The $510 million project debt for the $645 million Tihama Cogen 20-year build-own-operate-transfer (BOOT) project - otherwise known as the Saudi Aramco independent power project (IPP) - is the first large scale IPP to close in Saudi and arguably the first 'true' major project financing in the Kingdom.

Although much of Tihama's thunder was stolen by the first Saudi IPP - the $155 million Jubail Energy Company (JEC) deal for SADAF in autumn 2003 (see www.projectfinancemagazine.com) - both deals differ in key respects.

Tihama has pushed the envelope on Saudi tenors even further than JEC, from 15.5 years out to 18 years. JEC was a small, complex and innovative club deal for a more difficult credit. Tihama is less complex, big and comes with an energy conversion agreement that owes more to deals done in Oman and Abu Dhabi than JEC's structuring.

Closed on 27 February 2004, the deal is timely given the rush of requests for proposals for IPPs and IWPPs expected in the coming months. And the speed of close, just two months negotiating the energy conversion agreement, with financial close two months later, demonstrates the importance of the deal to Saudi Aramco.

The popularity of Tihama with local lenders - it was heavily oversubscribed - also proves that there is regional bank appetite for more Saudi power and that JEC-like legal structures (JEC was he first to be done under Saudi law) can be applied to bigger deals.

In reality both JEC and Tihama are not true IPPs but captive plants with full offtake and supply agreements with their respective counterparties SADAF and Saudi Aramco. And for the foreseeable future any further IPPs will be the same - under current Saudi law IPPs can only function as captives or sell to industrial zones.

The major innovation on JEC - a corporate loan that lies dormant and then springs on termination of the power offtake agreement and which enabled the deal to bridge the requirements of Shariah law with the security needs of the project finance syndicate - proved unnecessary on Tihama. Unlike SADAF on JEC, Saudi Aramco has a multitude of international assets over which lenders can exercise rights under the UK law side of the finance documentation in case of default.

However, the deal does feature many of the same concepts and principles under Saudi law as JEC. For example, a security instrument usually required by lenders is a share pledge from the project company. In Saudi Arabia this is impossible since shareholders of a Saudi limited liability company are not able to waive their pre-emptive rights with respect to the transfer or sale of shares. Consequently, lenders on Tihama take security over shares in a holding company in Bahrain.

Sponsored by International Power (60%) and Saudi Oger (40%), at the heart of the financial structure are four energy conversion agreements which were signed on 20 December 2003. Saudi Aramco will supply the natural gas and water feedstock, and the sponsors will be paid a guaranteed agreed tariff for producing electricity and steam over a 20-year period.

At present, the electricity and steam required by Saudi Aramco's oil and gas processing facilities come from two different sources. The Tihama cogeneration plants will enhance efficiency by combining the production of electricity and steam, which will be generated in a single facility featuring gas turbines connected to heat recovery steam generators.

The four Tihama plants will be built at the Ras Tanurah refinery and loading terminal on the Gulf, the nearby Ju'aymah liquefied petroleum gas (LPG) and crude loading terminal, and at the Shedgum and Uthmaniyah gas processing plants in eastern Saudi Arabia.

The Ras Tanurah plant will have a capacity of 150MW, while the other three plants will all be 308MW. Total power output across all four plants is 1074MW of electricity and 4.4 million pounds of steam per hour.

The engineering, procurement and construction (EPC) contract, worth around $464 million, has been awarded to Mitsui & Co of Japan, with Hyundai Heavy Industries of South Korea. GE Power Systems is supplying gas turbines for the plants and local companies will participate in maintenance and support services at an annual cost of around $27 million. All four plants are expected to be on-line by end of 2006.

The financing - lead arranged by Banque Saudi Fransi, Saudi American Bank and Arab National Bank - totals $510 million in project debt, which breaks down into an 18-year $488 million term loan and a $22 million cost overrun facility. In addition, a separate $5 million working capital facility will be available after the first plant is complete.

Syndication at the sub-underwriting stage proved very popular with regional banks and commitments totalling almost $500 million were received forcing the arrangers to scale back.

The margin on the facility starts at 130bp over Libor pre-completion, drops to 125bp until the end of year six, then rises to 140bp until the end of year 12 and to 175bp until final maturity. Fees of 110bp were offered to those bidding for a $75 million sub-underwriting commitment, and 90bp for $40 million. Repayment is semi-annual and commences post completion in 2006.

With Saudi's population projected to rise to 40 million by 2024, and the power sector requiring an estimated investment of $90 billion-plus until the year 2023, further BOOT IPP and IWPP schemes look set to be the only way the Kingdom is going to keep up with both demand for water and electricity. Of the two structures closed to date JEC is the more complex. But when it comes to repeatability, popularity with lenders and speed of closure, Tihama has reset the benchmark.

Tihama Power Generation

Company Limited

Status: Closed 27 February 2004

Description: Second Saudi IPP financing comprising 4 plants under a 20-year BOOT

Concession awarder: Saudi Aramco

Sponsors: International Power; Saudi Oger

Financial advisory to Saudi Aramco: BNP Paribas

Mandated lead arrangers:

Arab National Bank; Banque Saudi Al-Fransi; Samba Financial Group

Arrangers: Arab Bank; Credit Agricole; Apicorp; GIB; Riyad Bank; Saudi British Bank; Saudi Hollandi Bank; Standard Chartered Bank

Legal counsel to sponsors: Clifford Chance (international); Yousef & Mohammed Al-Jadaan (local) and Qays Zu'bi (local).

Legal counsel to lenders: Milbank Tweed Hadley & McCloy (international); Law Office of Dr. Mujahid Al-Sawwaf (local)

Legal counsel to Saudi Aramco:

White & Case (international)

Technical advisory to Saudi Aramco: Fichtner

EPC contractors:

Mitsui & Co; Hyundai Heavy Industries