The Al Hidd transaction is the first Independent Water and Power Project (IWPP) under the Bahraini privatisation programme. By Phil Roberts, director, project finance power team, Royal Bank of Scotland.
The deal involves the acquisition of the existing Phase I and Phase II Al Hidd power and water plants, which have a combined capacity of 965MW and 30 MIGD, and the construction of Phase III, a 60 MIGD desalination plant extension. Total project costs were of the order of US$1.3bn, with debt facilities providing US$1.204bn and the balance being provided by revenues from the existing assets.
The original request for proposal was issued by the Ministry of Finance in July 2005 and three sponsor groups submitted bids in November 2005. International Power PLC (IPR), Suez Tractebel SA (Suez) and Sumitomo Corporation (Sumitomo) joined forces and together formed an extremely attractive sponsor group providing a combination of regional development expertise, strong power plant construction and operational management capability of over 40,000MW of power assets, and the ability to be provided with aggressive financing from a combination of banks and financial institutions.
At the bid stage, the sponsor appointed six mandated lead arrangers – Royal Bank of Scotland (RBS), Gulf International Bank BSC (GIB), KfW, Mizuho Corporate Bank (Mizuho), Standard Chartered Bank (Standard Chartered) and Sumitomo Mitsui Banking Corporation (SMBC) – to underwrite 100% of the bid financing as well as having detailed discussions with Japan Bank for International Cooperation (JBIC) to ensure the bid financing was compatible with the provision of JBIC debt should the sponsor group be named preferred bidder.
The sponsors' bid encompassed the key elements required to win Middle East power and water projects, ie, project-specific technology selection, aggressive EPC price, optimised operating assumptions and debt financing with long tenors, aggressive cover ratios and efficient use of equity bridge loans. In addition, the MLAs provided mezzanine debt that would be the first to be successfully closed on a power and water project in the Middle East.
The project structure and documentation followed the precedence of the first power project, Al Ezzel, which was signed in November 2004, with the key difference being that this was a combined power and water project and involved the acquisition of existing assets. Following a series of clarification meetings, the sponsor consortium was named preferred bidder on December 14 2005 and a special purpose borrowing vehicle, Hidd Power Company BSC was incorporated.
After the announcement of the preferred bidder, the project documentation was negotiated by sponsors and banks, with the banks' initial due diligence being undertaken by a team of advisers – Clifford Chance (legal), Stone & Webster (technical), Miller Consulting (insurance) and KPMG (model audit). Due diligence included the key assessment of the condition of the existing assets, with KfW acting as technical and insurance bank. Despite the extent of documentation and due diligence to be undertaken, the project documents were executed by the project company only one month after the bid award.
Financing documentation was next on the agenda and the development of a suite of financing documents addressing the intercreditor issues of five facilities – JBIC, commercial bank, mezzanine, equity bridge and working capital with three sponsors, six commercial banks and JBIC required a significant amount of co-ordination and teamwork across all parties, with RBS acting as documentation bank; Clifford Chance as co-counsel for the banks and JBIC and Millbank Tweed as legal counsel for the sponsors and Mizuho as facility agent.
In parallel, due diligence was completed, the sponsors took over operation of the existing assets, the EPC contract was finalised and an interest rate pre-hedge mechanism was implemented to protect the company from adverse increases in rate movements between bid award and financial close. Despite the workload, the finance documents were signed on April 4, only 10 weeks after the signing of the project documents, and first drawdown was made under the equity bridge facility, enabling notice to proceed to be given to the EPC contractor.
The bookrunners (RBS, GIB, SMBC and Standard Chartered) launched syndication of the commercial bank and equity bridge loan in mid-May and 12 additional co-arrangers signed into the transaction at the beginning of July, enabling them to fund alongside the mandated lead arrangers and JBIC for first drawdown under the senior facilities. This drawdown was used for payment of the purchase price of the existing assets on July 10 in accordance with the project timetable, and this milestone was celebrated by a closing ceremony in Bahrain with representatives from the Bahrain government, the project company, sponsors, JBIC, mandated lead arrangers, the EPC contractor and their advisers.
Project summary
As with all successful projects, the underlying fundamentals were in place for its implementation. The Kingdom of Bahrain remains a key financial centre in the region and its continued divestment of business interests was reflected in the recent upgrade of its long-term credit rating to Single A by Standard & Poor's. Over the past 10 years, demand for electricity in Bahrain has increased at an average growth rate of about 7.3%, with future peak growth predicted at 5.3% between 2004 and 2012. In combination, there is increasing demand for desalination capacity, expected to reach 138 MIGD by 2012 and the additional 60 MIGD of capacity at Hidd will be a key element in meeting this demand.
Al Hidd is located on the northeastern coast of Bahrain approximately 5km to the east of Manama, the capital of Bahrain. The Al Ezzel power plant currently under construction lies to the south of the existing facilities.
The existing Phase I and II assets consisting of 965MW of power and 30 MIGD of desalination entered commercial operations in 2000 and 2004 respectively, with both plants utilising ABB 13E2 gas turbines – which is extremely well proven technology and of which one of the sponsors, International Power, has experience through interests on three other projects. The Phase I desalination plant consisting of four multi-stage flash distillators was constructed by Fisia Italimipianti. The construction of the Phase III extension, a 60 MIGD multi-effect distillation desalination plant, is to be undertaken by Sidem of France.
The government was advised by BNP Paribas, Freshfields and Mott MacDonald and the project contractual structure shown in Figure 1 follows the Middle East precedence building upon the foundations of the Omani privatisation programme and optimised to meet Bahraini requirements.
PWPA - The Ministry of Electricity and Water (MEW) contracted under a power and water purchase agreement (PWPA), which expires 20 years from the scheduled commercial operation date of Phase III of the plant, to purchase 100% of the project's power and water output, including any power and water generated in the period during construction of the extension project. The payment obligations of MEW are supported by a guarantee from the government of Bahrain through the Ministry of Finance. The project company does not have the right to terminate the PWPA but in the event of a MEW default or the long-term adverse impact of a government risk event, MEW is obligated to continue to pay capacity charges and the government guarantee remains for MEW's payment obligations.
The PWPA places a commitment on the project company to make available to the buyer the capacity of the existing Phase I and Phase II power and desalination plant during the initial operation period, and to construct Phase III in accordance with a scheduled timetable. The construction of the first two new desalination units must be completed by April 2007 and the remaining eight desalination units to be completed by November 2007, with both existing and new plants demonstrating minimum levels of performance.
NGSA - At the same time, the project company entered into a natural gas and sales agreement with the Bahrain Petroleum Company BSC (Closed) (BAPCO) under which the project is sold and delivered natural gas. The project is located on an existing site that is owned by the Bahraini government and leased to the project company subject to a land rights agreement which started on January 22 2006 and expires 30 years after the scheduled commercial operation date of Phase III.
Asset transfer agreement - The key difference from precedence was that existing assets were being acquired and therefore an asset transfer agreement (ATA) was signed alongside the Bahraini project documents, though the transfer of the assets will not become effective until the date on which the purchase price for the assets is paid, which must occur by a longstop date of July 11 2006. However, in the period between signing and payment of the purchase price, the project company has effective control over the operation and maintenance of the assets and will generate electricity and desalinate water pursuant to the terms of the PWPA.
Construction and operation - One of the key aspects of the transaction that enabled the sponsor consortium to win the bid was the selection of multi-effect distillation (MED) technology for the new desalination units, and securing a competitive EPC price from Sidem. Sidem is an internationally renowned provider of MED technology and has successfully implemented MED desalination projects in the gulf region including Sharjah (UAE), which has been successfully operating since 1999.
An additional development from the traditional IWPP model given the operating capability of the sponsor group and the alignment of interests as project shareholders is an owner-operator structure, which was also implemented on the QPower transaction in Qatar where RBS was documentation bank with International Power and Qatar Electricity and Water Company (QEWC) as sponsors.
This simplified straightforward structure contributes towards achieving a cost-effective and efficient ownership and operation of the plant and allows the sponsors to benefit from the plant knowledge of the existing staff currently seconded from MEW to the project company under the employee secondment agreement, with essential specialist and general technical support supplied through technical services agreements with International Power Global Development Ltd and Suez Tractebel.
The gas turbine maintenance strategy is flexible given the strong track record of the ABB 13E2 gas turbines and ongoing ownership requirements under the financing documentation and allows either for a long-term service agreement to be entered into or only a parts and services agreement with the additional protection of a maintenance reserve account to smooth out the maintenance expenditure profile.
Financing structure
The overall financing incorporates a senior term facility of up to US$994m over 20 years split between a commercial debt tranche and JBIC debt facility plus a 12-year mezzanine facility and a two-year equity bridge facility as detailed in Table 1.
Senior facilities - The senior term facilities comprise a commercial bank facility and an overseas facility to be provided by JBIC, both with a final maturity date of April 30 2026, which fund on a pro rata basis the payment of project costs including the purchase price, plant extension construction and other related project and finance costs.
A key differential between the two senior tranches is the repayment profile, as the JBIC facility is fully repaid over 37 semi-annual payment dates following the scheduled project completion date (November 2007), while the commercial bank tranche has an amortisation profile based on a notional 22-year repayment profile with a bullet repayment on the final repayment date at year 20. However, the commercial bank tranche benefits from a 100% mandatory cash sweep post scheduled debt service, which commences as required to ensure that the commercial debt tranche (including bullet) is repaid at year 20.
The extended commercial bank tenor provided the sponsors with a more competitive financing, but the use of the cash sweep mechanism allowed the commercial banks to catch up with the JBIC loan, resulting in both loans being repaid at the same time and maintaining a two-year PWPA tail that provides strong protection under a range of sensitivities, in addition to the structural protections in the financing documentation.
Mezzanine facility - The US$35m mezzanine facility is a 12-year subordinated facility and has an amortisation profile sculpted to meet a minimum debt service cover ratio, and the tenor is such to ensure that in the base case it is fully repaid prior to the senior debt cash sweep commencing.
The mezzanine facility is the first to be structured on a Middle East power and water transaction and provided a number of advantages to the sponsors, including increased gearing, improved returns, the ability to act as a standby facility for increased costs and shortfalls in revenue from the existing assets and to provide a special true-up payment to the sponsors at construction completion. The use of the mezzanine facility at completion allows the sponsors to offset the amount of hard equity they are required to inject to repay the equity bridge loan in the base case, which provides a significant equity IRR enhancement on their bid proposal. The facility is only available to be drawn down after the equity bridge and term facilities are fully drawn and is therefore scheduled only to be drawn at project completion in the base case, with proceeds being used to offset the equity bridge obligation. It can, however, only be drawn for the true-up payment if a number of pre-agreed tests are met that ensure that it is only made when the plant is operating as originally expected.
Equity bridge facility - The sponsors' equity contributions total US$175m and are bridged by a two-year equity bridge facility borrowed by the project company and repaid by the sponsors as a bullet on the project completion date or two years after signing of the equity bridge facility agreement and is secured by acceptable credit support. The equity bridge facility will be repaid by a combination of the true-up payment using the mezzanine facility and sponsor funding.
Working capital facility - A working capital facility of US$15m is provided by Gulf Investment Bank (GIB) on a pari passu basis with the senior facilities to fund the working capital requirements of the project company. The working capital bank benefits from security and voting rights post-enforcement by the senior lenders.
Conclusion
Al Hidd represented a challenging project and financing but ultimately provided a successful outcome for the Bahraini government, project sponsors and all finance parties. The key highlights of the transaction were:
- The continuation of the successful privatisation programme for the Bahraini authorities with a competitive bid process resulting in the sale of existing assets at an attractive price and the knowledge that the power and water plant is under the ownership and control of an exceptionally strong sponsor group
- The further development of the Bahraini project structure, as the Al Hidd project was the first in Bahrain to incorporate both power and water plants and the acquisition of assets
- Confirmation that the technical capability of the sponsors provides a significant competitive advantage through the identification of project-specific technology and that financing can incorporate flexibility for operational strategy
- The development of an innovative financing including two senior debt tranches with differing amortisation schedules, and the incorporation of the first mezzanine facility on a Middle East power and water transaction
- The demonstration of continued appetite for competitive and flexible financing from a range of financial institutions for well structured transactions
- Signing of finance and project documentation in less than four months from the announcement of preferred bidder in December 2005, which is of particular note given the number of parties involved – three sponsors, six commercial banks as MLAs, and JBIC.