S&P lowers rating on Taqa debt

Standard & Poor’s said on Tuesday that it had cut Abu Dhabi National Energy Company’s debt rating by a notch, citing “decreasing predictability of government support” for Taqa, as the energy company is known.

S&P said it downgraded Taqa’s rating to A- from A, which puts it four rating notches below the Abu Dhabi government’s rating, although Taqa officials say the government’s support remains unwavering.

Taqa is sensitive to rating changes as it is highly reliant on debt financing, with about Dh80 billion of debt outstanding, according to S&P, versus an equity share market capitalisation of Dh3.6bn.

It was founded in 2005 and has the near-monopoly providing Abu Dhabi’s water and electricity supply. The latest rating move follows Taqa’s recent release of financial results for last year, in which it realised a loss in value of its assets of Dh22bn.

Taqa had postponed realising that drop in asset value, despite plummeting oil prices over the past two years, by using accounting rules that allowed an unidentified “related third party” to underwrite the oil and gas assets at well above their market value – referred to by S&P as a “put” arrangement.

Taqa’s majority shareholder, the Abu Dhabi Water & Electricity Authority, which recently increased its holding to just above 74 per cent, filled the gap in the balance sheet left by removing the put by transferring land worth Dh18.7bn to Taqa.

However, S&P maintains that “the substitution of a favourable put arrangement from a related party with a transfer rights to use land, as mentioned in Taqa’s 2016 financial statements we view as a weaker mechanism for support to Taqa”.

The rating agency adds that the land “will not contribute to Taqa’s cash flows until the plants that currently are on these parcels come to an end of their life,” which means it will be of no help reducing the company’s debt load. However it is expected to generate cash flows in the long term.

Taqa officials say that after realising the big asset loss the outlook is improving and there has been no change to the level of government support.

“The transfer of leasehold land to Taqa in December 2016 demonstrated continued support from our majority shareholder, in line with a long track record of support in recent years,” said acting chief operating officer, Saeed Al Dhaheri.

The company’s first-quarter results are out in mid-May and with oil prices consistently well above $50 are expected to show improvement from last year, when prices averaged $45 per barrel.

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