US-based power company AES has presented two solutions for resolving its US$1bn debts with Brazil’s national development bank BNDES.

The first proposal involves bringing in a new partner or group of investors to Sao Paulo distribution subsidiary Eletropaulo, as well as handing over the 640MW Uruguaiana thermoelectric power plant to BNDES.

The second proposal would involve handing over Uruguaiana and AES’ Rio Grande do Sul state-based distributor, AES Sul, and a renegotiation of any outstanding debt.

“AES could allow a new partner into Eletropaulo, that could come from the market or from a consortium,” says Jose Pio Borges, a former president of BNDES who originally authorised the loans to AES in April 1998.

Borges says he would be working with a group of consultants hired by AES to provide strategic advice for operations in Brazil and help restructure the group’s debts.

In 1998, AES invested US$3.6bn to buy into Eletropaulo, including US$1.6bn of its own cash and US$2bn in debt from BNDES channelled primarily through two holding companies, AES Elpa and AES Transgas.

AES and the subsidiaries have already paid back US$940mn of the principal owed to BNDES, but recent turbulence in the electric power market coupled with the heavy US-denominated debt burden has pushed the companies close to, or into, default on the outstanding amounts.

AES Elpa recently defaulted on a US$85mn payment and Transgas is seeking to extend the terms of its debts.

AES has invested US$4bn of its own cash in Brazil. Beyond Eletropaulo, AES spent US$2.4bn to buy AES Sul and Uruguaiana, and generator AES Tiete. Last year, the company expressed its desire to sell AES Sul and Uruguaiana, but seems keen to hang on to Eletropaulo and AES Tiete.

The Brazilian press has recently criticised AES, accusing it of buying assets in Brazil by borrowing from BNDES and not putting in a penny from its own pocket. It also alleges bad management of local subsidiaries and criticized the company for repatriating dividends while not paying debts.

AES Elpa sent US$217mn to the US between 1999 and 2000 as dividends, but AES claims it has brought in much more direct investment.

All parties have a number of outstanding debts with private investors, including bank loans and bonds. Eletropaulo’s outstanding debt to these investors is about US$483mn, most of which has been restructured or is being renegotiated.

Market analysts are not concerned about any possible conflict of interest with Borges advising AES. But they are more concerned about the quality of the assets being offered by AES to resolve the debts.

AES spent US$600mn to build the Uruguaiana plant, but it is reported to be worth far less now due to excess supply of power in Brazil and the uncompetitive cost of thermoelectric power. Nor is AES Sul considered a prized asset: it has been on the market for several months but so far there have been no takers.

The federal and state governments have been an analysing their options regarding Eletropaulo.

The president of state power company Eletrobras, Luiz Pinguelli, admits he was examining the possibility that the federal government could take control of Eletropaulo, but suggested the best option was for AES to pay off its debts.

The Sao Paulo state government, which ultimately owns Eletropaulo’s concession, has also said it is prepared to step in and run the company if need be, but cannot afford to buy the company or settle the debts. Again, its preferred option seems to be a settlement between AES and BNDES.

Analysts concur that Eletropaulo is viable as a company as long as the debts can be worked out. According to a report by Brazilian bank Unibanco, turnover at Eletropaulo should reach R1.33bn this year rising to R1.54bn in 2004. This is likely to be further boosted when the company goes through the five-yearly price revision process in June, when it is expected to secure a price hike of around 30%.