As detailed at last month's annual IFC B-loan conference, AES has put plans forward to banks and multilaterals to finance and build a combined-cycle gas fuelled plant to serve the whole of Central America.

The 780MW generator would be built at Porto Cortez on the Carribean coast of El Salvador and the project will also involve building an open access gas terminal to receive Trinidadian gas, and a transmission line from Honduras to El Salvador and on to Guatemala.

The timing is good.

Although substantial amounts of investment capital have been raised for large-scale power projects in some of the larger South American countries, there has been relatively little institutional focus on electricity projects in Central America and the Caribbean. Most major companies ? with the exception of AES ? shun both regions. The perception is that electricity, particularly from island economies, is seldom exported and after domestic demand is met, overkill sets in.

Power plant capacity is basically too small to interest the major international IPPs. Electric generating capacity in the Caribbean is only 15GW-plus, and there is a general need for additional capacity throughout the region. Several countries ? including the Dominican Republic, Haiti, and Cuba ? experience power outages on a regular basis. And electricity demand in the region is expected to grow substantially in the coming decade.

?Central America and the Caribbean have greater potential growth than even the US in terms of power needs. Requirements are tied to general economic growth but also to per capita income increases and more white goods,? according to Robert Johnson, vice-president and senior utilities analyst at Moody's.

The region is characterised by old, small oil-fired plants. ?For most companies there is not enough critical mass in the region to justify investment ? we're talking $50 million deals,? says Ira Ginsburg, chief executive of the two-year old Caribbean Basin Power Fund, sponsored by Dresdner Kleinwort Wasserstein, Commonwealth Development Corp (CDC) and EIF Group. ?Enron and Coastal Energy are selling out, because the sheer numbers are not there. But we see the region as a growth opportunity,? adds Ginsburg. ?On the plus side, there are no barriers to entering the power generation business in Central America and few in Caribbean countries ? a 50 MW plant in Panama is a big deal.?

AES' latest proposal overcomes many of the negatives to building large plant in the region ? if a deal across such a wide range of country risk equations can be structured. Demand from the Central American countries already served by AES is around 1000MW per country and does not justify the cost of combined cycle technology on a country-by-country basis. But is just that technology that could reduce power costs in the region from $0.09/KWh to $0.04/KWh.

The proposed plant will sell 40% of output in El Salvador, 30% to Honduras, 20% to Guatemala and 10% to Nicaragua and Costa Rica.

Another development with a positive effect on the region is that Trinidad is a major source for liquefied natural gas (LNG) which is being touted as among the fastest-growing segments of the energy industry. In addition to supplying regional power generating facilities with cheap fuel, shipment of LNG is expected to provide Trinidad with export revenues with the reactivation of receiving terminals in the US. Trinidad and Tobago has emerged as a central player in the growing global gas economy. To date, a total of 35 tcf of gas sites have been discovered in Trinidad and Tobago including 23 proven and 12 probable. Although LNG currently makes up less than 2% of US gas supply that statistic will grow ? LNG already plays an important role in regional US markets like New England, providing about 15% of the gas it needs.

Wendell Mottley, senior advisor to the CSFB global energy group and former finance minister of Trinidad and Tobago, notes, ?Deal flow is strong in the region. The Puerto Rican economy is doing very well. Demand in the Dominican Republic has been growing at about 7% per year. The region has benefited from the privatisation of Jamaican power. The Jamaica deal is just about done. I expect that it will have associated with it some kind of financing.?

In February, CSFB closed the refinancing of project bonds for Mirant Trinidad ? originally used by Mirant (formerly Southern Energy Inc.) to finance its acquisition of privatised power generation assets in Trinidad ? the original privatisation was done five years ago when the government sold off 49% of its fully owned power generation assets through a $73 million 144A bond offering without registration rights. The deal was oversubscribed with 50% of the bonds bought by investors in Trinidad and another 12% in the Caribbean.

Mirant has been particularly busy in the Caribbean, with other electricity plants in Trinidad and Tobago, Jamaica and the Bahamas. In early May, Mirant completed the $210 million negotiated acquisition of an 80% stake in Jamaica Public Service Co (JPSCo), a utility which has experienced cash flow problems over the last few years. The government will retain a 20% shareholding in the company. The deal was led by Salomon Smith Barney.

The deal, which was strongly opposed by politicians and trade unions, attracted competing bids from Duke and Enron. Mirant is said to have won the day by purchasing the company's distribution and generation business while the other bidders were only interested in generation assets.

Attesting to the region's fuel diversity, JPSCo owns 23 generation plants that produce 73% of its power requirements. Five of the plants are steam-generating, eight are hydro-powered, eight are gas turbines and two use diesel fuel.

Robert Bellemare, vice president of RCI Consulting Group, which specialises in the energy sector, says: ?The pace of activity in that region is directly related to the US economy. In order to be comfortable with investing in the region, companies need to take a portfolio approach. There are a number of risks involved in that region including exchange rate fluctuations and political risks.?

The Dominican Republic has sought to alleviate chronic shortages by buying power from private producers and privatising selected power plants, as power cuts remain a problem for businesses and the general population. The country completed auctioned off its electricity assets in May 1999. However, this privatisation so far has not resolved the Dominican Republic's fundamental problem of assuring a steady supply of electricity to its population.

The Dominican Republic's 7% hike in annual demand already outstrips supply, though not necessarily available capacity. Part of the reason for this is that droughts have periodically reduced hydroelectric power. Another reason is that private generators, such as AES, Cayman Power, and Enron, have been at odds with the government since the privatisation, with some production stopped amidst charges of non-payment by the government, which has reached over $100 million.

The government, however, charged Union Fenosa (Edenorte and Edsur subsidiaries) and AES (Edeeste subsidiary), the two companies that took over distribution from formerly state-owned company and bankrupt Corporacion Dominicana de Electricidad (CDE), with withholding funds needed to pay suppliers. But, the distributors allege that the government does not pay for its own consumption, nor the subsidies that lower consumer electricity rates, on time, making it difficult to maintain the distribution system working effectively. Union Fenosa and AES are both distributors, through their subsidiaries, as well as private generators.

The dispute came to a head earlier this month when a senate report charged that CDE's assets were undervalued at privatisation ? and that possibly the $650 million tab for CDE's assets was never paid. Other charges include conflict of interest between CDE's administrator and winners of the privatisation tender. That allegation has been disputed by a spokesman for the two Union Fenosa distributors who claim that the tender was fair and transparent.

At the same time, the Inter-American Development Bank (IDB) has approved a $188 million loan to Edenorte and Edsur to expand and improve the quality of distribution services in the country. The facility takes the form of a $75 million loan from the bank's ordinary capital, and a $113 million syndicated loan.

Whether recent developments will help alleviate the energy shortage is unlikely. After seven years of debate, the legislature passed in April the General Electricity Law which stipulates that no power generator can hold more than 25% of the final user market, and that generators cannot be distributors at the same time nor vice versa. The new law provides that, in the event of such an occurrence, the dual-purpose company cannot hold more than 10% of the maximum demand of the interconnected power system.

AES back yard

AES made a series of acquisitions in the region last year, including deals in the Dominican Republic, El Salvador and Puerto Rico, and a ?hostile takeover? of Electricidad de Caracas (EDC) which gave the company eventual control over El Salvador's distribution system through Compania de Alumbrado Electrico de San Salvador, Empresa Electrica de Oriente, and Distribuidora Electrica.

If development of the planned multi-country plant goes ahead AES will have an unassailable hold on the market. And according to Leslie Biddle, general manager for AES' operations in the region the deal ?will happen, with construction beginning in summer 2002,? although no formal contract has been signed.

?In 1997, we established a division of AES to target the Central American market,? Biddle says. ?We went to El Salvador in 1998 to make our first deal.? AES acquired additional capacity in the region with the purchases of Gener and EDC. ?AES can now look at additional capacity in the region because of scale and scope,? adds Moodys' Johnson.

Currently, AES has 282 MW on line in Panama, included 240 hydro-powered and 42 oil-fired plants. The company has an additional 120 MW under construction in Panama. AES has seven diesel-powered plants in the Dominican Republic, with an additional 310 MW under construction.

?The AES culture reflects almost total decentralisation, with almost all deals structured as project financings, with no recourse to the parent. The company's investment in Gener was financed at the Gener level, with some debt at the AES level, which was taken out almost immediately by the sale of some Gener assets,? said a banker close to AES. ?They cut the best deals, generally achieving 16-20% after tax returns. The company stays away from financing at the corporate level because it is not as disciplined as financing at the project level. While you may pay higher fees and interest rates by financing projects, you gain operating efficiencies.?