Competition to finance power projects in the Gulf Coast Corporation (GCC) region has led to a series of unbelievably tight margins with the extension and refinancing of the Taweelah A1/10 power and desalination plant as a prime example of how low bankers are willing to go

It is not likely to stop there either, with the highly aggressive pricing that Taweelah received this could be the deal that opens up the floodgates for the refinancing of Middle East power projects.

The original Taweelah A1 project

Abu Dhabi Water and Electricity Authority (ADWEA) originally signed a contract with TotalFinaElf and Tractebel in July 2001 for the purchase, expansion and refurbishment of the existing oil-fired plant.

Gulf Total Tractebel Power Company (GTTPC), the project company, is owned by:

• ADWEA - 60 per cent
• TotalFinaElf - 20 per cent
• Tractebel - 20 per cent

The agreement was to expand the water production of the facility from 29.2 million gallons per day to 84 million gallons and to expand the generating capacity from 255MW to 1,360MW at a cost of US$1.35 billion.

Expansion of the facility was necessary as the demand for power and water in Abu Dhabi has been steadily growing as the region undergoes rapid economic and population growth.

Taweelah A1/10

Six years later and the expansion was not enough to meet the emirate's power hungry population so ADWEA approached GTTPC to see if the company was interested in increasing the plant's electricity generation further as well as signing an extension to the existing power and water purchase agreement (PWPA).

The new project will add a further 240MW of generating capacity to the facility bringing the total production of the plant to 1,600MW of electricity and 84 million gallons of desalinated water.

Because there was a huge existing asset with a relatively small increase in capacity there was not much risk meaning that the original financing was significantly more expensive than the refi.

Original financing

BNP and Citi arranged US$1.015 billion of project debt for Taweelah's first expansion with a 76:24 debt to equity ratio.

The loan had an 18.5 year term and reached financial close 2 December 2000.

Pricing for the original loan was set at:

• prime plus 110bp during construction
• prime plus 112.5bp until year 7.5
• prime plus 125bp year 8.5 until year 12.5
• prime plus 145bp year 13.5 - 18.5

Abu Dhabi Water and Electricity Company (ADWEC) signed a 20-year PWPA from 2003 - the date of project completion. The agreement stipulated that ADWEC was responsible for the procurement of fuel for the gas-fired facility.

Once the major expansion project was completed and other newbuild projects in the Middle East were seeing record tight pricing, GTTPC knew it could get cheaper money for Taweelah and decided to refinance.

Terms of refinancing

BNP was again mandated to arrange the debt for the Taweelah A1/10 project - this time alongside Calyon.

The US$1.1 billion refinancing of the Taweelah A1/10 IWPP set a record for pricing on a power project in the GCC and has set the stage for other sponsors to refinance and demand similarly tight pricing.

Pricing for the refinancing is set at prime plus:

• 55bp for the two and a half-year construction period - 2007-2009
• 50bp for the first five years of the repayment period - 2009-2014
• 65bp for the next five years - 2014-2019
• 80bp for the next five year period - 2019-2024
• 95bp for the final five years - 2024-2029

Interestingly the 80:20 debt to equity ratio is set up so that even if the new project failed, GTTPC would not default but rather the loan agreement would revert to the original deal at the original pricing.

Also, the PWPA which was extended by six years at the request of ADWEC would revert to the original deal if anything was to go wrong with the project.

That unique caveat of the deal's structuring further decreases the risk involved in the project and contributed to the bankers' willingness to price it so attractively for the development company.

HSBC provided financial advice to ADWEA while White & Case provided legal advice.

Berwin Leighton Paisner advised the project company and Shearman & Sterling acted as legal adviser to the banks.

Trend setting

Power projects that closed around the turn of the century like Taweelah A1 are prime candidates to take advantage of the aggressive pricing that bankers are offering.

'Currently, lender appetite for Middle Eastern power is very strong - we saw this most recently advising the Lenders on Taweelah A10,' said Shearman and Sterling's head of project finance Nick Buckworth.

'Canny developers will take full advantage of this liquidity and we fully expect the demand for refinancings to continue and the pricing for new deals in the region to remain keen,'

Pricing in the area is kept low by banks competing to get some action in the area so they can develop relationships with the sponsors and build up their portfolios.

New market entrants keen to get involved in the world's most active power market are keeping the market liquid and the pricing attractive to sponsors.

This will inevitably lead to a rash of refinancing of Middle East power projects.

The project at a glance