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Utility Surcharge Securitisation Kenneth R. White, Managing Director

June 2007. Utility Surcharge Securitisation Kenneth R. White, Managing Director. 1. Utility Surcharge Securitisation. 1.1 Background. Rationale for tariff surcharge securitisation Recover utility “stranded costs” through surcharge on consumer tariffs Avoid increase in general taxes

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Utility Surcharge Securitisation Kenneth R. White, Managing Director

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  1. June 2007 Utility Surcharge Securitisation Kenneth R. White, Managing Director

  2. CFB0085EGCFB0085EG 1. Utility Surcharge Securitisation 1.1 Background • Rationale for tariff surcharge securitisation • Recover utility “stranded costs” through surcharge on consumer tariffs • Avoid increase in general taxes • Accommodate government budgetary constraints • “User pay” • Monetise future surcharge collections using securitisation techniques • Immediate cash to the utility • Minimise cost to consumer • Spread cost over extended term • Maximise debt ratings to minimise cost of debt • Embed legal protections in enabling legislation • Raise funds on non-recourse basis to utility or government 1

  3. CFB0085EGCFB0085EG 1. Utility Surcharge Securitisation 1.2 Tariff surcharge securitisation structure 1 • Sale of surcharge collections to SPV that issues debt • Legislation and/or regulations passed to create tariff surcharge • Utility sells right to receive surcharge collections to SPV • SPV issues debt, pays net proceeds to utility • Consumers pay utility charges (including surcharge) to utility • Utility pays surcharge collections to SPV • SPV uses surcharge collections to pay debt service Debtservice Normal Tariff (including tariff surcharge) Right to receivesurcharge collections Investors Consumers Utility Issuer SPV Contract foressential service True sale Non recourse debt X No Recourse

  4. CFB0085EGCFB0085EG 1. Utility Surcharge Securitisation 1.3 Key provisions in enabling legislation 1 • Legal protections embedded in legislative framework • Surcharge payable by all customers – not bypassable • Clear mechanisms for calculation, billing and collection • Fixed component of tariff structure • Not subject to future adjustment • Collections protected from bankruptcy in billing chain • Collection priority – no “cap” • “True-up” mechanism to compensate for under- or over-collection Universal Transparent Permanent Non-reviseable Legally protected Not capped Self-adjusting Structural goal: “armour-plated” cash flow pipeline from consumer to SPV Consumers SPV SPV Distributors Suppliers Distributors Suppliers Grid Operator Utility

  5. CFB0085EGCFB0085EG 1. Utility Surcharge Securitisation 1.4 Rating debt securities backed by tariff surcharge 1 • High credit quality cash flow • Millions of consumers paying relatively small amounts over long period • Essential service – low delinquencies and defaults • Transparent collection mechanism • No credit or performance risk on system participants • Self-adjusting tariff mechanism • Regulatory “umbrella” • Subordinated tranche to absorb timing risks Draw parallel with consumer credit: ratings potentially as high as AAA/Aaa

  6. CFB0085EGCFB0085EG 1. Utility Surcharge Securitisation 1.5 Advantages to utilities and governments 1 • Advantages to Utilities • Monetise stranded costs • Non-recourse finance • Demonstrate value to equity markets • Low cost of funds • Long tenor • Advantages to Government • No increase in taxes • Minimal increase in tariffs • Smooth out cost profile • Shift cost to consumers • Permanent solution to structural “problem” 2

  7. CFB0085EGCFB0085EG 1. Utility Surcharge Securitisation 1.6 Transaction precedents 1 • United States – well established asset class • $ billions issued over 20 year period • Well understood asset class • AAA/Aaa ratings • Strong investor franchise • Europe – developing asset class with wide potential • Spain – CTC’s & tariff deficits • Portugal – CMEC & tariff deficits • Italy – CIP-6 power • Poland • CEE 2

  8. CFB0085EGCFB0085EG 2. Rothschild’s Debt Advisory Group 2.1 Rothschild provides authoritative, independent debt advice • Largest independent debt capital markets advisory practice in Europe • Over 50 dedicated debt professionals based in London, Paris, Frankfurt and Milan • One of only a small number of truly independent debt advisory practices – no conflicts of interest • Advised clients ranging across the credit spectrum on transactions valued at over €160bn in 2006 alone • Strong securitisation advisory franchise • Focus on complex transactions where value add is high • First time issuers • New asset classes • New jurisdictions • Cross border deals • Full range of services including structuring, ratings, derivatives, execution Restructuring Adviser of the Year Restructuring Deal of the Year: KarstadtQuelle Securitisation and Structured Finance Deal of the Year 2006: £260m Arsenal securitisation Corporate Deal of the Year 2006:£260m Arsenal securitisation

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