The Cemex Request-for-Proposal:An Auto-Generation Energy Project

Emerging MarketsFebruary 24, 2003

Salsa by Sunday

Andrea Fernandez

Jason Haight

Michael Philipse

Doug Rodriguez

Cesar Villaseñor

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AGENDA

• INTRODUCTION—THE SETTING

• CEMEX

• MEXICO & THE MEXICAN ENERGY SECTOR

• POWER GENERATION IN EMERGING MARKETS

• THE TEG PROJECT

• FRAMING THE DECISION TO BE MADE

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/TEG

International Tender for the

Development, Engineering, Financing, Construction,

Ownership,Operation and Maintenance of the

TERMOELECTRICA DEL GOLFO PROJECT

BIDDING RULES AND PROCEDURES1998 

Strictly Private and Confidential

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CEMEX

• The company– 1906 founded – 1985 International Expansion– 1996 diversification thru M&A

• Entering markets whose economic cycles operate independently and which offer long-term growth

– 1998• World's third-largest cement company• Mexico 45% (Sales & Assets)

1996 1997 1998Sales (MUSD) 3,577 3,872 4,300

Operating Income (MUSD) 853 915 1,174 Operating Margin 24% 24% 27%

Free Cash Flow (MUSD) 434 389 405 D/E 1.29 1.18 1.04

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PEMEX & CEMEX

• Cemex– Has a contractual, 20-year relationship with Pemex to take high

quantities of petroleum coke• Petcoke: low-value by-product of petroleum refinery

– Guarantees petcoke price and quantity supplied

– Win-Win contract

• Termoelectrica del Golfo (TEG) Synergies– Electricity generator using petcoke as fuel source

– Demand=Supply, 1.75 Millions Tons of petcoke per year

– Cemex guarantees petcoke supply for its cements plants (50%) and for the power plant (50%)

– Cemex buys all energy produced by plant

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ENERGY, ENVIRONMENT & CEMEX

• Cement production is an energy-intensive process

– 50% of its manufacturing cost related to energy

• 60% thermal energy, 40% Electricity

• Rationale for project:

– Guarantees the energy supply for cement facilities

– Reduces financial and operation risk by minimizing the volatility of

energy prices

– Leverages access to petcoke for cement and energy production

– Minimizes environmental impact thru a eco-efficiency program

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Energy Supply and Demand

• 98% of Mexico´s energy is generated by two state-owned companies– Demand: growing at 6%– Public utilities do not have the resources to expand

energy production

Energy Deficit (historical and projected)

-1000

-500

0

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

(PJ)

Note:

1 Petajoule=

10^15 joules

1 barrel of crude = 6,000 mega joules

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Remedies and Power Politics

• 1917 Constitution: All energy for “public use” must be produced by State.

• 1992 Amendment: Changes definition of “public use” to exclude self-generation and independent producers

• 1999 Reform Efforts: failure – Self-generation licenses issued (politics clouds legality)

• Electoral Politics: politics creating uncertainty– PRI: old party line– PAN: limited private sector involvement in energy– PRD: ???

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Uncompetitive Prices are big disad for Cemex

• Average electricity prices for industrial use:– World Average: US$.056 per KWHr

• Uncompetitive relative to NAFTA partners:– Mexico: US$.0475– USA: US$.0427– Canada: US$.0386

• Cement production is energy intensive (50% of variable costs).

• Cement production consumes 3% of Mexico’s energy..

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MEXICO´S ENERGY SECTOR

Natural Gas

Gasoline

Petcoke

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POWER GENERATION IN EMERGING MARKETS

• Structure of independent power projects– Non-recourse (off-balance sheet)– High leverage– Construction, operating, some fuel risk with sponsor– Take-or-Pay feature– Regulation contained in contract

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TEG PROJECT

• Termoeléctrica del Golfo is the legal entity with a self-generation licence.

• DFCOM of 230 MW petroleum coke-fired power plant

• Project will generate electricity for thirteen cement plants

• Surplus power will be sold to the Comisión Federal de Electricidad (“CFE”), the public electricity utility.

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TEG PROJECT

• Funding of $369 million– Debt:

• Coface: $100 million• IDB: $75 million A loan

$102 million B loan

–  Equity:• Cemex: 1%• Successful bidder(s) 99%

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TEG PROJECT

• SBS, S.A.– Extensive track record in power plant construction– Extensive operations experience as an operator

(Africa, Asia, South America)

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Discussion

• Sovereign risks• Operational risks• Financial risks• Environmental risks• Social risks