THE ELECTRICITY SECTOR

IN THE

DOMINICAN REPUBLIC

CWashington DC,June 21st, 2010

1

Current Situation

The electricity sector in the DR has shown little structuralimprovements, if any, in the last 12 months despite theefforts of the current administrationefforts of the current administration.

Clearly, the drivers for the historical “vicious cycle” remainunchangedunchanged.

Although the underlying causes for the “vicious cycle” arewell known we have the perception that we continuewell known, we have the perception that we continueshooting in the wrong direction. Myths continue to fog theright path.

After describing briefly these negative drivers our intention isto share with you our view on how to transform them, andcreate once again a “virtuous cycle” for the sector.c ea e o ce aga a uous cyc e o e sec o

2

Virtuous Cycle (1999-2001)

Causes Privatization process in

Effects Significant direct p

1999.

Regulatory framework

ginvestment in generation, distribution, and transmission. Regulatory framework

Electricity Law Specialized Regulatory

Bodies (OC, SIE, CNE)

transmission. Specially over 1,500MW of

new efficient generation capacity.

Long-term contracts Additionally diversification of the energy supply

Market oriented political message

gy pp ymatrix (fuel & tech). LNG, Coal, CC GT

3

New Investments

Technology Fuel MW PlayerCCGT & LNG Terminal Natural gas 300 AESCCGT & LNG Terminal Natural gas 300 AESOC GT (DPP) Natural gas 236 AESSteam Turbine Coal (Conversion) 235 El Paso, AES Di l E i HFO 150 B i E CDCDiesel Engine HFO 150 Basic Energy, CDCSteam Turbine Coal 45 Basic Energy, CDCSteam Turbine HFO (Repowering) 200 Basic Energy, CDCCCGT LFO 300 CDC, CogentrixDiesel HFO 100 Caterpillar, Local GroupDiesel HFO 60 Local GoupDiesel HFO 60 Local Goup

Total 1,626

Current peak demand ~1,800MW

4

Energy Matrix

100%

FuelsFuel Oil

40% 43% 47%39%

62% 64% 72%60%

80%

CarbónCoal

24%

10%

17%

60%3%

7%3%

14%

40%

Gas Natural

Bagazo deC ñ

Natural Gas

Bagasse

33%15%

37% 35%16%

10%21%60%

28%

0%

20%

Caña

GeonergíaGeothermal

Pan

amá

Salv

ador

epúb

lica

min

ican

a

uate

mal

a

ondu

ras

cara

gua

erto

Ric

o HidroenergíaHydro

P S Re

Dom Gu Ho

Nic

Pue

5

Vicious Cycle (2002-Today)

Causes No tariff adjustments. Non-

t h i l t iff

Effects Significant service interruption

ff ti l ti d ttechnical tariff. Non-focalized subsidies

Geographical subsidies (PRA) All users above 150kWh/mo

U i l Di C

affecting population and country growth.

Exit of private sector from the DisCos and GenCos.

Untimely payments to DisCosbefore their re-nationalization.

Renegotiation of LT contracts. Change of Political message

Stop of new investments in efficient generation within the SENI.

Withdrawal of existing generationg g State intervention and State utility

mindset Constant threat to renegotiate

contracts

Withdrawal of existing generation capacity from the SENI.

Inefficient investment in self-generation by small users.

Massive injection of state funds to Generation used as escape goat Lack of consistent LT plan and

investments to reduce energy losses

Massive injection of state funds to cover part of the “hole”.

Stalemate in government efforts to reduce fraud and energy losses. Hi h fi i t f th Financing the “hole” with the

generators Higher financing costs for the

country and all the players.

6

No Tariff Adjustments

30

35END USER TARIFF

20

25

30

10

15

cUS$

/KW

h

Indexed User Tariff Frozen User Tariff

0

5

Jan

Feb

Mar

Apr

May

Jun Jul

Aug

Sep

Oct

Nov

Dec

Jan

Feb

Mar

Apr

May

Jun Jul

Aug

Sep

Oct

Nov

Dec

Jan

Feb

Mar

A pr

May

Jun Jul

Aug

Sep

Oct

Nov

Dec

Jan

Feb

Mar

Apr

May

Indexed User Tariff Frozen User Tariff

The tariff is not used to curve consumption, give a pricesignal, and reflect market tendencies.

2007 2008 2009 2010

s g a , a d e ec a e e de c es Tariff is managed politically

7

DR Tariff is NOT the highest in the world nor the Region

45 END USER TARIFF, US$/KWh

2025 30 35 40

$/KW

h

5 10 15 20

cUS$

-

Trin

idad

Rep

. Dom

.

Bel

ice

Aru

ba

Bar

bado

s

St.M

aarte

n

Jam

aica

Virg

in …

Nev

is

St.

Luci

a

ST.

Vin

cent

Cay

man

Ber

mud

a

Mon

tser

rat

Ant

igua

Cur

acao

Dom

inic

a

Indexed tariff is still competitive when compared to the restof the regionof the region.

8

Source: Caribbean Electric Utility Service Corporation (CARILEC), 2009

Madrid Contract Prices & Market Spot Price

20.0

25.0

10.0

15.0

SCtv

s

0.0

5.0

U

Madrid Average Spot Average

Madrid energy prices are in line with the current systemgeneration mix.

Renegotiation of contracts already occurred once in 2001

9

Renegotiation of contracts already occurred once in 2001,however, structural situation remained unchanged. Energy prices were reduced (up to 40% in some cases).

Myth of Excessive Generation Profit

Company Country Corporate Rating

Sovereign Rating

(EBITDA/Sales)

AES Panama Panamá BBB- BBB- 66%Termocandelaria Colombia BB- BB+ 64%

Enel Fortuna Panamá BBB- BBB- 61%E N i l d El t i id d Chil BBB A 46%Empresa Nacional de Electricidad Chile BBB A 46%

AES Andres Dom Rep B- B 31%Itabo Dom Rep B- B 29%

AES Gener Chile BBB- A 23%H i D R B B 16%Haina Dom Rep B- B 16%

Electroandina Chile BB A 5%

The profits of the Dominican GenCos listed are amongst the lowest The profits of the Dominican GenCos listed are amongst the lowest.

This situation is worsened when returns are risk-adjusted.

10

Source: Fitch Ratings

Why the Withdrawals from the SENI?

Power Plant Technology Fuel MWSultana del Este Diesel Engine HFO 50Monte Rio Diesel Engine HFO 100Seaboard Diesel Engine HFO 97Seaboard Diesel Engine HFO 97

Total 247

Is the business that good?

Several international strategic players have exited the sectorat a significant discount to initial investment. Union Fenosa and AES as distributors. El Paso, CDC Globeleq, Cogentrix, Caterpillar.

11

Actual Capacity With & Without Investments

3,500

2,500

3,000

1 500

2,000MW

1,000

1,500

500

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Capacidad instalada Demanda Maxima Capacidad disponibleInstalled Capacity Max. Demand Available Capacity

12

Marginal Costs With & Without Investments

SPOT MARGINAL COST, cUS$/KWh

354045

No new Investments

15202530

cUS$

/kW

h

Additional 150 MW of Coal per Year

$

05

1015 (US$300mln/yr)

0 2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

13

Are AR an attractive financial business?

400

600 

800 

1,000 S$

 mln

AR

‐

200 

400 Jan

‐07

Mar‐07

May‐07

Jul‐0

7

Sep‐07

Nov‐0

7

Jan‐08

Mar‐08

May‐08

Jul‐0

8

Sep‐08

Nov‐0

8

Jan‐09

Mar‐09

May‐09

Jul‐0

9

Sep‐09

Nov‐0

9

Jan‐10

Mar‐10

US AR

Sales

Distribution companies’ late payments force generators to finance the deficit of theElectrical Sector with a negative carrying. Generators pay 9 5% to 12% on their indebtedness (144A/Reg S Notes) Generators pay 9.5% to 12% on their indebtedness (144A/Reg S Notes). Generators charge 7% to 9.5% to the DisCos (Historical USD Local Active Interest Rate

under PPAs). Additionally, merchant generators (mostly the DR Govt. throught CDEEE &

EGEHID) charge 11%-18% interest rate in DOP plus an 18% penalty, whichcombined with exchange rate stability makes a 25%-35% USD effective interestrate on energy purchases of Contracted Generators.

Conclusion, except for merchant generators financing the DisCos is a very badbusinessbusiness.

If the GenCos would monetize the AR, USD 400mln could be used to fuel a newwave of investments at higher rates of return.

14

¿Where is the hole?

US$MMPotential Gross Sales 2 473 1Potential Gross Sales 2,473.1   Tariff Deficit (404.7)       Commercial Losses ** (889.4)       Real Gross Sales (A) 1 179 0

31%

69%Real Gross Sales (A) 1,179.0   

Real System CostsG ti * 1 593 8

* This includes ~150mln annual

Generation * 1,593.8   Fixed Costs (D&T) 288.0         CAPEX (D&T) 96.0           

Tariff Deficit Commercial Losses **

This includes ~150mln annualprofit of the GenCos

** Losses from Theft and lack of

Sector Debt Interests 32.0         Total System Costs (B) 2,009.8     

15

collectionsAnnual Deficit (A‐B) (830.7)     

What Reducing the Contract Prices Means

Private GenCos combined Net Income was US$154mln in 2009.

Annual Deficit

154 

600 

700 

800 

900 

831 676 

200 

300 

400 

500 

US$

 mln

‐

100 

Current GenCos Conceed Net  Income

If GenCos were to reduce their prices in 0.02 US$/kWh their profitwould disappear and still the hole would be unmanageable. Notedthat without appropriate returns there are no investments.

Th bl i t i th G C it i i th ft f li d The problem is not in the GenCos, it is in energy theft, non-focalizedsubsidies and tariffs.

16

Conclusions

We are at a critical point for decision making. With the wrong incentives we will continue with the “vicious cycle” and

run out of generating capacity in 3 years.u out o ge e at g capac ty 3 yea s The electricity sector deficit representing ~1.8% of the GDP is

unsustainable. Implementing market oriented measures are the way to go:

A t h i l t iff hi h ill id th i ht i i l A technical tariff, which will provide the right price signal Focalized subsidies, below 150kWh/mo Fully transfer the DisCos to private ownership Eliminate arrears with generatorsg Political will to enforce the law against electricity theft

Moreover, key elements for positive change are present: Willingness of existing players to invest in new efficient capacity. The country remains attractive for the investment community (telecom The country remains attractive for the investment community. (telecom,

tourism, recent placement of sovereign bond, etc.)

The right incentives and fulfillment of contractual obligations,are the only way to reduce long-term energy marginal costs.

17