Hidromaule

Summary of Proposed Investment

This Summary of Proposed Investment is prepared and distributed to the public in advance of the IFC Board of Directors’ consideration of the proposed transaction. Its purpose is to enhance the transparency of IFC’s activities, and this document should not be construed as presuming the outcome of the Board decision. Board dates are estimates only.

Project number	25568
Company name	Hidromaule S.A.
Country	Chile
Sector	Utilities
Environmental category	B
Department	Infrastructure
Status	Active

Date SPI disclosed	February 2, 2007
Projected board date	March 5, 2007
Date revised SPI disclosed	February 20, 2008
Previous Events	Invested: August 9, 2007 Signed: June 26, 2007 Approved: May 9, 2007

View Environmental & Social Review Summary (ESRS), click here

Overview

Sponsor/Cost/Location

Development Impact

Contacts

Attachments

Project description

Hidromaule S.A. (Hidromaule or the company) is a start-up hydropower generation company owned by an Italian-Chilean consortium of professionals with substantial experience in the hydropower generation industry. The company’s initial project, Lircay, is a 20 Megawatt (MW) run-of-river hydropower project located along the Lircay River in the VII Region of Chile, approximately 30 km to the northeast of the city of Talca. The project is expected to have a construction period of approximately 18-24 months. The Lircay hydropower project takes advantage of water rights owned by the Canal Maule Association, a long-established irrigation group formed mainly by medium and small agriculturists and with approximately 2,200 shareholders. The Association utilizes water in the Maule River that is stored upstream in the Maule Reservoir, diverted at the Armerillo intake and distributed through two primary canals – Maule Norte Alto and Maule Norte Bajo. The Lircay project is made possible through a surplus of water during wet periods of the year and as a result of topographic relief at a point on the Maule Norte Bajo that over looks the confluence of the Corel and Lircay rivers. Up to 28.20 m3/sec of canal flow and a head of 107 meters are available at this location. During the season of irrigation (mid-September through mid-April) water is available for power generation only to the extent that flow exceeds irrigation requirements. The rest of the year water is available up to the 54.32 m3/sec of water rights owned by the Association. The company has used the 40-year period of record for flow in the Maule River to optimize the size of the Lircay plant for year-round operation. Infrastructure required for the Lircay project includes a diversion structure on the Maule Norte Bajo canal, a 2,950 meter-long canal to bring the diverted water to a point overlooking the powerhouse, a 520 meter long steel penstock pipe to the powerhouse, and a powerhouse with two Francis-type turbine-generator groups with a 9.7 MW capacity each. Water flow required for the powerhouse at full generating capacity is 22 m3/sec. As part of the project the company will also construct a 25 km transmission line to CGE’s Maule Substation in San Clemente.

Project sponsor and major shareholders of project company

Hidromaule is as Chilean Sociedad Anonima established in 2005. Its principal shareholders are:

- Italian company Sorgent-e S.R.L. (with a small participation from its 100%-owned subsidiary Font-e S.C.R.L.); and
- Chilean company Empresa Austral Andina S.A. (EAA).

The Lircay project is the first of several projects intended to be developed by the partners. Sorgent-e and EAA have signed a shareholders’ agreement through which they agree to jointly develop all of the projects that either company will carry out in Chile’s VII Region. Sorgent-e has substantial experience in the construction and operation of small hydro projects in Italy through its subsidiaries, although the Lircay project represents their first venture in Chile. EAA was founded in 2006, and is made up of Chilean professionals with prior experience in the hydropower generation sector.

Total project cost and amount and nature of IFC's investment

The total project cost is estimated at $23.3 million. The proposed IFC investment is a $6.2 million A Loan for IFC’s own account, a $10.0 million syndicated B Loan for the account of participants, and a $3.5 million subordinated C Loan for IFC’s own account.

Location of project and description of site

The project is located in the confluence zone of the Corel and the Lircay rivers, approximately 30 km to the northeast of the city of Talca, in Chile’s VII Region. The Lircay project is located towards the end of the Section 1 of the Low North Maule Canal, using the existing head between the Temos creek and its lower discharge point on the Lircay river, exploiting water rights owned by the Maule Canal Association. The project qualifies as a Non-Conventional Renewable Energy Project as defined in Section (a) Art. 60 of the Chilean Regulation for Non-conventional Means of Generation and Small Established Means of Generation of the General Law of Electrical Services of January 17, 2006.

Anticipated development impact of the project

Chile’s Central Interconnected System (SIC) has three generators: Endesa-Chile (owned by Endesa Spain), AES Gener (AES), and Colbun (Tractebel) - controlling more than 90% of the market. Of existing generation capacity, approximately 42% is coal or gas-fired. Over the last three years, there have been significant cuts in gas volumes imported from Argentina, especially during the critical winter months, because of limited production capacity in Argentina. Although these reductions in gas volumes have not had an impact in the residential sector, they have created problems for generators and industry in general, who have on occasion experienced complete loss of gas volumes for several days, impairing their production capability. Due to this problem, Chile has sought a number of possible alternative sources of fuel. These efforts include:

- exploration for gas in the southern region of Magallanes;
- importing LNG from Australia and Indonesia; and
- development of new renewable energy plants, to include wind power and hydropower.

Being a run-of-the river project, with a very low marginal cost of power, the project will lower the cost of electricity to its major offtakers and therefore help support a lower cost structure for industries in Chile. Given that the hydrology of project site is very well studied, it will also be able to do so with a great degree of reliability, without burning fossil fuels. The project will thus help reduce Chile’s NO2 and CO2 emissions by displacing thermal power generation in the economic dispatch order.

IFC's expected development contribution

Chile is a competitive market with good availability of long-term financing due to a well-developed capital market and high levels of liquidity of institutional investors. However, access to long-term finance for SMEs, first time bond market issuers and micro-enterprises is still limited. IFC’s financial assistance in Chile has been focused on projects where IFC’s involvement has high demonstration effects, in sectors such as infrastructure, including water and power. IFC’s development contribution is to provide relatively scarce long-term capital for small hydropower projects (classified as Non-Conventional Renewable Energy in the country), thus helping the Government of Chile fulfill one of the critical objectives of its energy policy. IFC will mobilize long-term capital to a key infrastructure sector in Chile, support smaller local sponsors without access to Chile’s well-developed capital markets, and act as a catalyst in encouraging the mobilization of additional bank financing for this relatively new sector.

Environmental and social issues - Category B

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