Abu Dhabi National Energy Company PJSC

September 23, 2009

Fair Value Estimate: AED 2.56 RESULT UPDATE

Recommendation:: Buy Share Data Market C ap A E D 10.0 bn Executive Summary P rice A E D 1.60 A bu Dhabi G eneral Index 3,100.05 The recent recovery in crude oil prices together with cost cutting Reuters TAQA.AD Bloomberg TAQA UH measures taken by Abu Dhabi National Energy Company (TAQA) Avg. Volume (52 W eek) 5.2 mn should benefit operating performance. 52-W eek High/Low A E D 2.42 / 0.87 S hares O utstanding 6,225 mn The acquisition of a 90% stake in Fujairah Water and Electricity Fair Value Estimate AED 2.56 Company (FWEC) and capacity expansion plans in Morocco, will Rating BUY expand TAQA’s downstream asset portfolio, increasing its investments in stable revenue generating businesses. Key Figures Y ear to 31 Dec 2008A 2009E R ev enue (mn) 16,805.5 18,321.3 TAQA has signed an agreement to acquire DSM Energy, which E BIT DA (mn) 9,822.8 8,524.9 should increase its production by ~5,000boe/d. It has also Net P rofit (mn) 1,825.2 547.5 acquired two large land blocks covering 1,300sq km in the EPS (AED) 0.35 0.09 Horn River Basin of NE British Columbia in Canada, and four +/- (% ) 41.4% (75.0)% RoA (%) 2.4% 0.5% exploration blocks in the Northern North Sea from Royal Dutch R oE (% ) 28.8% 7.0% Shell and Exxon Mobil. P / E (x ) 2.9x 18.2x EV / EBITDA (x) 6.3x 8.3x Despite expected lower profitability this year compared to 2008, P / BV (x) 1.1x 1.4x TAQA’s balance sheet position should remain strong. The Company reported cash & cash equivalents of AED 5.1bn and Shareholding Pattern (% ) undrawn credit facilities of AED 7.9bn at the end of Q2 2009. A bu Dhabi W ater and E lectricity A uthor 51.1% F armers' F und 21.1% Outlook: TAQA’s downstream business should perform strongly P ublic & O thers 27.8% in coming quarters. Profitability within the upstream segment is Relative Performance likely to improve with crude oil and natural gas prices now showing signs of recovery. US oil and gasoline stockpiles fell by 4.0 0.4mn boe and 3mn boe, respectively in the week ended 3.0

August 28, 2009, a firm indication that demand-supply for 2.0

crude oil is improving. 1.0

0.0 Valuation: Our weighted average DCF and peer group multiple Jul-09 Apr-09 Jan-09 Oct-08 Jun-09 Feb-09 Mar-09 Nov-08 Sep-09 Sep-08 Dec-08 Aug-09 valuation yields an estimated fair value of AED 2.56, indicating May-09 Rebased Index TAQA an potential upside of 60.3% from the current market price of AED 1.6. We therefore maintain our Buy rating.

ABU DHABI NATIONAL ENERGY COMPANY PJSC

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Industry Outlook We expect utility businesses to perform well despite the current adverse global business environment. The segment is price regulated providing stable return on investments. TAQA has particularly focussed on acquiring downstream assets in emerging economies including India and Morocco, where the current power deficit provides ample investment opportunities. Abu Dhabi’s mega planned projects and infrastructure developments will also require significant additions to domestic electricity generation and water desalination capacity in coming years.

Prospects for mid- and up-stream businesses are also improving with crude and natural gas prices showing signs of recovery. US oil stockpiles decreased by 0.4mn boe to 343.4mn boe in the week ended August 28, 2009, while gasoline inventories fell by 3mn boe to 205.1 mn boe, reducing our concern that supply cutbacks might be unable to offset lower demand for oil. Given current early signs of a global economic recovery, we expect crude prices to stabilise in the near-term at around USD 70-75/b. We have assumed crude prices of approximately USD 70-75/b in FY10 and USD 75-80/b in the longer term.

Investment Rationale Abu Dhabi National Energy Company (TAQA) reported a 3.9% y-o-y decline in revenues in Q2 2009 to AED 4.4bn, mainly as a result of weaker crude and natural gas prices. Revenue from oil and gas activities (including gas storage and other revenue) declined 30% y-o-y to AED 1.8bn. Conversely, revenue from the company’s electricity and water business, excluding supplemental fuel, increased 14% y-o-y to AED 1.6bn, mainly due to the expansion of Taweelah B and revenue from the Red Oak toll acquired in December 2008. Profit after tax in Q2 2009 fell 45.4% y-o-y to AED 315mn, largely attributable to higher operating costs concerning Northern North Sea assets acquired in December 2008.

However, the Company’s management has stated that its short-term focus lies in increasing efficiency and cutting costs. For example, in order to reduce expenses, the Company is currently negotiating contracts with suppliers regarding input prices. With oil prices having also recovered to ~USD 70/b, we expect TAQA’s profitability to improve in coming quarters.

Expanding its downstream asset portfolio TAQA’s focus on growing its downstream assets both organically and inorganically, further increases our confidence in the Company’s stock. The announcement of the transfer of a 90% stake in Fujairah Water and Electricity Company (FWEC) by ADWEA to TAQA for AED 1.1bn strengthens the Company’s foothold in the stable domestic water and electricity business. FWEC owns a 60% stake in the Fujairah F2 plant, which currently has 2,000 MW of power capacity and 130 MGD of water desalination capacity under construction. Moreover, the Company has also won a contract to build two power plants in Morocco each of 350 MW. TAQA’s global gross generation capacity increased from 10,609 MW at the end of 2008 to 12,909 MW as of June 30, 2009, following its acquisition of a 50% equity stake in the Caribbean portfolio of Marubeni Corporation. As shown by TAQA’s Q2 2009 results, its downstream business provides the Company with much needed stability in current adverse business conditions.

ABU DHABI NATIONAL ENERGY COMPANY PJSC

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Crude and natural gas prices hold the key – new acquisitions to yield increased production During the second quarter, the Company’s oil and gas production rose by 16.1% y-o-y to 138.2 mboe/d, largely due to the addition of North Sea assets in Q4 2008, resulting in a 166% increase in production by TAQA Bratani, up from 15.1mboe/d in Q2 2008 to 40.2mboe/d in Q2 2009. However, lower oil and gas price realizations, down 51% y-o-y to USD 37/b compared with USD 75/b in Q2 2008, more than offset the increase in production, while revenue from the upstream business fell 30% y-o-y to AED 1.8bn. Nevertheless, crude oil prices, after bottoming at USD 30.3/b in December, 2008, have rebounded to USD 70/b.

We remain positive towards TAQA’s strategy of continuously increasing its reserve base by acquiring assets. The Company has already signed an agreement to acquire DSM Energie Holdings B.V. (DSM Energy) with the acquisition expected to complete in Q3 2009. Under the terms of the agreement, TAQA will acquire a non-operating interest in the pipeline company Noordgastransport B.V. as well as three other pipelines and 20 oil producing fields in the Dutch North Sea. These assets are expected to increase the average daily production of TAQA Energy by around 5,000boe/d. During the second quarter, TAQA North acquired two large land blocks covering 1,300sq km in the highly prospective Horn River Basin of NE British Columbia in Canada. In September, 2009, TAQA also acquired four exploration blocks in the Northern North Sea from Royal Dutch Shell and Exxon Mobil, the exploration acreages of which lie close to the interests acquired by TAQA Bratani in 2008. The company intends to commence drilling in these blocks in 2010 and has already acquired new seismic data for appraisal. Although the company has not provided any guidance on the value and potential of the new exploration block, it clearly represents an opportunity to enhance production capacity supported by the existing infrastructure.

A healthy balance sheet to support growth TAQA’s liquidity remains strong with cash & cash equivalents of AED 5.1bn and undrawn credit facilities of AED 7.9bn at the end of Q2 2009. Even assuming capital expenditure (capex) exceeding AED 3bn in the third and fourth quarters of this year, we forecast cash & cash equivalents of AED 5.1bn at the end of 2009.

Despite current very high gearing of 85.3% at the end of Q2 2009, TAQA will experience no refinancing concerns as a result of its near-term capex plans. Moreover, gearing is also exaggerated by equity depletion due to non-cash items including translation and derivative losses. Excluding their effect, the Company reported 80% gearing. TAQA has a long-term target to maintain a capital gearing ratio of 70%.

Catalysts Increasing reserve base: During the past three years, TAQA has acquired over USD 2bn of North Sea assets as a part of its aggressive global expansion plan. The company has signed an agreement to acquire DSM Energy, which is expected to increase its total production capacity by 5,000b/d. Further, it has also acquired four exploration blocks in the Northern North Sea, and two large land blocks covering 1,300sq km in the highly prospective Horn River Basin of NE British Columbia in Canada.

ABU DHABI NATIONAL ENERGY COMPANY PJSC

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Focusing on stable revenue generating assets: The Company’s recent announcement of plans to acquire a 90% stake in FWEC from ADWEA and of capacity expansion plans in Morocco is positive evidence of the Company’s strategy to focus on retaining a significant proportion of its funds invested in stable revenue generating assets. A recovery in natural gas prices: Although crude oil prices have recovered sharply in recent months, natural gas prices have lagged. Since natural gas accounts for over 60% of the Company’s total oil and gas production, a recovery in natural gas prices should benefit its top-line growth.

Valuation We have valued TAQA using a combination of a Discounted Cash Flow (DCF) model and a peer based multiple and have assigned subjective weights of 70% to our DCF and 30% to our Peer-based Multiple Valuations to calculate our fair value estimate. Based on our valuation, we derive a weighted average fair value estimate of AED 2.56. With our target price indicating an upside potential of 60.3% from the current share price, we maintain our Buy rating. W eighted average value per share Valuation Method Value (AED) Weight (%)

Discounted Cash Flow (DCF) 2.93 70% E V /EBIT DA multiple 1.71 30% W eighted average fair value 2.56 100% Source: ADCB research

Discounted Cash Flow model (DCF) We have used a two-stage DCF model with explicit forecasts to 2016 and terminal period forecasts. Based on these, we have calculated free cash flows which have then been discounted by a WACC of 8.04% in order to estimate the fair value of the Company. The WACC has been calculated assuming an effective tax rate of 18.6%. Free Cash flow is defined as Operating Profit + Depreciation + Amortization - Capex - Changes in Working Capital. From the enterprise value of AED 77.7bn, derived from this calculation, we deduct net debt and the Company’s minority interest, yielding an estimated market capitalisation of AED 17.2bn, equivalent to a fair value per share of AED 2.93.

After revising the risk free rate from 4.8% to 4.1% and country risk premium from 0.9% to 2.9%, the WACC for the Company has increased to 8.04%. The terminal growth rate for the Company has also been revised upward from 3.25% to 3.5%.

Explicit forecasts Risk free rate: 4.1% Country Risk Premium: 2.9% Equity Premium: 6.0% Beta: 1.08 Cost of equity: 13.5% WACC: 8.04% Terminal growth rate: 3.5%

ABU DHABI NATIONAL ENERGY COMPANY PJSC

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Terminal cost of capital 2.9 7.5% 7.8% 8.0% 8.3% 8.5% 3.00% 3.16 2.64 2.18 1.77 1.39 3.25% 3.61 3.04 2.54 2.08 1.67 3.50% 4.12 3.49 2.93 2.43 1.98 3.75% 4.70 3.99 3.37 2.82 2.33

Terminal growth Terminal 4.00% 5.35 4.56 3.87 3.25 2.71 Source: ADCB research

Peer-based Valuation method In our peer-based valuation, we have made a comparison based on EV/EBITDA multiples of TAQA’s peers in the oil & gas industry and electric utilities. Based on a peer-group average estimated EV/EBITDA multiple of 8.3x 2009 earnings, our forecast 2009 EBITDA for TAQA of AED 8.5bn implies a value of AED 1.71 per share.

Comparable Company Trading Analysis Last Price Market Enterprise P/E Enterprise Value/EBITDA Company 9/22/09 Cap Value FY08 FY09 FY10 FY08 FY09 FY10 (AED) (AED mn) (AED mn)

A bu Dhabi National Energy Company 1.60 9,960 70,432 2.9x 18.2x 4.1x 6.3x 8.3x 6.0x

Oil and gas Encana Corporation 214.20 159,080 183,918 9.6x 16.2x 19.6x 4.3x 7.0x 6.2x Canadian Natural Resources Ltd. 263.08 137,556 178,618 15.1x 15.9x 13.0x 7.3x 8.5x 5.9x Talisman Energy Inc 66.18 66,082 73,030 9.4x 26.8x 21.3x 3.4x 5.8x 4.3x Enerplus 83.89 13,609 16,059 5.7x 38.3x 13.1x 3.9x 6.0x 5.1x ARC Energy Trust 65.22 15,265 17,693 8.5x 29.5x 18.3x 6.1x 9.2x 7.0x Pengrowth 35.08 8,658 14,293 9.5x N.M. 31.7x 5.8x 6.2x 5.8x Harvest Energy 23.89 4,217 11,789 7.5x 22.4x 63.8x 4.9x 6.8x 5.5x Bonavista Energy 70.78 7,577 9,874 7.5x 22.4x 12.9x 4.9x 6.3x 4.4x

Mean 9.1x 24.5x 24.2x 5.1x 7.0x 5.5x Median 8.9x 22.4x 18.9x 4.9x 6.6x 5.7x

Water & Electric Utilities NTPC 16.01 130,953 130,953 18.3x 22.6x 19.5x 13.0x 14.6x 11.8x Saudi Electricity Company 10.04 41,828 62,667 36.4x 33.0x 30.8x 7.7x 7.6x 7.1x American W ater W orks Co., Inc 73.72 12,958 32,673 17.4x 15.2x 13.8x 10.3x 9.5x 8.6x Pennon Group plc 28.96 10,125 21,624 12.1x 14.0x 13.2x 8.5x 9.4x 8.8x Neyveli Lignite 10.46 17,350 16,385 21.9x 22.4x 20.6x 14.5x 14.5x 15.4x Northumbrian W ater G roup plc 15.13 7,953 21,461 8.4x 11.6x 9.8x 7.7x 9.5x 9.0x

Mean 19.1x 19.8x 17.9x 10.3x 10.9x 10.1x Median 17.9x 18.8x 16.6x 9.4x 9.5x 8.9x

O verall Mean 15.1x 21.7x 20.4x 8.2x 9.3x 8.3x O verall Median 14.3x 20.3x 17.5x 7.6x 8.3x 7.6x E V /EBIT DA multiple 8.3x E BIT DA FY 09E 8,525 Equity value/share 1.71 Source: C ompany data, Reuters, A DC B research

Note: O verall Mean and Median have been computed using the following weights Oil and Gas segment 40% W ater and E lectric segment 60%

ABU DHABI NATIONAL ENERGY COMPANY PJSC

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Quarterly Balance Sheet Income Statement (AED mn, Q uarter ending) Q 1 2009 Q 2 2009 Q 3 2009 Q 4 2009 Q 1 2009 Q 2 2009 Q 3 2009 Q 4 2009 C ash and fixed deposits 4,609 5,092 4,673 5,141 R evenue 4,200 4,380 4,645 5,096 A ccounts and other receivables 4,398 4,509 4,327 4,747 % growth 11.8% 4.3% 6.0% 9.7% O ther C urrent A ssets 1,955 2,115 2,311 2,440 G ross P rofit 2,057 2,190 2,402 2,665 P roperty, P lant and E quipment 59,066 59,352 60,526 60,248 % margin 49.0% 50.0% 51.7% 52.3% Intangible assets 10,168 11,784 11,784 11,784 E BIT DA 1,890 2,006 2,193 2,436 O ther Long T erm A ssets 6,757 7,313 8,425 8,482 % margin 45.0% 45.8% 47.2% 47.8% T otal A ssets 86,953 90,165 92,045 92,842 E BIT 896 1,027 1,172 1,394 A ccount and other payables 18,991 17,607 19,173 19,556 % margin 21.3% 23.4% 25.2% 27.3% Debt 60,013 62,633 62,693 62,706 A djusted Net P rofit 40 136 113 258 Minority Interest 2,283 2,931 3,072 3,214 % margin 1.0% 3.1% 2.4% 5.1% S hareholders equity 5,666 6,994 7,107 7,365 T otal E quity & L iabilities 86,953 90,165 92,045 92,842 Basic E P S (A E D) 0.01 0.02 0.02 0.04

Yearly Balance Sheet Income Statement (AED mn, Y r. ending Dec. 31) F Y 07 F Y 08 F Y 09E F Y 10E FY 07 FY 08 F Y 09E F Y 10E C ash and fixed deposits 7,601 4,191 5,141 8,217 R ev enue 8,337 16,806 18,321 21,876 A ccounts and other receivables 2,381 3,508 4,747 4,577 C O G S (3,459) (6,210) (9,007) (9,192) Inventories 1,495 1,729 2,094 2,136 G ross Profit 4,878 10,595 9,314 12,684 O ther C urrent A ssets 300 264 346 425 S G &A (409) (773) (789) (984) Property, Plant and Equipment46,05160,02660,24859,579Net other operating income 0000 Intangible assets 3,467 10,358 11,784 11,784 E B IT DA 4,469 9,823 8,525 11,699 Investment in A ssociates 186 211 235 235 Depreciation & A mortization (1,428) (3,535) (4,036) (3,951) O ther Long T erm A ssets 6,365 6,100 8,247 9,054 E B IT 3,041 6,288 4,489 7,748 T otal A ssets 67,844 86,388 92,842 96,007 Net interest income (1,961) (3,604) (3,642) (3,571) A ccount and other payables 7,809 19,081 19,556 19,632 P rofit from associates 25 40 49 47 Debt 51,907 59,560 62,706 62,999 Net other non-operating income 213 385 420 4 Minority Interest 1,435 1,779 3,214 3,862 Profit Before T ax 1,318 3,108 1,316 4,228 S hare C apital 4,150 6,225 6,225 6,225 T ax 57 (913) (292) (1,266) R eserves & S urplus 2,544 -256 1,140 3,289 Minority Interest (341) (370) (558) (647) T otal E quity & L iabilities 67,844 86,388 92,842 96,007 A djusted Net Profit 1,035 1,825 465 2,315

C ash Flow Statement Key Ratios

Net Income before MI (reported) 1,318 3,108 1,398 4,336 Per share data (AED) Depreciation and amortization 1,428 3,535 4,036 3,951 S hares outstanding (mn) 4,150 5,177 6,213 6,225 Change in W orking Capital (994) (2,171) 395 (695) Basic EPS 0.25 0.35 0.09 0.39 Other Adjustments, net (516) (389) (1,159) (1,412) Diluted EPS 0.25 0.35 0.09 0.39 C ash F low from O perations 1,236 4,084 4,669 6,180 Book value per share (O/S shares) 1.61 1.15 1.19 1.53 C apex (4,194) (3,098) (2,521) (3,281) Disposal of interest in subsidiaries 514 639 0 0 Valuation ratios (x) A dditional investments in associates (14,453) (19,352) (1,495) 0 E V /Revenue 7.2x 3.7x 3.8x 3.1x Other Investing cash flow 1,022 (37) (186) 158 EV/EBITDA 13.4x 6.3x 8.3x 6.0x Cash Flow from Investments (17,111) (21,848) (4,202) (3,123) P /E 14.2x 2.9x 18.2x 4.1x P roceeds from loans 8,838 9,066 3,973 293 R epurchase of bonds 0 (736) (928) 0 Performance Ratios (%) Dividends (208) (415) (933) (218) R eturn on A ssets 1.7% 2.4% 0.5% 2.5% O ther F inancing cash flows (942) 6,609 (122) (56) R eturn on C apital E mployed 5.2% 8.0% 5.7% 8.5% C ash F low from Financing A ctiv ities 7,688 14,524 1,990 19 R eturn on E quity 16.5% 28.8% 7.0% 27.4% G ross P rofit Margin 58.5% 63.0% 50.8% 58.0% Net C hang e in cash and equiv alents (8,187) (3,240) 2,458 3,077 E BIT DA Margin 53.6% 58.5% 46.5% 53.5% C ash and cash equivalents - beginning 15,788 7,431 4,191 5,141 E BIT Margin 36.5% 37.4% 24.5% 35.4% C ash and cash equivalents - end 7,601 4,191 6,649 8,217 Net P rofit Margin 12.4% 10.9% 2.5% 10.6% Source: Company data, ADCB research

ABU DHABI NATIONAL ENERGY COMPANY PJSC

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Investment Ratings:

Buy: More than 15% potential return. We recommend that investors buy the stock based on the annualised return to the shareholders over 6-24 months time horizon (percentage change from current price to the projected target price).

Sell: Negative potential return. We recommend that investors sell the stock based on the annualised return to the shareholders over the 6-24 months time horizon.

Hold: Between 0 and 15% potential return. We take a neutral view on the stock over the 6-24 months period.

Other Disclosures:

Abu Dhabi Commercial Bank (ADCB) publishes independent research based on its own opinions and we do have investment banking relationships with the firm whose security is mentioned in this report. ADCB also hold securities of the firm mentioned in this report through its fund management activities. If you choose to use the information in this report, you do so on your own initiative, and you are responsible for compliance with any applicable local laws.

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The information and opinions in this report were prepared by employees of ADCB and are current as of the date of the report. The information contained herein has been obtained from sources that they believe to be reliable, but ADCB does not guarantee its accuracy, adequacy, completeness, reliability, or timeliness. Moreover, it is not responsible for any errors or omissions or for the results obtained from the use of such information. All opinions and estimates included in this report are subject to change without notice. ADCB will furnish, upon request, available investment information supporting this recommendation. This report is intended for qualified customers of ADCB.

This research report provides general information only. Neither the information nor any opinion expressed constitutes an offer or an invitation to make an offer, to buy or sell any securities or other investment or any options, futures or derivatives related to such securities or investments. It is not intended to provide personal investment advice and it does not take into account the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. Investors should seek financial advice regarding the appropriateness of investing in any securities, other investment or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realised. Investors should note that income from such securities or other investments, if any, may fluctuate and that price or value of such securities and investments may rise or fall. Accordingly, investors may receive back less than originally invested. Past performance is not necessarily a guide to future performance. Any information relating to the tax status of financial instruments discussed herein is not intended to provide tax advice or to be used

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by anyone to provide tax advice. Investors are urged to seek tax advice based on their particular circumstances from an independent tax professional. Foreign currency rates of exchange may adversely affect the value, price or income of any security or related investment mentioned in this report. In addition, investors in securities such as ADRs, whose values are influenced by the currency of the underlying security, effectively assume currency risk.

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ADCB Research Team:

Khaled Akl, MBA, CFA Head of Research [email protected] +971 2 696 2843

Sami Benghezal, M.Sc, FRM, CFA Research Manager [email protected] +9712 697 3525

Jehad Saeed Al Mazrooei Research Analyst [email protected] +9712 697 3522

Rakesh Kumar Agrawal, MBA Research Analyst [email protected] +9712 697 3685

Mohamed Junaid Bray, CFA Research Analyst [email protected] +9712 697 3461

ABU DHABI NATIONAL ENERGY COMPANY PJSC

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