Ras Abu Fontas B2 (RAFB2) - an upgrade of an existing IWPP in the Gulf state of Qatar - closed last week, with US$485.5 million in financing from six MLAs and some of the most aggressive pricing on any power and water deal in the region.

The margins reflect an innovative security structure, together with confidence in the stability of the Qatari investment environment, spurred on by improved regulatory frameworks there.

The project

RAFB2, located about 10km south of the capital, Doha, is to produce 597MW of power and 112,000 cubic metres of water.

It is being developed by the Qatar Water and Electricity Company (QEWC) - a privatised utility which was assigned a number of assets including Ras Abu Fontas, when the government stripped down publicly-owned generation capacity.

An interesting aspect of the deal is that there is no SPV,  limited recourse financing being acheived by contractual ring-fencing of the project assets.

QEWC is also going this alone, without partnering with any of the big international names that are active on most of the IWPPs in the region.

There is a GSA with Qatar Petroleum.

GE/Fisia Italimpianti are the EPC contractors and the two units will be completed by May and August 2007 respectively. QEWC will carry out O&M itself.

The offtaker is the country's single buyer - Kahramaa - which has entered into a 25-year PWPA with QEWC at a very attractive tariff.

That rate has been secured on the basis of certain contractual arrangements which go further similar deals in the  GCC.

Contractual arrangements and project risk

When QEWC was assigned the Ras Abu Fontas site, an emiri decree prevented banks taking possession of the facilities. Built into RAFB2 agreements however, is a provision which obliges the government to purchase any outstanding debt as well as QEWC equity, should the project go into default.

Similar issues had been embedded within the Abu Dhabi projects, but they had never been triggered by such a wide range of events, including potential problems QEWC might encounter.

This willingness on the part of the government to take on this risk was due to the benefit it expects to gain from a lower tariff. Its may also reflect realism on its part as it knows that if necessary it will bail out the project because it needs the power and water.

Long-term economic masterplans, including the construction of a new city - Lusail - and the expansion of the hydrocarbons, property and tourism sectors are driving demand in the power and water sectors in Qatar which cannot be met quickly enough.

Current projects on the table include the Ras Laffan project for the Ras Laffan industrial city north of Doha and the Messaid IWPP, worth an estimated US$1.5 billion, for which three bids recently were submitted.

There is very little project risk - one factor is the integration of RAFB2 with an existing facility, involving the sea-water intake.

There's no political insurance.

Financing

RAFB2 has a total value of US$623m. Of that, US$485.5m is debt and US$161.83 equity. The debt is split into a US$467.5m term loan (24.5 years) and a US$18m stand-by facility. The equity is composed of US$155.83 in base equity and US$6m in standby equity. There is a 75:25 debt:equity ratio.

Financing is compliant with the Equator Principles.

The MLAs on the deal are:

• BoTM (facility and documentation agent)
• Calyon (bookrunner)
• Commercial Bank of Qatar
• Gulf International Bank
• HSBC (bookrunner)
• Qatar National Bank

Pricing is as follows:

Term facility:

• 65bp to FC
• 55bp FC-10 year
• 85bp (10-15yr)
• 115bp (15-20yr)
• 150bp (thereafter)

Standby facility:

• 75bp (to FC)
• 65bp (FC-10yr)
• 95bp (10-15yr)
• 125bp (15-20bp)
• 160bp (thereafter)

There is a commitment fee of 0.3 per cent for both term loan and standby facilities and an upfront fee of 85bp. Repayment of the term facility starts 6 months after final completion. The DSCR has a minimum of 1.38.

Shearman & Sterling, HSBC and Mott MacDonald are advisers to the sponsor. Allen & Overy and Stone & Webster advised the banks.

Conclusion

RAFB2 will bring much needed power and drinking water to this fast-growing state using funds provided by national, regional and international commercial banks.

The security agreements, by which the government would buy out the outstanding debt and equity, are robust and triggered by a broader set of circumstances than has previously been envisaged in the region.

The project is set to please those on all sides, with the government getting a low tariff through its offtaker, Kahramaa, the borrower getting extremely aggressive pricing and the banks getting the opportunity to invest on a project in a stable country with relatively low risk.

The project at a glance