Hidromaule II

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	26483
Company name	Hidroelectrica Rio Lircay S.A.
Country	Chile
Sector	Utilities
Environmental category	B
Department	Infrastructure
Status	Dropped

Date SPI disclosed	May 11, 2009
Projected board date	June 15, 2009

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

Overview

Sponsor/Cost/Location

Development Impact

Contacts

Attachments

Project description

Hidroelectrica Rio Lircay S.A. (the “Company”) is a Chilean Sociedad Anonima established to develop and operate two run-of-river hydropower projects in Chile’s VII region: (i) a 6 Megawatt (MW) plant (“Mariposas”) and 10 km transmission line, and (ii) a 12.8 MW plant (“Providencia”) and 11 km transmission line (the “Project). The Company is owned by an Italian-Chilean consortium of professionals (the “Sponsors”) with substantial experience in the hydropower generation industry.

The Mariposas and Providencia plants are the second and third in a series of run-of-river hydropower plants being developed by the Sponsors located in the same irrigation canal network. The first plant, also an IFC investment (“Hidromaule”, Project ID 25568), is comprised of a 20MW run-of-river hydropower plant (“Lircay”) with a 29 km transmission line connecting the plant to a local distribution company’s substation; it has been operating successfully since October 2008. The proposed Project is being developed under the same ownership structure and management and with the same group of key contractors as was Hidromaule.

The Company will obtain water use rights primarily through water use contracts with the Maule Canal Association (“ACM”), the well-established association that manages the canals and holds the consumptive rights to the waters from the Maule River. This was the case for the Lircay plant as well. The Mariposas and Providencia plants will be connected to the existing Lircay substation via newly constructed transmission lines which will run alongside existing canals on ACM-owned land.

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.

Project sponsor and major shareholders of project company

The Company is as Chilean Sociedad Anonima. Its principal shareholders are:

- Italian company Sorgent-e S.R.L. (“Sorgent-e”); and
- Chilean company Empresa Austral Andina S.A. (“EAA").

The Mariposas and Providencia plants are the second and third in a series of projects intended to be developed by the partners. The first was the Lircay plant, which was developed under the same ownership and management structure. 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, with the Lircay project representing 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 $45.0 million. The proposed IFC investment is a $12.75 million A Loan for IFC’s own account, a $12.75 million syndicated B Loan for the account of participants, a $3.0 million subordinated C Loan for IFC’s own account, and a $3.0 million subordinated D Loan for the account of participants.

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 Mariposas plant will be located towards the end of the Section 1 of the Lower North Maule Canal, and will use its natural discharge into the Mariposas creek and the start of the Mariposas irrigation channel without interfering with the established irrigation activities. The Providencia plant will be located where Section 2 of the Lower North Maule Canal discharges into the Picazo creek.

Anticipated development impact of the project

Decreased power costs through displacement of expensive diesel-fired generation: The Project will displace diesel-fired generation that currently provides marginal pricing in Chile as a consequence of the shortage of gas imports from Argentina. This will help lower the cost of production in the Chilean grid.

Decreased emissions through the displacement of fossil-fuel powered generation: The Project will displace diesel-fired generation. This will help reduce local air pollutants (principally SOx and NOx), improve air quality for the local population, reduce global greenhouse gas emissions and contribute to climate change mitigation globally.

Increased installed generation capacity in context of supply shortage: Chile is currently experiencing an acute over-reliance on diesel generation for its power generation needs due to the severe curtailment of gas imports from Argentina that began in 2003. Development of additional generation capacity within Chile that does not rely on fuel imports will contribute to adequate electricity supply, and help diversify Chile’s energy mix. Diminished reliance on imports will in turn strengthen the country’s energy security in the context of the current energy crisis.

Development of new NCRE credits market though market participation/demonstration effect: The Project will help support the creation of an effective market in NCRE certificates as envisaged by the March 2008 Law. The Project will be one of the first participants of the nascent market.

IFC's expected development contribution

Financial Additionality. Despite the strong expected financial performance of IFC’s investment, IFC’s presence in the financing is essential to the Project’s viability, particularly in the current environment. Commercial banks are generally reluctant to finance merchant plants, i.e. plants without long-term contracts to sell electricity. It is even less likely that they will do so with a project with relatively small sponsors as is the case here. IFC’s financing on its own account, and its role in mobilizing additional financing, make the Project viable.

Demonstration effect: IFC has a role to play in a promising sector that relies on a relatively clearly defined, but still relatively untested, NCRE regulatory framework to support small-hydro and other renewable generation.

Environmental and social issues - Category B

The Project consists of two small run-of-river hydroelectric plants that offtakes water from existing irrigation canal systems. Land required for the hydroelectric plants and related transmission lines is privately owned and can largely be acquired through negotiated agreements. The project setting is forested grazing land and does not include habitats of high value or protected areas. Construction impacts can be readily mitigated, and operational impacts will be minor. Key issues going forward are the development of the company’s internal operational phase management systems and the Action Plan for the project. Based on the forgoing, the project has potential limited adverse social and environmental impacts and is categorized as B.

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