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Salsa by Sunday Andrea Fernandez Jason Haight Michael Philipse Doug Rodriguez Cesar Villaseñor

The Cemex Request-for-Proposal: An Auto-Generation Energy Project Emerging Markets February 24, 2003. Salsa by Sunday Andrea Fernandez Jason Haight Michael Philipse Doug Rodriguez Cesar Villaseñor. AGENDA. INTRODUCTION—THE SETTING CEMEX MEXICO & THE MEXICAN ENERGY SECTOR

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Salsa by Sunday Andrea Fernandez Jason Haight Michael Philipse Doug Rodriguez Cesar Villaseñor

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  1. The Cemex Request-for-Proposal:An Auto-Generation Energy ProjectEmerging MarketsFebruary 24, 2003 Salsa by Sunday Andrea Fernandez Jason Haight Michael Philipse Doug Rodriguez Cesar Villaseñor

  2. AGENDA • INTRODUCTION—THE SETTING • CEMEX • MEXICO & THE MEXICAN ENERGY SECTOR • POWER GENERATION IN EMERGING MARKETS • THE TEG PROJECT • FRAMING THE DECISION TO BE MADE

  3. /TEG International Tender for the Development, Engineering, Financing, Construction, Ownership,Operation and Maintenance of the TERMOELECTRICA DEL GOLFO PROJECT BIDDING RULES AND PROCEDURES 1998  Strictly Private and Confidential

  4. 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)

  5. 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

  6. 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

  7. 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 Note: 1 Petajoule= 10^15 joules 1 barrel of crude = 6,000 mega joules

  8. 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: ???

  9. Uncompetitive Prices are big disadvantage 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. .

  10. MEXICO´S ENERGY SECTOR Natural Gas Gasoline Coal Petcoke

  11. 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

  12. 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 thirteencement plants • Surplus power will be sold to the Comisión Federal de Electricidad (“CFE”), the public electricity utility. • Project site: 20,000-person town with railroad access petcoke shipping

  13. 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%

  14. TEG PROJECT • The Company (LVQR) • French energy company • Extensive track record in power plant construction • Extensive operations experience as an operator (Africa, Asia, South America)

  15. Discussion • Sovereign • Social/Environmental • Market risks • Project related risks

  16. Discussion

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