Credit FAQ:

Examining The Factors Behind Ruwais Power Co.'s Preliminary Issue Ratings
Primary Credit Analyst: Karim Nassif, Dubai (971) 4-372-7152; karim.nassif@standardandpoors.com Secondary Contacts: Michela Bariletti, London (44) 20-7176-3804; michela.bariletti@standardandpoors.com Michael Wilkins, London (44) 20-7176-3528; mike.wilkins@standardandpoors.com Ian R Greer, Melbourne (61) 3-9631-2032; ian.greer@standardandpoors.com

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Frequently Asked Questions Related Criteria And Research

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Credit FAQ:

Examining The Factors Behind Ruwais Power Co.'s Preliminary Issue Ratings
Standard & Poor's Ratings Services recently assigned preliminary issue ratings to the bonds to be issued by Ruwais Power Co. (herewith referred to as Ruwais Power or Shuweihat 2), a project financing of a power and water facility in Abu Dhabi that we consider a government-related entity (GRE). The government of Abu Dhabi has a strong track record of providing both ongoing and extraordinary support to GREs. Among other factors, this is evidenced by various instances of support to property developer Aldar Properties PJSC and district cooling company National Central Cooling Co. (Tabreed; not rated). Similarly, the government, through some of its GREs, has previously extended support to the Shuweihat 2 plant in the form of loans and guarantees, to assist it with refinancing. In this FAQ, we address some of the frequently asked questions from investors regarding our analytical approach in assigning preliminary ratings to Ruwais Power.

Frequently Asked Questions

What is Standard & Poor's analytical approach in assigning preliminary ratings to Ruwais Power's bonds?
Our general analytical approach to rating GREs is to consider their credit quality as falling between the inclusive bounds formed by their stand-alone credit profiles (SACPs) and their related sovereign credit ratings. Therefore, we base our ratings on these entities on an analysis of the following elements: The SACP, which represents our view of the credit quality of the project in the absence of extraordinary government support or negative intervention by government (such as, for example, by way of extracting cash through extraordinary dividends), but includes the benefit of any ongoing government support that may be provided to the project. Ongoing support might include, but is not limited to, the provision of recurrent operating or capital subsidies, access to preferential funding, monopoly powers, and favorable government contracts. Our ratings on the sovereign, which reflect the government's ability to support (or, in adverse circumstances, its need to avail itself of the resources of) the company. Our opinion of the likelihood of sufficient and timely extraordinary government intervention in support of the project meeting its financial obligations. This is derived from our assessment of the importance of the project's role to the government, as well as the strength and durability of the link between the two. For our definitions of roles, links, and extraordinary government support, see "Rating Government-Related Entities: Methodology And Assumptions," published Dec. 9, 2010, on RatingsDirect. The preliminary 'A-' ratings on the bonds to be issued by Ruwais Power reflect our assessment of the company's SACP as 'bbb' and a "moderately high" likelihood of timely and sufficient extraordinary government support in a situation of financial distress. This is based on our assessment of Ruwais Power's: "Important" role to the government of Abu Dhabi, given the company's strategic role in Abu Dhabi's 2030 plan.

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Credit FAQ: Examining The Factors Behind Ruwais Power Co.'s Preliminary Issue Ratings

Shuweihat 2 is a base-load plant generating an important share of Abu Dhabi's power and water output, and ensuring security of supply of power and water. "Strong" link to the Emirate of Abu Dhabi. Ruwais Power is 60% indirectly owned by the government of Abu Dhabi through its stakes in Abu Dhabi National Energy Co. PJSC and the Abu Dhabi Water & Electricity Authority (ADWEA). Furthermore, Ruwais Power has received financial assistance in the past from the government and/or government affiliates as part of refinancing arrangements.

What are the main factors that drive Standard & Poor's view of Ruwais Power as a GRE?
In our view, the project could be affected by the likelihood of timely and sufficient extraordinary government support. We base this view on, among other factors, a track record of government intervention demonstrated in the past. For instance, under the project's first refinancing in October 2009, after the failure of Lehman Brothers in 2008, the Emirate of Abu Dhabi--through its 100% owned utility ADWEA--provided the transaction sponsor with loans to support the refinancing. This support came at a time when it was difficult for the project (being in construction phase) to gain financing in the local, regional, and international markets. In addition, ADWEA, with fellow sponsor GDF SUEZ S.A., provided a financial guarantee (on an irrevocable, unconditional, and timely basis) for the outstanding $900 million bank bridge loan at the time. We also believe the government would support the project because of its role as one of nine key power and water projects providing 12% of the Emirate's power and water capacity. ADWEA (a 100% government-owned subsidiary), Abu Dhabi Water and Electricity Co. (ADWEC; 100% owned by ADWEA), and Abu Dhabi National Oil Co. (ADNOC; 100% owned by the government of Abu Dhabi and the provider of fuel to ADWEC), are all involved in the operations of Ruwais Power. The ultimate ownership of a number of these entities by the government of Abu Dhabi, as well as the importance of the success of Ruwais Power as a model for the future roll-out of other power and water projects in the emirate by the same principal government affiliates, leads us to conclude that a default of this project would have an adverse effect on the reputation of the emirate. Such an event could also adversely affect future sector expansion by the Abu Dhabi government. This led us to assess the role of this project as "important" under our GRE criteria. We consider that project financings such as Shuweihat 2 that operate in a sector where other future projects' success is co-dependent on their success, and where the same government-related affiliates are likely to be involved in future expansion of the sector, are more likely to be classified as GREs.

Under what circumstances does Standard and Poor's consider a project finance transaction to be a GRE?
Our GRE criteria apply to the analysis of corporate and government issues and issuers globally. This includes project debt and certain types of structured transaction debt issuance. GREs are entities whose credit quality could potentially be affected by extraordinary government intervention. Generally, GREs are partially or totally controlled by a government (or governments) and they often contribute to implementing policies or delivering key services to the population. (see "Rating Government-Related Entities: Methodology And Assumptions," Dec. 9, 2010). Project finance transactions can be GREs, but are generally not considered to be so. We rate such transactions under our project finance criteria. (For more details, see "Project Finance Construction and Operations Counterparty Methodology," Dec. 20, 2011, and "Updated Project Finance Summary Debt Rating Criteria," Sept. 18, 2007.) The reason that we don't generally consider these transactions as GREs is because governments typically provide ordinary

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Credit FAQ: Examining The Factors Behind Ruwais Power Co.'s Preliminary Issue Ratings

support embedded in the concession or contract, and we factor this in when assessing the project's business risk profile. Governments typically protect their interests by having step-in rights and the ultimate sanction of terminating the concession. Because of the moral hazard of supporting an underperforming project, we believe a government will most likely replace the concessionaire in these cases rather than provide extraordinary support. Furthermore, we would not expect a project's sponsor or parent (despite being a government or a government affiliate) to interfere in the financing of the project (either positively or negatively) owing to the structural separation. The structures of most project financing transactions provide a governance framework that limits the project's exposure to the parent's or sponsor's influence and insolvency. The non-recourse nature of most project financings provides a discipline to the project to operate without the expectation of support beyond that explicitly provided on the project documents, and lenders lend on this expectation.

What are the main characteristics of a project finance transaction that inform Standard & Poor's opinion of it as a GRE?
We do not have a prescriptive list of characteristics or conditions that would lead to the application of GRE criteria to a project finance transaction. For example, although GREs are often partially or totally controlled by a government (or governments) and contribute to implementing policies or delivering key services to the population, we observe that some entities with little or no government ownership might also be considered as GREs. We could take this view if we believe such entities might benefit from extraordinary government support due to their systemic importance or their critical role as providers of crucial goods and services. (For more details, see paragraph 3 of "Rating Government-Related Entities: Methodology And Assumptions.") In the case of Ruwais Power, we consider the effect of a default or credit stress on the power and water sector of the economy, as well as the track record of explicit support from the government of Abu Dhabi, as significant elements in our assessment of the company as a GRE. Furthermore, in assessing whether a project transaction may be considered as a GRE, we examine the likelihood of timely and sufficient extraordinary support for the project from the government on the basis of the project's capacity and willingness to meet its financial commitments as they come due. (For more details, see paragraph 14 of "Rating Government-Related Entities: Methodology And Assumptions.") We have also applied GRE criteria to structured finance transactions. However, Shuweihat 2 is a project financing and not a structured financing, although we do draw some similarities between the two types of financing in that special-purpose or shell entities are typically set up in both to issue debt. In the past, for example, we've applied GRE criteria to the $4 billion medium-term note program issued by Thor Asset Purchase (Cayman) Ltd., a special-purpose entity of Dubai Electricity and Water Authority. This transaction had features that were similar to those typically seen in project financings (such as a separate issuing vehicle from the parent, a cash waterfall, escrow accounts where revenues are received, and limitations on business purpose). We've also applied our GRE methodology to a project finance transaction based in the Province of Ontario, UMH Energy Partnership. The latter transaction relies on cash flows from government agencies for hydroelectric supply services from the project company. The project company also has indirect government ownership, and we assess the likelihood of extraordinary support for this transaction as "low."

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Credit FAQ: Examining The Factors Behind Ruwais Power Co.'s Preliminary Issue Ratings

The features we've observed in projects such as Shuweihat 2, and in structured financings such as Thor, where we consider the entities to be a GRE, include: A government or government affiliate acting as shareholder, concessionaire, and/or key offtaker to the transaction; The transaction playing a key role in a sector of the economy of that country, and/or the share of that transaction's revenues being an important proportion of the country's GDP; A proven track record of explicit support for the entity in the past by the government or government affiliate; and The related sovereign having, in our opinion, the ability and willingness to intervene to support the entity if it were to experience financial distress.

Does Standard & Poor's believe that other rated Middle East projects could be considered as GREs?
We maintain ratings on three project finance transactions in the Middle East. Two of them-- Ras Laffan Liquefied Natural Gas Co. Ltd. (II) and Ras Laffan Liquefied Natural Gas Co. Ltd. (3), collectively known as RasGas--are based in Qatar. The third is Ajman Sewerage (Private) Co. Ltd. (Ajman Sewerage), based in the Emirate of Ajman. We do not consider RasGas or Ajman Sewerage to be GREs because, in our opinion, the respective governments have very limited administrative ability to provide support to these enterprises on a timely basis due to the projects' structural and contractual features. Furthermore, both the Qatari and Ajman governments have exhibited a policy and track record of providing very limited credit support to these two transactions. In the case of RasGas, so far, the government has not needed to intervene. However, we do not expect it to intervene in future owing to the mitigants against such intervention in the structural features of the transactions. For Ajman Sewerage, the government has intervened indirectly to support the operations of the project and ensure that the returns on the transaction remain broadly in line with the terms of the concession. That said, the government of Ajman has not intervened directly in the debt service of the project, nor do we expect it to do so in future because of the mitigants against such intervention in the structural features of the transaction. Although both Ajman Sewerage and RasGas are key enterprises in their respective sectors, we consider that both entities operate on a commercial basis, and can be replaced by other operators who can perform a similar function. Also, we do not anticipate that Ajman Sewerage and RasGas, and the parties linked to these transactions as things stand, will be involved in further expansion in their respective utility sectors. Clearly, if Qatar or Ajman were to announce significant expansion within the industries involving these entities, then we might reconsider our current view. By contrast, we consider that Ruwais Power has a credit standing that's more significant to the government due to features of the transaction already described, in particular the track record of explicit support. In our opinion, Ruwais Power is a core component of Abu Dhabi's future power and water strategy. Ultimately, payment risk for both Ajman Sewerage and RasGas is exposed to parties other than the government. By contrast, payment risk for the Shuweihat 2 transaction is significantly tied to the government of Abu Dhabi. This risk arises due to the fact that ADWEC is the sole buyer of power and water from the project, and that the government of Abu Dhabi provides termination guarantees to mitigate a variety of conditions where ADWEC is unable to meet its payment obligations.

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Credit FAQ: Examining The Factors Behind Ruwais Power Co.'s Preliminary Issue Ratings

Related Criteria And Research

All articles listed below are available on RatingsDirect, unless otherwise stated. Presale Report: Ruwais Power Co. PJSC (Shuweihat 2), June 25, 2013 Project Finance Construction and Operations Counterparty Methodology, Dec. 20, 2011 Rating Government-Related Entities: Methodology And Assumptions, Dec 9, 2010 Stand-Alone Credit Profiles: One Component Of A Rating, Oct. 1, 2010 Updated Project Finance Summary Debt Rating Criteria, Sept. 18, 2007

Additional Contact: Infrastructure Finance Ratings Europe; InfrastructureEurope@standardandpoors.com

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