PRIVATISATION OF PUBLIC UTILITIES

Bucharest, 09 APRIL 2002

CONTENTS

1. EXECUTIVE SUMMARY

2. CSFB UTILITIES EXPERTISE

3. PRIVATISATION OBJECTIVES

4. KEY ISSUES

5. APPROACH AND METHODOLOGY

6. CASE STUDIES

EXECUTIVE SUMMARY

EXECUTIVE SUMMARY

I am pleased to have this opportunity to present on the privatisation alternatives for the Romanian utilities

CSFB has substantial experience in advising Governments on the privatisation of their utilities

Former and present clients include the Governments of Argentina, Australia, Brazil, Colombia, Philippines, Poland, Slovakia, Ukraine and United Kingdom

CSFB has been ranked #1 utilities privatisation advisor since 1992

Numerous alternatives are available to the Government in respect of the privatisation of its utilities

The chosen approach needs to meet the Government overall objectives

Each alternative should be evaluated within its timing and value implications

Depending on the readiness of the sector, a two phase approach may be most appropriate

Phase 1 – review, restructure and determine overall privatisation plan within the context of the Government objectives

Phase 2 – implement chosen privatisation strategy

CSFB UTILITIES EXPERTISE

CSFB UTILITY PRIVATISATION EXPERIENCE

CSFB is ranked #1 in utility privatisations worldwide

Source: Thomson Financial Securities Data Co., 18 June 2001. Since 1992

US$ 1,463,000,000

Advised Government ofAbu Dhabi on the privatisation

of Taweelah A1

2000

US$ 159,797,333

Advised Governmentof Ukraine on the privatisation

of 6 distribution companies

2001

US$ 313,000,000

Advised Governmentof Portugal and EDP

on selling minority stake

1998

US$ 1,900,000,000

Advised the city of Berlinon privatisation of50.8% of Bewag

1997

US$ 11,000,000,000

Advised Government ofSpain on sale of 68%

stake in Endesa

1997

£ 1,500,000,000

Advised the UKGovernment on privatisation

of British Energy

1996

US$ 17,000,000,000

Advised Governmentof Australia on privatisation of

Victoria electricity andgas industries

1995 – 1997

US$ 6,000,000,000

Advised Governmentof Argentina of 16 energy

and utility assets privatisation

1991 – 1997

Advised the Government of Slovakia on the sale of2.7 billion stake in SPP,Slovak gas monopoly

Government of Slovakia

US$ 2,200,000,000

2002

CSFB UTILITIES EXPERTISE

Over the past 5 years, CSFB has advised utilities or governments on all major transactions in the European utilities sector

UNITED KINGDOM Advised Innogy on its pending asset swap transaction with

Northern Electric plc ($2.1 bn) Advised Innogy on the acquisition of Yorkshire Power for a

cash consideration of £508.6m Advised Innogy on the acquisition of Yorkshire Power for a

total consideration of £1.9bn Advised Innogy on demerger from National Power ($2.8bn) Privatisation of British Energy ($2.3bn) Advised Cal Energy on acquisition of Northern Electric

($1.6bn) Global Co-ordinator in IPOs of PowerGen, National Power

and 12 RECs Advised Southern Electric on $7.6bn merger with Scottish

Hydro Advising UK Gov’t on privatisation of BNFL

FRANCE Advised Electricité de France on the acquisition of Dalkia

(Vivendi SA) ($1.4bn) Advised Electricité de France on acquisition of a stake in

ESTAG ($0.5bn) Lead managed Electricité de France notes due 2001 ($200m)

SPAIN Advisor to Endesa on acquisition of Iberdrola Advised Spanish Government on sale of 68% stake in

Endesa ($4bn) Advised on $2.7bn acquisition of 8 Spanish regional utilities

by Endesa

PORTUGAL Advised Government of Portugal and EdP on the strategic

partnership between EdP and Iberdrola Lead manager of loan facility for Electricidade de Portugal SA

($227m)

SCANDINAVIA Advised Incentive AB on disposal of AB Skandinaviska

Elverk ($1.1bn) Participated in loan facility for Vattenfall Treasury AB

($600m)

AUSTRIA Advised EdF on acquisition of strategic minority stake in

ESTAG SWITZERLAND Advised Swiss Railways on divestiture of various

electricity generation and grid assets Advised CS Holding on divestiture of 44.9% of Watt AG

($1.7bn)

ITALY Advising ENEL on the divesture of 15,000MW of

generation assets Advised City of Milan on IPO of 49% stake in AEM

Milano ($0.8bn) Advised Comune di Torino on privatisation of a 48%

stake in AEM Trino (Not disclosed)

CENTRAL EUROPE Advised the Slovak Government on the

privitatisation of SPP, its gas monopoly Advising the Government of Ukraine on

privatisation of further 12 distribution companies Advised Ukrainian government on privatisation of 6

distribution companies Arranged loan facility for Slovenske Elektra

($111m) Lead managed €200m debt offering for CEZ

GERMANY Advised E.ON on concurrent sale of VEBA Öl and

acquisition of Ruhrgas stake from BP ($7.7bn) Advised VEW on merger with RWE ($4bn) Advised Fortum on acquisition of EW Wesertal

($380m) Only non-German bank on IPO of MVV Advised City of Berlin on privatisation of Bewag

($1.9bn) to E. ON and Mirant Advising Mirant on acquisition of further Bewag

shares from E. ON and a stake in VEAG/Lambag Advised on merger of Badenwerk and EVS to form

EnBW ($6.5bn) Advised VEW/MEAG on acquisition of Stadrwerke

Leipzig ($650m)

GREECE Arranged loan facility for Public Power Corp

($220m) Acted as bookrunner in PPC’s issuance of

ITL340bn due 2004 and €500m 41/2% notes due 2009

PRIVATISATION OBJECTIVES

PRIVATISATION OBJECTIVES

The motivation for the restructuring and privatisation of the energy industry can be driven by numerous objectives

Reduce the cost of energy supplies to consumers, whilst improving service

Increase efficiency, improving managerial performance and accountability

Initiate market forces to the energy markets

Compliance with European Directives

Encourage and facilitate technology transfer

Raise revenue for the Treasury

Raise investment capital for the industry or company undergoing transformation

Re-position government’s role in the industry to essential regulatory oversight

Encourage foreign investment

Develop domestic equity capital markets

PRIVATISATION OBJECTIVES (cont’d)

OBJECTIVE MODEL ADVANTAGES

Maximise proceeds

Sell controlling stake to strategic investor

Australia improved their fiscal deficit and obtained lower electricity and gas rates

Acquire new technology and increase efficiency

Sell to a strategic investor

Argentina significantly reduced the cost of electricity and gas

Fast track process

Sell controlling stake to strategic investor

Ukraine attracted top-quality companies to operate their distribution companies in less than 10 months, during the period of relative political uncertainty in the country

PRIVATISATION OBJECTIVES (cont’d)

OBJECTIVE MODEL ADVANTAGES

Gain political support/improve image

Sell controlling stake through public offering

The UK privatised its companies through IPOs. Strategic investors later acquired most of the privatised companies at higher premiums

Develop capital markets

Domestic public offering

In Latin America, privatisation offerings have been unsuccessful in developing capital markets because of culture of low saving large flow-backs

KEY ISSUES

KEY ISSUES

Several key issues would need to be addressed to ensure that the Government privatisation objectives are met

Industry structure model

Clear separation between generation /purchasing, transmission, distribution and supply / Creation of vertically integrated utilities

Level of regulation vs. competition

Regulatory Framework

Status of Industry Regulator

Rate of Return / Performance based regulation

Readiness of the industry for privatisation

Accounting / Technical / Environmental / Legal

European Energy Directives

Compliance required prior to accession to EU

INDUSTRY STRUCTURE MODELS (ELECTRICITY)

Customers choose their retailers under full competition

Distribution companies buy direct from producers (or through aggregators)

Single buyer chooses from Vertically-integrated

The choice of initial model should not prevent the Government from achieving its ultimate goals, and to the extent desired, complying with EU Electricity Directives

There are four general industry structure models differentiated by degree of competition. The choice of the initial structure will greatly depend on timing and value considerations, overall industry readiness as well as resources available

1. MONOPOLY 2. SINGLE BUYER 3. WHOLESALECOMPETITION

4. RETAILCOMPETITION

Generator(s)

Purchaser/Wholesaler

Distribution/Retail

Consumer

G

C

D&R

GG

G

C

D&R

A

GG

G

C

R

A

D

GG

C

D&R

SB

INCREASING COMPETITION AND COMPLEXITY – BUT EXPECTED LOWER PRICES

REGULATORY FRAMEWORK

Simplicity: allows to set tariffs and recover the costs plus a reasonable rate of return

Adjusts prices instantaneously to ensure that a regulated company always earns a fair return on capital

Advantages Inability to effectively promote productive

efficiency, which can lead to dynamic inefficiencies over time

Prices do not necessarily reflect marginal costs, which leads to allocative inefficiencies

Delays in resetting prices Risk of over-investment

Disadvantages

The company has the flexibility to set individual tariffs

Companies have an incentive to achieve productive efficiency

Dynamic efficiency: companies have flexibility to respond to new developments

Advantages Possibility of price distortion in an allocatively

inefficient manner It involves a simple comparison of average prices

between years, which could lead to difficulties if the mix of units changes

Complexity: need to use quantity forecasts and potentially correction factors

Disadvantages

Rate of Return Approach

Performance Based Regulation (also known as RPI - X)

PRIVATISATION STRATEGY

In deriving its privatisation strategy the Government would need to take into consideration numerous factors, some of which may be conflicting in nature

Government objectives— Protection of end-customers

— Timing

— Valuation

— Employment considerations

Results of Strategic Review— Existence of Legal, Technical, Environmental and Accounting Issues

Availability of credible Regulatory framework

Determination of Industry Structure

Market Conditions— Strategic Sale vs. Initial Public Offering

APPROACH AND METHODOLOGY

APPROACH AND METHODOLOGY TO ENSURE A SUCCESSFUL PROCESS

CSFB recommends that the Government adopts a global approach to the privatisation of its utilities by addressing as many issues as practicable prior to privatisation, to

maximise the value of assets sold

We believe that a two phase approach should be particularly suitable for Romania

During Phase 1, CSFB could assist the Government with the following tasks:

Assess overall readiness of the industry

Assist with hiring other advisors, as necessary

Address identified issues

Assist with industry restructuring

Perform valuation analysis

Consider sales strategy and tactics

Propose final privatisation plan

Phase 1: Strategic Review and Preparation of Preferred Privatisation Strategy

Following the completion of Phase 1, CSFB would anticipate immediately proceeding to Phase 2. Our approach to Phase 2 will enable us to accomplish the following tasks

Preparation of Documents, including the Information Memorandum

Marketing and Road Show

Prequalification of Bidders

Data Room Preparation / Due Diligence

Proposal Evaluation

Assistance in negotiation with the Selected Bidders

Phase 2: Implementation of the Chosen Strategy

PRIVATISATION ALTERNATIVES

Sell majority stake equity to strategic investor

MODEL

Sell minority control to strategic investor and float the rest, Government might retain stake

Maximise proceeds

Relatively fast Gain new

technology and operational best practices

ADVANTAGES

Relatively easy to implement

Develop capital markets

Gain new technology and operational best practices

Doesn’t stimulate domestic capital markets

No opportunity for general population to participate

DISADVANTAGES

Government doesn’t receive control premium

Less interest without control

The Netherlands Australia Columbia El Salvador Panama Czech Republic Ukraine

EXPERIENCES

Peru

No two countries followed identical privatisation models, and Romania would need to develop a model that best suits its needs

PRIVATISATION ALTERNATIVES (cont’d)

Sell control to strategic investor and float the remainder, Government might retain stake

MODEL

Float 30%-100% of the equity(in tranches or in full)

Gain control premium

Gain new technology

Develop capital markets

ADVANTAGES

Opportunity to broaden share ownership

Easier political sell Develop domestic

capital markets

Argentina Panama Chile Poland

EXPERIENCES

UK Spain Italy Chile YPF

Government doesn’t receive full control premium

DISADVANTAGES

Does not maximise proceeds

May be difficult in current markets

Requires high degree of asset readiness

No two countries followed identical privatisation models, and Romania would need to develop a model that best suits its needs

CASE STUDIES

CASE STUDY – UKRAINIAN DISCO PRIVATISATION

CSFB Role

CSFB assisted the Government in all aspects of the privatisation process— Selection and appointment of other advisors — Limited restructuring— Future structure of the industry — Regulatory framework— Design and implementation of marketing strategy

Project Environment

Government objectives — Raise revenue for the treasury — Introduce market forces into the industry— Quick implementation — Keep electricity prices as as low as possible— Fair and transparent process

CASE STUDY – UKRAINIAN DISCO PRIVATISATION (cont’d) State of the companies

— No audited accounts — No reliable technical / environmental information — Substantial debt to state owned Energy market — Inability to cut-off non payers

Industry Structure — Viable short term industry structure in place / long term objectives identified— No regulatory framework

Political Situation — Government of PM Yushenco dismissed few days before auction

Tender process attracted six audible bidders from U.S., Spain, France, Japan and Slovakia — Sales proceeds in excess of $150 million — First successful privatisation with participation of foreign buyers

CSFB was re-mandated to privatise another 12 discos

CASE STUDY: PRIVATISATION OF SPP

CSFB Role

CSFB assisted the Government in all aspects of the privatisation process— Selection and appointment of other advisors

— Limited restructuring

— Future structure of the industry

— Regulatory framework

— Design and implementation of marketing strategy

Project Environment

Government objectives— Maximise revenue within the context of protecting Slovak consumers

— Compliance with EU Gas Directive

— Quick implementation

— Fair and transparent process

CASE STUDY: PRIVATISATION OF SPP (cont’d)

Industry Structure— Long term structure dictated by EU Gas Directive

— No infrastructure to implement EU Gas Directive (lack of regulatory framework)

— Long-term off take contracts restricting medium term liberalisation

SPP readiness— Audited accounts (but not unbundled along areas of activity)

— Technical / Environmental audits available

— Substantial cross subsidies between international and domestic businesses

Other factors— Difficult privatisation environment (Post Enron and Sep 11)

— Upcoming elections

— Competition from Czech Republic (Transgas privatisation)

Successful privatisation – $2.7 billion for 49%— Company sold to a consortium of Ruhrgas / GdF / Gazprom

— 13% of Slovak GDP