3.3 billion of current financial liabilities as of 31 December 2019, as well as capital spending, abandonment expenses, working capital and dividends of around AED9.3 billion.

OUTLOOK

The stable outlook reflects the stable outlook on Abu Dhabi's sovereign rating because of the strong credit links between TAQA and the government.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

TAQA's ratings could be upgraded as a result of an improvement in the perceived importance of TAQA for the government. TAQA's BCA could be upgraded if its financial profile improves such that (CFO pre-WC + interest)/interest is sustained above 4.5x; and (CFO pre-WC - dividends)/debt is sustained above 17%. An upgrade of the BCA would also require a more clearly developed financial policy.

TAQA's ratings could be downgraded in case of a change in Moody's government support assumptions, for instance, as a result of adverse changes in regulation and oversight by the Government of Abu Dhabi or a material reduction in government ownership. TAQA's BCA could be downgraded in case of a weakening of TAQA's credit metrics such that (CFO pre-WC + interest)/interest trends below 3.75x; or (CFO pre-WC - dividends)/debt trends below 13% or in case of a growing contribution to cash flows from unregulated businesses.

LIST OF AFFECTED RATINGS

Upgrades:

..Issuer: Abu Dhabi National Energy Company

.... LT Issuer Rating (Foreign and Local Currency), Upgraded to Aa3 from A3

.... ST Issuer Rating (Foreign and Local Currency), Upgraded to P-1 from P-2

....Senior Unsecured Medium-Term Note Program (Foreign Currency), Upgraded to (P)Aa3 from (P)A3

....Senior Unsecured Regular Bond/Debenture (Foreign Currency), Upgraded to Aa3 from A3

Outlook Actions:

..Issuer: Abu Dhabi National Energy Company

....Outlook, Changed To Stable From Rating Under Review

PRINCIPAL METHODOLOGY

Since the last rating actions on this issuer, Moody's has updated its approach to rating TAQA, and currently assigns and monitors such ratings using the Regulated Electric and Gas Utilities published in June 2017.

The methodologies used in these ratings were Regulated Electric and Gas Utilities published in June 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1072530, and Government-Related Issuers Methodology published in February 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1186207. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

TAQA is the vertically-integrated power and water utility of the emirate of Abu Dhabi, UAE with ownership of almost all of the power and water generation plants. The company also owns and operates the emirate's power and water transmission and distribution networks, and has international power generation and oil and gas businesses. These activities are spread in the UAE and countries in the Middle East, North America, Europe, Africa and the Indian subcontinent. TAQA will be indirectly owned at 98.6% by the Government of Abu Dhabi, held primarily through Abu Dhabi Power Corporation, with the remaining shareholding (1.4%) being in free float, limited to UAE investors. TAQA generated pro-forma revenue of AED44 billion and pro-forma EBITDA of AED18.6 billion for 2019.

The local market analyst for this rating is Thomas Le Guay, +971 (423) 795-45.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Julia Pribytkova
Vice President - Senior Analyst
Corporate Finance Group
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