Saudis mull Shoaiba guarantee options

Subscription required

As a guest you can read up to 3 full articles before a subscription is required.

You can read a further 1 articles for free.

A ministry of finance guarantee is available . . . for a fee. It is in WEC’s interest to pay it if it wants to keep project costs down.

Qualified bidding groups for the Shoaiba IWPP were awaiting Saudi government approval of the project’s guarantee structure as the Eid celebrations came to a close at the beginning of February.

The transaction advisers are hopeful that government authorisation will be given in the next three weeks and that RFP documents can still be sent out in the first quarter. However, the bidders contacted by GWI last month did not share their optimism.

“I don’t expect to see the RFP documents until at least the second quarter”, said representative from the Al-Jomaih/CCC/- RWE group. “The guarantee structure is still under review”.

The main difficulty has been agreeing the exact type of credit support for the project’s off-taker – the Water & Electricity Company (WEC). WEC is the company set up jointly by the Saline Water Conversion Corporation (SWCC) and Saudi Electricity Company (SEC) to act as the sole purchaser of power and water from the Shoaiba plant.

As a start-up company with no operating or credit history, WEC needs a sovereign guarantee to make the transaction bankable. Accordingly, the Saudi ministry of finance has offered to guarantee WEC’s obligations under the 20-year power and water purchase agreement.

Before the break for the Hajj religious festival, the finance ministry was considering two alternatives for the guarantee: an invoice and termination guarantee and a termination guarantee only. The ministry had also proposed that WEC pay a guarantee fee equivalent to 1% of the value of each monthly invoice for power and water.

If WEC agrees to pay the fee, the assumption is that it will be able to secure the full invoice and termination guarantee from the finance ministry.

What this means is that WEC’s two shareholders are likely to incur an additional obligation for the deal to move forward. The guarantee fee would have to be paid by SWCC and SEC in order for WEC to remain in a neutral financial position (the company’s only source of revenue is from the sale of water to SWCC and the sale of electricity to SEC).

The view taken by WEC’s financial advisers is that a termination guarantee on its own would be viewed as significantly less attractive than the full invoice and termination guarantee. If the termination guarantee were adopted, WEC would be forced to pay higher power and water costs as the market would charge a premium to reflect the increased risk.

Based on an estimate of the total water and power costs which could result from a financing of the project under the two guarantees, the financial advisers have concluded that adopting the termination guarantee on its own would result in WEC paying 5m higher water and power costs than if the invoice and termination guarantee was selected.

This is the result of an increase of 13.4% in levelised power costs and 12.7% in levelised water costs (going without the full guarantee could add as much as .08/m3 to the cost of water and .50/MWh to the cost of power).

If an invoice and termination guarantee were in place, the advisers estimate the discounted sum of monthly water and power invoices payable by WEC to the project company (that is, excluding the cost of fuel) over the term of the contract to be ,116 million: 1% of this amount is equivalent to million.

They have therefore recommended that their client agrees to the proposed guarantee fee as it would lead to WEC incurring an additional obligation of million (on a discounted basis) in consideration for a potential saving of 5 million, or a projected net saving of 4 million in discounted water and power costs.