International power company AES has continued its international expansion strategy with completion of the acquisition of the coal fired Masinloc power plant in the Philippines.

The US-based company says that the success of the $1 billion deal indicates the attractiveness of the investment as well as the strength of the project finance market in Asia.

AES completed the 100 per cent purchase of the 660 MW (gross) plant, located in Barangay Bula, Luzon, in one step and is planning to implement an upgrade programme to improve the plant’s operational and environmental performance. It bid for the plant in a privatization auction conducted by the Philippines’ Power Sector Assets and Liabilities Management Corporation (PSALM).

“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 the lowest cost thermal plant 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.”

The privatization will help to improve competition as well as environmental performance in the Philippines’ electricity sector, says the Asian Development Bank (ADB), which helped to finance the deal. AES will invest $47 million to rehabilitate Masinloc.

“This will save coal and reduce carbon dioxide and other emissions,” said Kurumi Fukaya, ADB Senior Investment Specialist. “It will also diversify the electricity generation market in the Philippines, thereby promoting competition and helping reduce power rates in the long run.”

Some 60 per cent of the electricity generated at Masinloc will be sold to electric distribution companies, cooperatives and special economic zones under power supply contracts. The remaining capacity will be sold via the wholesale power pool or under new contracts.

The International Finance Corporation (IFC) is AES’ minority partner in the deal with an eight per cent stake. The total project cost is around $1057 million, including the planned upgrade programme, says AES.

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 the ADB, 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 Philippines has some of the highest electricity prices regionally, according to the ADB. The government embarked on a market-orientated reform programme in 2001 and introduced the wholesale electricity market.

With electricity demand on the Philippines’ main island of Luzon increasing by about 11 per cent last year, an estimated $1.7 billion is needed to finance the construction of new power plants in coming years. Masinloc is the eighth and largest power plant to be privatized out of a total of 31 plants identified for sale.