Electrica SA - an attractive Electrica SA - an attractive investment opportunityinvestment opportunity

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.

 

Romania’s 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.

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 Standard&Poor’s and Fitch rating.

*Starting with September 20, 2005

Source: S&P, Moody’s

Rating agencies 2002 2003 2004 2005 2006

Standard&Poor’s & Fitch B+ BB BB- BBB- A-

Moody’s B1 Ba3 Ba3 Ba1 Baa3

Romania – an attractive investment opportunity

Economic growth dynamics:Economic indicators 2002 a 2003 a 2004 a 2005 b

Population (mil.) 21.8 21,7 21,7 21,6

GDP increase (% , compared to previous year)

5.0 5.2 8.3 5.0

GDP (bill. USD at market prices) 45.8 57.0 70.3 93.6

GDP (bill. USD at PPP) 150 160 170 190

Inflation (%, EOY) 17.9 14.1 9.3 8.0

Unemployment rate (%, EOY) 8.1 7.2 6.2 6.5

Foreign Direct Investment (bill. USD)

1.1 2.2 5.1 4.5

Exchange rate (RON/ USD) at EOYc 3.35 3.26 2.91 2.78

Exchange rate (RON/ EUR) at EOYc 3.49 4.11 3.97 3.53

a – actual , b – estimated, c – denominated

Source: Economist Intelligence Unit, Country Report, September 2005

Romania - an attractive investment opportunity

Attract foreign investments

One of the main targets of Romania’s 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

Romania – an attractive investment opportunity

Romania’s energy sector privatization background

Privatizată

Privatizată

Privatizată

Privatizată

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 Romania’s Government and Parliament.

Energy sector = the most important economic sector to be privatized.

Pursuant to Government strategy, the sector’s privatization will be achieved through strategic sales and listing on international and domestic stock exchanges.

Generation

Transmissionre

Distributie si

furnizareOltenia* Dobrogea* Moldova*Muntenia

N Muntenia

STransilv.

NTransilv.

S Banat*

Electrica SA – cu cele 8 filiale

Furnizori priva ?i

Transelectrica SA•Dispecer

•Operator servicii de sistem

TermoelectricaElcen . Bucure?ti

Elcen . TurceniElcen . Rovinari

Elcen . Deva•Energie termica

TermoelectricaElcen . Bucure?ti

Elcen . TurceniElcen . Rovinari

Elcen . Deva•Energie termica

Hidroelectrica•Energie hidro

Nuclearelectrica•Energie nuclear?

Produc?tori independen?iGeneration

Transmission

Distribution and Supply

Transelectrica SA•Dispatcher

• System Service Operator

Electrica SA with 8 Subsidiaries (all legal bodies)

Private suppliers

HIDROELECTRICA

•Hydro

NUCLEARELECTRICA

•Nuclear

Independent

Producers

ELCEN BucurestiELCEN Turceni

ELCEN RovinariELCEN Deva

TERMO

Energy sector

a strategic infrastructure for the entire development of the country

a public utility with an important social impact

Romania’s electricity market

Major shareholder: CEZ, Czech Republic

Major shareholder: Enel, Italy

Major shareholder: E.ON, Germany

In different stages of privatization

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:

Market opening degree

33%40%

55%

83%

100%

2002 2003 2004 2005 2007

Romania’s 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.

Romania’s electricity market

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 = RRR*RAB

 RRR is calculated in real terms, before taxes, based on the weighted average capital cost (WACC).

Electricity distribution tariffs Regulatory environment

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.

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

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.

Electrica SA Privatization Targets

•Obtain investments for the company modernization in compliance with the Road Map for Romania’s 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 Romania’s 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.

•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.

Electrica SA Privatization Targets

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.

Continuing the privatization process

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.

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.

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

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

Romania – an attractive investment opportunity

New business development

Conclusions Romania’s 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 Romania’s Government (Electrica) must prove that its is a high caliber, credible partner.

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.

Electrica’s 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: Romania’s Government, investors, customers.