Mitsubishi Corporation's independent power project (IPP) business gets only a fleeting mention on the company's corporate website, a reflection more of the vast size of the company as a whole, than the relative significance of the unit. In fact, Mitsubishi's international power unit is one of the leading global players in the IPP market. And with aggressive internal growth targets, the company's presence in the market looks set to become a lot more visible in the years to come.

Over the last two years, Mitsubishi's main focus has been concentrated on bringing existing projects through construction to commencement of commercial operation.

"Last year we didn't sign any new PPAs [power purchase agreements], but it was still a big year for us as three major IPP projects in which we are sponsors came on line," says Yu Saito, general manager of the Power Generation and marketing, International unit at Mitsubishi Corporation. The three completed developments were: the 846MW Alabama I plant which starting running commercially in April 2002, the 495MW Altamira II project (which began operations in May 2002), and the 1,200MW Illijan project in the Philippines (which came on line in June 2002).

Three more of the company's IPP projects have come on line this year: the 885MW Alabama II power facility and the 1250MW Oklahoma power station, which both entered service in May and the 90MW Curacao plant, which began operating in June.

Although the opening of the Curacao plant was effectively the closing of Mitsubishi's current list of IPPs under construction, the company has plans for an even more aggressive expansion in the next few years. "Our intention is, in fact, to double the size of our IPP portfolio, on a net equity basis," says Saito.

Mitsubishi Corporation is therefore very eager to clinch upcoming IPP projects in its target markets. "We are bidding on the Tuxpan V project in Mexico, which is an expansion of the existing Tuxpan II facility. Bids for the project are due in at the end of October," says the general manager.

The power giant is also working on two greenfield projects (of approximately 500MW to 600MW each) in the US, in Nevada and Oregon. "Both the US projects are being developed by our Los Angeles based subsidiary, Diamond Generating Co and are at a fairly mature initial stage - we have already secured the land and received the necessary permits," says Saito.

From a portfolio perspective, of the 15 IPP facilities that Mitsubishi owns (in whole or part), eight of these projects are in the United States (representing 5,890MW gross and 1730MW on a net equity basis), four are in Mexico (totaling 1530MW gross and 1130MW on a net equity basis), one is in the Philippines and another in Curacao. Mitsubishi Corp also has a small (7%) holding in the Gladstone Power Station in Queensland, Australia.

The company's portfolio strategy entails the opposite of geographic diversification. Despite growing opportunities for IPP sponsors in many emerging markets, and concentration risks implied in sticking to a few select markets, Mitsubishi's core focus remains the United States, Mexico, and some areas of Asia and the Middle East. "In the Middle East, Saudi Arabia, in particular, is an important market for us," says the Mitsubishi official.

Mitsubishi was one of the bidders for the Jubail Energy Company cogeneration plant in Saudi Arabia, also known as the SADAF Cogen project, which is expected to be the first independent power project in the country to enter commercial operations. Mitsubishi lost out in the bidding to CMS Energy and the National Power Company, but the Japanese corporate is gunning for further opportunities in the Saudi market where average demand growth for electricity is estimated at 3.8% each year.

At first glance, the United States seems an odd target for future growth, given the relatively slow demand growth for electricity in the country, and the recent energy market problems. Saito comments: "the US may be a mature market, but it is still a huge market, much bigger than any other. So even just 1% growth in this market implies substantial opportunities for us."

Mitsubishi's interest in Mexico is partly explained by its long standing experience in the country (40 plus years). In addition, Mitsubishi Corp is lured by the country's rising credit rating, and economic expansion since joining NAFTA. "Plus what is very important to our strategy is finding expansion synergies. Since we already own and operate several assets in Mexico, we are able to realize greater efficiencies by expanding our presence in the country. In general, this is why we are focusing on a relatively small number of markets for the IPP business," says Saito.

As a rough rule of thumb, the general manager says Mitsubishi Corp aims to grow a portfolio that has roughly 30% to 40% of its assets (on a net equity basis) in the United States, another 30% to 40% in Mexico and the remaining 20% to 40% in Asia and the Middle East.

In other fast growing markets, such as China, Mitsubishi is mainly active as a trading house and EPC supplier. Saito says its Power Systems Export Unit, which is responsible for EPC business, has signed a contract in March to supply 10 gas turbines to China. The equipment will be installed in the country's first, large-scale natural-gas-fired combined cycle power plants. However, Mitsubishi is not currently active in China as an IPP developer.

The general manager explains: "at the present time we prefer to concentrate on markets where we already have resources in place and expertise and know how regarding the local market."

In Indonesia, Mitsubishi Corp does have prior experience as an IPP player. Before the Asian financial crisis, the company, together with Duke Energy and local Indonesian investors, signed a power purchase agreement with Perusahaan Listrik Negara (PLN) to build a 450MW coal-fired power plant in Cilacap, Central Java. Like most other IPP projects in the country the $652 million venture ran into serious difficulty in the wake of the financial crisis, forcing Mitsubishi and the other sponsors to terminate the PPA. "The fact that we got our fingers burnt, doesn't mean we aren't interested in the country. In fact, it is a very important market for Mitsubishi Corp as a whole and, again, we are very active on the power side as an EPC contractor," says Saito. "We are keen to be back in the market when the time is right, and that means when non-recourse financing is again available for Indonesian power projects," Saito adds.

Even if IPP opportunities present themselves that meet Mitsubishi's internal risk and return criteria, Saito says the company will not automatically bid for the project if it is not in the geographic focus areas. "Even a company as large as ours cannot spread itself too thinly. We need to think about what each project means to us in terms of our core know-how and potential synergies with other projects in the same geographic area," he explains.

While Mitsubishi continues to scour for new greenfield IPP projects, its internal growth target for the international power division is forcing a major shift in emphasis towards acquisition of existing power facilities rather than simply construction and operation of brand new IPP ventures. "We recognize that there probably won't be enough activity in terms of greenfield IPP projects in our chosen markets in the next few years and that means we have to look to acquisitions to meet our growth target," says the official.

This is not a complete break with the past as the company has previously acquired power stations. Saito says that Mitsubishi's former US subsidiary, Diamond Energy purchased several power plants. Mitsubishi also participated as an equity holder in Orion Power Holdings, (together with Goldman Sachs and Constellation Energy), which purchased a number of power stations on the US East Coast. These East Coast assets, however, were subsequently sold to Reliant Resources.

But this new acquisition phase will likely see a much more aggressive buying spree on the part of Mitsubishi. Saito reveals that his company is already expecting to close one acquisition deal in the US in the next six months.

What of acquisition opportunities in other markets? Close to Japan, the Philippines is currently attempting to sell off almost the entire state-owned power sector, transmission and distribution assets as well as generation facilities. Saito says that Mitsubishi is indeed looking at purchase opportunities in the Philippine market. "But we still need to wait for some critical questions to be answered, particularly regarding how they will open up the market. A broad framework has been announced by the Philippine government for a new power market, but the detailed mechanism is still missing," Saito says.

But for transmission assets, at least, it is highly unlikely, though, that Mitsubishi will buy in emerging markets, adds the official. "For a start we don't want to be widely regarded as a regulated utility," says Saito, "and if we are going to look at a new arena such as transmission grids, we are going to start in a mature market which we know well, the US," he adds.

Going forward, another aim for Mitsubishi Corp is to increase the proportion of IPP projects where the company has what Saito calls a, "majority role." Saito explains: "that doesn't necessarily mean majority ownership but we do want to own a controlling interest and have a very active participation in all the projects we are involved in."

Yet, the company will still continue its practice of selling down a portion of its interest in ventures where it owns close to 100% of the venture. This process of selling down exposure occurred, for instance, in two Mexican projects, Tuxpan II and Altamira II. At the start of the Tuxpan II project, Mitsubishi held 100% of project equity but then brought in Kyushu Electric, a Japanese electric utility, as a strategic partner. Mitsubishi still owns the controlling interest in the project.

Mitsubishi will also continue to pursue non-recourse finance for all of the overseas IPP projects it pursues. "All our previous IPP ventures involve project finance and this strategy is not going to change in the near future," says Saito.

Similarly, Mitsubishi Corp has turned to the export credit agencies, particularly Japan Bank for International Co-operation (JBIC) and NEXI, for almost all of its financings related to international IPP projects. "Our projects in Mexico, the Philippines, and Curacao had JBIC financing," Saito notes. JBIC, for instance, provided a direct loan of $118 million to the Altamira II financing and NEXI contributed by providing political risk cover on 97.5% of the commercial bank debt. Fuji Bank (now Mizuho Corporate Bank) and Citigroup were the mandated lead arrangers for the deal. In 2001 JBIC also signed a $255 million loan agreement to support Mitsubishi's KEPCO Ilijan Corporation project in the Philippines. The loan was co financed with Bank of Tokyo-Mitsubishi, BNP Paribas, Tokyo Branch, Citibank, and Sumitomo Bank. JBIC assumed $153 million or 60% of the total debt amount.