TEL or Sustainable Investment in an Eastern European Energy Company TBLI CONFERENCE EUROPE 2008 Workshop: TBLI in Emerging and Transition Economies in CEE Amsterdam, November 14, 2008

Romania – a small picture EU member since 01.01.2007 The 7 th largest country in EU: 238,391 km 2 (5.5% of EU); 21,154,226 inhabitants (4.5% of EU); Capital: Bucharest Currency: Leu (RON) National Bank convergence plan: in ERM II in 2012, € in 2014 function of the impact of international financial crisis; Macroeconomic evolution in 2008 (prognosis): economic growth – 9.1%; GDP – 505 bln lei; inflation rate – 5.8%; Macroeconomic issues & risks 2008: a financial system affected by the external turbulences; the credit cost will be increased; Indicator s 2005 2006 2007 GDP (bill lei) 288.18 344.54 404.71 GDP growth (%) 4.1 7.9 6.0 Inflation (%, annual rate) 8.6 4.87 6.57 Current account deficit (% of GDP) 8.7 10.3 13.9 Exchange rate (lei/€) the last trading day 3.6771 3.3817 3.6102 Average exchange rate (lei/€) 3.6234 3.5245 3.3373

EU member since 01.01.2007

The 7 th largest country in EU:

238,391 km 2 (5.5% of EU);

21,154,226 inhabitants (4.5% of EU);

Capital: Bucharest

Currency:

Leu (RON)

National Bank convergence plan: in ERM II in 2012, € in 2014

function of the impact of international financial crisis;

Macroeconomic evolution in 2008 (prognosis):

economic growth – 9.1%;

GDP – 505 bln lei;

inflation rate – 5.8%;

Macroeconomic issues & risks 2008:

a financial system affected by the external turbulences;

the credit cost will be increased;

in the energy flow in the energy market Transelectrica’ roles … Metering Operator OMEPA (TEL branch) Day ahead market ~10% Billateral contract market ~12% POWER EXCHANGE OPCOM (TEL 100% owned subsidiary) Balancing Market & Ancillary Services Market TEL CE Hydro Nuclear Thermo PRODUCERS TRANSELECTRICA SUPPLIERS DISTRIBUTORS Regulatory Authority

… and activities TSO = Transmission and System Operator = Natural Regulated Monopoly Transmission services ~30% System services ~36% Balancing services ~27% Others: ATC, green certificates etc. ~7% Revenue-cap Methodology Use Transmission Grid Infrastructure Regulated Asset Base = RON 2,690 mill WACC = 7.5% for 2008-2012 Functional system services: Revenue-cap Methodology Use Dispatch Infrastructure Regulated Asset Base = RON 66 mill Technological system services: power reserve capacity reserve efficient cogeneration Market admin. – tariff ATC – auction ITC – computation (revenues/expenses) Green certif. – prices All tariffs approved by ANRE -> justified costs + a reasonable level of profitability

TSO = Transmission and System Operator = Natural Regulated Monopoly

Technological system services:

power reserve

capacity reserve

efficient cogeneration

All tariffs approved by ANRE -> justified costs + a reasonable level of profitability

the shareholders … public company 73 , 303 , 142 shares - 5% threshold not reached by shareholders - application of Law no. 10/2001 provisions for ex-owners of properties subject to expropriation under the communist regime (1945-1989) – residual small volumes of secondary shares transferred form Government’s stake to entitled individuals’ accounts, as private transactions within an stock compensation plan ran by the Romanian Government, so free-float rose accordingly (with a 6 months stock lock-up lag). Administration Board – 7 members – the General Director is also the President of the Board

public company

73 , 303 , 142 shares

- 5% threshold not reached by shareholders

- application of Law no. 10/2001 provisions for ex-owners of properties subject to expropriation under the communist regime (1945-1989) – residual small volumes of secondary shares transferred form Government’s stake to entitled individuals’ accounts, as private transactions within an stock compensation plan ran by the Romanian Government, so free-float rose accordingly (with a 6 months stock lock-up lag).

Administration Board

– 7 members

– the General Director is also the President of the Board

… and the share 10 lei/share par value 16.80 lei/share IPO value

10 lei/share par value

16.80 lei/share IPO value

company‘s responsibilities … What should an utility public company be responsible for? Shareholders‘ perspective Financial performance -> to maximize the shareholder value (within what is legally allowed) -> self-interest Value Profitability Long-term strategies and development (growth opportunities) Stakeholders‘ perspective Security of supply (energy) -> responsibility Commitment to a truly sustainable performance -> satisfaction among all stakeholders -> right thing to do Environmental impact Social impact Governance

Shareholders‘ perspective

Financial performance -> to maximize the shareholder value (within what is legally allowed) -> self-interest

Value

Profitability

Long-term strategies and development (growth opportunities)

Stakeholders‘ perspective

Security of supply (energy) -> responsibility

Commitment to a truly sustainable performance -> satisfaction among all stakeholders -> right thing to do

Environmental impact

Social impact

Governance

financial targets … Macroeconomic issues Law: Natural regulated monopoly (justified costs + a reasonable level of profitability ) -> tariff methodologies Ensures the Romanian Power System reliable and stable operation Energy Strategy Dividend policy Shareholders: Return on the capital invested requirements answers Fair input data and computation for the methodologies Cost efficiency factor (↓ cost with 1.5%/yr) No blackouts in the Romanian Power System Support through own investments the renewable targets Rating, Audit etc. Payout ratio -> min. 50% Financial performance

Macroeconomic issues

Law:

Natural regulated monopoly (justified costs + a reasonable level of profitability ) -> tariff methodologies

Ensures the Romanian Power System reliable and stable operation

Energy Strategy

Dividend policy

Shareholders:

Return on the capital invested

Fair input data and computation for the methodologies

Cost efficiency factor (↓ cost with 1.5%/yr)

No blackouts in the Romanian Power System

Support through own investments the renewable targets

Rating, Audit etc.

Payout ratio -> min. 50%

… and non-financial/extra-financial ones People = Human Capital treating right the employees -> a fair day's pay for a fair day's work treating right the community -> give back some of the gains through sponsorships, donation or projects that go towards the common good integrates Environmental, Social and Governance factors Planet = Natural Capital to minimize the ecological impact in all areas Profit making a honest profit instead a profit at any cost made in harmony with the other two principles (People and Planet) Triple Bottom Line In ordinary times? All the time!!

People = Human Capital

treating right the employees -> a fair day's pay for a fair day's work

treating right the community -> give back some of the gains through sponsorships, donation or projects that go towards the common good

Planet = Natural Capital

to minimize the ecological impact in all areas

Profit

making a honest profit instead a profit at any cost

made in harmony with the other two principles (People and Planet)

… environmental ISO 14001/2004 New technologies Decrease the pollution Decrease the negative impact of the equipments to the environment Energy Strategy of Romania -> Sustainable development requirements answers http://www.transelectrica.ro/RaportMediu Investments Waste management Co-existence btw power equipments and environment Investments in order to support the connection of renewable generation to the grid Environmental

ISO 14001/2004

New technologies

Decrease the pollution

Decrease the negative impact of the equipments to the environment

Energy Strategy of Romania -> Sustainable development

http://www.transelectrica.ro/RaportMediu

Investments

Waste management

Co-existence btw power equipments and environment

Investments in order to support the connection of renewable generation to the grid

… social Sponsorship fund allowed – acc. to the Fiscal Code: ≤ 3‰xTurnover ≤ 20%x Profit tax Donations: “ Polytechnica” University schools Prizes for writers, Paul Dimo Prize Floods affected people Retired employees requirements answers Social

Sponsorship fund allowed – acc. to the Fiscal Code:

≤ 3‰xTurnover

≤ 20%x Profit tax

Donations:

“ Polytechnica” University

schools

Prizes for writers, Paul Dimo Prize

Floods affected people

Retired employees

… governance Bucharest Stock Exchange - Governance Code (?) requirements answers Internal regulations, rules, procedures http://www.transelectrica.ro/CodEtica.pdf Governance

Bucharest Stock Exchange - Governance Code (?)

Internal regulations, rules, procedures

http://www.transelectrica.ro/CodEtica.pdf

company‘s responsibilities … What should an utility public company be responsible for? Shareholders‘ perspective better strategy and decisions appropriate risk management stability moderation Stakeholders‘ perspective balancing all interests involvement respect for the company good feeling about the company Joint shareholders‘ & stakeholders’ perspective RESPONSIBILITY (NO NEED FOR A BLACKOUT) KEPT INFORMED TRUST ETHIC MORALE WELL MANAGEMENT PRUDENTIAL BEHAVIOR During a crisis? All the time!!

Shareholders‘ perspective

better strategy and decisions

appropriate risk management

stability

moderation

Stakeholders‘ perspective

balancing all interests

involvement

respect for the company

good feeling about the company

Joint shareholders‘ & stakeholders’ perspective

RESPONSIBILITY (NO NEED FOR A BLACKOUT)

KEPT INFORMED

TRUST

ETHIC

MORALE

WELL MANAGEMENT

PRUDENTIAL BEHAVIOR

investors‘ responsibilities … What should the investors be responsible for? Company’s perspective Decision based on logic and analysis not on greed, emotions and panic Balance between long term (stability)/short term (liquidity) investments Trust Loyalty Better understanding, acceptance and support of the strategy and decisions of the organization Constructive cooperation -> ideas, lobby, know-how transfer During a crisis? All the time!!

Company’s perspective

Decision based on logic and analysis not on greed, emotions and panic

Balance between long term (stability)/short term (liquidity) investments

Trust

Loyalty

Better understanding, acceptance and support of the strategy and decisions of the organization

Constructive cooperation -> ideas, lobby, know-how transfer

Thank you for your attention! Cristina LOGHIN Head of Capital Market & Investor Relations Department Business Development Unit CNTEE TRANSELECTRICA SA [email_address] [email_address] www.transelectrica.ro