Electrica SA - an attractive investment opportunity

1

• Electrica SA - an attractive investment
  opportunity

2
Romania an attractive investment opportunity
The second largest market (after Poland) in
Central and East Europe (22,3 mil. inhabitants
and a surface area of 238.391 km2 ) Romania is
located at the junction of Central Europe and
the Balkans and is an important transit point for
Caspian resources toward the European
electricity market.  
Romanias regional positioning, its political
stability and economic performance, its NATO
membership since 2002 as well as its EU
membership beginning with 1st of January 2007,
make Romania an important investing destination.

3
Romania an attractive investment opportunity
Economic growth dynamics After 2000, the
economic growth along with the accelerated pace
of institutional harmonization to EU standards
are reflected by the obvious improvement of our
country credit rating investment degree since
September 2005, according with StandardPoors
and Fitch rating.
Starting with September 20, 2005 Source
SP, Moodys
4
Romania an attractive investment opportunity
Economic growth dynamics
a actual , b estimated, c denominated
Source Economist Intelligence Unit, Country
Report, September 2005
5
Romania - an attractive investment opportunity
Attract foreign investments
One of the main targets of Romanias Government
is to turn Romania into a main destination for
foreign investments in the region. Since 1st
of January 2007, Romania is a Member of European
Union
6
Romania an attractive investment opportunity
Romanias energy sector privatization background
Privatization purpose to render efficient,
profitable, competitive companies, well
positioned on the regional liberalized
electricity market. General background
Government initiative to liberalize, develop
and consolidate the Romanian private sector in
accordance with EU standards.
Privatization process completion a key
political priority for Romanias Government and
Parliament. Energy sector the most important
economic sector to be privatized. Pursuant to
Government strategy, the sectors privatization
will be achieved through strategic sales and
listing on international and domestic stock
exchanges.
7
Romanias electricity market

• Energy sector
• a strategic infrastructure for the entire
  development of the country
• a public utility with an important social impact
  

Termoelectrica
Termoelectrica
ELCEN Bucuresti
Elcen
.
Buc
ure?ti
Elcen
.
Buc
ure?ti

• HIDROELECTRICA
• Hydro

• NUCLEARELECTRICA
• Nuclear

Independent Producers
Hidroelectrica
Nuclearelectrica
Produc
?
tori
ELCEN Turceni
Elcen
.
Turceni
Elcen
.
Turceni
Generation
Generation
Energie hidro
Energie nuclear
?


independen?i
ELCEN Rovinari
Elcen
.
Rovinari
Elcen
.
Rovinari
ELCEN Deva
Elcen
.
Deva
Elcen
.
Deva
TERMO

Energie termica

Energie termica

• Transelectrica SA
• Dispatcher
• System Service Operator

Transelectrica
SA
Transmission
Transmissionre

Dispecer

Operator servicii de sistem
Electrica SA with 8 Subsidiaries (all legal
bodies)
Electrica
SA

cu cele 8 filiale
Distribution and Supply
Distributie
si
Muntenia
Transilv
.
Transilv
.
Muntenia
Oltenia

Dobrogea

Moldova
Banat

N
N
S
S
furnizare
Furnizori
priva
?i
Private suppliers
Major shareholder Enel, Italy
Major shareholder E.ON, Germany
Major shareholder CEZ, Czech Republic
In different stages of privatization
8
Romanias electricity market
Successful implementation of the Romanian
electricity market model         Market
division the deregulation process started in
1999 and currently the energy system is organized
in electricity generation (split into thermal,
hydro and nuclear), transmission, distribution
and supply.        Grid access third
party access to transmission networks is
regulated and nondiscriminatory         
Bilateral contracts the electricity market
operates based on bilateral contracts for the
eligible customers and on a regulated basis for
the captive customers, with a spot and balancing
market.
Market opening degree
Market opening
100
83
55
40
33
2002
2003
2004
2005
2007

9
Romanias electricity market
Fully liberalized for the industrial customers
since 1st July 2005. Around 2007, residential
customers are also expected to get access to the
free electricity market. Starting with 1st of
July 2007, the market will be fully liberalized
and will operate according with the last
resort supplier principle, as requested by EU
Directives on energy market liberalization. The
Romanian electricity distribution and supply
companies unbundled their distribution and
supply activity only at accounting level. By
2007 discos are expected to achieve legal
unbundling of distribution and supply.

10
Regulatory environment
Electricity distribution tariffs
Distribution tariffs are regulated based on the
cap price basket mechanism (CPI X) starting
with 2005, for 5-year control periods, except
for the first control period that will cover only
3 years(2005 2007). A regulated return on
capital (RC) above the economically justifiable
costs for the distribution activity is calculated
as the regulated rate of return (RRR) on the
regulated asset base (RAB) as shown below  RC
RRRRAB  RRR is calculated in real terms,
before taxes, based on the weighted average
capital cost (WACC).
RRR for private capital distribution operators
is regulated for 12 in real terms for each year
of the first control period (2005-2007) and for
10 in real terms for each year of the second
control period (2008-2012). During the first
control period, the year -to-year increase in
distribution tariffs shall not exceed 18 in
real terms. During the second control period the
year-to-year increase in distribution tariffs
shall not exceed 12 in real terms.
11
ELECTRICA SA structure
8 Subsidiaries for Electricity Distribution and
Supply, with legal personality . In 4 of them
Electrica is the minority shareholder, the rest
are in different stages of privatization . Core
business Electricity distribution and supply

• A Subsidiary for Maintenance and Energy Services
  with 8 Branches
• Support activities
• electric power equipment maintenance, repairs,
  revisions
• workshop lab repairs, verifications and tests
  
• designing- consulting
• motor vehicle transport, repairs and revisions
• commercial activity
• related activities

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PRIVATIZATION OF ELECTRICA SA SUBSIDIARY
COMPANIES

• Goal to attract the capital required for
  companies consolidation, create stronger, more
  competitive companies and obtain competitive
  electricity prices, to avoid increases above
  the affordability limit.
• Method preferred capital injection combined with
  equity sale nevertheless there is flexibility
  to adapt to investor used practices.
• Legal framework
• Law No. 137/2002 on some measures for
  privatization acceleration.
• Government Emergency Ordinance No. 88/1997 on
  company privatization.
• Energy Road Map, allowing for business
  projections on mid and long term
• Provisions in Law no. 318/2003 on electricity
  - the regime of ownership and concession.

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Electrica SA Privatization Targets

• Obtain investments for the company modernization
  in compliance with the Road Map for Romanias
  Energy Sector, July 2003, as approved by
  Government Decree 890/2003 and the EU
  regulations
• Support liberalization and promote competition in
  the energy sector in Romania, according with EU
  existing and future requirements.
• Sustain the development of the Romanian energy
  sector as part of Romanias Government Program
  for economy and infrastructure modernization,
  efficiency and profitability.
• Sustain the development and implementation of the
  energy sector regulatory structure as well as
  the practice to achieve economically attractive
  investments in the Romanian economy
  infrastructure and promote the interests of
  electricity consumers.

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Electrica SA Privatization Targets

• Capital investments to modernize and maintain the
  infrastructure and the scope of activity of the
  Company, proportional to the related obligations
  and the profitability allowed by the established
  regulatory regime
• Provision and improvement of distribution and
  supply safety
• Satisfying and protecting customers interests,
  including the service quality and the tariff
  level, proportional to the promotion of
  investments in company modernization and
• Promotion of vocational development of employees
  in the energy sector and improvement of
  recruiting and career opportunities.

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Continuing the privatization process

• Electrica Muntenia Sud
• the privatization of Electrica Muntenia Sud,
  which covers the capital Bucharest and its
  surroundings is about to reach its final stages.
  The Governmental Decision that will approve the
  Privatization Contract should be published in the
  Official Gazette in the near future and,
  subsequently, the privatization transaction will
  be closed during year 2007. The Italian giant
  ENEL SpA won the bid for EMS, with an offer of
  820 mil. euros which was declared as the winning
  one by the Privatization Commission in the mid of
  last year.

Electrica Transilvania Nord Electrica
Transilvania Sud Electrica Muntenia Nord The
remaining three DISCOs EMN, ETS and ETN will
have, first of all, to comply with the provisions
of the newly issued Energy Law (no.13/2007)
regarding the unbundling of distribution and
supply activities in the discos. This unbundling
process should be finalised not later than the
1st of July 2007, as stipulated in the Law and
also in the EC Directive nr. 2003/54. These
companies (or those which will result from the
unbundling) will be eventually privatised, the
strategic pattern for this process is to be
decided by the involved public authority AVAS,
which is the shareholder of Electrica starting
with January 2007 in accordance with the
strategic views of the Romanian Government.
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Continuing the privatization process 2006
2007 period

• PRIVATIZATION OF ELECTRICA SERV SA
• As regarding the services subsidiary Electrica
  Serv the privatisation of this company is also
  envisaged by AVAS (the strategy will be defined
  in the next period of time). A reorganization of
  the company could be considered, prior to
  privatisation, and Electrica SA is currently
  performing the selection process for advisory
  services for the privatisation of Electrica Serv.
  
• The company has 8 branches for maintenance and
  energy services with a territorial net of 42
  agencies in all counties.
• The main goal of this privatization is to
  attract capital investments to modernize and
  maintain the infrastructure and the scope of
  activity of Electrica Serv in order to increase
  the economic efficiency of a company that
  operates in a competitive market and relies on
  high performance equipment and highly qualified
  specialists in the fields of maintenance
  services for electricity distribution and
  supply.

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Romania an attractive investment opportunity
New business development

• Investments in energy projects with companies
  interested in electricity generation. Such
  projects may include
• Hydropower plants
• Thermal power groups
• Nuclear power plant
• Renewable electricity generation projects in
  partnership with municipalities and business
  investors in the respective areas
• Joint ventures (wind, solar, photovoltaic,
  bio-mass)
• Recyclable materials

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Romania an attractive investment opportunity
New business development

• In the area of wind energy
• Measurements in the locations recommended by
  Electrica
• Feasibility studies for investments
• Co-participation to project finance as
  public-private partnership, joint venture
  companies or other association forms
• For bio-mass projects
• Joint ventures with experienced companies for the
  use of forest wastes, grains, industrial cultures
  (rape), operators with know-how in this area

19
Conclusions

• Romanias electricity market is the biggest
  emerging market in South-East Europe it is a
  rapidly developing market and its mid term
  economic forecast - sustained GDP increase
  makes it very attractive
• Its stable geopolitical environment, its NATO
  membership and the forthcoming EU membership
  (expected in 2007) as well as the modern and
  stable business and regulatory environment offer
  confidence to potential investors
• The privatization of Electrica SA subsidiaries,
  in the general context presented above,
  represents a good business opportunity for
  strategic investors who need a predictable
  business environment in order to invest in this
  field. This kind of investments is characterized
  by long term commitments and Romanias
  Government (Electrica) must prove that its is a
  high caliber, credible partner.

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Conclusions

• It is important to also consider customers
  interest in the privatization process customers
  expect post-privatization services of better
  quality at affordable prices. In this respect,
  ANRE has the difficult task to ensure an optimum
  price/quality ratio.
• Electricas offer the privatization of its
  last 4 subsidiaries for electricity distribution
  and supply must be analyzed taking into
  account that it is probably the most attractive
  offer in South-East Europe where in the near
  future there will be no comparable offers in
  terms of commercial interest. By buying these
  companies, all big investors will try to get a
  consolidated position on the market.
• If these assumptions are true, the privatization
  of Electrica subsidiaries will be a success in
  terms of the price obtained and from the
  perspective of all stakeholders Romanias
  Government, investors, customers.