Electricity Sector Regulatory Framework

Investor Presentation
November 17, 2020
Electricity Sector Regulatory
Framework
1
Disclaimer
This document has been prepared by Saudi Electricity Company (“SEC”) solely for presentation purposes. The information contained in this document has not been independently verified and no
representation or warranty, expressed or implied, is made as to, and no reliance should be placed on, the fairness, the accuracy, the completeness or the correctness of the information contained
herein. None of SEC, the Ministry of Finance, the Ministry of Energy, the Electricity & Cogeneration Regulatory Authority or any of their respective affiliates, advisors or representatives shall have
any liability whatsoever for any direct or indirect loss whatsoever arising from any use of this document, or contents, or otherwise arising in connection with it.
This document and any information provided at this presentation or in this document is confidential proprietary information and is being made available on a strictly confidential basis. All material
contained herein and all information disclosed in connection with this presentation is in summary draft form for discussion purposes only, is subject to correction, update and change, and is
strictly not to be relied upon for any purpose whatsoever. It does not purport to contain all information required to evaluate SEC and/or its financial position and, in particular, is subject to
completion, amendment, revision, verification, correction and updating in its entirety.
This document and the information contained herein may not be disclosed, taken away, reproduced, redistributed, copied or passed on, directly or indirectly, to any other person (whether within or
outside such person’s organisation or firm) or published or used in whole or in part, for any purpose. Neither this document nor the meeting at which it is presented constitute a recommendation
regarding any shares or securities of SEC.
This document does not constitute an offer or invitation to purchase any share or other security in SEC and neither it nor any part of it shall form the basis of, or be relied upon in connection with,
any contract or commitment whatsoever. Before making any investment decision, an investor should consider whether such an investment is suitable for his particular purposes and should seek
the relevant appropriate professional advice.
Any decision to purchase shares or other securities in SEC is the sole responsibility of the investors.
Certain information contained in this document consists of forward-looking statements reflecting the current view of SEC or the Government of the Kingdom of Saudi Arabia with respect to future
events. They are subject to certain risks, uncertainties and are based on certain assumptions. Many factors could make the expected results, performance or achievements be expressed or
implied by such forward-looking statements (including, but not limited to, worldwide economic trends, the economic and political climate of Saudi Arabia, and the Middle East and changes in
business strategy and various other factors) to be materially different from the actual historical results, and performance achieved by SEC. Should one or more of the risks or uncertainties
materialize or should the underlying assumptions prove different stock movements or performance achievements may vary materially from those described in such forward-looking statements.
Recipients of this document are cautioned not to place any reliance on these forward-looking statements. SEC, the Ministry of Finance, the Ministry of Energy and the Electricity & Cogeneration
Regulatory Authority undertake no obligation to republish revised forward-looking statements to reflect changed events or circumstances.
2
Introduction
1
A new transparent RAB-based regulatory framework has been developed by the regulator (ECRA) without any negative impact on consumers and with
sufficient flexibility to adapt to new circumstances
2 The Balancing Account will allow SEC and its investors to have full financial visibility
3
The conversion of legacy net financial obligations into a non-dilutive equity-like financial instrument held by the MOF will simplify SEC’s capital
structure and improve its capitalisation and leverage
5 The holistic reforms reinforce the commitment of government support to SEC through clear mechanisms
4
Enhancing SEC’s financial strength and operational capability have been at the center of the sector reform
Key stakeholders in the Kingdom of Saudi Arabia have been working together for a number of years to develop holistic
reforms to the electricity sector with the aim of ensuring the sustainability and efficiency of the electricity sector in the
Kingdom in line with the objectives of Vision 2030
3
Reforms contribute to the achievement of sector pillars
Safety, Security and Reliability
of supply to all households,
businesses and government
Efficiency reflecting in a
competitive cost-to-serve
Financial Sustainability allowing
sector players to be profitable
Customer Centricity ensuring
value added services and
high customer satisfaction
Environmental Stewardship
enabling the realization of the
Kingdom’s commitments
Increased Localization through
alignment between power
demand growth and national
economy growth
4
Summary of actions
• RAB based regulatory
framework balances
the interest of key
stakeholders and
allows for SEC to
generate commercial
returns
• The balancing account
to cover the difference
between required and
actual revenues:
• Balancing account
payment =
• required revenue –
revenue from approved
tariffs
• Conversion of SEC
legacy obligations
(government payables
and soft loans) to an
equity-like Financial
Instrument
Existing government Regulatory framework
liabilities
Balancing account Government fee
• Cancellation of
Government fee
5
Key elements of the Regulatory Framework
 Revenue for SEC determined on a global standard
Regulatory Asset Base methodology starting 01 Jan, 2021.
 Balancing fund to cover difference of SEC’s required revenue
and actual revenue.
 Framework to enable SEC to be financially sustainable and
meet its:
 Operational expenses
 Financial obligations to stakeholders
 Equity returns to all the shareholders
 First regulatory period to enable capability to improve future
regulatory framework
Regulatory Framework
Performance related
compensation based on RAB
Maximum revenue is set through
allowed OpEx, depreciation and
return on regulated asset base
Examples of implementing countries
6
Regulatory framework summary
Step 1:
Company data submissions
Step 2:
ECRA review
Step 3:
Initial determination
Step 4:
Stakeholder consultation
Step 5:
Final determination
Step 6:
Process review
Tariff setting &
Balancing Account
Regulatory review process
Regulated
Asset Base • Delineating regulated asset base components upon which utilities are allowed to earn a return
WACC • Defining a fair cost of capital (WACC) that reflects the company’s cost to finance debt and
equity
+ +
Return on RAB1
(RoIt
)
Allowed
Opex (AOt
)
Depreciation of
RAB (Dept
)
Revenue
Correction (RCt
)
Pass-Through
Costs (PTCt
)
+ + + Bad debt Required
Revenue (RRt
)
=
Notes:
1. Return on RAB = RAB x WACC
2. For the regulatory period 2021-2023
6%2
7
Balancing account overview
• Balancing account based on required revenue formula
 Forward looking model based on fair returns on investments
 Established & transparent formula stimulating economical behaviour and enabling long term planning
 Incentivisation of performance improvement
• Balancing account, that started operating in 2019, will continue in 2020 enabling SEC to meet all its financial obligations including
fuel & dividend payments to all shareholders
• A new mechanism will be implemented to ensure timely payment of public sector electricity consumption
Balancing account = required revenues – actual revenues
These are the actual revenues of
SEC from applied tariffs
These are the notional revenue
requirements to ensure financial
sustainability of SEC
8
Customer centricity focus
• Regulatory framework to set
opex metrics to enable SEC to
provide benchmark service
quality
• ECRA will monitor various
parameters of SEC’s opex, capex,
etc.
• SEC incentivized and
remunerated to spend capex to
maintain service reliability
Enhances reliability Improves service quality Incentivizes Efficiency
9
Summary of Equity Like Financial Instrument
Key Characteristics
• Status: Unsecured and deeply subordinated (junior to all senior payments and obligations; ranks ahead of common equity only).
• Maturity: Perpetual in respect of which there is no fixed redemption date.
• Profit rate: Set at 4.5% for 3 year period ending Dec 31 2023; to be reset with reference to the regulatory WACC less margin of 1.5% in
line with the regulatory period.
• Payments of profit rate: The profit rate is payable if a distribution of dividends to common shareholders is declared by SEC.
• Mandatory redemption event: To be redeemed in proportion of any share buy back by SEC.
SEC’s historical net liabilities owed to
the KSA Government
Accounting treatment expected
SAR 167.92 bn Equity-like
10
Financial impact on SEC
Policy decisions Financial impact
RAB-based regulatory framework Revenue visibility and adequate ROCE
Balancing account Tariff deficit transferred to MOF, Δ Revenues
Government fee cancellation Δ Net Revenues
Public Sector electricity consumption bill Δ Net working capital
Cash settlement of fuel payments to Saudi Aramco ∇ Net working capital
Legacy receivables netted against payables ∇ Assets and liabilities
Conversion of government payables to equity-like financial instrument Δ Equity
Conversion of soft loans to equity-like financial instrument ∇ Debt, Δ Equity
Payment of dividends to other shareholders = Dividends (no impact expected)
11
Next steps
2020: Transition period
1
Settlement of all government receivables and payables
pertaining to 2020, partly offset by Government fees
2
Balancing fund for 2020 to cover returns for SEC on a
Revenue cap basis to meet its financial obligations
2021 onwards: Implement and improve
1
Proposed regulatory framework to come in effect from 1
st
January 2021
3
Framework to enable SEC to be financially sustainable and
meet its:
 Operational expenses
 Financial obligations to stakeholders
2
Balancing account to cover difference of SEC’s required
revenue and actual revenue

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