Project Development

Over twenty-five years of international (Latin America, Pacific Rim, Eastern Europe) botom-line experience. AAE is a group of seasoned professionals with a broad range of direct and related experience in the development of independent power projects. AAE differs from many US developers presently in Latin America and elsewhere because of our active interest in creating pro- jects with local partners and training local people in American power technology. We have expertise in:

1. Marketing analysis and strategy. 2. "Sanity check", or "fatal flaw analysis", ofthe potential projects. 3, Tariff studies based on the calculation of marginal generation costs. 4. Permitting, licensing, environmental issues, site selection, power purchasing agreement (PPA), fuel supply agreement, and providing lastingand successful business relationship with clients/partners/sponsors/governments.

In the last ten years we have worked as developers assisting IPP companies to verify the technical and economical viability of a project (the "Due Diligence"). We developed a three stage approach to constructing lasting and successful business relationships with clients/partners/sponsors. Within each stage is a myriad of issues that, if properly identified, understood, analyzed, planned for and given adequate attention to, will form a fabric of a sound and praiseworthy project. To illustrate the importance of usinga staged approach, we'll share with you some learned experience in twenty-fiveyears of Latin American power develop ment.

First, we do the "sanity check", or "fatal flaw analysis," of the potential project. To give an idea what we mean by this the followingis a partial list of the participants whose benefits must be determined to at least two levels: power purchaser, country of project, site location, power transmission provider, fuel supplier, site owner, primary projects ponsor, turn key contractors, other equipment vendors, equity investors, debt providers debt and equity guarantors, multilateral institutions,lenders legal coun sel, financial advisors sub groups of vendors such asvendors equity providers, national support available on behalf of vendors, insurers, water providers, politicians and clergy, the environmental groups representing everything from air to the water, to their own pet interest. By two levels we mean that you need to know as a minimum what each parties motivations would be to par- ticipate in the transaction as well as theirview of the overall desirability of the project and how they should relate to all of the other project participants. After we have identified these items as they exist today, based on our more than two decades of ex- periencein Latin America, we must look at how they are likely to exist five, ten, and twenty-five years from today. The world, attitudes, and motivations of many if not all of the projects participants will change during the development process as well as during the life of the project. Everyone affected by the project, including the sponsors, power buyyers, community, government agencies, vendors, neighbors and passersby, must receive positivere inforcements and if possible a reason to actively support the project. If the key participants have a clear understanding of the benefits, they will enjoy as a result the project going forward, the project will have the resiliency to survive all of the changes, challenges, political variations, and unforseen problems that will occur during the tdevelopment process. The first priority of the project participants must be brought out so that in compatibilities can be discovered early. If everyone wants the projectto succeed and there is a general sense that it is good for everyone involved, then even seemingly insurmountable obstacles get resolved in compromises that no one even expected. We called this first stage of the development "relationships and reconnaissance" and only after we are confident that we did a good homework and we did not forget anything, we are thinking of proceeding to the second and third stages of the development process. It looks like there are three "stages" as if they are separate,distinct, and sequential. This is not the case. In actual practice the transitions are more likely a ramping up of the project activities. Since many of the relationships and contacts made during phase one will be continuous threads that will become part of the final fabric they are not separated but simply become more and more defined as the project evolves. By the time a project gets to the third stage it will be taking on a life of itsown. Many of the participants will want to start running to the finish line. The uninitiated will start calling it a done deal. Don't be fooled. The real manpower part of the project has just begun. It is very important to have scheduling systems up and operating by this time. It is very difficult for the development team, let alone the task force leaders, to keep track of the necessary linkages between the project tasks and contracts.

This is also the time in the development process to start integrating the long term management and operating team people since all of the contractsand decisions that are being made are starting to firm up and need to be double checked from a practical implementation approach.

Negotiating in Latin America is completely different than in other regions. Many transactions will involve different cultural approach indistinct countries. We would beseech you to try to remember that no matter how frustrating it is when someone else's business style seems completely inappropriate that they are still probably doing the best they can to makethings work. We know, there are exceptions, but for the most part it is safe to assume that, at worst, the person on the other side of the tran- sactionis trying to succeed by using a style that has always worked in his business career. It takes some time for any of us to make a heartfelt adjustment to the cultural differences. This seemingly inappropriate behavior does not necessarily represent incompetence or deceit. In this specific cultural environment, the following is an example of our strategy of negotiating the | PPA, one of the most important agreements in a power generation contract.

The Power Purchase Agreement will have three (3) components in thepricing of power. First, there will be an annual payment which covers AAE'scost of debt service and equity in the project. (Since debt is cheap and equity expensive, AAE can minimize cost by maximizing the amount of debt and minimizing the amount of equity required to finance a project. The factors mo- tivating equity investors, however, are very different from hose motivating debt. Equity generally focuses on returns. Debt is usually concerned with risk). This payment will be made only in relation to the maximum capacity of the plant, and independent of how many kilowatt hours are actually purchased by the utility each year. The second payment will be an annual payment covering the projected cost of operating and maintaining the plant in first class condition by the operating company. Because most of the cost of operationand maintenance are independent of how much the plant is actually used on an annual basis, the O & M payment will be established by contract and will escalate with inflation rates for labor inLatin America and theUnited States. The third component of the price of electricity is the fuel cost. The electricity purchaser will pay for AAE's cost of fuel for the project, when AAE guarantees the efficiency of the plant and guarantees the reliability of operation. (For more information about PPA see Financing and Risk Mitigation page).

As a result of our experience in Latin America and elsewhere we have changed the development approach substantially in order to better address what we perceive the real opportunities to be. Our three stage approach described above is designed to provide as much time as is necessary for relationship building project undestanding without overburdening eachproject with attributable overhead. In recognition of the evolution of IPP market in Latin America we have made a conscious decision to actively seek roles in consortiums where we can add additional value by helping to create development teams staffed primarily by native people who are from the country or region in which we are working (We have offices in five countries offered by our local collaborators). We feel that this will create a long term ability for local business to actively and constructively participate in the development of the tremendous potential in Latin America, and at the same time keep the cost down, because we coordi- nate tasks done by local people by phone, fax, E-Mail, etc.

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