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Foreign Investment in the Saudi Power Sector: Structures for Project Financing. Osman Shahenshah Managing Director Middle East, Africa and Europe. Jubail Industrial City, KSA November 15, 2000. Outline. Profile of Taylor-DeJongh KSA Physical Challenges for Power Development

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Foreign Investment in the Saudi Power Sector: Structures for Project Financing

Osman Shahenshah

Managing Director

Middle East, Africa and Europe

Jubail Industrial City, KSA

November 15, 2000

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Outline l.jpg
Outline Project Financing

  • Profile of Taylor-DeJongh

  • KSA Physical Challenges for Power Development

  • Power Capacity Growth Needs

  • Power Sector Organization

  • Tariff Structure Elements

  • KSA Power Financing Models

  • Structuring a Successful Power Project Financing

  • Future Developments

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Who is Taylor-DeJongh? Project Financing

  • Leading independent financial advisory, structuring and investment management firm.

  • Over 20 years’ experience in major international projects.

  • Developed, structured, negotiated and financed US$30 billion of international capital projects in 75 countries. Active assignments in 25 countries.

  • Ranked #1 Financial Advisor by Privatisation International in:

    • Middle East and Africa (1996-2000).

    • Power Projects (overall period since 1994).

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Taylor-DeJongh’s Clients Project Financing

  • We advise Sponsors in petroleum, petrochemical, power, telecommunications, water, industrial and infrastructure projects.

  • We advise Governments on privatizations, e.g.:

    • Mozambique, Namibia, Senegal, Egypt, India, Poland, Kazakhstan, Philippines, Moldova, Colombia, Madagascar.

  • We advise major Lenders, e.g.:

    • U.S. Export-Import Bank, ECGD (UK), SACE(Italy).

    • OPIC, MIGA, World Bank.

  • Co-Manager $350 million New Africa Infrastructure Private Equity Fund.

  • Developing Islamic Equity/Mezzanine Fund

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Physical Challenges Project Financing

  • Large country (2.2m sq km), and major load centers are widely separated:

    • Jeddah

    • Makkah/Medinah

    • Al-Khobar/Dammam/Dhahran

    • Riyadh

  • Over 200,000 km of power transmission lines built over rough geography to reach small population/load centers.

  • Limited interconnection between regions.

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Physical Challenges (cont.) Project Financing

  • Harsh climate

  • A/C demand in hot summers (4-5 month period) means summer peak demand often double rest of year

  • Plants often forced to run well below rated capacity due to high temperatures

  • Lack of water limits use of large, cost-efficient steam plants to coastal areas.

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Capacity Project Financing

  • Estimated investment needed through 2020 around $117 billion

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Sector Organization Project Financing

  • Originally 4 SCECOs (Saudi Consolidated Electricity Companies) covered west, central, east, and south, plus three “special producers”.

  • All SCECOs and EC merged into Saudi Electric Company (SEC) in December 1999.

  • Special Producers:

    • General Electricity Corporation (EC) – was responsible along with six smaller companies for the north.

    • Royal Commission for Jubail and Yanbu: responsible for providing electricity to the two industrial cities. Until recently did not handle Jubail, but new Utility Company (UCO) will be in charge of all infrastructure in both cities.

    • Saline Water Conversion Corporation (SWCC): Government’s desalination company also generates significant electricity of around 4,000 MW.

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Tariff Structure Project Financing

  • 1975: Government consolidated electricity system and set tariffs well below cost.

  • Tariffs revised three times through ‘92; still were below cost.

  • April 2000: Tariffs raised following establishment of SEC.

  • Previous rate structure was actually “temporary” increase made permanent. Excess funds went to “Halala Fund” for infrastructure projects.

  • Now mixed signals on tariff levels. Recent decreases.

  • Independent regulatory body will be established to periodically review rates.

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Tariff Structure (cont.) Project Financing

  • Latest Developments:

    • Users over 5000 kWh/month receive 30-50% reductions from end October 2000.

    • SEC faces consumer resistance to higher tariffs, particularly since new structure began during peak-use summer months.

    • Government to address cashflow deficit to avoid derailing private investor interest in sector; question is how?

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KSA Power Financing Models (1) Project Financing

  • Ghazlan II

    • $1.7b 2400MW plant with four steam turbine units.

    • Owner: SEC, originally SCECO East.

    • Completion expected in February 2002.

    • Security package of receivables from Aramco, supported by receivables from 3 SABIC companies.

    • Attractive receivables package brought in international banks.

    • Also attractive because facility governed by English law.

    • $500m 10-year internationally syndicated commercial loan (first such loan in Saudi history).

      • Reportedly less than 100bp pricing.

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KSA Power Financing Models (2) Project Financing

  • Riyadh PP-9

    • Continuation of Riyadh PP expansion by SCECO Central, now SEC.

    • Expansion of SCECO-Central’s Riyadh PP-9 plant by building 1200MW oil-fired combined-cycle plant.

    • First block commissioned 1997, completion by 2001.

    • Financing covered by definitively allocated funds from Halala Fund – Halala fund buildup behind schedule, project time frame extended to 6 years from 3.5.

    • Payments security structure allowed local banks to fund the contractors.

    • US Ex-Im providing political risk insurance for $595m of equipment imports.

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KSA Power Financing Models (3) Project Financing

  • Qassim Expansion

    • 1998 upgrade of power station for SCECO-Central by adding 300MW of capacity.

    • Locally financed using consumer receivables as security.

      • virtually all electricity payments made through banks (few industrial customers).

      • If payment through a particular bank is relatively stable, trapping the cash creates a pool of receivables against which financing can be assured.

      • Local ANB and Al-Rajhi arranged a SR750m ($200m) Islamic structure.

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KSA Power Financing Models (4) Project Financing

  • MoF “support”:

    • Some financing facilities in early ‘90s received Ministry of Finance acknowledgement that provision would be made in budget to meet debt service.

    • Payments have been delayed due to conflicting demands on MoF, though always ultimately met.

    • Banks involved have all been local.

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Structuring a Successful Limited Recourse Power Project Financing

Turkey “BO” Model:

  • InterGen/ Enka 3500 MW gas-fired IPPs just closed: almost $2 BN.

  • Competitively bid on basis of lowest tariff.

  • Power sold to National Electric Company (TEAS), at a $-denominated tariff. TEAS chooses the tariff it charges ultimate consumer. Capacity payments firm, and sufficient for all debt service.

  • Fuel supply risk passed through to TEAS. (Capacity payments still made, even if no fuel for generation).

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Structuring a Successful Limited Recourse Power Project Financing

  • Payment obligations of TEAS guaranteed by Treasury – only in event of default.

  • Ample completion support from EPC and Sponsors.

  • Ample equity and liquidity from Sponsors.

  • General Considerations:

    • Regulatory regime is critical

    • Tariff levels and structure are cornerstone of successful limited recourse power project financings

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Future Developments? Financing

  • Long term commitment to private power clear

  • Short term financial viability of sector less certain, particularly given recent tariff uncertainties.

  • Numerous innovative financing models available

  • Interest of international and local banks in financing Saudi projects is significant; continued interest depends on good structuring and reliable regulatory scheme.

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Thank you. Financing

www.taylor-dejongh.com

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