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Middle East Report 2010| pfi| 25

It can be expected that more asset sales will take place in the Gulf power market.

The key to the Barka deal, as in all other current Gulf power projects, is the power (and water) purchase agree- ment. Another reason why there has been little power M&A activity in the Gulf is that the market has been driv- en by its contractual nature. All the schemes developed over the past decade are backed by long-term contracts from state utilities.

This is a good model for developing projects and cre- ating competitive tension between the bidders and their suppliers. But it is not so good for creating market flex- ibility. Indeed, a recent report from consultant Booz Allen pointed this fact out – and recommended a less con- tractual and more merchant style market be adopted with a greater range of non-baseload plants to be developed. The PWPA in Oman is shorter than most other power markets in the Gulf at 15 years. This presented a signifi- cant challenge to any bidder. Barka’s PWPA runs out in 2018. In addition, Barka has its own unique characteristics following a refinancing of its project finance loan in 2006. Under the loan’s terms, a cash sweep of 95% of the revenues after debt service kicks in from 2012 to 2017, leaving just a “trickle” dividend for the owners from 2012 onwards. But post-2017 Acwapower decided, in its bid evaluation, that while the Omani government has talked about moving to a more deregulated market, a fully merchant market would not be put in place. And indeed, on the existing power assets in the country, it believes the PWPAs could be renegotiated and extended. This would provide big upside potential for Acwapow- er and the other investors, post-2018. By then the proj- ect debt would have been fully paid off and the project company would have the freedom to negotiate a new tar- iff structure – with no banks to worry about. And perhaps with a new PWPA, leverage could be reintroduced. Acwapower International’s chief financial officer Rajit Nanda said it was the robustness of the Omani power sec- tor law that went along way to providing comfort to Acwa’s bid. In addition, Acwapower carried out a third- party market study to understand the tariff potential in case a merchant market was established, “which estab- lished the competitiveness of the Barka plant in the Omani grid”.

Acwapower could, of course, have chosen to restruc- ture the project debt to increase dividend flows now. But the loan, which has US$240m remaining to be paid off, is very cheaply priced at 65bp stepping up to 90bp from the pre-credit crunch days. It has a debt service cover ratio of 1.2x. Credit Agricole arranged the deal. Given the contractual nature of a PWPA backed deal, various change of control constraints were required in

order for Acwa to buy the plant. The sale process took some time – eight months from the time it was announced in December 2009. Consents were needed from the Omani Authority for Electricity Regulation, the project finance lenders, the local stock exchange, given that the company is quoted, and from the customer, the Oman Power & Water Procurement Company (OPWP). In addition, AES Oasis had a company holding structure off- shore on the Cayman Islands.

The PWPA in Oman is shorter than most other power markets in the Gulf at 15 years.

An important feature of Gulf power deals is the oper- ations and maintenance (O&M) component. Some investors have recently discovered that their equity returns were lower than they would have assumed due to the fact they were not involved in the O&M side of the deal. With the Gulf power procurement model produc- ing tight bidding situations, the long-term O&M area is one that can still leave some juice for developers. On Barka, the project company is responsible for the O&M. But Acwa wanted to use an owner-operator model instead, whereby the O&M is carried out by a separate company that it will own 100%. Acwapower is currently establishing a new subsidiary to undertake the O&M and all the existing O&M employees will be transferred to it with no adverse impact on their monetary benefits. By buying Barka and obtaining the O&M presence, Acwa now has a foothold in Oman, one of its key target markets. Indeed, it could have been a double strike for the company this summer in Oman as Acwa fought hard for the Barka 3 and Sohar 2 power deals. But in the end these went to GDF Suez (see separate article in this supplement). GDF was pushing equally as hard for B3/S2, and indeed the Manah sale occurred because Suez was required to sell the asset before bidding for the new big- ger 1,500MW scheme. Acwa, however, lives to fight another day. It will be bid- ding for the next Omani scheme, the 1,500MW Sur asset. Suez will be precluded from bidding. But never- theless the competition will be tough. And guess what, one of the bidders will be AES.

It can be expected that more asset sales will take place in the Gulf power market. NM Rothschild is expected to send out an info memo on the Almanakher Islamic fund sale shortly, once various reports on the plant’s first year in operation have been completed. That will be a fairly small sale given it will be for 28%. But after that, it is possible that the merger of GDF Suez

and International Power could lead to the need for asset sales in the Gulf. The new company might need to ratio- nalise its portfolio in countries where there is an overlap – such as Oman and Abu Dhabi.

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