RAM Ratings has reaffirmed the AA1/Stable rating of Abu Dhabi National Energy Company PJSC's Sukuk Murabahah Programme of up to MYR 3.5 billion in nominal value (2012/2032). Based on RAM's methodology on government-linked entities (GLEs), the AA1 rating is primarily anchored by the very high likelihood of extraordinary support from the Government of Abu Dhabi (GoAD) in the event of financial distress. TAQA is a GLE in Abu Dhabi, with a mandate to own the majority of critical power and water (P&W) assets in the Emirate. TAQA is also an independent oil and gas (O&G) player.
TAQA derives stable cashflow and earnings from its P&W division, which contributed 53.9 per cent of its operating profit in FY Dec 2013. Its domestic P&W operations and its majority-owned foreign power businesses earn fixed capacity payments based on availability. TAQA's P&W assets have healthy operational track records.
TAQA's O&G segment continues to be challenged by subdued natural gas prices and needs to consistently incur hefty capex to replenish its relatively limited reserves. In FY Dec 2013, the segment's North American operations made an AED 3.2 billion provision for impairment of assets due to reserve write-downs and continued subdued natural gas prices. This contributed to a net loss for the year which wiped out retained earnings. On the other hand, the integration of newly-acquired assets from BP in 2H 2013 and the resumption of production at the Cormorant Alpha platform (which was shut down for rectification and accelerated maintenance work from January to August 2013) augur well for the segment's UK North Sea operations.
TAQA's debt as at end-March 2014 was relatively flat, having increased 0.1 per cent since end-December 2012, with 53.9 per cent of the debt being the project-finance borrowings of its P&W subsidiaries. However, both an increase in asset retirement obligations (AROs) from recently acquired North Sea O&G assets, which nudged up the Group's total adjusted debt (includes operating lease commitments and AROs) to AED 89.16 billion, and reduced equity from an AED 1.77 billion net loss in FY Dec 2013 led to a higher adjusted gearing ratio of 7.49 times and a correspondingly weak annualised adjusted funds from operations debt coverage (FFODC) ratio of 0.16 times. The Group's average adjusted gearing ratio for the next three years is projected to remain high at around 6.0-7.0 times due to a continuous expansion plan while its average adjusted FFODC ratio is estimated to hover at 0.15 times. Further debt-funded acquisitions will strain TAQA's financial position and stand-alone credit profile.
Geographically diverse operations expose the Group to regulatory and geopolitical risks associated with the regions in which it operates. We note that as a GLE, TAQA rides on strong government-to-government relationships in expanding its assets in India and the Middle East and North Africa region. This provides a level of comfort in respect of the Group's ventures into places which entail heightened geopolitical risks such as Kurdistan in Iraq. Recent tensions between Russia and Ukraine could affect its European gas storage business in which Gazprom, Russia's energy giant, is a strategic partner.