UAE-based National Central Cooling Company assigned 'BBB-' long-term rating; outlook stable

The rating reflects Tabreed's dominant position in district cooling in the UAE; the low operating risk associated with its plants; a revenue stream based on stable, long-term contracts; a strong economic rationale for the company's products; a high proportion of contracted business; contractual ties with the UAE government; and cash flow that is resistant to downside. These strengths are offset by Tabreed's aggressive financial profile; ongoing construction risk; high, but reducing, exposure of revenues to a single counterparty (the UAE armed forces); the threat of greater competition; and a somewhat aggressive dividend policy, in what is a period of considerable growth for the company.

Tabreed expects to grow significantly, with cooling capacity likely to more than quadruple by 2010. The company plans to increase its portfolio of district cooling plants to more than 35 in 2008, from the 17 currently in operation. Tabreed's relatively strong business profile is underpinned by long-term contracts (with a typical duration of 20 years), which allow utility costs and inflation to be passed through to end users.

A substantial amount of planned construction creates contracting and construction risk. Operational risk is offset by the relatively low levels of output factored into the contracts, the high historical availability of Tabreed's plants, and the fact that each of these facilities is equipped with multiple cooling trains, (which provides back-up in the event that one or more of these fails).

Tabreed expects planned projects to represent capital expenditures of about United Arab Emirates dirham (AED) 4 billion ($1.1 billion) between 2006 and 2010.

These will largely be funded through an AED2.38 billion increase in debt between now and end 2010. We expect funds from operations (FFO) to interest to remain at, or above, 2.7x for the period 2006-2010, and that FFO to average gross debt will reach a minimum of 13% by end 2010. Tabreed's large negative free cash flow position will likely improve to near zero by 2010.

Liquidity
Tabreed has moderate liquidity. At Dec. 31, 2005, the company had cash balances of AED520 million, and undrawn, committed facilities of AED318 million. At Feb. 28, 2006, overdraft facilities of AED227 million were in place, of which AED165 million had been drawn.

Funding for the commissioning of plants during 2006 is complete. Nevertheless, the company's ambitious capital expenditure program for 2006-2008 will require about AED1.5 billion of additional funding (about AED850 million having already been funded). There is some flexibility in this respect, however, as capital expenditures that are not supported by a contract remain highly discretionary.

Tabreed's funding policy is conservative, and the company does not commit capital expenditures until new plants are underpinned by a base offtaker. Tabreed has a somewhat aggressive dividend policy, given strong ongoing growth (although this is consistent with regional norms), which could provide additional flexibility in the event of lower-than-expected cash flow (dividends for 2005 were paid by way of a script dividend).

Outlook
The stable outlook reflects our expectation that Tabreed will continue to maintain its market leading position in the UAE, and successfully expand its business, both domestically and abroad. Standard & Poor's expects FFO to interest to remain above 2.7x over the period 2006-2010, and FFO to average gross debt to reach 13% by 2010.

Negative free cash flows for 2006-2009 would need to gradually reverse and come close to zero in order to support the rating category.

The ratings could be lowered if Tabreed begins to engage in speculative construction without firm contracts being in place, or if its contract with the UAE armed forces is terminated (both of which are unlikely). The rating could also come under pressure if an increase in the number of commercial and domestic counterparties leads to a deterioration in collection rates, or lower-than-expected revenues, due to a weakening of contract terms.