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

1. 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 1

2. Outline • 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 2

3. Who is Taylor-DeJongh? • 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). 3

4. Taylor-DeJongh’s Clients • 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 4

5. Physical Challenges • 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. 5

6. Physical Challenges (cont.) • 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. 6

7. Capacity • Estimated investment needed through 2020 around $117 billion 7

8. Sector Organization • 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. 8

9. Tariff Structure • 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. 9

10. Tariff Structure (cont.) • 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? 10

11. KSA Power Financing Models (1) • 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. 11

12. KSA Power Financing Models (2) • 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. 12

13. KSA Power Financing Models (3) • 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. 13

14. KSA Power Financing Models (4) • 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. 14

15. 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). 15

16. 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 16

17. Future Developments? • 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. 17

18. Thank you. www.taylor-dejongh.com 18