Nuove Acque: An Italian first

The Eu181 million Nuove Acque project is the first water concession finalised since the inception of the Galli Law 10 years ago. The project has been a long time in gestation: for instance it pre-dates Allen & Overy's Italian project finance team, which was working on he deal before its transfer from Chiomenti. Nevertheless, the deal has swept aside political resistance and leaves the path clearer for other water deals.

Nuove Acque involves the operation and upgrade of the water system in the Alto Valdarno region in Tuscany. Specifically, the project consists of expanding the bulk water supply, constructing and upgrading treatment plants and distribution networks, extending the sewerage network, and refurbishing wastewater treatment plants.

The project covers 37 municipalities of the provinces of Arezzo and Siena. The Arezzo and Siena provinces have a combined 54% stake in project company Nuove Acque SpA, with 46% owned by Intesa Aretina. Intesa Aretina is a joint venture comprising Suez (51%), Genova utility Amga SpA (35%) and other utilities. The consortium was selected out of six bids after an international tender was launched in 1998.

Financing comprises Eu69.8 million lead arranged by Dexia and MPS Banca per l'Impresa and Eu34.3 million equity. The lead banks guarantee a Eu44 million 17-year EIB facility and are providing Eu15 million in 17-year money from their own account. Both facilities have an availability period of 7 years, whose length reflects the need to fund a capital expenditure programme over the term. MPS's credit subsidiary Banca Monte dei Paschi di Siena and Banca Etruria are jointly underwriting a revolving facility of Eu9.4 million that will provide working capital. The revolver will be refinanced by the EIB loan.

The long-term facilities are thought to pay in the region of 120bp to 150bp over Euribor.

The involvement of the state at equity level is a model that is increasingly used for PPP projects with many small-ticket investments staggered over a concession. Effectively, the rolling mandate cuts down on bid costs and takes advantage of the economies of scale of a large single financing.

The Nuove Acque project is based on the legal environment fostered by the Galli Law, whose principal purpose is to consolidate the number of water system operators from 8,000 small businesses to 91 larger operators.

The project company's credit derives solely from revenue streams from the domestic and industrial end users in the region, without any supplement from a concession payment. Nuove Acque is monopoly provider to a region that currently has a population of about 300,000 consuming around 16.1 million cubic metres of water a year ? yet lenders are still taking volume risk and limited price risk. Every three years Nuove Acque will renegotiate its business plan with local regulator, ATO 4 Alto Valdarno, after which tariffs for the following three years are set.

Also, the project company bears the technology and construction risks associated with a complex rehabilitation program, and as well as the commercial risks, the regulatory risks associated with retail water distributions.

The dearth of deals following Galli's inception is largely down to three reasons: firstly, Galli is a complex framework law that required a raft of implementation rules; secondly, the many disparate and incumbent operators provided substantial political resistance to change; and thirdly, the capital expenditure on these projects are high and the margins relatively low.

Given that Nuove Acque is a first, a large amount of time was expended to match the public-side expectations to commercial realities. Jean-Marc Turchini, senior investment officer at Suez Environment, says: ?There were two major obstacles that had to be overcome before this project became reality. The concession was based on a development plan that outlined a heavy capital expenditure plan over a period of more than ten years, starting from the beginning of the concession period, but the expected cash flow was not sufficient to meet such a requirement.

?We had to renegotiate with the concession authority to produce a more balanced concession, with an investment program re-profiled to match the free cash-flow of the company, that will increase over the years. This ? with the ability of the lenders to provide a long availability period for the loan ? was a key success factor. Also we needed to obtain clarifications on certain critical provisions of the concession agreement, in particular as to the consequence of early termination of the contract on the part of the concession authority, for lenders' comfort.?

Nuove Acque could be something of a sluice gate for other water projects, and post-negotiation the project sets a high benchmark for expeditious closings: the arranging competition was conducted in March, Dexia and MPS were named in July and the financing closed 22 December.

The next project likely to follow will be the Terni water concession, in the Umbria region, awarded by ATP Terni. The project company is part sponsored by UK utility Severn Trent. MPS Banca per l'Impresa and Banea Intesa are the mandated lead arrangers of about Eu45 million of debt that should close around March 2005.

Nuove Acque
Status: Financial close 22 December 2004
Size: Eu181 million total project cost; Eu69.8 million debt
Location: Alto Valdarno, Tuscany
Description: Financing for the rehabilitation and operation of water system over a 25-year concession
Sponsors: Arezzo and Siena provinces (54%); Intesa Aretina (46%)
Concession awarder: ATO 4 Alto Valdarno
Mandated lead arrangers: Dexia Crediop; MPS Banca per l'Impresa
Legal counsel to sponsors: Sciume, Zaccheo e Associati
Legal counsel to lenders: Allen & Overy
Technical adviser: MWH
Insurance: AON
Financial model: KPMG