1. The proposed sale of Midlands Electricity’s distribution business to Scottish & Southern Energy © Utility Consultants Ltd 2003 Prepared by Utility Consultants Ltd www.utilityconsultants.co.nz

2. Disclaimer

3. This research report is of a general nature, and is not intended as specific professional advice. Accordingly, neither Utility Consultants, nor its’ directors and shareholders, shall be liable for any loss or damage arising from action or inaction based on this research report.

4. Contents

5. Disclaimer Contents Introduction History of the MEB Structure of Midlands Electricity Interested bidders Deal structure Regulatory implications Feedback & Contact us

6. Introduction

7. Midlands Electricity serves 2.4m customers in Birmingham and the West Midlands Operates 60,000km of lines and cables, and has a regulatory asset value of about ₤981m Annual revenue of about ₤310m, and NOPAT of ₤115m Acquired by Scottish &Scottish & Southern Energy plc Southern Energy plc in May 2003 subject to bond-holder approval which did not eventuate

8. ColorCompanyMarket share LE Group (EdF)28% Scottish & Southern Energy21% Northern Electric13% ScottishPower12% Powergen (E.On)9% Western Power Distribution9% United Utilities8% Proposed industry structure

9. History of the MEB

10. Vested as Midlands Electricity plc March 1990 Floated on the LSE December1990 Acquired by Avon Energy Partners June 1996 50% owned by CinergyCinergy and 50% owned by GPUGPU Supply business sold to National Power (since re-named InnogyInnogy and sold to RWE)RWE June 1999

11. GPU buys out Cinergy’s 50% stake July 1999 Midlands Electricity renamed GPU Power UKGPU Power UK March 2000 UtilicorpUtilicorp offer to buy out GPU’s interest in Avon Energy Partners October 2000 GPU merges with FirstEnergy Corp in November 2001 Utilicorp changes name to Aquila inAquila March 2002

12. Aquila buys 79.9% stake in Avon Energy Partners from FirstEnergy and renames business Aquila Networks May 2002 Scottish & Southern Energy acquire Aquila Sterling for ₤1,112m subject to bond-holder approval in early July May 2003

13. Structure of Midlands Electricity

14. Midlands Electricity plc Aquila (79.9%)First Energy (20.1%) Aquila Sterling Avon Energy Partners Holdings Bonds (ring-fenced from any repatriation to the US)

15. Bonds ₤360m variable bonds due in 2006 US$250m senior notes due in 2007 US$250m senior notes due in 2008

16. Interested bidders

17. Initially interested bidders Scottish & Southern Energy plc YTL Corporation E.OnE.On via Powergen Macquarie Bank Macquarie Bank in association with United Utilities plc PPLPPL (owners of Western Power) indicated no interest in increasing their UK investment

18. Scottish & Southern Energy plc Obvious geographical fit with former Southern Electric business Would incur the ₤32m penalty for reducing inter company comparison

19. YTL Corporation Geographical fit with Wessex WaterWessex Water business Would avoid the ₤32m penalty for reducing inter company comparison Would seem to ignore the difficulties of 2 other multi-utility ventures

20. Macquarie Bank in association with United Utilities plc Would avoid the ₤32m penalty for reducing inter company comparison Good source of unregulated revenue for United Would have alleviated OFGEMOFGEM concerns about operating expertise

21. E.On via Powergen Would incur the ₤32m penalty for reducing inter company comparison Obvious geographical fit with former EastEast Midlands Midlands business

22. Short-listed bidders Scottish & Southern Energy plc YTL Corporation Macquarie Bank in association with United Utilities plc

23. Deal structure

24. Deal structured as follows… Scottish & Southern Energy to assume ₤502m in debt Scottish & Southern Energy to pay ₤43m cash to Aquila & First Energy Scottish & Southern Energy to pay ₤567m to AEPH bond-holders Represents about 86% of the face value of the bonds that were recently trading at 78% to 80% Aquila has an obligation to pay First Energy US$95m

25. Regulatory implications

26. Key regulatory issues Assessment under The Fair Trading Act 1973 for reduction of competition Penalty of ₤32m over 5 years to compensate for reduced inter company comparison

27. The eventual sale to E.On (Powergen)

28. Scottish & Southern Energy were unable to obtain bond-holder approval, hence the acquisition bid failed Aquila Sterling was eventually sold to E.On via the UK subsidiary Powergen A description of this bid can be downloaded by picking herehere

29. Feedback

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31. Contact us

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