AES Completes Acquisition of 660 MW Power Plant in the Philippines

(Note: This is an official press release of AES Corporation on formal takeover of Masinloc plant)



Manila, Philippines, April 16, 2008 – The AES Corporation (NYSE:AES) today announced it has completed the $930 million purchase and transfer of assets of the 660 MW (gross) Masinloc coal-fired thermal power plant located in Barangay Bula, Zambales Province, Luzon, Philippines.

“This acquisition is a key component of our strategy to invest in areas where there is a significant need for new capacity and offers AES an excellent entry point into the growing Philippine economy through one of the lowest cost thermal plants in the system,” said Paul Hanrahan, AES President and Chief Executive Officer. “This is a particularly attractive investment because the existing facility has the infrastructure in place to allow AES to add an additional 600 MW of generation capacity. As AES has done through similar acquisitions in other parts of the world, we expect to improve the overall efficiency and output of the existing plant, providing more reliable energy to the Philippine market.”

AES and its eight percent minority partner International Finance Corporation (IFC) paid 100 percent of the purchase price upfront to complete the Masinloc transaction in one step. Including transaction costs and completion of a planned upgrade program to improve environmental and operational performance, the total project cost is estimated at $1,057 million. The transaction funding included $635 million in secured non-recourse financing comprised of a $240 million, 18-year facility from IFC, a $200 million, 15-year facility from Asian Development Bank, and a $195 million, 10-year facility from a consortium of banks including ING Bank, Security Bank, Bank of Philippine Islands and Rizal Commercial Banking Corporation. In addition, over $30 million of unsecured working capital facility commitments have been obtained from three local banks.

“The impressive local and international group of commercial and multilateral lenders reflects not only the strong fundamentals of the project but also demonstrates the strength of the project finance market in Asia,” said Mark Woodruff, Executive Vice President and President of AES’s Asia and Middle East region.

Approximately 60 percent of the electricity generated at the Masinloc plant will be sold to electric distribution companies, cooperatives and special economic zones via power supply contracts of various tenors in place at the plant turnover. The remaining capacity will be sold through the wholesale power pool or under new contracts.

AES provided the winning bid for the Masinloc facility in a privatization auction conducted by the Power Sector Assets and Liabilities Management Corporation (PSALM). Originally constructed in 1998, the plant utilizes coal from a variety of sources in the Pacific Rim. Through this acquisition, AES now operates the Philippines’ first privatized thermal plant.

AES has been operating in Asia since 1994. Today, AES’s businesses in the region include electric utilities and generation facilities in China, India, Jordan, Oman, Pakistan, Qatar and Sri Lanka. AES has more than 5,000 MW of generation capacity in the region.

Making RP a competitive investment destination in energy: Learning from Indonesia

By J R Ruaya

Energy and Chemistry Consultant

In a recent post ("Indonesia poised to overtake RP in geothermal production by 2010", April 11, 2008) it was pointed out that Indonesia is likely to overtake RP in geothermal production mainly because of structural changes that has taken place in recent years which create an atmosphere conducive to fresh investments from both foreign and local interests. The renewed interest is not only happening in the geothermal subsector but apparently encompasses the whole energy sector.

In the latest April 2008 issue of the Oil and Gas Financial Journal, the banner article is "Shaping a competitive Indonesia", which chronicles the rapid strides the country is taking in making it a preferred investment destination in energy. Watching our neighbor's progress in this area could enable us to pick up some lessons applicable to our own efforts at aiming for similar objectives.

Indonesia is a major oil and gas producer and the only Asian member of the Organization of Oil Producing Countries (OPEC), the de facto international oil cartel. Yet in 2004, the country has become a net importer of oil for the first time in history as domestic production failed to keep up with rising consumption. The milestone event set alarm bells which compelled the present government to initiate a motion to change the country's energy basket, "with the objective of re-balancing the share of its oil and gas sectors, and to allow for new sources of power from biofuels to geothermal through to possibly nuclear energy to find their places in the country's energy future," acccording to the article.

Production of oil and condensate has been in decline for years, but according to Purnomo Yusgiantoro, Indonesia's Minister of Energy and Mineral Resources, investment in exploration and production (E & P) activities has picked up over the last several years which he attributes to the passing of new laws and regulations for the sector.

Briefly, the strategy is to alter the current energy mix, which is dominated by oil and gas, occupying 52% and 29% respectively, of the total mix. The governement targets an energy basket by 2025 in which oil contribution falls to 20% of the blend, coal to double to account for 33%, gas to edge slightly to 30%but still a substantial increase in absolute terms), geothermal and biofuels contributing 5% each, and the remaining 7% would be accounted for by a combination of biomass, hydro, solar, coal liquefaction and possibly, nuclear energy.

All these plans are embodied in the New Energy Law passed in 2007 which constitutes Indonesia's first attempt to provide a general framework for managing the country's energy resource, the article pointed out. The new law also creates a National Energy Council to oversee the creation of a concerted energy policy among the government instrumentalities.

The move was lauded by William Deertz, leader of intrernational auditor PriceWaterhouseCoopers (PwC) Indonesia's Energy, Utilities and Mining (EU & M) practice, who regards this development " a positive step for the country's resource sector as it will put into place a structure for ensuring appropriate optimization of its natural resources".

Production Sharing Contract (PSC), currently the standard practice of oil and gas development, originated in Indonesia in the '60s. In late 2001, a "New Oil and Gas Law No 22/2001" was promulgated which maintained the PSC as the basis of oil and gas development, but more importantly, it mandated the deregulation of the upstream and downstream sectors, including Pertamina's (the state oil and gas behemoth) monopoly over oil distribution and marketing of oil products. The law also mandated the establishment of an implementing agency called BP Migas for upstream activities and a regulatory agency called BHP Migas for downstream activities to assume Pertamina's regulatory roles.

Making sure that the rhetorics of the law translates into concrete results falls into the hands of Luluk Sumiarso, head of the Directorate General of Oil and Gas (Migas). All indicators point to Luluk in sharp focus on the job at hand, putting things in order and seeing to it that the recent activities in the oil and gas sector comply with the laws.

An active partner in the whole enterprise is the Indonesian Petroleum Association (IPA), which is preparing its annual concention for May 2008. For this year, this association's flagship event is not merely an exhbition of the prowess of the association members but rather " a public forum and debate on the main issues that affect the industry in Indonesia, from business environment to corporate social responsibility, " pointed out Roberto Lorato, the President of IPA and a Managing Director of Eni Indonesia LTD, the local unit of Italy's energy giant.

Rising from the ashes

Over the last ten years, Indonesia has been buffeted by a slew of transformational events. It has undergone from an authoritarian regime to a presidential democracy, rocked by a festering secessionist movement in Aceh and political intramurals in its eastern provinces, hit hard by the Asian financial crisis starting in 1997, became the eye of the bird flu and SARS epidemic storms, faced natural disasters such as earthquakes which hit at almost regular intervals, floored by a devastating tsunami in December 2004, and a litany of other natural and man-made disasters.

But recent economic indicators point to a resilient economy which is confidently bouncing back under the current reform government of President Susilo Bambang Yudhoyono, which has focused on improving the economic fundamentals and creating a better environment for business. The country's estimated economic growth for 2007 and 2008 are at well above 6%, inflation has been tamed and interest rates seem to be under control. Both foreigh direct investment and consumer spending - signs of economic confidence - are on the rise.

Some credit has to be given to BKPM, the government's investment service agency responsible for foreign investment promotion, which operates six international offices around the world. It was instrumental in writing a new investment law in April 2007 that eliminates many of the barriers that prreviously hindered foreign investment in the country. The law drastically reduces bureaucratic processes for investors, increases anti-corruption measures, gurantees equal treatment for overseas and local investors, and decentralizes investment through regional onew-door integrated services.

Training a combative national champion

In reponse to the anticipated fierce competitive environment, Indonesia's National Oil Company (NOC) Pertamina, is not given a protective blanket by the government, but fangs and claws to fight on even terms regional giants like Shell Petroleum and Malaysia's Petronas.

Pertamina's challenge is to "modify the culture, mindset and management style that are all inheritance of the past," says Ari Soemamo, president and CEO, whose condition to take the job in 2006 was that he would have a free hand to truly transform the Company, whose previous reputation was more like a spoiled, lumbering giant, unable to take against opposition without government protection. In 2003, Pertamina was officially transformed from being a state oil and gas enterprise to a state-owned limited liability company - very much like a private corporation. This was the statutory framework aimed to establish a truly competitive and efficient NOC.

Elephant hunters on the prowl

The gauge the efffects of this cultural transformation, one needs to examine the conditions at the trenches. Already, the guerilla oil outfits and the elephant hunters (elephant is a term in the oil industry which refers to a major oil find) are combing the hinterlands and the backwaters of the country for the black gold. The cast of characters is a diverse lot: from Santos of Australia, Statoil of Norway, ConocoPhillips, Eni of Italy, giant CNOOC of China - as well as local players like Star Energy.

For sure, challenges lie ahead, for decades-old problems of corruption, red tape and protectionism are difficult to brush aside. But industry players generally share the optimism that changes are on the way - and for real - by putting their money where their mouths are.

Lessons from a neighbor

Our policymakers should take notice.

Here, the mindset is still of protectionism and grandstanding. Petron's majority stake sale to Ashmore, a hedge fund, quickly becomes a national security problem, and protectionists are on the offensive to have the company "re-nationaized".

A suggestion to open the debate on the nuclear option (see previous post, "Is nuclear the way to go? - re-opening the debate", April 16) could very well lead to resumption of old animosities and charges of corruption.

A mere joint seismic study on the oil potential of the country metamorphosed into a question of national sovereignity, when scientific collaboration is the norm to attain significant progress in a ny economic endeavor.

Our mine sites are languishing at a time of near $1000 an-ounce-gold with developments stymied by bureaucratic processes, parochial oppposition and political noise.

For sure, developing natural resources has its attendant challenges, but these are not insurmountable.

In the very important energy sector, our once lowly neighbor is showing the way. Let us not be surprised if we eat our neighbor's dust on the racetrack of economic progress.

Is nuclear the way to go? - Re-opening the debate

By J R Ruaya

Energy and Chemistry Consultant

Recently, the Department of Energy is considering undertaking a comprehensive study on the feasibility of delving into nuclear power generation, upon the recommendation of a United Nations-sanctioned body. This is a clear signal that this government is at least dusting off the nuclear files which have been in limbo since 1986, when the newly-installed government of Corazon C. Aquino shelved the operation of the 620 MW Bataan nuclear power plant in Morong. Energy Secretary Angelo Reyes said the eight-person delegation from the International Atomic Energy Agency (IAEA) had recommended the conduct of a thorough feasibility study before deciding whether or not to go into nuclear power generation. The core group who wll conduct the two-year study is composed of key experts from the DOE, National Power Corp. and the Philippine Nuclear Research Institute of the Department of Science and Technology. The IAEA group came to the Philippines in January to visit the mothballed Bataan Nuclear Power Plant (BNPP) in Morong and help the government in deciding whether or not to pursue nuclear power generation. The IAEA team would merely make a recommendation on what could be the best options for the government—whether to rehabilitate and refire the BNPP, to convert it to a plant that used another type of fuel, or to just scrap it altogether.

At about the same time during the Philippine Energy Summit held 28-30 January at the SMX Convention center at the Mall of Asia, Dr. Jose O. Juliano of the National Academy of Science and Technology and a long-time advocate of nuclear power, argued for a fresh look at the nuclear option as part of the country's long-term strategy for energy security.

He cited several advantages of nuclear power such as low pollution emissions, small land requirements in contrast to those of hydro and geothermal which require hundreds of hectares of land often in watersheds and protected areas, small fuel and waste volumes which are meticulously managed, and the existence of a proven intermediary storage.

He pointed out that nuclear power is a non-producer of carbon dioxide, the main greenhouse gas allegedly reponsible for global warming, and other airborne pollutants such as particulates, nitrogen oxides and sulfur-bearing gases which are products of coal and fossil fuel burning.

At the same time, he pointed out its inherent disadvantages in which he singled out the problem of nuclear waste disposal. He noted that there is no final repository in operation, high toxicity of processed fuel which need to be isolated for a long time (decades). He added that this could be a potential burden for future generations.

In terms of economics, Juliano cited its advantages which include: NPPs are cheap to operate, has stable and predictable costs, long life time, secure fuel supply (this is debatable) and low external costs. On the flip side, nuclear power needs a high upfront capital cost, can be difficult to finance, costs can be sensitive to interest rates, long lead times, long payback periods and there are regulatory risks to contend with.

In the mid-eighties, there was a marked stagnation of nuclear power development brought about by a confluence of factors, as Juliano noted. The factors he cited include energy efficiency improvements, economic restructuring, drop in electricity demand, excess generating capacity, oil price collapse, advent of highly efficient, cheap gas turbine technology, electricity market liberalization and privatization in many countries, and regulatory intervention after the Three Mile Island incident.

But today is quite different, Juliano argues. Nuclear is already a proven technology that provides clean electricity at predictable and competitive costs, has 12,000 years of accumulated reactor experience, stringent safety standards are in place, and the nuclear industry itself accepts full responsibility for its waste.

Environmentalists and anti-nuclear activists would quickly pounce upon nuclear's environmental hazards of its nuclear waste and safety records. But, argues the nuclear proponents, environmental contamination due to nuclear plants is far negligible compared to say the massive oil spill by Exxon Valdez and to our own Guimaras oil spill. In terms of safety records, one can only point to the hundreds of coal mine deaths and injuries in China and even the United States which dwarf by orders of magnitude the number of casualties in the nuclear industry.

Here in the Philippines, there are other issues that one needs to contend with. The Bataan Nuclear power plant, argues the opponents, sits near an active geologic fault, and a tectonic movement could release devastation radioactive material from the plant. On the other side of the coin, Japan, which uses about 20 % power from nuclear is as tectonically-active, if not more, than the Philippines. Such an issue has not become a rallying point to Japanese nuclear activists. Emotionally, the Japanese would have the strongest argument against nuclear power, having tasted its deadly side during World War II at Hiroshima and Nagasaki.

A government agency also pointed out that with the mothballing of the Bataan plant, our trained local talent required to run a nuclear power plant has gone on to greener pastures or morphed into something else. It would take years before a critical mass of talent can be assembled if one is to pursue again the nuclear option.

The Ramos administration, after smarting from the massive brownouts in the early '90s, actually included the nuclear option in its agenda, and targeted year 2022 for the opening of a new nuclear facility. The program took into account ther economic scenario then, and included the development of a pool of nuclear talent.

The twin proposals above effectively opened up an invitation to a fresh look on the nuclear option. Beyond passion and emotional baggages from the Bataan plant, one needs a dispassionate and unencumbered platform from which to view the issues involved.

Let us just make sure that the window we are opening leads to a brighter future and not opening a Pandora's box.

Indonesia poised to overtake RP in geothermal production by 2010

By J R Ruaya

Energy and Chemistry Consultant

Indonesia is poised to overtake the Philippines in geothermal power production by 2010 based on the current program of both countries, and aims to be the world leader by 2014.

Indonesia, which lags the Philippines in power production from geothermal, has a current installed capacity at 970 MW compared to Philippines' 1931 MW as of 2007. However, with the ongoing capacity expansion in existing producing fields such as Kamojang and ongoing development at Indonesian fields of Darajat, Wayang Windu, Lahendong, Sarulla and others, installed capacity is projected to reach 2180 MW by 2010. This does not include projects which are planned to be finished by 2010 which may not come on stream on time.

Indonesian geothermal capacity has grown 35 % between 2000 and 2005.

In contrast, the Philippines does not have a firm additional capacity by 2010 in the pipeline, while the recent 49 MW power plant at Northern Negros has been generating only 4-5 MW, well below its installed capacity, according to a recent report in Inquirer.net dated March 25, and confirmed by industry insiders.

After years of foot-dragging, Indonesia may have finally found a firm base to grow its geothermal capacity. To recall, with the onset of the Asian financial crisis in 1997, almost all geothermal projects were stopped or cancelled when it became clear that PLN, the state-owned electricity generating entity, was not going to buy the produced electricity as promised, according to a report by consultancy Layman Energy Associates.

Most of the foreign investors have stopped their development projects or have packed up under severe losses. The only foreign geothermal business that was left was Chevron (the operations were previously owned by Unocal). It was able to do so because it operates on contracts signed decades ago under the then - strongman General Suharto. At present, Chevron manages two geothermal projects in Indonesia - Darajat and Salak - which generates 259 MW of electricity, the latest of which is a 110 MW Darajat unit which started commercial operations in June 2007.

In 2006, Sugiharto Harsopragitno, director of the Ministry of Energy and Natural Resources' geothermal department, said that it could take years for foreign investors to return. However, with the improvement in business climate starting in 2003, the return could take sooner than later. That year, a new geothermal law was passed which became a catalyst for renewed geothermal activities in recent years.

During the Clean Energy, Good Governance and Regulation Forum held in Singapore last March 16-18, 2008, Asclepias Rachmi Indriyanto of the Indonesian Institute for Energy Economics, cited important geothermal development progress in recent years as a result of overhauling the country's geothermal laws and regulations. These are:

2003 - Geothermal Law 27/2003 was passed which has given legal certainty in the geothermal enterprises;

2004 - Geothermal development blueprint was enacted;

2005 - The Directorate of geothermal Enterprise and the Supervision of Groundwater Management was established;

2006 - Commissioned the JICA-funded Master Plan Study for Geothermal Power Development in Indonesia; and

2007 - A regulation allowing exemption of import duties for geothermal exploration equipment and exemption of taxes for exploration activities was released.

In addition, Presidential Decree No. 03/2005 on Regulation of Electricity Supply and Utilization was issued to (1) regulate the supply and utilization of electricity and (2) to prioritize the utilization of renewable energy (including geothermal) for power generation without bidding process.

As a result of improved business climate, foreign investors have started to trickle in in recent years. Last year, eight companies have signed a Joint Operation Contract, a preferred business route, with state-owned energy developer Pertamina. The latest announced entrant is the Reykjavik Energy Invest (REI) of Iceland which signed a cooperation agreement with Pertamina Geothermal to explore and develop some three geothermal fields in Indonesia, according to the company's press release.

It must be noted that REI and another Icelandic firm Geysir Green Energy (GGE) teamed up with local energy firm FirstGen Corporation, to take control of local geothermal developer PNOC Energy Development Corporation (PNOC-EDC) from the Philippine government through the consortium Red Vulcan Holdings. However, on December 28, 2007, REI and GGE divested their total 40 % stake in Red Vulcan.

Gudmundur Thorodsson, REI President and CEO said that while REI's plans regarding PNOC-EDC have changed, REI is committed to long-term involvement in the Philippines. He said, REI remains "committed to our other projects in the Philippines, including the Biliran steam field".

PNOC-EDC itself tried to enter Indonesia in 2003 when it concluded a three-company memorandum of agreement with Marubeni Power Systems and Pertamina to jointly carry out development relating to geothermal power generation and to construct geothermal power plants in three locations in Indonesia. The chosen locations and target capacities (in parenthesis) are Lumut Balai (330 MW) and Ulubelu (110 MW) in south Sumatra and Tompaso (60 MW) in North Sulawesi. However, these projects seemed to have not taken off.

Indonesia possesses the largest geothermal potential in the world, which is estimated at 27,000 MW. There are 253 identified fields, of which 53 are ready for detailed exploration and exploitation.