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IPR in the Middle East

IPR in the Middle East. January 2006. Introduction. Mark Williamson. Middle East . . . in the IPR portfolio. Our commitment to the region. Contract Type - IPR Group (by net MW). PPA. ME Net MW. MW. Al Hidd Bahrian. 34%. 66%. Merchant (short/medium term contracted). Ras Laffan B

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IPR in the Middle East

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  1. IPR in the Middle East January 2006

  2. Introduction Mark Williamson

  3. Middle East . . . in the IPR portfolio Our commitment to the region Contract Type - IPR Group (by net MW) PPA ME Net MW MW Al Hidd Bahrian 34% 66% Merchant (short/mediumterm contracted) Ras Laffan B Qatar Tihama Saudi Arabia 35% Al Kamil IPO Net MW Umm Al Nar UAE Net MWunderconstruction • Creating value through core skills • Project development and construction • Offtake contract design and execution • Project financing • Plant operation - both power and desalination Shuweihat,UAE Set up in region Al Kamil, Oman 2000 2001 2002 2003 2004 2005 2006

  4. Middle East . . . in the IPR portfolio Contribution to IPR from the region Middle East EBIT (£m) 85 EBIT 54 Equity 29 23 22 9 1 -1 2001 2002 2003 2004 Only includes equity from operating assets

  5. Overview Ranald Spiers

  6. IPR in the Middle East Al Hidd • Six projects in six years with an enterprise value of US$6.5 billion • current IPR equity commitment of nearly US$400m • Creation of new region - £29m PBIT by 2004 • Existing assets performing well • Construction is the other major regional activity • Power and desalination • IPR largest private supplier of desalinated water in the world • Pipeline of future projects • three currently in bid/negotiation Bahrain Ras Laffan B Qatar Tihama Umm Al Nar Shuweihat UAE SaudiArabia UAE Oman Al Kamil

  7. IPR in the Middle East IPRShare(MW) Net DesalCapacity(MIGD) Net SteamCapacity(m lbs / hr) End ofPowerContract % ofownership FuelType Name Country Al Kamil Shuweihat Umm Al Nar Tihama Ras Laffan B Al Hidd Total Oman UAE UAE KSA Qatar Bahrain 65 20 20 60 40 40 185 300 310 645 410 364 2,214 - 20 20 - 24 36 100 - - - 2.7 - - 2.7 Gas Gas Gas Gas Gas Gas 2017 2024 2026 2026 2033 2028 Middle EastEBIT (£m) 29 23 9 2002 2003 2004

  8. The Middle East - a growing asset portfolio MW 6,995 6,870 6,570 910 910 Al Hidd 910 1,025 900 Ras Laffan B 600 1,075 1,075 1,075 Tihama 3,355 1,550 1,550 1,550 Umm Al Narextension 2,655 700 1,500 1,500 1,500 1,500 1,500 1,155 Shuweihat 870 870 870 285 (1) 650 650 Umm Al Nar 650 Al Kamil 285 285 285 285 285 285 285 2002 2003 2004 2005 2006 2007 2008 (1) 650 MW retires at the end of 2008

  9. The Middle East Team • Abu Dhabi Development Office • project selection, bidding, negotiating, project development and management • Project companies • construction, asset management, client and partner relationships, operations and maintenance • Operating companies • operations and maintenance, owner and partner relationships

  10. Key markets Primary target markets: • UAE • Qatar • Saudi Arabia • Oman • Bahrain • Kuwait

  11. Macro environment • Stable Governments, low country risk rankings and good credit ratings • Massive oil and gas reserves • Petrodollar economies • Strong economic growth driven by high oil prices and diversification away from oil • Growth rates between 5% to > 10% pa • Drivers for power and water demand • infrastructure development / tourism • replacement vs incremental demand • GCC states becoming increasingly interconnected and interdependent

  12. Regulatory overview • Pragmatic regulation, primary method of control via long-term contracts • Markets unlikely to liberalise in the short or medium term • Environmental regulation • most new plants gas-fired

  13. Commercial structure • Long-term contracts which set in stone all major revenues and costs • Major risks laid off wherever possible • PWPAs, PPAs, ECAs, NGSAs • EPC costs fixed with LDs for delays in construction and poor performance • Long term operations and maintenance service agreements with OEMs • Interest rates and currencies hedged

  14. Return on investment • Return profile similar across the region • UAE local shareholder return 13% • Seek to enhance returns by O&M, success fees and TSAs • Cash generation, use of Equity Bridge Loans • Scope to increase return once project has been commissioned, for example by refinancing

  15. Financial structuring • Projects structured using project finance • carried out in conjunction with London-based project finance team • Maximise use of senior debt • Availability of local capital and international debt with international MLAs /JBIC • High leverage is not a problem

  16. Competitive environment • Projects becoming increasingly competitive but IPR still winning regularly • New players from Japan, Korea, Malaysia • Traditional competitors (Suez/Tractebel, AES, Marubeni) • Fewer EPC contractors tends to limit competition • Competitors or partners (eg Mitsui)

  17. Partnerships • Partnering is a key element of risk diversification and gaining local knowledge • ADWEA, CMS, Saudi Oger, QEWC, Mitsui, TEPCO, Sumitomo, Chubu, Suez • We choose the right partners to help us win the deal • Each partner brings something different to the table

  18. Desalination • Strong power demand and even stronger water demand • Most Gulf projects are designed to offer both power and water • Increases the overall efficiency of the plant • Uses waste heat from the steam • IPR has assets with the major thermal desalination processes

  19. Agenda Contract Structures David Wadham Financing our Growth Peter Barlow Desalination Jaideep Sandu Coffee Break Oman Tom Mackay & Kevin Cox Abu Dhabi David Barlow & Ed Metcalfe Saudi Arabia David Barlow, Jeff Wright & Steve Pedrick Qatar Tom Mackay Coffee Break Bahrain John Hurst Summary Ranald Spiers

  20. Contract structures David Wadham

  21. Similarities across contracts • Part-owned in conjunction with other international or local partners • Financed on a highly leveraged, project finance (limited-recourse) basis • Operate with the security of a long-term power (and water) offtake contract for the plant’s available capacity and output • Contract with sovereign/quasi-sovereign counterparty • state’s single buyer of power and water

  22. Differences across contracts • PWPAs structured on an energy conversion basis (ECA) or fuel supply agreement (FSA) • Most projects are BOO, some BOOT • Sub-contracted O&M or combined owner/operator structures • Government interest in some projects

  23. PWPAs and PPAs • Project company responsible for: • design • construction • commissioning • Offtaker obligation to provide connections to power and water grid and purchase available capacity and output • Flat tariff with capacity charge to recover debt service, fixed O&M and equity return; pass-through output charge to cover variable O&M and fuel • Payment is in local currency (except Tihama) but includes exchange rate protection • ownership • operation • maintenance

  24. PWPAs and PPAs (cont.) • Capacity or termination payments guaranteed by the host government • Revenue protection for offtaker defaults and political force majeure (war, change in law, government action/inaction) • Commercial documents subject to local law but international arbitration • Finance and construction documents subject to English law

  25. PWPAs and PPAs (cont.) • Energy conversion (Abu Dhabi, Tihama) or separate fuel supply arrangements (Oman, Qatar, Bahrain) • BOO (Abu Dhabi, Oman, Bahrain), BOOT (Tihama and Qatar), with a transfer to the offtaker • Accounting treatment: always an operating or finance lease • Terms vary from 15 years (Oman), through 20-23 years (Tihama, Abu Dhabi and Bahrain) to 25 years (Qatar), but without market liberalisation renegotiation clauses

  26. Operation and maintenance Abu Dhabi • Requires a separate operator owned by foreign investors • Payment on a fixed price basis • Ability to generate Operator fees and bonuses against a lower equity stake (e.g. Umm Al Nar, 20% stake in the generator, but a 70% stake in the operator) Others • More flexibility (e.g. Al Kamil, Ras Laffan) • Advantages of a combined owner/operator

  27. Gas turbine maintenance • Long-term arrangements with the OEM (Al Kamil, Umm Al Nar, Tihama with GE and Shuweihat and Ras Laffan with Siemens) • For one or two maintenance cycles The benefits of an LTSA include: • All scheduled maintenance sub-contracted for a fixed price, with a degree of unscheduled outage cover provided within the price • Based on a term warranty concept, i.e. OEM guarantees to replace all program parts as needed

  28. Shareholding structure The advantages of a government shareholding and the need to generate local investment opportunities • Abu Dhabi IWPPs have 60% holding retained by the government • Al Kamil initially 100% owned by IPR, now 65% owned following a mandatory IPO on the Muscat Stock Market • Ras Laffan has no direct state involvement, although QEWC holds 55% and is in turn listed on the DSM • Tihama and Bahrain owned entirely by private investors

  29. Umm Al Nar Shareholders’ Agreement • Foreign shareholder has the ability to manage the projectand enjoys significant minority protection • coupled with government partner with shared goals as an investor • Board of 7 directors (4 ADWEA and 3 foreign investors) • Foreign investor appoints the Executive Managing Director • Ed Metcalfe • Voting on all significant matters at board and shareholder level requires approval of both ADWEA and the foreign investor • Government IPO provisions (Taqa was listed on the ADSM in July 2005)

  30. Conclusion • Long-term off take arrangements with single state buyers, guaranteed by sovereigns with investment grade ratings and a strong economic future • Robust contractual terms offering secure future returns with revenue protection for supplier and offtaker defaults and for political force majeure events • Projects are embedded in the region, with governments participating as co-investors or encouraging direct public ownership • Key cost risks (financing and gas turbine parts and maintenance) well mitigated through long-term hedging and supply arrangements • Upside remains through refinancing opportunities, the ability to reduce costs over time and merchant tail on BOO projects

  31. Financing our growth Peter Barlow

  32. Project finance • Fundamental part of IPR’s financial strategy • Objective is to finance on a non-recourse basis at the asset level

  33. Structure of Middle East IPPs/IWPPs • Assets backed by long-term (20yrs+) Power (and Water) Purchase Agreements (PPAs/PWPAs) • Contractual Structure designed specifically for non-recourse financing • Clients’ obligations backed by Government guarantees • Predictable, long-term cashflows allow high leverage without sponsors’ support

  34. Lenders’ view on IPP/IWPP risk/country risk • No merchant risk • Excellent track record of project financed IPPs/IWPPs: ‘success stories’ / accepted model in the banking market • Loan syndication allows diversification of lending across different projects/countries: lower risk • Project financed IPPs/IWPPs include security on assets and stricter covenants than corporate loans • ME countries hydrocarbon-rich, financially sound and politically stable: country risk acceptable to most international PF lenders

  35. International and regional debt providers • IPR’s approach: mix international and regional lenders’ expertise • International lenders particularly active in most countries in the region: UAE, Oman, Qatar and Bahrain • Predominantly regional lenders in the Kingdom of Saudi Arabia (KSA) so far • Recent improvements in KSA (e.g. entry in WTO) suggests increased role of int’l lenders there • Islamic financing further source of liquidity, of which IPR has experience through Umm Al Nar and Shuweihat • Export Credit Agencies being increasingly used

  36. IPR capabilities in debt capital raising • Core skill - IPR takes lead role in every project financing • To date 5 IPPs/IWPPs project financed in the region • Raised $3.9 billion in non-recourse bank debt • IPR successfully financed first large scale IPP in Saudi Arabia • Financing also achieved in potentially adverse market conditions(e.g. Shuweihat syndication launched on 12 Sept.2001; Umm Al Nar financing arranged at start of 2nd Iraq war) • In 2004 successful IPO of Al Kamil on Omani stock exchange

  37. IPR capabilities in debt capital raising Non recourse long-term debt • Al Kamil: $100m • Shuweihat: $1.2 billion (of which $100m Islamic Tranche) • Umm Al Naar: $1.1 billion (of which $250m Islamic Tranche) • Tihama: $510m • Ras Laffan: $663m • Al Hidd $1.0 billion (in negotiation)

  38. Lenders appetite for future deals • Competitive pricing and increasing level of interest suggest large appetite for future IPP/IWPP deals in the region • Virtually all major international project finance lenders present in the region and display appetite for more deals • More regional players are becoming familiar with project finance through participation in loan syndications

  39. Case study: Umm Al Nar • Largest IWPP in the world: • existing net capacity: 870 MW (power) + 162 MIGD (water) • after construction net capacity: 1,550 MW (2,200 MW for 2 years during construction) + 95 MIGD • 23 year PWPA with ADWEA: proven contractual structure (4th such deal in Abu Dhabi, but longest tenor to date); • Largest ever project finance deal at the time, when lenders appetite in the region was limited; • Financing plan structured to maximise liquidity and included use of Islamic financing, short and long term conventional debt; • Long-term debt tenor: 20 years; • Optimal utilisation of operating cash flow for project funding

  40. Case study: Umm Al Nar Amounts Debt Facilities Main Features US$ million 1) Equity Bridge Facility 441 Tenor / Repayment: Bullet repayment on July 2008 Of which: Islamic Tranche 291 Other: Of which: Conventional Tranche 150 100% guaranteed by Shareholders 2) Short Term Facility 232 Tenor / Repayment: July 2006 to July 2008 Of which: Islamic Tranche Nil Other: Of which: Conventional Tranche 232 Ranking Pari-Passu with Long Term F. 3) Long Term Facility 1,105 Tenor / Repayment: Door-to-door years; Profiled 20 Of which: Islamic Tranche 250 repayments: Jan 2009 to Jul 2023 Other: Of which: Conventional Tranche 855 "True-Up Advance": Drawdown at end of availability period to repay part of EBF and achieve 80:20 gearing (subject to cover ratio covenants) Total Debt Facilities 1,778

  41. Case study: Umm Al Nar Amounts Capital Structure US$ million Total Funding Requirements: 2,116 Of which: Acquisition Purchase Price 1,000 Of which: EPC Contract 736 Sources of Funds Before After "Refinance" "Refinance" US$m % US$m % Short Term Facility 231 10.9% 0 0.0% Long Term Facility 978 46.2% 1,102 52.1% 20.8% Equity Bridge Facility 440 0 0.0% 14.9% Equity Injection 0 0.0% 315 Cash Flow From Operations 468 22.1% 698 33.0% Total Sources of Funds: 2,116 2,116 2,116

  42. Desalination Jaideep Sandhu

  43. Introduction • Removal of salts from seawater • suitable for human consumption, agriculture or industrial use • Desalination Processes • Thermal Distillation Processes - Multi Stage Flash (MSF) - Multi Effect Distillation (MED) • Membrane Processes - Reverse Osmosis - Electro Dialysis • Hybrid Plant (Thermal with RO)

  44. IPR Middle East Desalination portfolio 2006 2008 Shuweihat S1 IWPPMSF (Fisia) Umm Al NarMSF & MED (Fisia, IHI, Sidem, Doosan, Hitachi Zosen)* Ras Laffan Facility B MSF (Doosan) Al Hidd, BahrainMSF & MED (Fisia, Sidem) Total Desalination capacity Potential opportunity:Abu Dhabi Reverse Osmosis Plant 100 181.5 - 30 311.5 52.5 100 95 60 90 345 Assumeconstruction

  45. Typical Power/Water Revenue Split • Dependant on power and water capacities and load factors • Power/Water capacity ratio of 15:1 (1,500 MW/100 MIGD) • e.g. Shuweihat, water contributes around 40% of the revenue and profit • Power/Water capacity ratio of 5:1 (1,000 MW/100 MIGD) • e.g. UAN, water contributes around 68% of the revenue and profit

  46. Multi Stage Flash Technology - 1 Vacuum Seawater Brine Vapour Vapour Steam Power Condensing Brinerecirculation DesalinatedWater Vapour &Brine Droplets Vapour &Brine Droplets RejectBrine

  47. Well proven track record Large capacity units Low O&M cost High quality product water Used in IWPPs where adequate steam and power is available Technology - Doosan, Hitachi Zosen, HHI/Sasakura and Fisia Multi Stage Flash Technology - 2

  48. Multi Effect Distillation Technology - 1 Seawater Vacuum 2nd Effect 1St Effect Vapour Vapour Steam Condenser Condensate DesalinatedWater DesalinatedWater Reject Brine

  49. Well proven track record Mid-size units Low O&M cost High quality product water Used in IWPPs where adequate steam is available but may be some constraints on power Technology - Sidem, Weir Techna, IDE and Doosan Multi Effect Distillation Technology - 2

  50. Reverse Osmosis Process - 1 Chemicals Chemicals DesalinationWater Potable Water Highpressurepump Posttreatment system MembraneRacks Pre treatmentsystem Reject Brine

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