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

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 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 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..

10 MEXICO´S ENERGY SECTOR Natural Gas Gasoline 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 thirteen cement plants Surplus power will be sold to the Comisión Federal de Electricidad (“CFE”), the public electricity utility.

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 SBS, S.A. –Extensive track record in power plant construction –Extensive operations experience as an operator (Africa, Asia, South America)

15 Discussion Sovereign risks Operational risks Financial risks Environmental risks Social risks