Magat Hydro

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	26041
Company name	SN Aboitiz Power, inc.
Country	Philippines
Sector	Utilities
Environmental category	B
Department	Infrastructure
Status	Active

Date SPI disclosed	July 30, 2007
Projected board date	September 6, 2007
Previous Events	Invested: October 22, 2007 Signed: September 28, 2007 Approved: September 6, 2007

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

Overview

Sponsor/Cost/Location

Development Impact

Contacts

Attachments

Project description

The Magat Hydroelectric plant (Magat HEPP) is a 360MW power plant built at the foot of the Magat dam in the north of Luzon, the Philippines, which has been operational since 1983. The Magat HEPP has been undergoing a privatization process since December 2006 through an international tender process, as part of the privatization program of the Electric Power Industry Reform Act (EPIRA), a comprehensive sector reform law, under which the Power Sector Assets and Liabilities Management Corporation (PSALM) has been created to privatize substantially all of the assets of the National Power Corporation (NPC), the state-owned transmission and generation company. The Magat HEPP is among the country’s few peaking plants in the Luzon grid and is expected to be dispatched largely during peak hours, running primarily as a 100% merchant power plant and selling electricity through the bid-based wholesale electricity spot market (WESM).

The proposed IFC investment of a $105 million A Loan will partly finance the privatization of the Magat HEPP. The winning bid of $530 million was tendered by SN Aboitiz Power Incorporated. (SNAP), a 50:50 joint-venture between subsidiaries of Statkraft Norfund Power Invest AS (SN Power) of Norway and Aboitiz Equity Venture (AEV) of the Philippines. This would be the first and only privatization deal successfully concluded with significant foreign participation under EPIRA.

Project sponsor and major shareholders of project company

The project sponsors are two subsidiaries of Statkraft Norfund Power Invest AS (SN Power) of Norway and Aboitiz Equity Ventures, Incorporated (AEV) of the Philippines.

SN Power was established in 2002 as a joint venture between Statkraft (50%) and Norfund (50%), both of which are 100% owned by the Norwegian government. The objective of SN Power is to develop, build, acquire, own and operate environmentally friendly hydropower assets in Latin America, Asia and Africa on commercial terms. SN Power has ownership in nine projects with a total installed capacity of about 627MW in operation and six projects with a total installed capacity of about 1,163MW under implementation, of which two projects, a 155MW La Higuera project in Chile and a 192MW Allain Duhangan in India, are IFC projects.

AEV is the public holding and management company of the Aboitiz Group, one of the largest conglomerates in the Philippines, owned and controlled by the Aboitiz family, originally based in Cebu. AEV’s core businesses, conducted through its various subsidiaries and associates, can be grouped into four main categories:

- power distribution and generation through Aboitiz Power Corporation;
- financial services;
- food manufacturing; and
- transport.

The power distribution and generation businesses contribute the largest share of the group’s revenues and the group’s future major investments will be focused on its core business.

SNAP, the project company, is a joint-venture between SN Power Holding Singapore Pte. Ltd (SNPS) and Aboitiz Power Corporation (APC), two subsidiaries of SN Power and AEV respectively, through a two-tier structure to comply with a local regulation that requires hydro generation facilities to be at least 60% controlled by Philippine entities. SN Power Singapore owns a 40% equity interest in SNAP directly and another 10% indirectly through its 16.7% equity interest in Manila-Oslo Renewable Enterprise (MORE), while APC will own a 50% interest in SNAP indirectly through its 83.3% ownership in MORE. As a result, SNAP is owned directly and indirectly on a 50:50 basis by both SN Power and AEV.

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

The total project cost is estimated at $542 million, which includes the bid price of $530 million and a provision for working capital of $12 million. The project cost is currently funded through mixture of equity from the project sponsors, shareholders’ advances, a shareholder loan from AEV, and PSALM’s deferred payment facility. SNAP will use the proceeds from the proposed financing to pay PSALM’s deferred payment in full in order to complete the privatization process.

IFC will provide a $105 million A loan, Nordic Investment Bank will contribute an additional $47 million senior loan and a consortium of local banks will complete the financing with $228 million equivalent in Peso loans. The project sponsors believe that the proposed Peso and US$ mixture in borrowing would be cost efficient and provide effective currency hedging.

Location of project and description of site

The Magat HEPP is a reservoir hydro power plant located on the island of Luzon at the border between Ramon (province of Isabela) and Alfonso Lista (province of Ifugao) approximately 350 km northeast of Manila in the Philippines. Its reservoir covers 117 km2 and has the usable storage capacity of about 21 days of electricity generation. It was built in 1983 and runs on four 90MW Francis hydro turbines. Historical annual production ranged from 550 to 1,445 Gwh with an average of approximately 928 Gwh per annum. The project will be the first IFC investment in a reservoir hydro power plant.

Anticipated development impact of the project

The project is the first power privatization project with significant foreign participation and the first merchant power plant to be financed internationally in East Asia. It has a high development impact, as it is expected to:

- reinvigorate foreign investors interest in the country’s power privatization program after several years of inertia,
- continue to support power sector reform by restoring market confidence in the WESM mechanism and the institutional capacity of the Philippines in general;
- provide proof of concept and demonstration effect of a successful privatization of a large scale merchant hydro power project to other East Asian countries who hesitate to embark in similar sector reforms; and
- support the improvement in the operations and the potential capacity expansion of an environmental friendly source of energy in the country.

IFC's expected development contribution

IFC will play an important role in the project by:

- supporting the success of the privatization of the Magat HEPP by sharing IFC’s extensive experience in investing in merchant hydro power plants in other parts of the world,
- providing long term, flexible financing structured to match project and sponsor’s needs,
- leading the consortium of lenders and mobilizing additional bank lending, and
- assisting in the implementation of environmental and social policies in line with international standards.

Environmental and social issues - Category B

IFC's review of this investment identified the following issues: environmental and social management capacity of the project company, SNAP, and the expected technical support from the sponsors; existing environmental liabilities from past operations, and planned corrective actions; impacts of possible expansion plans (up to two additional units); environmental upgrade plan; dam and reservoir safety; water rights and water use and uses other than irrigation conflicts with irrigation and other users and watershed management planning.

None of the identified issues are expected to result in significant impacts, and this is a Category B project according to IFC’s Environment and Social Review Procedure because potential environmental or social impacts attributable to the private project are limited.

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