Lighting up Brazil.

El Paso Energy unveils a bold plan to build a US$1 billion electricity-generating complex in power-poor S[tilde{a}]o Paulo state.

WEARING A PLASTER CAST THAT STRETCHED FROM HIS HEEL to his thigh, Greg Bafalis was hopping around the Houston headquarters of El Paso Energy on one leg. An old football injury? More like a new one that occurred while playing soccer with some friends in Rio de Janeiro, where he is based. "I just jumped into the air and came down wrong," he explains. "I hobbled here, and I'll hobble back."

Bafalis hasn't let his injury slow him down. As vice president and general manager of the southern cone region for El Paso Energy, Bafalis is leading the pipeline and power company headfirst into South America.

El Paso Energy has taken a lead role in the US$2 billion Bolivia-to-Brazil pipeline, which is expected to feed much-needed natural gas to 29 Brazilian cities along its 2,000-mile route. The first leg--from Bolivia to S[tilde{a}]o Paulo--was completed in late 1998 and began transporting gas in March 1999. The second leg--from S[tilde{a}]o Paulo to Porto Alegre--is currently under construction. El Paso Energy is so pleased with the project, executives would like to up their 10% stake if the opportunity presents itself.

The Texas-based energy concern is also busy building power plants that would consume gas transported through the pipeline. The company will break ground in July on a $300 million, 480-megawatt power plant at Araucaria in the southern Brazilian state of Parana with partners Companhia Paranaense de Energia (Copel), British Gas of the United Kingdom and Gas Petro, a unit of Petrobr[acute{a}]s. The facility should be up and running by 2002. Next: Develop other power plants north and south of Araucaria.

But El Paso Energy's biggest play to date came in July 1999, when it formed a consortium with GE Power Systems, a unit of General Electric of the United States, Initec of Spain and ITS of Brazil, to explore the possibility of developing a 2,000-megawatt power generation complex in the electricity-poor state of S[tilde{a}]o Paulo. If it goes ahead, the complex should be completed by 2003. The cost: an eye-popping $1 billion.

The complex is sorely needed. Much of S[tilde{a}]o Paulo's power comes from hydroelectric facilities thousands of miles away. And when there's drought, which has been the case over the last few years, there are blackouts that disrupt the lives of millions of Brazilians, from their homes to their offices to their factories.

Two years ago, the Brazilian government set a goal of adding 3,000 megawatts of electricity a year for the next 10 years. But so far, it's only added 1,000 megawatts. A relatively mild summer saved S[tilde{a}]o Paulo state's residents and manufacturers from blackouts this year. But that could change next year. They need it," says Mark Croke, senior vice president of El Paso Energy's Latin American operations. "They just haven't moved quickly enough."

Pipeline and power combo. However, El Paso Energy is not pinning all its hopes on S[tilde{a}]o Paulo. It built a 250-megawatt, oil-fired power plant in the Brazilian state of Amazonas--the first independent power project (IPP) in the country. It then picked up another project next door, a 158-megawatt, $116 million plant called Rio Negro. It's now beginning work on a plant that will bring 340 megawatts of power to Porto Velho in the northwestern state of Rondonia. El Paso Energy is also partnering with Brazilian oil giant Petrobr[acute{a}]s to build a gas pipeline that will bring gas from the Urucu basin to the plant.

The company has also followed a similar pipeline and power plant strategy in other parts of Latin America. It has even taken it across the border of Argentina and Chile with the $380 million Gasoducto del Pac[acute{i}]fico project, a 320-mile pipeline across the Andes. Indeed, many analysts believe connecting the disparate networks together will be the key to El Paso Energy's success. "They have been reasonably effective at creating an asset network down there," says John Olson, who follows the company for brokerage firm Sanders Morris Harris in Houston. "Tying it all together and making sense out of it is the next step.

Building a huge electricity-generating complex in S[tilde{a}]o Paulo state--the center of industry in the country--would certainly be a major step toward that goal. El Paso Energy's plan is to construct a four- to seven-plant facility that would be fueled primarily by gas from the Bolivia-to-Brazil pipeline. If completed, the project would be the one of the largest power plants in Latin America's largest country.

So far, El Paso Energy has managed to rally local support. At last July's signing ceremony, seven mayors from the region signed a preliminary agreement to go ahead. Several Brazilian bigwigs also showed up, including Vice President Marco Maciel, S[tilde{a}]o Paulo Governor M[acute{a}]rio Covas and Energy Minister Rodolpho Tourinho.

But the devil was in the details. The project finally moved forward last February, when Brazilian President Fernando Henrique Cardoso signed a series of protocols that will give projects like El Paso's special privileges, such as indexed pricing. Now that El Paso Energy has the terms it wants, its executives are negotiating with utilities and investors to begin work on the complex's first 500-megawatt plant. "That really gives us the impetus to go forward," Bafalis says.

'Samalanunca' This is not the first time El Paso Energy has had to be patient--and diligent--when it comes to bringing big projects to fruition. In northern Mexico, just 25 miles south of El Paso, the company is a 40% investor in the 750-megawatt Samalayuca II power plant as well as a 50% investor in the pipeline that feeds natural gas to it and its sister plant, Samalayuca I. The $647 million power project attracted financing from the likes of the Inter-American Development Bank and the U.S. Export-Import Bank as well as well-heeled partners such as GE Power Systems and GE Capital Services. But it was mired in regulatory delays for years, leading some to call it "Samalanunca," or "Samalanever."

El Paso Energy stuck with it. The $19 million pipeline began transporting gas in late 1997 to Samalayuca I, and Samalayuca II went on line early last year. "Once construction started, operations have been over expectations," Croke says. "It really has been a wonderful project."

A not-so-wonderful project was El Paso's aborted foray into Venezuela. In March 1999, the company and its partners--Nissho Iwai Corp. of Japan and GE--withdrew from a $400 million gas injection project in Venezuela, costing the company $3 million in related bidding costs. The project--which, if completed, would have been the largest such facility in the world--has since been awarded to the No. 2 bidder, Williams Co. of the United States.

Many thought the company retreated because it didn't like the policies of the country's president, Hugo Ch[acute{a}]vez. But Croke says it was the financiers who got cold feet. "We had actually gone down to Venezuela with the contracts in hand signed. And in the two weeks between the time we tried to hand in the documents and the time they were ready to accept them, we saw the softening of the financial community, and we made the difficult decision to leave," he says. "It shows you that life is a matter of timing."

El Paso Energy's international division has a $350 million investment kitty to spend this year, and Croke plans to spend half of that in Latin America, He says that the company will focus on pipelines and power for the wholesale market as it has in the United States. "We think we have a very good chance of replicating that in Latin America," Croke says. Clearly, "timing" in Brazil will play a big role.