1. Willie de Beer, COO, EDI Holdings Potential Impacts of EDI Restructuring Potential generation and transmission impacts as a result of restructuring the RSA Electricity Distribution Industry (EDI) 16-19 May 2005

2. South Africa ’s real gross domestic product (GDP) grew 2.6% in 2004, and is forecast to grow 3.2% in 2005. Forecasts may cause shortages in as early as 2007 or as late as 2011. Building increased capacity requires significant funding, which requires excellent credit ratings. Source: EIA (U.S) and Eskom Possible Shortages 20011 Access to Capital Markets Dependent on SA Electricity Industry Outlook GDP Growing Credit ratings

3. Current Industry Structure Scheduling Metering & Billing Currently, South Africa operates in the traditional mode of vertical integration with financial and physical flows following the same path Municipalities ESKOM Generation Physical Energy Flow Financial Flow Transmission Distribution Industry Business Residential

4. Energy Market 21% 20% 4% 29% 26% 5% 95% Electricity Market Electricity Supply in SA

5. Eskom Distribution PERCENTAGE OF CUSTOMERS 187 Municipalities Current Situation SALES VOLUME Eskom Distribution 187 Municipalities

6. SA EDI Statistics

7. Challenges Facing the Industry Current industry structure is highly inefficient owing to fragmentation Inadequate maintenance of networks Inability to supply electricity to the indigent Unequal treatment of consumers across the country Significant disparities in tariffs Ineffective regulation over the whole industry Absence of economies of scale in respect of investing in assets, sharing of facilities, services, people development etc.

8. EDI- the need for restructuring Five National Objectives: 1.Provide low cost electricity 2.Provide reliable and high quality supply and service 3.Meet country’s electrification targets cost effectively 4.Meet legitimate interests of all sector employees 5.Operate in financially sound and efficient manner Implications: 1.Stabilise tariffs 2.Infrastructure improvements 3.Significant costs to implement 4.Provide salary harmonisation 5.Financial viability Objectives 1 through 4 will require significant additional investment, and objective 5 will require effective governance and optimisation of spending to ensure all objectives are met.

9. Industry Business Residential Scheduling Physical Energy Flow Financial Flow Metering & Billing Current Blueprint view is focusing on resolving current issues within the Electricity Distribution Industry Physical and financial flows follow the same path, allowing for in-house cross subsidisation. Blueprint view of the EDI

10. Last Revised: 18 June 2004 RED Boundaries

11. Eskom Generation needs a major capital improvement program to build new capacity Eskom Transmission needs network enhancement Eskom Distribution currently provides surpluses to Generation & Transmission Municipalities use some electricity surpluses to pay for municipal services and for credit leverage over other services Credit Ratings for Eskom and Municipalities are critical Stakeholder Interests Eskom Distr. 187 Munics GenerationTransmission RED Surplus Needs Capacity Needs Network Needs Everyone is looking for REDs to fund cash needs

12. Success of Generation and Transmission are dependent on success of Distribution Revenues and Credit Ratings are highly correlated….. GenerationTransmission Distribution (EDI) Customer Revenues Generation & Transmission dependent on revenues, credit ratings, and overall viability of the EDI Customer ESI Viability is Critical

13. EDI is “owned” by Municipalities and Eskom How do you Value the assets and Compensate Owners (V&C)? (without jeopardising the Electricity Supply Industry?) GenerationTransmission Distribution (EDI) Eskom Customer Eskom MunicsCurrent Owners Value Chain Distribution Owners

14. Structure all parts of value chain with low cost of capital to the benefit of low tariffs Secure access to capital for plant expansion, refurbishment, and strengthening Promote the recovery of costs of capital & asset replacement, without price shocks, through long term sustainable tariffs Avoid negative impacts on municipalities who are key elements within Government strategy for other service delivery. V&C Objectives

15. Major challenges for REDs are to: acquire EDI assets without raising tariffs, provide for compensation to ensure Munics made whole, and Eskom has sufficient monies to provide for generation and transmission Major Challenges Distribution (EDI) Munics Eskom 6 REDs (Future Owners to acquire Eskom & Municipal distribution businesses) V&C Current Owners

16. Raise Debt? Buy Assets? Provide Shares? Raising new debt created significant tariff challenges Buying assets precluded Munics and Eskom from financial and operating control Providing shares was the best option. It provided Munics and Eskom with operational and financial oversight over REDs Valuation Options How to Acquire the Assets from Eskom and Munics? Valuation option chosen is to provide share ownership of REDs by Municipalities and Eskom

17. How do you value the Munic and Eskom Distribution businesses? Eskom focused on Assets Some Munics wanted to use Revenues to determine value of their businesses Other Munics found Profits to be most indicative of value Valuation View Points AssetsRevenuesProfits Three stakeholders had different views of which criteria to use:

18. Balancing Stakeholder interests -- Implications Pay high surpluses to Eskom and Munics REDs Credit Ratings will suffer No funds will be available for national objectives REDs retain surpluses for National Objectives Munics credit ratings drop Eskom credit ratings drop Both have higher cost of capital The key is to find the right amount of surpluses to ensure viability of all

19. Answer – Use Best Practice Using 16 different utility deals, a weighted combination of assets, profits, and revenues are being used. SUGGESTED METRIC ‘BASKET’WHY 1. Net Assets Simple Accounts-based Regulatory economics 2. Profits (Earnings Before Depreciation, Interest and Adjustments Simple Accounts-based Cash-based measure consistent with DCF techniques 3. Revenues Simple Accounts-based

20. Valuation & Compensation Step 1 – Value the Businesses, determine shares as % of total Step 2 - Adjust the valuation shares based on actual conditions of assets and revenue management Step 3 - Compensate fairly, adjust for poor infrastructure or high bad debt Value Businesses in Rand + / - based on Asset & revenue conditions Compensate fairly Use international experience to weight assets, profits, and revenues Use agreed upon % to modify valuation and monthly surpluses to take into business value Compensate in the form of shares in exchange for adjusted value (revenue, profits, and assets) and cash income based on surpluses adjusted for asset condition and revenue management

21. How to ensure viability Value (acquire) businesses with shares. Compensate to ensure stable Municipal and Eskom credit ratings Ensure REDs achieve national objectives and REDs are financially viable.

22. Good Governance - Vital A sound Governance framework will: Improve and sustain the economic viability of the electric industry Improve overall reliability and service orientation of the industry Facilitate the fair treatment of all customers Assure equitable and transparent dealings with all electric service entities Build a foundation for economic development throughout South Africa

23. Summary – A viable restructured EDI will provide for the national objectives, Properly structured V&C will provide for control by Munics and Eskom, A credit worthy (and financially successful REDs) will provide good revenue streams for Munics, Eskom Generation, Distribution, and A well restructured EDI will ultimately provide reliable, safe, and economic power to South African industry, commercial, and residential customers

24. For any additional information, please do not hesitate to contact EDI Holdings Willie de Beer EDI Holdings Presidia House 255 Pretorius Street Cnr. Paul Kruger PRETORIA 0001, South Africa Phone: +27 12 316 7824 Fax: +27 12 316 7788 willem.debeer@ediholdings.co.za www.ediholdings.co.za Media Contact: Billy Mawasha Tel: +27 12 316 7722 Fax: +27 12 316 7703 Mobile:+27 82 337 9692 billy.mawasha@ediholdings.co.za Contact Info