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Electricity and Co-Generation Regulatory Authority (ECRA) Workshop on Reforming the Electricity Industry in Saudi Arabia Prepared for 6th November 2006 Introduction and Speaker HSBC Bank plc (“HSBC”) is delighted to present our thoughts at the Electricity & CoGeneration Regulatory Authority (“ECRA”) workshop, together with other leading market participants Paul Eardley-Taylor is a Director in HSBC’s Power & Utilities team, responsible for Project Finance transactions across the Europe, Middle East and Africa region Paul acted as Financial Adviser to Water & Electricity Company LLC (“WEC”) in respect of the successful development and tender of the 900 MW / 880,000 m3/d Shuaibah IWPP (Closed January 2006) and is acting as Financial Adviser to WEC in respect of the 850 MW / 212,000 m3/d Shuqaiq IWPP (preferred bidder status) We will provide some summary thoughts on investors and lender expectations and requirements across a deregulating industry, noting possible incentive measures and assessing how Saudi Arabia handled its main power privatisation to date 2 Select HSBC Power Transactions Middle East Sidi Krir IPP Egypt, 2006 Fujairah IWPP UAE, Ongoing Ras Abu Fontas B2 Qatar, 2006 Shuqaiq IWPP Saudi Arabia, Ongoing USD TBA million USD 525 million C, USD 1,900 million Financial Adviser Financial Adviser and Mandated Lead Arranger Financial Adviser USD 251 million Sole Arranger Hedge Arranger Sole International Underwriter Sole Bookrunner Shuaibah IWPP Saudi Arabia, 2006 Taweelah B IWPP UAE, 2005 Q-Power Q.S.C. Qatar, 2005 Al-Ezzel IPP Bahrain, 2004 USD 2,500 million USD 2,500 million USD 695 million USD 492 million Financial Adviser Mandated Lead Arranger Financial Adviser Mandated Lead Arranger Mandated Lead Arranger and Joint Bookrunner Mandated Lead Arranger Hedging Co-ordinator HSBC in the Global Utility sector Global Announced M&A deals - Utilities - 1 January to 30 June 2006 Adviser Bank 1 2 3 4 5 6 7 8 9 10 JP Morgan Lehman Brothers HSBC Merrill Lynch & Co BNP Paribas Group Rothschild Goldman Sachs & Co Deutsche Bank AG Morgan Stanley Lazard LLC Global Finance – Annual Awards 2006 Amount (US$m) Sector Winners - Power 116,987 116,368 115,162 113,983 112,710 73,957 71,489 70,838 69,764 67,110 Global Finance World's Best Investment Banks - 2006 Source: Global Finance, June 2006 Source : Bloomberg, July 2006 4 It all depends on the applicable sub-sector….. Unbundling the industry into its components Generation — Major portfolio disposals (UK, Italy). Russia (UES) to follow in 2007. — Major plant sell-offs (UK (again), Australia, Abu Dhabi) — Standalone IPPs / IWPPs span the world (including the GCC) Transmission & Distribution — Very rarely offered to the market (“the family silver”) (UK, Latin America) — Attractive regulated asset bases (RPI regulation). GCC Interconnector ? Supply — Disaggregate before – post losses - re-integrating into vertical utilities Renewables — Globally, a major growth area (principally wind generation) 5 It depends on the private sector risk proposition…….. From the investor perspective, key risk issues which will impact upon appetite and required returns are as follows… Country credit rating — Investment grade threshold (major impact on IRR requirements) — IPP / utility default history in Argentina, India, Indonesia, Pakistan and UK Relationship with the State — What do stakeholders want the deregulatory process to achieve? — Ownership, Fund Raising / Investment, Purchasing or Competition objective? Role of incumbents post deregulation — Contrast UK / Italy with France, Germany or Ireland with Australia Role of subsidies and competition — Subsidy of consumers (GCC) or subsidy of producers (Renewables) — Will the market rules change post investment? (UK) Merchant risk spectre 6 Case Study – Shuaibah IWPP Shuaibah IWPP Saudi Arabia, 2006 Borrower: Shuaibah Water and Electricity Company Sponsor: Saudi-Malaysian Consortium, PIF and Saudi Electricity Company Status: Closed - January 2006 Project Cost: US$2,500 million Project: Greenfield 900 MW and 194 MIGD IWPP US$ 2,500 million Financial Adviser Financial Adviser to the Awarding Authority Key Features: - First IWPP in Saudi Arabia - World’s largest new-build IPP/IWPP to date (Dealogic) - 20 year PWPA with the Water and Electricity Company HSBC Roles: Financial Adviser to WEC/Government Awarding Authority Awards: – EMEA Power Deal of the Year 2005” (PFI) – EMEA Power & Water Deal of the Year 2005 (Euromoney) 7 Shuaibah IPP – Incentives & Obligations From a high level perspective, respective obligations and incentives in the Shuaibah IWPP are as follows…. Public Sector Obligation Private Sector Obligation Political / Change in Law Risk Construction / Completion Fuel Supply Risk Financing (debt and equity) Dispatch Risk Availability & Performance Demand Risk Operations & Maintenance Exchange Rate Risk Insurable Risks Public Sector Incentive Private Sector Incentive Fixed Power Price (exc. Fuel) Fixed Revenues (not profit) Security of Supply Future optimisation potential Capped Exposure Limited commodity risk Competitive Procurement Investment Grade Destination The above is one approach which the market deemed suitable to raise USD 300m of private sector Equity and USD 1.9 billion of senior debt in a “First Of A Kind” deal 8 Typical Mitigants and Remedies In conclusion, typical mitigants and remedies are as follows… Solving the Asset Value Problem — Generation: — Regulated Asset Base and regulatory ring fence Supply — PPAs / PWPAs, Renewables Obligations (often backed by legislation) T&D — Competitive auctions (usually English auction or reverse auction) Usually, let the market decide (compete on customer service, branding, billing) Role of Government — Need for clear and consistent stakeholder objectives for deregulation — Historic ownership obligation becomes a future regulatory obligation — In Saudi Arabia, likely need to continue Government support mechanisms 9