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Electrica SA - an attractive investment opportunity

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Title: 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


12
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.


13
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.


14
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.


15
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.
16
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.


17
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


18
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.


20
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.

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