Document of The World Bank Report No: 53503 - CL PROJECT APPRAISAL DOCUMENT ON A PROPOSED PURCHASE OF EMISSIONS REDUCTIONS BY THE PROTOTYPE CARBON FUND (PCF) IN THE AMOUNT OF US$3.5 MILLION FROM THE HIDROELECTRICA GUARDIA VIEJA, S.A (REPUBLIC OF CHILE) FOR THE CHACABUQUITO HYDROLECTRIC POWER PROJECT January 15, 2002 Finance, Private Sector and Infrastructure Department Country Department: Argentina, Chile, Paraguay, Uruguay Region: Latin America and Caribbean CURRENCY EQUIVALENTS (Exchange Rate Effective December 13, 2002 ) Currency Unit = Peso Chileno Peso Chileno 667 = US$ 1 FISCAL YEAR January 1 ­ December 31 ABBREVIATIONS AND ACRONYMS CAS Country Assistance Strategy CDEC Centro de Despacho Económico de Carga (Economic Load Dispatch Center) CDEC-SIC Centro de Despacho Económico de Carga-Sistema Interconectado Central (Economic Load Dispatch Center -Central Interconnected System) CDM Clean Development Mechanism CNE Comision Nacional de Energia (National Energy Commission) CONAF Corporación Nacional Forestal (National Forrestry Corporation) CONAMA Comisión Nacional del Medio Ambiente (National Environmental Commission) DGA Dirección General de Agua (General Water Directorate) EA Environmental Assessment EIRR Economic Internal Rate of Return ER Emission Reduction ERPA Emission Reduction Purchase Agreement FIRR Financial Internal Rate of Return HGV Hidroeléctrica Guardia Vieja, S.A. IRR Internal Rate of Return JI Joint Implementation MVP Monitoring and Verification Protocol NPV Net Present Value PCF Prototype Carbon Fund ROW Right of Way SEC Superintendencia de Electricidad y Combustibles SIC Sistema Interconectado Central (Central Interconnected System) SINC Sistema Interconectado del Norte Grande (Northern Interconnected System) UNFCCC United Nations Framework Convention on Climate Change Vice President: David de Ferranti Country Manager/Director: Myrna Alexander Sector Manager/Director: Danny Leipziger Task Team Leader/Task Manager: Eduardo Zolezzi, Nelson de Franco Chile Chacabuquito Hydroelectric Power Project TABLE OF CONTENTS A. PROJECT DEVELOPMENT OBJECTIVES .....................................................1 1. Project development objective ......................................................................1 2. Key performance indicators ..........................................................................1 B. STRATEGIC CONTEXT ...................................................................................1 1. Sector related Country Assistance Strategy (CAS) ......................................1 2. Main sector issues and Government strategy ................................................2 3. Sector issues to be addressed by the project and strategic choices .................5 C. PROJECT DESCRIPTION SUMMARY ...........................................................6 1. Project components .......................................................................................6 2. Key policy and institutional reforms supported by the project .....................8 3. Benefits and target population ......................................................................8 4. Institutional and implementation arrangements ............................................8 D. PROJECT RATIONALE ....................................................................................12 1. Project baseline and environmental additionality for the purpose of the Kyoto Protocol ................................................................12 2. Major related projects financed by the Bank and/ or other development agencies.......................................................................14 3. Lessons learned and reflected in the project design ......................................14 4. Indications of Borrower commitment and ownership ..................................14 E. SUMMARY PROJECT ANALYSIS .................................................................14 1. Economic ......................................................................................................14 2. Financial ........................................................................................................16 3. Technical .......................................................................................................19 4. Institutional ...................................................................................................25 5. Environmental ...............................................................................................26 6. Social .............................................................................................................30 7. Safeguard Policies .........................................................................................31 F. SUSTAINABILITY AND RISKS ......................................................................32 1. Sustainability .................................................................................................32 2. Critical Risks .................................................................................................32 3. Possible controversial aspects .......................................................................32 G. MAIN LOAN CONDITIONS ............................................................................33 H. READINESS FOR IMPLEMENTATION .........................................................34 I. COMPLIANCE WITH BANK POLICIES ........................................................34 ANNEXES Annex 1. Estimated Project Costs and Detailed Financial Analysis Annex 2. Project Processing Schedule Annex 3. Documents in Project File Annex 4. Statement of Loans and Credits Annex 5. Country at a Glance Annex 6. Environmental and Social Assessment Chile -- Chacabuquito Hydroelectric Power Project Project Appraisal Document Latin America and the Caribbean Region LCSFE Date: January 15, 2002 Team Leader: Eduardo Zolezzi, Nelson de Franco Country Manager/Director: Myrna Alexander Sector Manager/Director: Danny Leipziger Project ID: P074619 Sector: Energy Lending Instrument: Certified Carbon Emission Theme(s): C Reductions (CERs) Purchase Poverty Targeted Intervention: [ ] Yes [ ] No Project Financing Data [ ] Loan [ ] Credit [ ] Grant [ ] Guarantee [x] Other [Prototype Carbon Fund] Financing plan: [] To be defined Source Local Foreign Total Other (PCF) 3.5 Total: 0 0 3.5 Sponsor: Hidroeléctrica Guardia Vieja S.A. Address: Hidroelectrica Aconcagua S.A. Teatinos 220-8º Piso Santiago ­ Chile Contact Name,Telephone/Fax: Carl Weber Silva, Gerente General. Tel. 56-2-421-6000/Fax. 56-2-361-1548 Estimated disbursements (PCF disbursement, US$M): Year 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Low-case scenario Annual 0.21 0.24 0.24 0.24 0.24 0.24 0.24 0.24 0.24 0.24 0.24 0.24 0.24 0.24 0.24 Cumulative 0.21 0.45 0.69 0.92 1.16 1.40 1.64 1.88 2.11 2.35 2.59 2.83 3.07 3.30 3.54 High-case scenario Annual 0.21 0.44 0.44 0.44 0.44 0.44 0.44 0.44 0.24 Cumulative 0.21 0.65 1.10 1.54 1.98 2.43 2.87 3.31 3.55 Project implementation period: 15 years Expected effectiveness date: 2002 Expected closing date: 2016 A. Project Development Objective 1. Project development objective The objective of the project is to support development of the international market mechanism for the new commodity known as Emission Reduction (ER), developed in the framework of the Kyoto Protocol. In this particular case, the project will facilitate reduction of CO2 emissions in Chile through substituting electricity produced by thermal plants with electricity from a Chacabuquito run-of-the-river hydro plant. The project is supported by the Prototype Carbon Fund (PCF). PCF supports projects that produce high quality greenhouse gas ER which could be registered with the United Nations Framework Convention on Climate Change (UNFCCC) for the purposes of the Kyoto Protocol. The objective of the PCF is to develop experience through a learning-by-doing approach, applying Clean Development Mechanism (CDM) and Joint Implementation (JI) processes of the Kyoto Protocol. 2. Key Development indicators 1. Certified ER of 1 million tCO2 purchased by PCF during the first 15 years of the project. 2. Additional certified ER purchased by PCF 3. Additional certified ER sold at the market. B. Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project: The last Country Assistance Strategy (1995) established five priority areas: education, rural poverty, infrastructure, urban management and environment. With respect to the environment, the CAS acknowledged that Chile`s rapid growth had entailed significant environmental costs. The strategy for the environmental sector was identified as to provide the relevant institutional framework, formulate policies and strategies to identify priorities for action, and to assign primary responsibility to both public and private enterprises for addressing pollution issues of their own creation. The project fully supports this CAS goal, mainly by demonstrating potentials of the new market-based approach to support climate-friendly technologies. 1.a Global Operational Strategy/Program objective addressed by the project The project supports PCF global objectives: 1. High-Quality Emission Reduction The PCF supports funding of projects that produce high quality greenhouse gas ER which could be registered with the UNFCCC for the purposes of the Kyoto Protocol. 2. Knowledge By transacting the business of reducing greenhouse gas emissions, the PCF is developing -1- a knowledge base of business processes and practices to facilitate climate-friendly investment and inform the ongoing UNFCCC negotiations. 3. Public-Private Partnership PCF resources are provided by both the public and private sectors. The PCF demonstrates how insights and experience from both sectors can be pooled to mobilize additional resources for sustainable development and address global environmental concerns. 2. Main sector issues and Government strategy Sector reforms Chile was the first country in Latin America to implement far-reaching power sector reforms, including vertical separation of sector activities and privatization, under the principles of the 1982 General Electricity Law. Subsequently, the Chilean power sector has served as a model for sector reforms and privatizations in the rest of the region. The Chilean power sector is currently characterized by an unregulated competitive generation (with no entry restrictions), open access to transmission and distribution networks, and private participation at all levels. The sector has a sound legal and regulatory framework and well established regulatory and oversight agencies. Sector structure The national electrical network is divided into four systems (two large systems in the north and the center and two small systems in the south). The northern system (Sistema Interconectado del Norte Grande ­ SING) comprises 33% of the total installed capacity, but only 5.6% of the population. The majority of clients are large industrial complexes (mainly mining companies). The generation is almost exclusively thermal. The central system (Sistema Interconectado Central - SIC), in which the proposed project will be located, contains 66% of installed capacity, but over 90% of total population of Chile. The current installed capacity in the SIC reaches 6,682 MW, of which 60% are hydro plants and 40% are thermal plants. The Government intends to facilitate the interconnection of the northern and central systems. For this purpose, the Government is preparing modifications to the current electricity law regarding transmission regulation and pricing, in order to stimulate interest of private participants in the interconnection of the two systems. Interconnection would help to balance existing excess supply in the north with the fast-growing demand in the central system. The earliest realistic date when the interconnection of the two systems can be accomplished is 2004. -2- Figure 1: Chile's Four Electrical Systems In each of the large systems (northern and central), the dispatch center (Centro de Despacho Economico de Carga-CDEC) is responsible for planning and coordinating load dispatch. The Law establishes the obligation to optimize generation and thus, dispatch is based on pre- programmed economic merit order for the corresponding system, based on marginal costs of each unit. Generators receive payment for capacity and for actual energy delivered. They can sell power via negotiated contracts with distributors and large unregulated consumers and/or make power available to the system`s spot market. Prices to be charged by generators to distributors correspond to the weighted average of projected marginal costs of the system and are calculated by the National Energy Commission (Comisión Nacional de Energia -CNE) for different nodes in the transmission system (node prices). Prices to unregulated consumers are free. At the spot market, prices are determined by the marginal cost of the most expensive unit dispatched. There are no entry restrictions to the market for generators. All current and prospective generators make their own judgments and take their own risks on amount of capacity to be installed, technology, fuels and site locations, based on their own perception of demand growth, the evolution of capital and fuel markets, and any other parameters that may influence their businesses. -3- Distribution and transmission are regulated. Distribution companies have an obligation to provide service in their respective concession areas, with maximum tariffs set by the regulatory agency. Transmission companies have to guarantee open access to their network for all generators, under regulated price. Currently 26 generation, 5 transmission, and 36 distribution companies are operating in Chile, all of them private. Government strategy The 1980s reforms were successful in setting ground for a continuous, private sector-led expansion of the generation capacity, as well as transmission and distribution networks, capable of keeping pace with the fast demand growth, averaging 7.5% p.a. Nevertheless, even after almost 20 years of successful sector performance, the regulatory system still requires certain adjustments and fine-tuning. The main challenges facing the sector include: (i) Strengthening market forces in the operation of the sector The market signals in the operation of the system are still relatively weak, particularly in the central system, where the proportion of unregulated consumers is relatively low. The Government`s strategy to foster competition includes: (i) reducing the threshold of 2,000 kW for unregulated consumers, and (ii) improving regulation of commercialization activities, including measures that would improve access to distribution networks. (ii) Improving transmission regulation The Government intends to introduce modifications to regulation and pricing of transmission in order to ensure adequate investment in transmission and to facilitate interconnection between northern and central systems, as discussed above. (iii) Ensuring adequate medium- and long-term generation capacity From the medium- to long-term perspective, it will be essential to ensure that the sector counts with an adequate generation capacity. Certain concerns in this respect have been raised in the past years, in view of the decreasing trend of investment in the sector and relatively high demand growth forecasts. The Government needs to analyze the underlying forces behind the current deceleration of the investment in generation, which seems to be caused by a mix of factors, including: (i) relatively low node prices (recently the CNE has increased the node prices); (ii) unclear rules for determination of the capacity payment; and (iii) unusually high compensation requirements in case of generation outages or failure to meet demand. The Government also intends to introduce legislative changes that would reserve the Government the right to call for bids for installing additional generation capacity in case of a severe power supply shortage. The Government is preparing legislative changes to confront these three challenges. The most urgent adjustments are included in the fast-track draft law to be presented to the Congress by -4- early 2002. At the same time, the Government continues working on a more comprehensive reform of the Electricity Law. Environment Environment-related issues also continue to present important challenges for the power sector, as a large proportion of the energy sold still proceeds from highly polluting coal-fired plants, even though these are being slowly displaced by newer (more efficient and less expensive) technology based on natural gas (combined cycle plants). Still, in SIC, energy from coal-fired plants accounted for approximately 12 % (3,750 GWh) of total electricity produced during the year 2000. This figure was even higher in the 1997-99 period, due to severe drought.1 This production from coal-fired plants results in over 3,500,000 tCO2 emitted to the air per year. Table 1: Coal-fired Thermal General and C02 Emissions in 2000 Plant name Owner Date Marginal Installed Gross Emission CO2 costs capacity generation factor emissions (US$/ (MW) (GWh) (tCO2/ (million MWh) GWh) tCO2) Bocamina ENDESA 1970 18.3 125 437.3 907 396.6 Ventanas 1 GENER 1964 21.6 120 266.4 1,023 272.5 Ventanas 2 GENER 1977 20.0 218 1,052.8 979 1,030.2 Guacolda GUACOL 1995-6 14.2 304 1,958.7 887 1,738.0 (1&2) DA Huasco ENDESA 1965 39.1 16 0 1,823 0.0 Lag. Verde GENER 1939-49 58.5 55 19.9 2,096 41.7 Renca GENER 1962 129.3 100 14.2 This situation is unlikely to change in the near future, as the coal plants are expected to be needed in order to meet fast demand growth, estimated to be an average 8% p.a. in the next decade. In addition, the most important coal plant, Guacolda, is relatively new and efficient, built only in mid 1990s. 3. Sector issues to be addressed by the project and strategic choices The project aims to generate high quality ER and contribute to finding market-based solutions to the environmental problem of the power sector in Chile. Specifically, the energy produced from the Chacabuquito project will replace electricity produced from thermal plants, particularly the highly polluting coal-fired plants, resulting in CO2 ER of approximately 137,600 t per year. Most importantly, however, the project is expected to have significant demonstration effects, both within and outside the power sector in Chile. Specifically, it is expected that the project will improve government and private sector understanding of how to take advantage of the opportunity to achieve and sell ER in the framework of the Kyoto Protocol and the UNFCCC. 1 Hydro-generated electricity accounted for 63% of total annual generation in the SIC system in 2000, but only 48% -5- The project is expected to prepare ground for implementation of similar projects in the future, contributing to the reduction of greenhouse gas emissions both in Chile and worldwide. C. Project Description Summary 1. Project components As PCF only buys ER and agrees to a payment schedule against the delivery of the certified ER, there are no project components to describe other than the production and sale of ER. The Chacabuquito Project is being developed by Hidroeléctrica Guardia Vieja (HGV), a Chilean private company, and consists of a run-of-the-river power plant of 25 MW capacity that utilizes the waters of the Aconcagua River and will produce an average annual generation of 160 GWh. The project is located in the 5th Region of Chile, near Los Andes, about 100 km Northeast from Santiago. The project`s construction time is approximately 15 months and is expected to be completed in 2002. The construction is financed fully by HGV. The project will consist of hydroelectric generation that will displace thermal generation, therefore producing ER. For the purposes of the project, the Emission Reduction Purchase Agreement (ERPA) will be signed between PCF and HGV, the implementing party (project sponsor), (Annex 10), accompanied by the Monitoring and Verification Protocol (MVP) (Annex 11) that will specify rules and procedures for calculation and certification of the actual ER produced. The quantity and price of ER are negotiated between the two parties, but the quantity is based on the estimates of the baseline study, implemented and verified by independent experts (Annex 8). PCF and HGV have agreed to contract ER of one million tCO2. -6- Figure 2: Project's Location Chacabuquito It is expected that the Chacabuquito plant will become operational in 2002 and the same year the first ER should occur. The actual amount of the annual ER will depend on the type of power generation displaced by the Chacabuquito project. In principle, there are two scenarios, for which PCF has developed an implementation schedule. In the high-case scenario, Chacabuquito will displace only coal-based thermal generation, resulting in annual ER of approximately 137,600 tCO2. Economic and technical analyses carried out in the baseline study have determined that this is the most likely scenario, at least during the first seven years of the project. The low-case scenario consists of the ER achieved if all coal-based generation in the SIC system is terminated. In that case, Chacabuquito displaces only the less polluting thermal plants using natural gas, generating approximately 79,000 tCO2 of ER per year. It would still be possible to reach the projected purchase of 1 million tCO2 of ER by extending implementation period to 15 years. This scenario, however, is not considered likely. Therefore, the following yearly schedule is established: 1. PCF will purchase minimum 68,000 tCO2. 2. After reaching the 68,000tCO2 threshold, HGV is entitled to freely dispose of an additional 11,000 tCO2 of ER that can be sold either to PCF or at the market. 3. All ER above the annual 79,000 tCO2 will be sold again to PCF. If coal is displaced at all times, these additional ERs should amount to 58,600 tCO2. Consequently, the objective of 1 million tCO2 of ER purchased by PCF would be accomplished between the 9th and 15th year of the project. This purchase would correspond to a total value of US$3.5 million in nominal terms. -7- The total period of the project will be 21 years, consisting of three renewable 7-year baselines. After reaching one million tCO2 target, PCF has an option to purchase additional 500,000 tCO2 of ER at the agreed price. HGV will be entitled to place in the market any additional ER produced on top of these quantities agreed with PCF in ERPA. Table 2: Tentative Project Implementation Schedule: PCF Purchase of One Million tCO2 Minimum and Distribution of annual ER PCF minimum and maximum annual ER maximum annual ER production (tCO2) purchase (tCO2) (tCO2) Year ER from ER from PCF HGV share PCF PCF PCF gas coal minimum additional minimum maximum baseline baseline purchase purchase annual annual (low-case) (high-case) (if coal purchase purchase baseline) 2002 30,000 60,000 60,000 60,000 60,000 2003 79,000 137,600 68,000 11,000 58,600 68,000 126,600 2004 79,000 137,600 68,000 11,000 58,600 68,000 126,600 2005 79,000 137,600 68,000 11,000 58,600 68,000 126,600 2006 79,000 137,600 68,000 11,000 58,600 68,000 126,600 2007 79,000 137,600 68,000 11,000 58,600 68,000 126,600 2008 79,000 137,600 68,000 11,000 58,600 68,000 126,600 2009 79,000 137,600 68,000 11,000 58,600 68,000 126,600 2010 79,000 137,600 68,000 Min. 11,000 68,000 68,000 2011 79,000 137,600 68,000 Min. 11,000 68,000 2012 79,000 137,600 68,000 Min. 11,000 68,000 2013 79,000 137,600 68,000 Min. 11,000 68,000 2014 79,000 137,600 68,000 Min. 11,000 68,000 2015 79,000 137,600 68,000 Min. 11,000 68,000 2016 79,000 137,600 68,000 Min. 11,000 68,000 Total 1,136,000 1,986,400 1,012,000 165,000 820,400 1,012,000 1,014,200 2. Key policy and institutional reforms supported by the project The project will contribute to the promotion of the development of the market for the high quality ER in Chile and internationally, and to the increased knowledge and understanding of the functioning of these markets. The project is the first project of its kind in Chile, and it is expected to contribute significantly to the formation of the legal, regulatory and institutional frameworks for this type of activity in the country. 3. Benefits and target population Directly, the project will have environmental benefits of reduced CO2 emissions of approximately 137,600 tCO2 per year. The project will also increase generation capacity in Chile. More importantly, however, the project will have significant demonstration benefits, showing how the government and the private sector can benefit from the carbon trading -8- mechanism. Therefore, indirectly, the project is expected to contribute to additional climate improvement that may be achieved through similar projects in the future. 4. Institutional and implementation arrangements Prototype Carbon Fund (PCF): The Bank established PCF in July 1999, with the operational objective of mitigating climate change. PCF supports projects expected to generate greenhouse gas ER while complying with requirements of Joint Implementation (Art. 6) and the Clean Development Mechanism (Art. 12) of the Kyoto Protocol. PCF purchases high quality greenhouse gas ER which could be registered with the UNFCCC for the purposes of the Kyoto Protocol. PCF enters into irrevocable ERPA and accompanying MVP with project sponsors - in this case HGV, defining the quantity, price and other delivery conditions of ER to be purchased by PCF, as well as accompanying institutional arrangements, including the monitoring and verification systems and methods. To increase the likelihood that the ER will be recognized by the Parties to the UNFCCC, independent experts provide baseline validation and verification/certification procedures for emissions reductions that respond to UNFCCC rules as they develop. The ER estimates are based on the findings of a baseline study, carried out and validated by independent experts. The baseline study also certifies project`s environmental additionality, as the Kyoto Protocol requires that reductions in emissions are additional to any that would occur in the absence of the certified project activity. In other words, the project is additional if the scenario with project generates fewer greenhouse gas emission than the baseline scenario. PCF retains services of internationally-recognized, fully independent third parties to verify and certify the actual ER produced, so that this certification creates an internationally-recognized environmental commodity, in conformity with relevant international agreements. The PCF will only disburse against delivery of verified and certified ER. In the event that the project sponsor fails to deliver the quantity of ER for any given calendar year as set forth in the ERPA, the project sponsor will be required to make-up the shortfall over the course of the following calendar year or any other period agreed with PCF. The Chacabuquito project will be carried out by HGV, a Chilean private corporation (Sociedad Anónima). Apart from the PCF support, the project does not include any World Bank or IFC financing. The construction of the Chacabuquito plant is fully financed by HGV. -9- Figure 3: PCF Operational Structure PCF operations: Companies and Governments have contributed to the PCF which uses Fund resources to support projects designed to produce emission reductions fully consistent with the Kyoto Protocol and the emerging framework for Joint Implementation (JI) and the Clean Development Mechanism (CDM). Contributors, or "Participants", in the PCF receive a pro rata share of the emission reductions, verified and certified in accordance with carbon purchase agreements reached with the respective countries "hosting" the projects. * EIT--Economies in Transition Project sponsor: Hidroeléctrica Guardia Vieja, S.A. (HGV): HGV is a subsidiary of Minera Valparaiso, SA, a public and diversified holding company controlled by Grupo Matte. Minera Valparaiso began operations in 1906 and has become one of Chile`s strongest economic groups. This diversified organization has activities in energy generation and retail, port services, forestry pulp and paper industry, and in real estate investment and development. HGV is fully controlled by Minera Valparaiso and has been involved in ownership, development and operation of hydro-power plants since 1939. HGV has successfully owned and operated two other run-of-the-river plants: Los Quilos (39MW) and Aconcagua (72MW) on the Aconcagua River. HGV has a lean and efficient organization of 125 employees and a prudent and profitable financial performance. - 10 - Figure 4:. Direct Financial and Reporting Flows between PCF and the Project Sponsor (HGV) P C Government Legal, regulatory F F } Participants and CONAMA institutional Reporting Payments framework & ERs HGV Govern (Project Sponsor) ment For construction and financing of new projects (including Chacabuquito), the approach of the Group is to create a new independent corporation which receives institutional, technical and financial support of the parent company. The general manager of HGV will take over the same position in the new company. The Government: The role of the Government in the implementation of the project will be limited and will concentrate on two areas: (i) ratification of the Kyoto Protocol and setting the rules and mechanisms allowing both public and private entities (including HGV) to produce and sell ER, in accordance with mechanisms established by the Kyoto Protocol and related negotiations; (ii) Regulatory and oversight responsibilities of the respective power sector and environmental agencies as described below. (i) Kyoto-related institutions: CONAMA: Once the Kyoto Protocol is ratified, CONAMA (Comisión Nacional del Medio Ambiente) is expected to be named the institution responsible for its implementation. Currently, CONAMA is the institution responsible for environmental issues in general, including in the power sector. Its responsibilities include administration of the environmental impact evaluations, development of environmental norms and oversight of the compliance with these norms. - 11 - (ii) Sector institutions: CDEC: The economic load dispatch center in each system is controlled by a private, independent entity CDEC (Centro de Despacho Económico de Carga), composed of representatives of generation and transmission companies. CDEC is in charge of planning the optimum operation of the system, based on lowest marginal costs, and of determining values of economic transactions that were carried out among the generators. The SING and the SIC have each its own dispatch center. CDEC­SIC (Economic Dispatch Center in the Central Interconnected System) will play an important role in the quantification of the actual emission reductions achieved each year. CDEC`s operation and information system enables a relatively easy quantification of the actual emission reductions achieved on an hourly basis, calculated as the emissions avoided from the marginal unit that was displaced by the Chacabuquito project. CDEC-SIC is a private entity composed of representatives of generation and transmission companies, independent of the Government. Although HGV is not a CDEC member (as membership is obligatory only for generators of capacity above 2% of the total installed capacity in the whole SIC), all generating plants supplying electricity to the system, including Chacabuquito, are under CDEC-SIC operating supervision. CNE: The sector is regulated by an autonomous agency: Comisión Nacional de Energía (CNE). Its main responsibilities for the power sector include (i) proposing sector norms and regulations; (ii) coordinating planning, policies and norms for efficient functioning of the market; and (iii) calculating and enforcing regulated prices. Ministry of Economy: In the area of the power sector, the Ministry of Economy is responsible for (i) setting distribution tariffs and node prices (based on CNE`s calculations), (ii) resolving possible conflicts among the members of CDEC, and (iii) awarding concessions. SEC: Superintendencia de Electricidad y Combustibles (SEC) is responsible for supervising compliance with existing laws, regulations and technical norms related to the generation, production, storage, transport and distribution of liquid fuels, gas and electricity. D. Project Rationale 1. Project baseline and environmental additionality for the purpose of the Kyoto Protocol The project was selected on basis of meeting PCF eligibility criteria. The PCF funds projects in the framework of Articles 6 (JI) and 12 (CDM) of the Kyoto Protocol. Most importantly, Kyoto Protocol requires that reductions in emissions are additional to any that would occur in the absence of the certified project activity. This environmental additionality of the project is assessed against a baseline, which describes what would happen without the proposed project. - 12 - In the Chacabuquito case, the baseline study confirmed the eligibility and viability of the proposed project. Particularly, the study (i) confirmed the environmental additionality of the project, (ii) estimated the quantity of ER that the project is expected to generate, and (iii) confirmed the project`s economic and technical feasibility. In a deregulated power sector such as Chile the baseline should be determined as the most likely scenario of capacity additions private investors would choose on the basis of demand projections, node and spot prices, investment costs of alternative capacity expansions and expected price of fuels. Although other factors could influence private sector investment decisions, least-cost expansion of power supply could be used as a proxy to determine the baseline scenario. The baseline study has determined that the least-cost expansion is combined cycle generation based on natural gas, and that hydroelectric generation in general, and Chacabuquito in particular, is not part of this least-cost expansion baseline scenario. Ex-ante potential ER from Chacabuquito was estimated on basis of the most likely source of generation that the project would displace by being dispatched. The actual ER to be credited are determined ex- post, based on the actual dispatch data for the SIC. The dispatch data, to be provided by the Economic Load Dispatch Center (CDEC), will conclusively indicate the type of generation displaced by the addition of Chacabuquito in the generation mix in the SIC. The accompanying monitoring and verification plan (MVP) for the project utilizes the data to be provided by CDEC to estimate emission reduction. The baseline study was verified by an independent third party. Det Norske Veritas (DNV), in co- operation with ICF Consulting, was requested by the PCF to perform this verification of the baseline of the Chacabuquito Hydropower project (referred to as Validation in the Kyoto Protocol`s Clean Development Mechanism). The Validation Report (annex 9) from DNV and ICF Consulting concludes: "The project is in our opinion likely to achieve the estimated emission reductions as given in the project design documentation. The project baseline is well elaborated and conservative in its nature. The project MVP is comprehensive and will enable transparent and accurate monitoring and reporting of emission reductions as a result of the project. The Chacabuquito project is also likely to create and enhance sustainable development in the Aconcagua region in Chile. Hence, the validation report concludes with a validation opinion that recommends the project for registration as a CDM project under the UNFCCC. " 2. Major related projects financed by the Bank and/or other development agencies All related Bank-financed projects have been completed. The last, Pehuenche Hydroelectrid Power Plant (Loan 2832), closed 6/30/94. Previous projects include: (i) Chile Sixth Power Project (Loan 1351-CH)--reports archived up to 1987; (ii) Chile Fifth Power Project (Loan 0479- CH)--reports archived up to 1977; (iii) Electric Power Expansion Project (Loan 0402-CH)-- reports archived up to 1965; and (iv) Endesa Power Expansion Project (Loan 0153-CH)--reports archived up to 1956. - 13 - 3. Lessons learned and reflected in the project design The proposed Chacabuquito project is one of the first projects of the PCF portfolio that is implemented by the private sector. This private sector orientation is essential in the case of Chile where all power sector activities are in the hands of the private sector. The experience with similar type of project that could be reflected in the project design is therefore very limited. Nevertheless, the project has benefited from the coordination and consultations with parallel PCF projects that are being developed in Latin America (Costa Rica, Colombia, and Nicaragua). 4. Indications of borrower commitment and ownership The Government of Chile has been an active participant in the Kyoto Protocol negotiations. The Kyoto Protocol is currently being reviewed by the Congress and its ratification is expected for March/April 2002. Chile is a member of the PCF Host Country Committee. In addition, the Government has confirmed its commitment to the Project through a letter of endorsement for the Chacabuquito Project by CONAMA, the Government`s authority in charge of the environmental issues. It is expected that CONAMA will be appointed the agency in charge of the implementation of the Kyoto Protocol, once the Protocol is ratified. 5. Value added of Bank support in this project The PCF was established with the objective to pioneer the ER purchase transactions. The Bank`s involvement was seen critical in terms of ensuring quality of the first projects, as well as institutionalizing experiences and ensuring replicability of the projects, while providing necessary project due diligence and other fiduciary responsibilities. The value-added of Bank support also includes the availability of in-house expertise in managing energy and environmental projects, ability to mobilize global experts with long experience in the field, technical support for project preparation and supervision capacity. E. Summary Project Analysis 1. Economic PCF requires that supported projects demonstrate environmental additionality. A project is additional if the scenario with the project generates fewer greenhouse gas emission than the baseline (business as usual) scenario. In a centrally planned system the baseline scenario can be determined on the basis of the least cost expansion as defined by the planning authority. In Chile, however, there is no central planning for expansion of power facilities. Generation is privately-owned and competitive. All current and prospective generators make their own judgments and take their own risks on amount of capacity to be installed, based on their own perception of demand growth, the evolution of capital and fuel markets, and any other parameters that may influence their businesses. Therefore, the baseline can be determined only as the most likely scenario of capacity additions private investors would choose on the basis of demand and price projections, investment costs and expected price of fuels. The appropriate method to determine the environmental additionality - 14 - in the context of the Chilean power sector is to compare the proposed project with this likely scenario of least-cost generation capacity additions. Three alternatives of thermal generation expansion were identified that could be compared to the Chacabuquito project. These alternatives include: (i) coal-fired steam plants; (ii) gas-fueled combined-cycle (CC) plants; and (iii) gas-fueled open cycle turbines. Generation costs for these alternatives are shown in Table 3. The baseline study has determined that gas fueled CC plants represent the least-cost option for all discount rates between 10 and 16 % p.a. Table 3: Generation Costs of Thermal Options (US$/MWh) Disc. Rate CC PLANT FACTOR COAL PLANT FACTOR GAS TURBINE PLANT FACTOR (%) 40% 60% 80% 40% 60% 80% 40% 60% 80% 10 32.7 27.4 24.8 55.8 44.3 38.5 38.6 34.4 32.3 12 36.0 29.6 26.4 63.1 49.1 42.2 41.1 36.0 33.5 14 39.4 31.9 28.1 70.7 54.2 45.9 43.6 37.7 34.8 16 43.0 34.2 29.9 78.5 59.4 49.8 46.2 39.4 36.1 This analysis is also consistent with the CNE`s indicative expansion plan, shown in Table 4. Table 4: CNE's Indicative Expansion Plan for the SIC Comissioning Date Plant Power (MW) Month Year January 2003 Combined Cycle Natural Gas Plant - "Tal - Tal" (1) 360.0 December 2003 Ralco(2) 570.0 April 2004 Combined Cycle Natural Gas Plant #1 372.6 April 2005 Combined Cycle Natural Gas Plant #2 372.6 April 2006 Combined Cycle Natural Gas Plant #3 372.6 April 2007 Combined Cycle Natural Gas Plant #4 372.6 April 2008 Combined Cycle Natural Gas Plant #5 372.6 January 2009 Combined Cycle Natural Gas Plant #6 372.6 April 2009 Combined Cycle Natural Gas Plant #7 372.6 April 2010 Combined Cycle Natural Gas Plant #8 372.6 Note (1): Includes 240 MW of existing open cycle plant (2): Reservoir hydro facility by Endesa- Chile Source: CNE Table 5 compares Chacabuquito costs to those of the least-cost thermal alternative. The comparison shows that Chacabuquito costs are above those of the natural gas CC plant, which represents the least-cost expansion option in the SIC. In other words, Chacabuquito is not the least-cost expansion option and therefore is not a part of the baseline scenario. - 15 - Table 5: Chacabuquito's Generation Costs Chacabuquito`s annual costs Chacabuquito`s Generation cost generation cost per MWh of Discount Capital cost * O & M Cost Total per MWh natural gas CC rate (US$ Million) (US$ Thousand)) (US$ Million) plant alternative (US$) (US$) 10% 3,784 470 4,254 26.6 24.8 12% 4,488 470 4,958 31.0 26.4 14% 5,208 470 5,678 35.5 28.1 * Chacabuquito`s useful life is estimated at 40 years, investment costs does not include financing charges. The case for the environmental additionality and thus PCF selection is further established in the financial analysis, which demonstrates the impact of carbon revenues on the financial internal rate of return (FIRR). The financial analysis shows that carbon revenues can increase the FIRR of the Chacabuquito project to a level already attractive for the private sector. (Detailed analysis is included in the Financial Issues section below). 2. Financial The project will cost approximately US$37.0 million including contingencies but excluding financing charges. This cost is considered reasonable for a run-of-the-river plant of this size and characteristics. Of this amount, US$32 million correspond to the cost associated with the hydroelectric plant and related equipment and US$5 million are required for the expansion of the current 110-kV transmission lines that connect Los Quilos and Aconcagua plants. Annex 1 shows detailed project breakdown of costs and financing plan. Preparation activities have already started in early 2001 and commissioning is expected for late 2002. While some commercial lenders have expressed interest in providing project finance, the project sponsor has decided to negotiate financing after the commissioning of the project. In the interim time, the project will be financed through equity inflow and a possible bridge loan from Minera Valparaiso, the holding company. After that, HGV will seek the best financing structure according to its interest. The present option is to issue 15-year bonds in order to achieve a 50/50 equity-debt financial structure for the Chacabuquito undertaking. The financial projection of the cash flow for the Chacabuquito hydro power project is presented in Table 6. This presentation summarizes the power/energy revenues and financial factors underlying the project: (a) revenues from sales of energy and capacity payments; (b) investment; (c) operation, maintenance and administrative expenses of the hydro plant; and (d) an estimate of an accelerated depreciation based on the Chilean income tax law, by which the project will not be levied with such tax during the first six years of operation. HGV expects to contract out 85GWh/year at the node price at approximately US$26.6 MWh, and receive capacity payment of at US$58.31/kW/year. These estimates are consistent with both official and market forecasts. HGV will sell remaining generation (around 75 GWh per year) at the spot market. The spot price - 16 - used for the financial projections is US$14.8 GWh which has been the historical average of the October-March period, when favorable hydrological conditions allow for higher power generation. It is expected that this price will remain relatively stable in the future. Table 6: Chacabuquito Project: Financial Projection of the Cash Flow (Thousand US$) 2011 / 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2016 NORMAL HIDROLOGY (GWh) - 50.0 160.0 160.0 160.0 160.0 160.0 160.0 160.0 160.0 160.0 (MW) - - 15.7 15.7 15.7 15.7 15.7 15.7 15.7 15.7 15.7 INVESTMENT -17000 -20000 INCOME - 1348 4453 4453 4453 4503 4503 4503 4503 4503 4503 - Spot Energy - 148 1110 1110 1110 1110 1110 1110 1110 1110 1110 - Contract Energy - 1065 2264 2264 2264 2264 2264 2264 2264 2264 2264 - Capacity - - 916 916 916 916 916 916 916 916 916 - ER Income (low-case scenario)- - 135 163 163 163 213 213 213 213 213 213 - ER Income (high-case scenario) - - 135 368 368 368 418 418 418 418 213 -- COST - -150 -470 -470 -470 -470 -470 -470 -470 -470 -470 - Operation and Maintenance - -150 -320 -320 -320 -320 -320 -320 -320 -320 -320 - Toll - - -150 -150 -150 -150 -150 -150 -150 -150 -150 - EBDIT 1063 3820 3820 3820 3820 3820 3820 3820 3820 3820 (without ER) - EBDIT 1198 3983 3983 3983 4033 4033 4033 4033 4033 4033 (low-case scenario) - EBDIT (high-case - 1198 4188 4188 4188 4238 4238 4238 4238 4033 3820 scenario) DEPRECIATION - -1524 -1524 -1524 -1524 -1524 -1524 -1524 -1524 -1524 -1524 OPERATIONAL REVENUE -461 2296 2296 2296 2296 2296 2296 2296 2296 2296 (without ER) OPERATIONAL REVENUE - -326 2459 2459 2459 2509 2509 2509 2509 2509 2509 (low-case scenario OPERATIONAL REVENUE -326 2664 2664 2664 2714 2714 2714 2509 2296 2296 (high-case scenario) CASH FLOW -17000 -18937 3820 3820 3820 3820 3820 3820 3820 3820 3820 without ER - 17 - income CASH FLOW with ER income, -17000 -18802 3983 3983 3983 4033 4033 4033 4033 4033 4033 (low-case scenario) CASH FLOW with ER income, -17000 -18802 4188 4188 4188 4238 4238 4238 4238 4033 3820 (high-case scenario) Table 7: Chacabuquito Project: Financial Analysis Low-case scenario High case scenario (natural gas CC) (coal) Base Case Base Case Base Case Base Case Base Case and ER & and ER & and ER and ER Bonds Bonds EIRR 9.8% 10.2% - 10.3% - FIRR - - 11.2% - 11.4% Disc Rate 8% 8% 8% 8% 8% NPV 6.52 7.97 8.75 8.39 9.17 (US$Million) Disc Rate 10% 10% 10% 10% 10% NPV -0.75 0.51 2.57 0.95 3.00 (US$Million) Disc Rate 12% 12% 12% 12% 12% NPV (US$ Million) -5.56 -4.46 -1.46 -4.02 -1.03 Table 6 indicates estimates of annual revenues from the sale of ER with two scenarios. In both cases the PCF buys the same total amount of ER of one million tCO2. In the low-case scenario, ER sales extend to the year 2016 when the sale of one million tCO2 is achieved. The high-case scenario, with higher ER due to coal base line, allows PCF to purchase the one million tC02 already by 2010. The table includes only carbon revenues from the PCF transaction. It does not include other potential revenues from selling excess ER on the market. The economic internal rate of return (EIRR), comparing total investments (assets) and economic results of the project for the base case, that is without ER income, is 9.8%, as shown in Table 7. This EIRR increases with the sale of ER to 10.2% in low-case scenario (natural gas CC) and to 10.3% with high-case scenario (coal). Net present value (NPV) for this base case with a discount rate of 10% (Chilean power sector legal discount rate) is ­ US$0.75 million, increasing to US$0.51 million and US$0.75 million when low-case and high-case ER revenues are added. Sensitivity analyses with other rates is also shown in Table 8. The financial internal rate of return - 18 - (FIRR) comparing equity with financial results for the two scenarios is 11.2% for the low-case scenario and 11.4% for the high-case scenario, due to the higher income and the leverage of financing. Sensitivity analysis has been carried out to assess impact on IRR and NPV of changes of individual factors (changes in revenues due to price change, ER sales and investment costs). The variation of indicators has been low. The complete summary of economic and financial ratios and sensitivity analysis is presented in Annex 1. HGV's Past Financial Performance and Present Condition: Historically, HGV has held a prudent and profitable financial performance, as indicated in the financial statements included in Annex 1. Net income was US$ 41.5 million in 1999 and US$ 17.6 million in 2000, resulting in a ratio of net income to total assets of 24% and 10%, respectively. Operational results and earnings before depreciation, interest and taxes were stable during the period 1998 to 2000, largely thanks to stable contractual relations with HGV`s main clients: Division Andina of Codelco Chile and Empresas Melon. Account receivables also maintain an excellent standard. Non-operational results were unusually high in 1999 due to the sale of HGV`s equity stake in Endesa, and extraordinary dividends from its investments in Chilquinta. Balance sheet as of December 2000 shows total assets amounting to US$ 176.4 million while total equity is US$ 168.9 million or 95.8 % of total assets. There are no significant guarantees on subsidiaries affecting assets of HGV. This solid capitalization is part of the tradition of the Matte family, principal owners of the holding company, who strongly believe in maintaining a sound equity position and minimizing debt. 3. Technical Project's technical design: The project consists of a run-of-the-river power plant of 25 MW capacity that utilizes the waters of the Aconcagua river and will produce an average annual generation of 160 GWh (net). The plant is in cascade with the other two HGV`s hydro plants, located upstream (Aconcagua of 81 MW and Los Quilos of 39 MW). Chacabuquito will be connected to SIC and will generate power for industrial and residential consumers in the SIC. Its design uses a simple layout and technologies well proven in Chile and worldwide and used in other HGV plants. It consists of a diversion weir, a system of channels (11 km) and tunnels (3 km), a pressure penstock, water fall of 137 m, a powerhouse and a high voltage line, and upgrade of existing transmission system. HGV has demonstrated a successful experience of construction, setting up and operating similar plants. - 19 - Figure 5: Project's Design Characteristics ESQUEMA CENTRAL CHACABUQUITO TUNEL CHACABUQUITO L = 2178 m CANAL ADUCCION L = 313 m CAMARA DE CARGA TUNEL LOS QUILOS CANAL ADUCCION TUBERIA DE PRESION L = 787 m L = 1162 m L = 545 m H = 137 m SIFON CANAL ADUCCION CASA DE MAQUINAS L = 8775 m KM 10 de Los Andes CANAL COLECTOR RIO ACONCAGUA CENTRAL LOS QUILOS KM 20 DE LOS ANDES CAMINO INTERNACIONAL CUADRO RESUMEN CANALES 10.250 m TUNELES 2.965 m TUBERIA 545 m ALTURA DE CAIDA 137 m POTENCIA 25 MW Figures 5 and 6 illustrate the proposed project. Except for the new regulating reservoir (Las Vizcachas), all project facilities will be on the south bank of the Aconcagua river, downstream of the existing Los Quilos plant. Canals and tunnels and the penstock will take the 21.5 m3/sec from the Los Quilos plant through a series of canals and tunnels over a distance of approximately 10 km to a 440 m long and 137 meter head penstock to the 25 MW Chacabuquito power house. From the power house, the 21.5 m3/sec will be discharged back to the Rio Aconcagua at Chacabuquito to meet the project's water right requirement to supply 18 m3/sec to a downstream existing hydro plant and to satisfy irrigation users. Neither Chacabuquito plant nor any of the upstream plants operated by HGV entail any physical construction such as dams and dikes, or cause reservoir-like impoundments on the Aconcagua River or any of its branches. - 20 - Figure 6: Chacabuquito Project Location DIAGRAMA UNIFILAR DIAGRAMA UNIFILAR NORTE NORTE RIORIO ACONCAGUA ACONCAGUA ( INVIERNO ) ( INVIERNO ) DIAGRAMA UNIFILAR NORTE RIO ACONCAGUA TEN TEN RADO RADO COL COL O O I I MA MA RIO RIO EL EL EMBALSE VIZCACHAS EMBALSE VIZCACHAS TEN RADO EST EST ( PROYECTO ) GUAPI ( PROYECTO ) GUAPI ERO ERO COL LILL LILL O O EL EL I MA 0,6 0,6 BOCATOMA BOCATOMA O m3/ RIO seg m3/ ADUCCION BLANCO ADUCCION BLANCO JUN JUN CA seg CA EL AG AG 1,1 m3/seg 1,1 m3/seg EMBALSE VIZCACHAS UA UA EST RIO ( PROYECTO ) GUAPI CHA CHA ERO LILL RIO CAY CAY ( 1,5 ( 1,5 m3/seg ) m3/seg ) O EL ES ES 0,6 m3/seg 0,6 m3/seg 0,6 BOCATOMA 0,5 m3/seg0,5 m3/seg DE DE 0,2 m3/seg m3/ ADUCCION BLANCO PEÑ PEÑ JUN 0,2 m3/seg OJO OJO seg ON ON CA S S 0,5 m3/seg 0,5 m3/seg AG UA CHA LOS LOS 1,2 m3/seg1,2 m3/seg EL RIO EL CAY 0,3 m3/seg ES 0,3 m3/seg DE PEÑ 3,9 m3/seg OJO 3,9 m3/seg ON S 4,2 m3/seg4,2 m3/seg 15,1 m3/seg 15,1 m3/seg LOS 10,9 m3/seg 10,9 m3/seg EL * * FUTURA FUTURA 2,0 m3/seg2,0 m3/seg CENTRAL LOS QUILOS CENTRAL LOS QUILOS BOCATOMA BOCATOMA UNIFICADAUNIFICADA 3,2 m3/seg 3,2 m3/seg 3,4 m3/seg 3,4 m3/seg REGANTESREGANTES 3,9 m3/seg 3,9 m3/seg 10,9 m3/seg 10,9 m3/seg 10,9 m3/seg * FUTURA BOCATOMA UNIFICADA VIL CUY VIL CUY 2,0 m3/seg CENTRAL LOS QUILOS 0,3 m3/seg REGANTES CENTRAL CHACABUQUITO CENTRAL CHACABUQUITO 0,3 m3/seg A A 3,2 m3/seg HO ( PROYECTO ) ( PROYECTO ) HO RNI RIO RIO RNI TOS 2,3 m3/seg2,3 m3/seg TOS 10,9 m3/seg 2,0 2,0 m3/ CENTRAL ACONCAGUA CENTRAL ACONCAGUA 0,3 m3/seg0,3 m3/seg 4,2 m3/seg4,2 m3/seg JUN CAL JUN CAL VIL m3/ BOCATOMA BOCATOMA seg CUY seg EMBALSE GUARDIA EMBALSE GUARDIA VIEJA VIEJA CENTRAL CHACABUQUITO A ADUCCION CHACABUQUITO ADUCCION CHACABUQUITO ) ) HO 1,0 m3/seg1,0 m3/seg ( PROYECTO ) ( PROYECTO ) ( PROYECTO ) RNI RIO TOS 2,0 m3/ CENTRAL ACONCAGUA 0,3 m3/seg JUNCAL JUNCAL JUN CAL BOCATOMA seg EMBALSE GUARDIA VIEJA RIO RIO ADUCCION CHACABUQUITO ) ( 5,2 ( 5,2 m3/seg ) m3/seg ) ( PROYECTO ) 0,5 m3/seg 0,5 m3/seg JUNCAL 5,2 m3/seg 5,2 m3/seg RIO RIO 0,8 m3/seg 0,8 m3/seg 0,5 m3/seg RIO 9,4 m3/seg 9,4 m3/seg 0,5 m3/seg AC AC 0, O O 1,5 1,5 m3/seg ) m3/seg ) NCA NCA RIO GU GU A A AC BOCATOMA BOCATOMA O ) 0,7 m3/seg 0,7 m3/seg ADUCCION JUNCAL ADUCCION JUNCAL NCA GU A 1,5 m3/seg 1,5 m3/seg BOCATOMA ADUCCION JUNCAL BOCATOMA BOCATOMA POLVAREDA POLVAREDA ESTERO ( ESTERO ADUCCION ACONCAGUA ADUCCION ACONCAGUA ( 2,7 RIE 2,7 RIE m3/ 0,2 m3/seg 0,2 m3/seg CIL CIL m3/ LOS seg seg LOS ) RIO RIO ) BLA BLA BOCATOMA NC ESTERO NC POLVAREDA O O ADUCCION ACONCAGUA RIE CIL LOS RIO BLA NC O 0,5 m3/seg 0,5 m3/seg EMBALSE LOS LEONES EMBALSE LOS LEONES RIO RIO DE LOS DE LOS g LEONES LEONES 2,7 m3/seg EMBALSE 2,7 m3/seg LOS LEONES RIO BOCATOMA BOCATOMA ADUCCION BLANCO ADUCCION BLANCO DE LOS 0,5 m3/seg0,5 m3/seg LEONES 2, EMBALSE PIUQUENITOS EMBALSE PIUQUENITOS BOCATOMA ( SOLO EN INVIERNO ) ( SOLO FUNCIONA FUNCIONA EN INVIERNO ) ADUCCION BLANCO TUNEL DE DESVIO TUNEL DE DESVIO LOS LEONES-ANDINA LOS LEONES-ANDINA EMBALSE PIUQUENITOS ( SOLO FUNCIONA EN INVIERNO ) 2,2 m3/seg2,2 m3/seg BOCATOMA BOCATOMA EMBALSE PIUQUENITOS EMBALSE PIUQUENITOS TUNEL DE DESVIO LOS LEONES-ANDINA BOCATOMA EMBALSE PIUQUENITOS - 21 - The international road from Los Andes to Mendoza in Argentina is the main road in the entire area in addition to some secondary and rural roads that connect settlements and camps along that highway. Most of these roads will be used during construction of the project. However, the construction and future maintenance of canals and other infrastructure on the southern side of the Aconcagua River will require the construction of two bridges across the river and the upgrading of some of these roads. The selection of bridge sites was based on technical considerations (stability of river embankments), project needs (access to sites) and the requests of local population living on the southern part of the river that saw these bridges as an improvement to their mobility. Table 8 Chacabuquito's Design Characteristics Project Details Generation Physical Infrastructure Power: 25 MW (4 x 5.5 MW nominal, 7.5 MW 11 km of open channel maximum Francis turbines) 2 tunnels (in total 3 km) Annual Net Generation: 160 GWh Pressure penstock: 400m Flow: 21.5 m3/s Water fall: 137m Placed at 13 Km down river from Los Quilos 4 Francis turbines Budget 500 m of 110kV high voltage line (interconnection with Total budget: US$ 37.1 million including 5% HGV system) of contingencies Upgrade of existing transmission system Construction time: 15 months Energy production: The plant is expected to produce an average of 160 GWh a year net (ranging from 128 GWh in dry year to 185 GWh in wet year). These estimates are based on long-term observations of water conditions of the Acocangua River ­ see Table 9 and Figure 7 Table 9: Chacabuqito Yearly Energy Production Hydrological conditions Dry Wet Average GWh per year (net) 128.0 184.3 160.0 Figure 7: Average Monthly Generation Based on Hydrological Conditions Chacabuquito Project: Average expected monthly generation (GWh) 20 15 10 Dry conditions 5 Average conditions Humid conditions 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dic The baseline study has determined that the average of 160 GWh (net) produced per year will translate into approximately 137,600 tCO2 avoided, corresponding to an approximate value of US$480,0002, depending on the type of generation plant (particularly its CO2 emission factor) that would be displaced by the Chacabuquito project. The projected dispatch is based on the principle that Chacabuquito will replace the most expensive unit in line, as the Chilean dispatch system is designed to optimize system`s operation. The emission factor (tCO2/GWh) of the coal power plants in the SIC system ranges between 887 and 2,095 (see Table 1). The average emission factor, however, is likely to be around 900t/GWh, close to the standard value of 860t/GWh. The baseline study has determined that in the situation of the current market conditions and their projections (demand, prices, costs, and available technology), Chacabuquito is expected to displace only coal-based generation. 2 Assuming price of US$3.5/tCO2 - 23 - Figure 8: Historic and Projected Energy Availability in SIC with Chacabuquito 7,000 Other Thermal Plants Combyned Cycle Plants 6,000 Hydro Reservoir Hydro Run-of-the-River 5,000 Average Energy Consumption MWh/h 4,000 3,000 2,000 1,000 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 It should be noted that the Chilean dispatch seeks to optimize system`s operation, generation units being dispatched in merit order of increasing marginal costs (the principles of its operation are set in the General Electricity Law and Regulations). This process ensures that the run-of-the- river plants (such as Chacabuquito) with lowest marginal costs will always be dispatched. The last in line for the dispatch will be the least efficient coal-fired plants (included in other thermal plants in the Figure 8. Changes to this baseline scenario may arise from (i) lower than expected demand increase; (ii) extremely favorable hydrological conditions, displacing coal-based generation with hydro- power; and (iii) decommissioning of coal fired thermal plants. In all these cases, the actual CO2 emissions might be lower than expected as coal-based generation might be partly or completely displaced by hydro and natural gas CC plants. This scenario, however, is not considered likely in the foreseeable future (next decade). Nevertheless, to avoid this risk, a low-case scenario was included in ERPA, according to which Chacabuquito would displace only natural gas CC plants. In that case, the project would achieve its targets of 1 million tCO2 in 15 years. Dry hydrological conditions are not expected to have a very significant influence over ER delivery. First, dry and wet periods are likely be relatively balanced over the 15-year period of the project. Second, the variation in energy production between wet and dry years is within reasonable limits (see Table 9 and Figure 7). Third, lower energy production in dry years would - 24 - be partly compensated by higher ER, as less efficient / more polluting thermal plants would have to be dispatched to compensate for the lower hydro generation (see Figure 8). It should also be noted that the intended interconnection between the northern and the central systems (SING and SIC) should not affect project`s assumption regarding Chacabuquito`s displacement of thermal generation, as the northern system is almost exclusively based on thermal generation, including a high proportion of coal-fired thermal plants. 4. Institutional Hidroeléctrica Guardia Vieja (HGV): The project will be implemented by Hidroeléctrica Guarda Vieja, SA (HGV), a subsidiary of Minera Valparaiso, SA, which in turn is a public and diversified holding company controlled by Grupo Matte. HGV will be the only institution responsible for construction and operation of the Chacabuquito power plant. Minera Valparaiso, the holding company, began operations in 1906 and has become one of Chile`s strongest economic groups. This diversified organization is involved in generation and retail of energy, sea port services, forestry, the pulp and paper industry, and real estate investment and development. HGV has been involved in ownership, development and operation of the run-of-the-river plants since 1939. HGV has successfully owned and operated the Los Quilos facility, a hydroelectric plant in the Aconcagua Valley, which in the 1980s was expanded from 17 to 39 MW. In 1990s, HGV built a new run-of-the-river plant of 72 MW (Hidroeléctrica Aconcagua) on the same river, of which HGV is a major stockholder, with minority participation of the IFC. HGV has a lean and efficient organization of 125 employees. Of this total, some 20 are managerial, engineering and administrative officials reporting directly to the Board, located at headquarters, in Santiago de Chile and 105 are operational staff in the hydroelectric plants. HGV centralizes its core activities in a small group of highly qualified managers. Engineering studies, construction, inspection, development and maintenance of major information systems, and other functions are typically outsourced. Although there is no specific written human resources policy for HGV, there are well established guidelines on recruitment, promotions and training programs. HGV has an operational manual that contains administrative procedures and internal control policy. The approach of HGV to planning is two fold. First, every three years a ten year strategic plan is formulated that mainly sets long range objectives, presents new projects and devises new ways to enhance client relationship. Secondly, on the context of the strategic plan, an annual business plan is issued and the annual budget is prepared establishing short term objectives and the resources needed to achieve them. A monthly managerial report is made for the Board including a set of commercial, operational and financial indicators with the performance of the company. The Board and management discuss the report and decisions are made, if needed, towards compliance of objectives. External auditing is carried out by Deloitte and Touche. - 25 - For construction and financing of new projects, the approach of the Group is to create a new independent corporation which receives institutional, technical and financial support of the parent company. In the Group`s view, this outfit will provide autonomy of the day to day management of HGV in the administration of the construction activities and will also represent a tax benefit. The general manager of HGV will take over the same position in the new company. In summary, HGV appears to be a well-managed company with demonstrated substantial experience in construction and operation of run-of-the-river plants, similar in design to the proposed Chacabuquito project. Institutional framework for the implementation of the Kyoto Protocol The Government still needs to establish the legal and institutional framework for the implementation of the Kyoto Protocol and carbon trading activities. It is highly expected that CONAMA (in charge of environmental issues) will be named the agency responsible for the implementation of the Kyoto Protocol. However, its appointment, as well as the clarification of the rules for carbon production and trading activities, can be carried out only after ratification of the Kyoto Protocol, which will establish the basic legal framework for this activity. It is expected that Chile will ratify the Kyoto Protocol in early 2002. If Chile does not ratify the Kyoto Protocol by the time of the initial verification of the Project, the PCF and HGV will attempt to reach an agreement with the Government on other mechanism of transfer of ER under the CDM. 5. Environmental: Environmental Setting The project will be located on the Rio Aconcagua, 10 km upstream of Los Andes (Region V), Chile. The watershed has been long intervened by human settlements, mining activities and hydroelectric projects that date over 40 years. The region is served by an international highway with heavy traffic (3,600 vehicles per day on average). Camp sites, hotels and other recreational areas have sprawled along the highway. In addition to the highway, the area is crisscrossed by power transmission lines, a railroad from the copper mines upstream, and irrigation canals that feed agricultural activities in the valley downstream. Although the project area is not highly complex particularly from the socio-economic and ecological perspectives, an environmental baseline was needed to highlight locations of highest potential impact. Hydrology. The Aconcagua River Watershed rises up to 6,140 m to the Nevado del Juncal. The watershed is enclosed in a steep canyon that lowers to a 190 km long valley before its discharge into the Atlantic Ocean. Snow melting in the spring and summer influences the large fluctuations in river flows. - 26 - The Juncal and Colorado rivers are the main upstream affluent to the Aconcagua River. They present abundant water flows and are currently being used for the Los Quilos and the Aconcagua run-of the-river power plants. The Colorado river has excellent water quality, while the Juncal presents symptoms of copper pollution from mining activities upstream. All of the flow of the Juncal is almost completely used up downstream of the Guardia Vieja for the Los Quilos Plant. However, the river recovers rapidly because of a series of streams and groundwater recharge. Neither Chacabuquito plant nor any of the upstream plants operated by HGV entail any physical construction such as dams and dikes, or cause reservoir-like impoundments on the Aconcagua River or any of its branches. Low height diversion weirs are placed on the river bed to ensure adequate diversion of water and hydraulic heads during the low-flow winter months. Flora and Fauna. The vegetation of the area of the project has been reduced to a few patches of riverine vegetation and some scrubs of dry forest with some remnants of native vegetation. Foreign species have also been introduced along the area. There are no known critical natural habitats in the area of the project. The project will not dam any part of the river, consume water through the process or affect by construction activities or operation the overall surface water balance, groundwater recharge areas, wetlands or any other aquatic ecosystem. There will not be any transbasin transfer of water. Only two species of concern as defined by the National Forestry Commission, (Corporación Nacional Forestal-CONAF) still can be seen in the area, especially on the southern side of the river: Guayacán (Porlieria chilensis) and Algarrobo (Prosopis chilensis). Some individuals were identified in the area of the proposed tunnels. Because of the continuous disturbances in river flows from the existing power plants, especially the pollution from the Codelco copper operations upstream, the Rio Aconcagua is devoid of any fish life. Environmental Impacts Water Quality and Quantity: Run-of-the river projects are considered benign to water quality. No major changes in water quality are expected from the Chacabuquito plant. In addition, ongoing agricultural practices in the valley and pollution from upstream mines are the main cause of the deterioration of water quality for the entire watershed. The water intake needed for the project and the proposed further use of the Los Quilos power plant discharge will affect water flows and water levels in an approximately 13 km stretch of the Aconcagua river between the Los Quilos Plant and the Chacabuquito power plant discharge. Chilean legislation now requires the definition of a minimum ecological flow to avoid or minimize severe impacts on aquatic ecosystems. The following Table 10 presents the estimated minimum ecological flows for the Aconcagua River based on the most commonly used methodologies, in addition to estimates carried out by Dirección General de Agua (DGA) in 1993. - 27 - Table 10: Minimum Ecological Flows for the Aconcagua River Methodology Estimated Minimum Ecological Flow (m3/s) Tennant Method 2,00 Establishes a minimum of 10% of mean annual flow in order to guarantee fish survival. Wet Perimeter 1,30 Based on flow and wet perimeter of the river which guarantees sufficient aquatic habitat for fish (spawning, migrations, feeding, etc.). Swiss Legislation 2,29 Establishes mean annual flow that is exceeded 347 times per year. Minimum depth for fish survival 0,84 Based on predominant species; in this case a 20 cm minimum depth was established for endemic species (that have but all disappeared from the river); 20 cm has been commonly used in Chile. DGA study, 1993 3,70 Stretch of the Aconcagua River: Río Colorado ­ San Felipe. Based on the above referenced DGA study and other analyses, the DGA established a minimum ecological flow of 3 m3/s. This minimum flow is considered adequate and any potentially negative impacts on aquatic biodiversity are further minimized by the presence of a major affluent to the Aconcagua downstream from the intake. In addition to several minor streams, the Colorado River has a mean monthly flow of 11.6 m3/s, and discharges water of excellent quality just 1 km downstream from the Chacabuquito intake. A favorable impact from this situation would be the improvement of water quality in that stretch of the river as the higher polluted discharge from the Los Quilos plant would be delivered further downstream. Hydrological balances for the entire watershed for the winter and summer seasons are presented in Figures 4 and 5 in Annex 6 and provide assurance that hydrological impacts will be kept at a minimum and the stretch of the river will always have sufficient water. Biodiversity Impacts. Three potential impacts were identified: (i) clearing of native vegetation; (ii) clearing of trees of some ecological concern; and (iii) increasing hydrological imbalance in the river. The project will entail clearance of some vegetation (18 has in the right of way of canals), which includes some species of concern. Thus the impact of the project on biodiversity will be minimal. However, as required by Chilean laws, adequate compensation measures will be - 28 - implemented. Freshwater biodiversity will not be affected (almost non-existent anyway) while that of the minimum ecological flow required by the DGA will guarantee that riverine vegetation remains unchanged along the 10 km stretch. Impact on fisheries was also deemed of low magnitude and importance as native species have all but disappeared from the watershed. Although scarce, most trout (an introduced species) fishing takes place in areas upstream of the project. Biological activity along the Aconcagua River is almost non-existent. Construction Impacts. The construction of civil works (channels, penstock, and power plant) will entail potentially negative impacts, albeit of temporary nature, on communities and surrounding natural habitats. The proper management of excavation materials, river and drainage crossings, and the reduction of nuisances such as dust, noise, increased traffic, pedestrian safety, will necessitate careful engineering planning, closed supervision, and a continuous and intense community information programs. All environmental requirements for construction will be part of an Environmental Construction Manual which will be enforced by the engineering supervision firm. These specifications will be disseminated and explained to local communities. Cultural Heritage. Neither channels nor transmission line alignments, nor the power plant site affect sites of historical or archaeological value. An archaeological survey carried out for those sites did not identify any evidence of potential or chance findings. The projects will not generate visual impacts that could affect the tourist or scenic value of the area. The proposed channels are aligned in parallel to existing linear projects (railroad, irrigation canals, and transmission lines). Canals will be located on the southern part of the river, quite a distance from the well traveled international road. The powerhouse facilities will be located at a site scarcely visible from the international highway. Environmental Management Plan (EMP) The Environmental Assessment Report (EAR) recommends a number of measures to mitigate environmental impacts during the construction and implementation phases. Minimum Ecological Flow: Perhaps the most important environmental measure for the project is the requirement by law to keep a minimum flow of 3 m3/s in the stretch of Aconcagua river affected by the project. This requirement will be monitored by DGA. Reforestation Plan: Any tree removed due to construction activity needs to be compensated for by adhering to CONAF`s requirement of planting three trees for every tree cut. However, the density of trees is quite low. A Management Plan for Clearing of Vegetation and Reforestation for the Chacabuquito Project (Plan de Manejo de Corata/ Reforestación en Obras Civiles, Proyecto Chacabuquito, January 2001) was approved by CONAF in February, 2001. The Plan requires the reforestation of 18 ha. in an area owned by the project`s sponsors but selected by CONAF within the Los Andes municipality. All reforestations will be with native vegetation, including species of concern, for a total estimate of 28,000 trees to be planted. The Plan establishes the protection of riverine vegetation along two streams that cannot be cleared during construction activities. Cutting of algarrobo and guayacan will be avoided as possible, and these trees will have to be clearly identified prior to initiation of construction activities. - 29 - Environmental Management during Construction: Environmental and social mitigatory measures to be implemented during the construction phase are included in technical specifications that will be included in bidding documents and construction contracts. Implementation Capacity: The EMP will be implemented by HGV through its contractors and will be enforced by a construction inspection firm. Environmental specialists will be hired as needed. All activities will be controlled by the Chief Engineer of HGV. The EAR submitted to the World Bank by HGV conforms fully to Bank policy guidelines regarding environmental and social concerns. As designed, this category B project complies with the World Bank`s environmental and social safeguard policies. 6. Social Social setting The host environment of the Chacabuquito project is semi-arid, scrub forest and thinly populated with the exception of the narrow river valley. No extensive agriculture is practiced in this area and there are no indigenous people. Communities along the river have a piped potable water supply system from a rural system that takes water from the upper watershed. Hence, the removal of 21 m3/sec of water from the Aconcagua River for an additional 10 km will not result in any significant ecological or social impact. The water rights for the Chacabuquito project (issued by DGA) include the obligation to release 18 m3/sec to the Aconcagua River to meet the water requirement for an existing downstream power plant and to provide water in the river to satisfy downstream agricultural needs. The project includes a water supply program for the downstream agricultural community fashioned after the existing program at the Los Quilos project. Social impacts Careful selection of Right-of-Way (ROW) alignments for all canals, penstock and transmission line avoided any major need for resettlement of families. Most of the ROW traverses steep slopes of the canyon on the southern part of the river. Only one dwelling will have to be relocated and the project will build a new brick house on a site within the same lot (a "lean-to" shack). Land uptake has been kept to a minimum. In addition to land already owned by Hidroelectrica Aconcagua, S.A., land had to be either acquired or compensated for from four private landowners and a Region V holding (0.5 ha). All agreements have been completed in accordance with the Electricity Act (all negotiated). The land acquisition/compensation process has been completed. Construction of civil works will not entail significant inflow of new workers to the area. Project contractors will have to hire local workers as much as possible and no worker`s camps will be allowed. Bus transportation from villages and from Los Andes to work sites will be the responsibility of the contractor. Food services will also be contracted with local restaurants near the work sites. - 30 - The construction of the two access bridges over the Aconcagua is seen by all communities (especially Villa Aconcagua) as perhaps the most positive impact of this project. Existing crossings only allow for pedestrian traffic while the new ones will allow all modes of transportation. The new short access roads from the bridges to the canals will be maintained by HGV. On the north bank, just downstream of the Los Quilos plant, there is a regulating reservoir. At this point, water is stored at night and released in early morning to offset the impact of the plant operating in peak hours on river flow and to meet the Los Quilos water right obligation to satisfy downstream agricultural water requirements. This practice will be continued when the Chacabuquito plant is completed. In agreement with water users downstream, an additional regulating reservoir will be constructed (Vizcachas) on the north bank just downstream of the Chacabuquito plant, and an additional intake direct water from the Aconcagua river to an existing 1.8 km canal terminating at the new reservoir. It will operate similarly to the existing reservoir upstream near Los Quilos (which will be decommissioned after initiation of operations). The company and the "Junta de Vigilancia Rio Aconcagua" have extended their existing agreement in this area. Community and Stakeholder Consultation There have been extensive consultations with the owners of the Los Quilos Canal, the downstream farmers, and the affected landowners. The latter consultations resulted in several reroutes for the canals. Extensive consultation and negotiations have also taken place with downstream water users (Asociación de Usuarios del Río Aconcagua, and Asociación de Regantes) concerning the need to relocate the compensatory reservoir. An agreement was reached to build a new compensatory reservoir downstream the Chacabuquito power plant. Individual agreements were reached with each property owner. 7. Safeguard Policies Do any of the following safeguard policies apply to the project? Policy Applicability Environmental Assessment (OD 4.01) X Yes No Natural habitats (OP/BP/GP 4.04) X Yes No Forestry (OP 4.36) X Yes No Pest Management (OP 4.09) Yes x No Cultural Property (OPN 11.03) Yes x No Indigenous People (OD 4.20) Yes x No Involuntary Resettlement (OP 4.30) Yes x No Safety of Dams (OP 4.37) Yes x No Projects in International Waterways(OP 7.50) Yes x No Projects in Disputed Areas (OP 7.60) Yes x No - 31 - F. Sustainability and Risks 1. Sustainability The project is expected to be sustainable. The power sector in Chile is well developed, mature, liberalized, with efficient regulatory agencies. The Chilean power sector was reformed already in 1982 through the General Electricity Law, which introduced privatization and unbundling of generation, transmission and distribution activities. Since then, the sector has been performing well, even though certain adjustments and fine-tuning are still needed. Overall, the sector and regulatory risks are minimal. On the technical side, the feasibility of the technical design was confirmed and emission reductions were estimated in the baseline study, and verified by an independent validator. The project will be developed by a private entity (HGV), experienced in construction and operation of similar run-of-the-river plants on the same river. HGV has a strong and experienced management team with a successful track record. HGV`s existing hydro-power plants are modern, well maintained and operated efficiently, according to the highest technical standards. HGV`s financial management has been prudent and profitable, as evidenced by its conservative balance sheet and stable profit record. Financial analysis of the project confirmed its financial viability (see Annex 1). 2. Critical risks Political Kyoto Protocol not ratified by Chile or abandoned in general by international community: The risk is considered low. Chile has been active participant in UNFCCC negotiations and is expected to ratify the Kyoto Protocol in early 2002. The recent progress in international negotiations related to climate change has confirmed the commitment of international community to the Kyoto Protocol. Technical Miscalculations related to future hydrology, miscalculation of emission reductions due to (i) lower than expected demand increase, or (ii) earlier decommissioning of coal-fired thermal plants: This risk has been taken into account in the design of the project. First, the project design is based on conservative estimates. Second, a low-case scenario was established for the case of reduced emission reductions (in case Chacabuquito displaces only generation based on natural gas). The project would still produce expected emission reductions of 1 million tCO2 in 15 years. Hydrological conditions are not expected to have significant impact on ER delivery over the 15-year period of the project. - 32 - Financial . Financial risks are not considered substantial. HGV`s financial management has been prudent and profitable, as evidenced by its conservative balance sheet and stable profit record. Financial analysis of the project confirmed its financial viability. Sensitivity analysis has been carried out to assess financial impact of changes of individual factors (changes in revenues due to price change, ER sales and investment costs). The variation of indicators has been low. Policy/Regulatory Policy and regulatory environment for the power sector has been very stable since the implementation of the reforms in 1980s. No major regulatory risks are foreseen. Main risks are related to the price changes, particularly the node price calculated by CNE. However, both the Government and the market expect that the node price should stabilize at slightly above US$26/MWh. Abrupt, unexpected price changes (particularly downwards) could affect financial performance of the company. The likelihood of such changes, however, is considered small. 3. Possible controversial aspects No controversial aspects of the project are foreseen. G. Main Conditions of the ERPA If Chile has not ratified the Kyoto Protocol by the time of initial verification of the Project, PCF and HGV will attempt to reach an agreement with the Government on transfer of ER under the CDM. Until such agreement is reached, PCF will pay only the reduced price (1US$/tCO2). PCF can terminate the ERPA if the Republic of Chile has withdrawn from the UNFCCC or fails to ratify the Kyoto Protocol within 180 days of the Kyoto Protocol coming into force or has withdrawn from another international agreement which affects the ER transfer from the project to the PCF. PCF may also terminate the ERPA if: (i) the project construction phase is not completed by June 30, 2003; (ii) HGV fails to deliver for three consecutive years 60% of the expected net annual generation of 160 GWh from the Chacabuquito plant (except force majeure); or (iii) HGV fails to generate ERs prior to March 30, 2004. It should be noted, however, that the likelihood of occurrence of any of these events is considered low. - 33 - H. Readiness for Implementation [x] 1. a) The engineering design documents for the first year`s activities are complete and ready for the start of project implementation. [ ] 1. b) Not applicable. [ ] 2. The procurement documents for the first year`s activities are complete and ready for the start of project implementation. Not applicable. [x ] 3. The Project Implementation Plan has been appraised and found to be realistic and of satisfactory quality. [ ] 4. The following items are lacking and are discussed under loan conditions (Section G). I. Compliance with Bank Policies [x] 1. This project complies with all applicable Bank policies. [ ]2. The following exceptions to Bank policies are recommended for approval. The project complies with all other applicable Bank policies. - 34 - Chile: PCF Chacabuquito Hydroelectric Power Project Annex 1 HGV ­ CHACABUQUITO HYDROELECTRIC POWER PLANT FINANCIAL ANALYSIS REPORT The Sponsor The Sponsor of the Chacabuquito Project is Hidroelectrica Guarda Vieja Sociedad Anonima (HGV), a subsidiary of Minera Valparaiso Sociedad Anonima (MV), a public and diversified holding company controlled by Grupo Matte (the Group). Minera de Valparaiso Sociedad Anonima (MV) Minera Valparaiso, the holding company, began operations in 1906 and has become one of Chile`s strongest economic groups. The strategy of MV is to invest in a wide range of economic activities to minimize risk factors. This diversified organization with more than twenty subsidiaries and affiliates (Table 2.A), is involved in generation and retail of energy, sea port services, forestry, and in the pulp and paper industry, and in real state investment and development. Minera Valparaiso`s total assets in December of 2000 amounted to US$1.166 million of which US$1.145 million represent total equity or 98.2% of total assets; the main allotment of total assets (more than 60%) is the shareholding in subsidiaries and affiliates as displayed in Table 2.B. Between 1998 and 2000, MV slightly changed its investing strategy to enhance liquidity by increasing fixed short term deposits and decreasing shareholding in other entities. Table 2.C illustrates on individual and consolidated main financial indicators which show the strength of the holding organization. The financial statements supporting this report have been audited by Deloitte and Touche. Hidroelectrica Guarda Vieja (HGV) HGV is fully controlled by Minera Valparaiso and has been involved in ownership, development and operation of plants since 1939. HGV has successfully owned and operated the Los Quilos facility, a hydroelectric plant in the Aconcagua Valley. Between 1986 to 1989, HGV increased 22-MW of generating capacity to the existing capacity of 17-MW. Four years later, HGV developed, managed, and provided technical assistance to Central Aconcagua. This 72-MW generation project was developed for Hidroelectrica Aconcagua, also a subsidiary of the Group. Project construction was in accordance to budget, and currently this facility is successfully operated by the subsidiary. HGV is a major stockholder of Hidroelectrica Aconcagua with 85% ownership while the IFC is the minority shareholder. 1.1 Management and Management Systems HGV has a lean and efficient organization of 125 employees. Of this total, some 20 are managerial, engineering and administrative officials reporting directly to the Board, located in headquarters, in Santiago de Chile and 105 are operational staff in the hydroelectric plants. HGV is committed to generation, transmission, distribution, and purchase and sale of electricity. HGV is currently evaluating the purchase of a state-of-the-art enterprise resource planning system. 1.2 Organization and Operations Hidrolectrica Guarda Vieja centralizes their core activities in a small group of highly qualified managers. Table 3.A shows their organizational chart. Engineering studies, construction, inspections, development and maintenance of major information systems, and other functions are typically outsourced. Although there is no specific written human resources policy for HGV, there are well established guidelines on recruitment, promotions and training programs. HGV has an operational manual that addresses administrative procedures and internal control policy. - 35 - 1.3 Planning and Control The approach of HGV to planning is two fold. First, every three years a ten year strategic plan is formulated that mainly sets long range objectives, presents new projects and devises new ways to enhance client relationships. Secondly, on the context of the strategic plan, an annual business plan is issued and the annual budget is prepared establishing short term objectives and the resources needed to achieve them. A monthly managerial report is made for the Board including a set of commercial, operational and financial indicators with the performance of the company. The Board and management discuss the report and decisions are made, if needed, towards compliance of objectives. External auditing on financial statements on which this report is based is carried out by Deloitte and Touche. 1.4 Past Performance and Present Financial Condition HGV has held a prudent and profitable financial performance as demonstrated in the financial statements included in Table 3.B. Net income was US$ 41,5 millions in 1999 and US$ 17,6 million in 2000, resulting in a ratio of net income to total assets of 24,0 % and 10,0 % accordingly. Operational results and Earnings Before Depreciation Interest and Taxes were stable during the period 1998 to 2000 due to very strong energy sales contracts with its few main clients: the Division Andina of Codelco Chile and Empresas Melon. Account receivables maintain an excellent standard. Non-operational results were unusually high in 1999 due to the sale of their equity stake in ENDESA, and extraordinary dividends from its investments in Chilquinta. Balance sheet shows as of December 2000 total assets amounting to US$176.4 million while the total equity is US$168.9 million or 95.8 % of total equity. There are no significant guarantees on subsidiaries affecting assets of HGV. This solid capitalization is part of the tradition of the Matte family, principal owners of the holding company MV, who strongly believe in maintaining a sound equity position and minimizing debt. The Chacabuquito Hydro Power Project The Chacabuquito Project consists of the development of a run-of-the-river power plant of 25-MW capacity that utilizes the waters of the Aconcagua river and will produce an average annual generation of 175 GWh gross (160 GWh net) with an 80% plant factor. The project is located in the 5th Region administrative division near Los Andes, about 100 km Northeast of Santiago. This plant is in cascade with two other upstream existing plants. Upstream from these three plants, a future project, Guardia Vieja, will complete the river hydropower development. Chacabuquito will be connected to the 5th Region`s 110 kV sub-system within the SIC and will generate power for industrial and residential consumers in the 5th Region. Its design uses a simple layout and technologies well proven in Chile and consists of a diversion weir, a system of open canals and tunnels, a penstock, and a powerhouse. 1.5 Construction arrangements For construction and financing of new projects, the approach of the Group is to create a new independent corporation which receives institutional, technical and financial support of the parent company. In the Group`s view, this outfit will provide autonomy of the day to day management of HGV in the administration of the construction activities and will also represent a tax benefit. Reimbursement from the Federal Tax Agency of the Value Added Tax paid for construction contracts and provision of electromechanical equipment will be facilitated. To assure this management philosophy, the general manager of HGV will take over the same position in the new company. 1.6 Project cost and financing The project will cost approximately US$37.0 million including contingencies but excluding financing charges. Of this amount, US$32.0 million corresponds to the cost associated with the hydroelectric plant and related equipment and US$5.0 is required for the expansion of the current 110-kV transmission lines that connect Los Quilos and Aconcagua plants. Table 4.A shows detailed project breakdown of costs and financing plan. Construction has already started in early 2001; and commissioning is expected for late 2002. While some commercial lenders have expressed interest in providing project finance, the project sponsor has decided to negotiate financing after the - 36 - commissioning of the project, eliminating construction risk for the lenders. In the interim time, the project will be financed through equity inflow and an eventual bridge loan from MV, the holding company. After that point in time, the project sponsor will seek the best financing structure according to its interest. The present option is to issue bonds to obtain a 15-year loan in order to achieve a 50/50 equity-debt financial structure for the Chacabuquito undertaking. 1.7 Project Financial Projection The financial projection of the cash flow for the Chacabuquito hydro power project is presented in Table 4.B.1. This presentation summarizes the power and financial factors underlying in the project: (i) sales of energy and capacity to the electric network; (b) investments; (c) operation, maintenance and administrative expenses of the hydro plant; and (d) an estimate of an accelerated depreciation based on the Chilean income tax law, by which the project will not be levied with such tax during the first six years of operation. It is estimated that after 2008 the annual projection will remain substantially similar, although no significant changes are expected, as income tax payments. Tables 4.B.2(i) and 4.B.2(ii) include an estimate of annual revenues for the sale of Carbon Emission Reduction Certificates (CERCs) with two scenarios. In both cases the PCF buys the same amount of emission reduction of 1 million TC02e. In scenario 1, base on marginal generation by natural gas fired plants, CERs purchases extend until year 2015. In scenario 2, the higher emission reduction due to marginal generation by coal fired plants, allows PCF purchase of 1 million TC02e to be achieved by year 2009: This scenario 2 is front loaded the first 8 years, so the disparity between them is not only displacing plants with different fuels, but also the period in which CERCs are bought.(See Table 4.B.3). HGV Future Financial Performance As discussed above, past performance and present financial condition are satisfactory for the capability and expertise of management, the regular profitability of operations and the sound capitalization structure of both HGV and MV, the parent company. Future operational and financial developments are expected to continue in a similar trend. Additionally, the context in the present business environment in Chile is highly positive, one of the best in the Latin-American and the Caribbean Region. Stable institutions, sustained GDP and investment rate growth, low rate of interest in the domestic market, open access to foreign commercial lending, low unemployment rate as well as social and political stability Minor uncertainties in the power sector regarding regulations and pricing might affect the sector. Forecast Tables 5.A.1 to 3, set forth three cases of financial forecast under different scenarios. The main parameters and hypothesis of the projections are the same for those cases: energy sales and prices as well as operational and maintenance costs and administrative expenses. Regular energy sales has a sharp decline in 2004 because it is expected that prices of future contracts to be renewed such year will be lower than present contract prices. Net non- operational income has been forecast by HGV in a conservative manner. Current Liabilities have been maintained constant during the projection period. The three scenarios assumed are summarized below: Case of Table 5.A.1: The basic case, not including Carbon Emission Reduction Certificates (CERCs) and loan. Case of Tables 5.A.2 (i) and (ii): The basic case plus CERCs (scenario 1 and 2) sold during the first 15 years after commissioning. Case of Tables 5.A.3 (i) and (ii): The basic case plus CERCs (scenario 1 and 2) sold during the first 15 years and a 15-year loan amortized in equal payments in 15 years with a 7% interest rate paid on due balances. When the loan is received in 2003 there is an equivalent estimated increase in Other Assets. - 37 - The economic internal rate of return (EIRR) of the project for the basic case comparing total investments (assets) and economic results is 9.8%, as shown in Table 5.B This EIRR increases with CERCs to 10.2% with scenario 1 and to 10.3% with scenario 2. Net present value (NPV) for this basic case with a discount rate of 10% is ­ 0.75 million US$; a sensitivity analysis with other rates is also shown in Table 5.B. The financial internal rate of return (FIRR) comparing equity with financial results for the basic case plus CERCs is 11.2% with scenario 1 and 11.4% with scenario 2, due to the higher income and the leverage of financing. The complete summary of economic and financial ratios is presented in the above mentioned Table. 1.8 Project Risk There are two possible sources of risk, one is the CER baseline risk and the other is the standard risks affecting this type of projects. Changes to the existing baseline scenario may arise from: (i) lower than expected demand increase, and (ii) decommissioning of coal fired thermal plants. If demand were to grow at a rate lower than 8% p.a. the only effect on the baseline would be to delay implementation of future combined cycle plants; however, the coal based generation would not decrease and thus, this would not affect the emissions reduction estimates. Decommissioning of coal based generation is not likely to occur, at least in the medium term, because currently the SIC is short of capacity expansion projects; which is interpreted as the node prices calculated by the CNE being too low to attract investors. Regarding other risks, (e.g. political, technical performance and resource availability, or those associated with the power sector institutional framework) have also little probability of occurrence. Chile is the most stable and growing country in the LAC Region and its institutions are very stable and has a very a very low political risk. The only risk that might be seen is the regulatory risk, but it only may affect energy prices and market conditions, not other project developments. The technology for the project is widely used along the world since many years, and the company actually runs other run-of-the-river hydroelectric facilities along the same river. 1.9 Sensitivity analysis Sensitivity analysis is a technique employed when one or more factors are subject to uncertainty. This analysis attempt to assess what is the behavior of relevant economic or financial indicators (IRR and NPV) when an individual factor changes. NPV has been calculated with a discount rate of 10% (interest rate based on the Chilean power sector legal rate of return) and a sensitivity analyses with other discount rates was also carried out. The scenarios assumed forecast low risk and little uncertainty, consequently the variation of indicators are low and are shown below and in Table 5.B. Case 5.A.1 Case 5.A.2 Case 5.A.3 EIRR (%) NPV (U$SM) EIRR (%) NPV (U$SM) FIRR (%) NPV (U$SM) 1 Changes in Revenues due to demand or prices Plus 5 % 10.3 1.03 10.9 2.72 12.1 4.50 Minus 5 % 9.1 -2.59 9.7 -1.00 10.5 0.90 2 Changes in Revenues due to Carbon Emissions Reduction Certificates Scenario 1 9.8 -0.75 10.3 0.85 11.35 2.80 Scenario 2 9.8 -0.75 10.3 0.65 11.3 2.60 3 Changes in Amount of Investments Plus 5 % 9.2 -2.39 9.7 -1.10 10.5 1.10 Minus 5 % 10.3 0.9 10.9 2.35 12.2 4.42 - 38 - NPV has been calculated with 10% interest rate based on the Chilean power sector legal rate of return. See sensitivity analyses on discount rates in Table 5.B. - 39 - LIST OF TABLES 1) 2.A Minera de Valparaiso Property Relations with Subsidiaries 2) 2.B Minera Valparaiso Consolidated Historic Financial Statements 3) 2-C Minera Valparaiso Historic Financial Indicators 4) 3.A HGV Organization Chart 5) 3.B HGV Historic Financial Statements 6) 4.A HGV Chacabuquito Hidro Power Project: Cost and Financing Plan 7) 4.B.1 HGV Chacabuquito Hidro Power Project: Financial Projection 8) 4.B.2 (i) HGV Chacabuquito Hidro Power Project: Financial Projection including CERCs Income ­ Scenario 1 9) 4.B.2 (ii) HGV Chacabuquito Hidro Power Project: Financial Projection including CERCs Income ­ Scenario 2 10) 5.A.1 HGV Financial Projections 11) 5.A.2 (i) HGV Financial Projections including CERCs Income - Scenario 1 12) 5.A.2 (ii) HGV Financial Projections including CERCs Income - Scenario 2 13) 5.A.3 (i) HGV Financial Projections including CERC Income Scenario 1 and a 15-year loan 14) 5.A.3 (ii) HGV Financial Projections including CERC Income Scenario 2 and a 15-year loan 15) 5.B HGV Financial indicators 16 to 21) 5.B.1 to 6 HGV Financial indicators ­ Tables supporting sensitivity analysis. 22) 4.B.3 PCF Payments. - Scenarios 1 and 2. - 40 - HGV CHACABUQUITO HYDRO POWER PROJECT Table 2.A Minera Valparaiso Historic Financial Statements 1998 1999 2000 Income Statement M$ MU$S % M$ MU$S % M$ MU$S % Total Operating Revenues 26,837 56.8 77.1 27,514 51.1 50.2 28,211 49.1 71.0 Operating Cost 13,244 28.0 38.1 13,706 25.5 25.0 13,596 23.7 34.2 Operating Margin 13,592 28.8 39.1 13,808 25.7 25.2 14,616 25.4 36.8 Adm. & Comer. Expenses 1,641 3.5 4.7 2,269 4.2 4.1 2,427 4.2 6.1 Gross Income 11,951 25.3 34.4 11,539 21.4 21.1 12,189 21.2 30.7 - Net Non Operating Income 29,366 62.2 84.4 48,725 90.5 89.0 34,119 59.4 85.8 Income before Taxes 41,318 87.5 118.8 60,264 112.0 110.0 46,307 80.6 116.5 less: Income Tax 1,957 4.1 5.6 1,785 3.3 3.3 3,023 5.3 7.6 Minor Interest Participation (1) 5,213 11.0 15.0 4,945 9.2 9.0 5,376 9.4 13.5 Higher Value Investmens (Circ.368 SVyS) (2) 643 1.4 1.8 1,087 2.3 2.3 1,519 3.2 4.6 Net Income 34,791 73.6 100 54,621 101.8 100 39,427 69.2 100 Balance Sheet Statement Current Assets 59,978 127.0 11.0 159,439 296.2 26.4 173,784 302.4 25.9 Fixed Assets 68,513 145.0 12.6 65,447 121.6 10.8 71,469 124.4 10.7 Other Assets 416,821 882.4 76.4 379,778 705.6 62.8 425,058 739.7 63.4 Total Assets 545,312 1154.4 100 604,665 1123.5 100 670,311 1166.5 100 - Current Liabilities 3,178 6.7 0.6 3,895 7.2 0.6 9,840 17.1 1.5 Long Term Debt 1,702 3.6 0.3 1,537 2.9 0.3 2,197 3.8 0.3 Equity and Reserves (3) 449,736 952.0 82.5 479,635 891.2 79.3 548,774 955.0 81.9 Minor Interest 63,920 135.3 11.7 71,020 132.0 11.7 77,902 135.6 11.6 Annual Net Income 34,791 73.6 6.4 54,621 101.5 9.0 39,427 68.6 5.9 less: Interim Dividends 8,013 17.0 1.5 6,043 11.2 1.0 7,830 13.6 1.2 Total Liabilities and Equity 545,312 1154.4 100 604,665 1123.5 100 670,311 1166.5 100 (1) Dividend Payment to Minority Shareholders; (2) According to Chilean Regulations; (3) Include legal reserves and accumulred income - 41 - HGV CHACABUQUITO HYDRO POWER PROJECT Table 2.B Minera Valparaíso Historic Financial Indicators 1998 1999 2000 Consolidated Individual Consolidated Individual Consolidated Individual 1. CURRENT LIQUIDITY Current Assets/Current 18.88 0.72 40.94 65.53 17.66 12.80 liabilities 2. ACID TEST Current Assets less...*/Current 18.71 0.72 40.80 65.53 17.59 12.80 Liabilities 3. DEBT RATIO Liabilities / Equity 0.01 0.00 0.01 0.00 0.02 0.01 4. RETURN ON CAPITAL Net Return / Equity 0.07 0.07 0.10 0.10 0.07 0.07 5. RETURN ON ASSETS - - 0.10 0.11 0.06 0.07 6. RETURN IN $ PER SHARE 278.32 278.32 436.97 436.97 315.41 315.41 7. DEBT COMPOSITION 7.1 Short Term Total Debt 65% 96% 72% 93% 82% 98% 7.2 Long Term Total Debt 35% 4% 28% 7% 18% 2% * Inventories and Advanced Expenses - 42 - HGV CHACABUQUITO HYDRO POWER PROJECT Table 2.C Minera Valparaíso Property Relations with Subsidiaries Minera Valparaíso 87,8% 92,88% 100% Forestal Cominco IFC H. Guardia Vieja Cominco 99,9% 85% 15% 0,1% 41,5% Electropacífico Inv. Ltda. Obras y Desarrollo H. Aconcagua 33,2% 10,29% 39,71% 87,5% 12,5% 40,28% 16,14% 20% Inv. Energéticas For. Y Pesquera Puerto de Ltda. Sardelli Investment Callaqui Lirquen 0,02% 3,13% 38,52% Colbún Machicura - 43 - HGV CHACABUQUITO HYDRO POWER PROJECT Table 3.A HGV Organization Chart General Manager Counsel Financial and Power Plant Commercial Deputy Engineering Chief Project Chief Administrator Manager Acounting Operator Chief Administrative Chief - 44 - HGV CHACABUQUITO HYDRO POWER PROJECT Table 3.B HGV Historic Financial Statements 1999 2000 Income Statement M$ MU$S % M$ MU$S % Total Operating Revenues 16233.2 30.2 72.6 17855.6 31.1 176.6 Operating Cost 9099.1 16.9 40.7 8760.5 15.2 86.7 Operating Margin 7134.1 13.3 31.9 9095.1 15.8 90.0 Adm. & Comer. Expenses 574.6 1.1 2.6 576.1 1.0 5.7 Gross Income 6559.5 12.2 29.4 8519.0 14.8 84.3 Net Non Operating Income 17052.2 31.7 76.3 3673.9 6.4 36.3 Income before Taxes 23611.7 43.9 105.7 12192.9 21.2 120.6 less: Income Tax 770.6 1.4 3.4 1592.9 2.8 15.8 Minor Interest Participation (1) 494.7 0.9 2.2 489.9 0.9 4.8 Net Income 22346.4 41.5 100 10110.1 17.6 100 Balance Sheet Statement Current Assets 22837.9 42.4 0.2 24713.4 43.0 24.4 Fixed Assets 45362.6 84.3 48.9 45585.9 79.3 45.0 Other Assets 24622.6 45.7 26.5 31062.6 54.1 30.6 Total Assets 92823.1 172.5 100 101361.9 176.4 100 Current Liabilities 1909.6 3.5 2.1 2354.8 4.1 2.3 Long Term Debt 1451.2 2.7 1.6 1950.4 3.4 1.9 Equity and Reserves (2) 60973.5 113.3 65.7 80499.4 140.1 79.4 Minor Interest 6142.4 11.4 6.6 6447.2 11.2 6.4 Annual Net Income 22346.4 41.5 24.1 10110.1 17.6 10.0 Total Liabilities and Equity 92823.1 172.5 100 101361.9 176.4 100 (1) Dividend Payment to Minority Shareholders (2) Include legal reserves and accumulated income - 45 - HGV CHACABUQUITO HYDRO POWER PROJECT Table 4.A Cost and Financing Plan Cost US$ Civil Works River Diversion works 400,000 Channels 8,000,000 Tunnels 6,000,000 Load Chamber an Security works 900,000 High Pressure Pipes 3,000,000 Power House (4 units) 900,000 Water restitution channel 100,000 Access, Roads and Bridges 500,000 Reservoir 2,000,000 SUBTOTAL 21,800,000 Electromechanical Equipment Electrical Equipment 3,300,000 Mechanical Equipment 3,800,000 SUBTOTAL 7,100,000 Transmission System High Voltage Patio 2,000,000 High Voltage Line 3,000,000 SUBTOTAL 5,000,000 Others Engineering 550,000 Inspection and Administration 1,500,000 Land and rights of access 1,000,000 Losses in Central Los Quilos 50,000 SUBTOTAL 3,100,000 Total 37,000,000 Financing Plan 1st Stage (years 2001/2002) Equity 37,000,000 2nd Stage (year 2003) Equity 18,500,000 Long Tern Debt 18,500,000 TOTAL 37,000,000 - 46 - HGV CHACABUQUITO HYDRO POWER PROJECT Table 4.B.1 Financial Projection (with no CERCs) 2001 2002 2003 2004 2005 2006 2007 2008 NORMAL HIDROLOGY GWh - 50.0 160.0 160.0 160.0 160.0 160.0 160.0 MW - - 15.7 15.7 15.7 15.7 15.7 15.7 INVESTMENT -17000 -20000 INCOME - 1213 4290 4290 4290 4290 4290 4290 Spot Energy - 148 1110 1110 1110 1110 1110 1110 Contract Energy - 1065 2264 2264 2264 2264 2264 2264 Capacity - - 916 916 916 916 916 916 COST - -150 -470 -470 -470 -470 -470 -470 Operation and Mant. - -150 -320 -320 -320 -320 -320 -320 Toll - - -150 -150 -150 -150 -150 -150 EBDIT - 1063 3820 3820 3820 3820 3820 3820 DEPRECIATION - -1524 -1524 -1524 -1524 -1524 -1524 -1524 OPERATIONAL REVENUE - -461 2296 2296 2296 2296 2296 2296 CASH FLOW -17000 -18937 3820 3820 3820 3820 3820 3820 - 47 - HGV CHACABUQUITO HYDRO POWER PROJECT Table 4.B.2 (i) Financial Projection with CERC Income -Scenario 1- 2001 2002 2003 2004 2005 2006 2007 2008 NORMAL HIDROLOGY GWh - 50.0 160.0 160.0 160.0 160.0 160.0 160.0 MW - - 15.7 15.7 15.7 15.7 15.7 15.7 INVESTMENT -17000 -20000 INCOME - 1348 4453 4453 4453 4503 4503 4503 Spot Energy - 148 1110 1110 1110 1110 1110 1110 Contract Energy - 1065 2264 2264 2264 2264 2264 2264 Capacity - - 916 916 916 916 916 916 CERC Income -SCENARIO 1- - 135 163 163 163 213 213 213 COST - -150 -470 -470 -470 -470 -470 -470 Operation and Mant. - -150 -320 -320 -320 -320 -320 -320 Toll - - -150 -150 -150 -150 -150 -150 EBDIT - 1198 3983 3983 3983 4033 4033 4033 DEPRECIATION - -1524 -1524 -1524 -1524 -1524 -1524 -1524 OPERATIONAL REVENUE - -326 2459 2459 2459 2509 2509 2509 CASH FLOW -17000 -18802 3983 3983 3983 4033 4033 4033 - 48 - HGV CHACABUQUITO HYDRO POWER PROJECT Table 4.B.2 (ii) Financial Projection with CERC Income -Scenario 2- 2001 2002 2003 2004 2005 2006 2007 2008 NORMAL HIDROLOGY GWh - 50.0 160.0 160.0 160.0 160.0 160.0 160.0 MW - - 15.7 15.7 15.7 15.7 15.7 15.7 INVESTMENT -17000 -20000 INCOME - 1348 4658 4658 4658 4708 4708 4708 Spot Energy - 148 1110 1110 1110 1110 1110 1110 Contract Energy - 1065 2264 2264 2264 2264 2264 2264 Capacity - - 916 916 916 916 916 916 CERC Income -SCENARIO 2- - 135 368 368 368 418 418 418 COST - -150 -470 -470 -470 -470 -470 -470 Operation and Mant. - -150 -320 -320 -320 -320 -320 -320 Toll - - -150 -150 -150 -150 -150 -150 EBDIT - 1198 4188 4188 4188 4238 4238 4238 DEPRECIATION - -1524 -1524 -1524 -1524 -1524 -1524 -1524 OPERATIONAL REVENUE - -326 2664 2664 2664 2714 2714 2714 CASH FLOW -17000 -18802 4188 4188 4188 4238 4238 4238 - 49 - HGV CHACABUQUITO HYDRO POWER PROJECT Table 4.B.3 PCF Payments Number of years 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Year 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 ERs from gas baseline 30000 79000 79000 79000 79000 79000 79000 79000 79000 79000 79000 79000 79000 79000 79000 ERs from coal baseline 60000 137600 137600 137600 137600 137600 137600 137600 137600 137600 137600 137600 137600 137600 137600 Emission Reductions (TCO2e) PCF MER purchase - SCENARIO 1 (gas baseline) 60,000 68,000 68,000 68,000 68,000 68,000 68,000 68,000 68,000 68,000 68,000 68,000 68,000 68,000 68,000 Cumulative PCF MER purchase 60,000 128,000 196,000 264,000 332,000 400,000 468,000 536,000 604,000 672,000 740,000 808,000 876,000 944,000 1,012,000 HGVs share 11000 11000 11000 11000 11000 11000 11000 11000 11000 11000 11000 11000 11000 ALL PCF purchase - SCENARIO 2 (coal baseline) 58,600 58,600 58,600 58,600 58,600 58,600 58,600 Total PCF purchase 60,000 126,600 126,600 126,600 126,600 126,600 126,600 126,600 68,000 68,000 68,000 68,000 68,000 68,000 Cumulative PCF purchase 60,000 186,600 313,200 439,800 566,400 693,000 819,600 946,200 1,014,200 Payment stream for the year Assumed price ($/tCO2e) PCF purchase (1) -SCENARIO 1 210,000 238,000 238,000 238,000 238,000 238,000 238,000 238,000 238,000 238,000 238,000 238,000 238,000 238,000 Total PCF gross payment for the year ($) - SC. 2 210,000 443,100 443,100 443,100 443,100 443,100 443,100 443,100 Cumulative PCF gross payments 210,000 653,100 1,096,200 1,539,300 1,982,400 2,425,500 2,868,600 3,311,700 3,311,700 Project preperation cost instalment 50,000 50,000 50,000 50,000 Verification costs 25,000 25,000 25,000 25,000 25,000 25,000 25,000 25,000 25,000 25,000 25,000 25,000 25,000 25,000 Net PCF payment - SCENARIO 1 135,000 163,000 163,000 163,000 213,000 213,000 213,000 213,000 213,000 213,000 213,000 213,000 213,000 213,000 Net PCF payment - SCENARIO 2 135,000 368,100 368,100 368,100 418,100 418,100 418,100 418,100 - 50 - HGV CHACABUQUITO HYDRO POWER PROJECT Table 5.A.1 HGV Financial Projections (with no CERCs) (US$ million) 2000 2001 2002 2003 2004 2005 2006 2007 2008 Income Statement Total operating Revenues 31.07 34.70 42.60 43.06 32.70 32.35 31.94 32.13 32.13 Regular Revenues 31.07 34.70 41.40 38.77 28.41 28.06 27.65 27.84 27.84 Chacabuquito Revenues 0.00 0.00 1.20 4.29 4.29 4.29 4.29 4.29 4.29 Total Operating Cost 15.25 14.50 13.10 11.95 10.36 10.98 11.10 11.24 11.24 Regular Costs 15.25 14.50 13.00 11.48 9.89 10.51 10.63 10.77 10.77 Chacabuquito Costs 0.00 0.00 0.10 0.47 0.47 0.47 0.47 0.47 0.47 Operating Margin 15.83 20.20 29.50 31.11 22.34 21.37 20.84 20.89 20.89 Adm. and Sales Expenses 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 Operational Results 14.83 19.20 28.50 30.11 21.34 20.37 19.84 19.89 19.89 Net Non Operating Income 6.39 7.60 7.60 7.63 7.63 7.63 7.63 7.63 7.63 Income Before Taxes 21.22 26.80 36.10 37.74 28.97 28.00 27.47 27.52 27.52 less: Income Tax 2.77 2.20 3.60 3.63 2.32 2.15 2.24 2.49 2.49 Minor interest participation 0.85 1.00 1.00 1.00 1.00 1.00 0.00 -1.00 -1.00 Net Income 17.59 23.60 31.50 33.11 25.65 24.85 25.23 26.03 26.03 Flow of Funds SOURCES Net Income 23.60 31.50 33.11 25.65 24.85 25.23 26.03 26.03 plus Depreciation 3.10 3.10 3.10 3.10 3.10 3.10 3.10 3.10 Gross Internal Generation 26.70 34.60 36.21 28.75 27.95 28.33 29.13 29.13 Capital Inflow 17.00 20.00 0.00 0.00 0.00 0.00 0.00 0.00 Borrowing 0.00 Total Sources 43.70 54.60 36.21 28.75 27.95 28.33 29.13 29.13 USES Investments 17.00 20.00 0.00 0.00 0.00 0.00 0.00 0.00 Debt Service payments Payment of Dividends 17.60 23.60 31.50 33.11 25.65 24.85 25.23 26.03 Variation of Working Capital 9.10 11.00 4.71 -4.36 2.31 3.48 3.90 3.10 Total Uses 43.70 54.60 36.21 28.75 27.95 28.33 29.13 29.13 Balance Sheet Statement Current Assets 43.01 52.11 63.11 67.82 63.45 65.76 69.24 73.14 76.24 Fixed Assets 79.33 96.33 116.33 116.33 116.33 116.33 116.33 116.33 116.33 Other Assets 54.06 54.06 54.06 54.06 54.06 54.06 54.06 54.06 54.06 Total Assets 176.40 202.50 233.50 238.21 233.84 236.15 239.62 243.53 246.63 Current Liabilities 4.10 4.10 4.10 4.10 4.10 4.10 4.10 4.10 4.10 Long Term Debt 3.39 3.39 3.39 3.39 3.39 3.39 3.39 3.39 3.39 Equity and Reserves 140.09 160.19 183.29 186.39 189.49 192.59 195.69 198.79 201.89 Minor Interest 11.22 11.22 11.22 11.22 11.22 11.22 11.22 11.22 11.22 Annual Net Income 17.59 23.59 31.49 33.10 25.64 24.85 25.22 26.03 26.03 Total Liabilities and Equity 176.40 202.50 233.50 238.21 233.84 236.15 239.62 243.53 246.63 - 51 - HGV CHACABUQUITO HYDRO POWER PROJECT Table 5.A.2 (i) HGV Financial Projections with CERC Income -Scenario 1- (US$ million) 2000 2001 2002 2003 2004 2005 2006 2007 2008 Income Statement Total operating Revenues 31.07 34.70 42.74 43.22 32.86 32.51 32.15 32.34 32.34 Regular Revenues 31.07 34.70 41.40 38.77 28.41 28.06 27.65 27.84 27.84 Chacabuquito Revenues 0.00 0.00 1.34 4.45 4.45 4.45 4.50 4.50 4.50 Total Operating Cost 15.25 14.50 13.10 11.95 10.36 10.98 11.10 11.24 11.24 Regular Costs 15.25 14.50 13.00 11.48 9.89 10.51 10.63 10.77 10.77 Chacabuquito Costs 0.00 0.00 0.10 0.47 0.47 0.47 0.47 0.47 0.47 Operating Margin 15.83 20.20 29.64 31.27 22.50 21.53 21.05 21.10 21.10 Adm. and Sales Expenses 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 Operational Results 14.83 19.20 28.64 30.27 21.50 20.53 20.05 20.10 20.10 Net Non Operating Income 6.39 7.60 7.60 7.63 7.63 7.63 7.63 7.63 7.63 Income Before Taxes 21.22 26.80 36.24 37.90 29.13 28.16 27.68 27.73 27.73 less: Income Tax 2.77 2.20 3.60 3.63 2.32 2.15 2.24 2.49 2.49 Minor interest participation 0.85 1.00 1.00 1.00 1.00 1.00 0.00 -1.00 -1.00 Net Income 17.59 23.60 31.64 33.27 25.81 25.01 25.44 26.24 26.24 Flow of Funds SOURCES Net Income 23.60 31.64 33.27 25.81 25.01 25.44 26.24 26.24 plus Depreciation 3.10 3.10 3.10 3.10 3.10 3.10 3.10 3.10 Gross Internal Generation 26.70 34.74 36.37 28.91 28.11 28.54 29.34 29.34 Capital Inflow 17.00 20.00 0.00 0.00 0.00 0.00 0.00 0.00 Borrowing 0.00 Total Sources 43.70 54.74 36.37 28.91 28.11 28.54 29.34 29.34 USES Investments 17.00 20.00 0.00 0.00 0.00 0.00 0.00 0.00 Debt Service payments Payment of Dividends 17.60 23.60 31.64 33.27 25.81 25.01 25.44 26.24 Variation of Working Capital 9.10 11.14 4.73 -4.36 2.31 3.53 3.90 3.10 Total Uses 43.70 54.74 36.37 28.91 28.11 28.54 29.34 29.34 Balance Sheet Statement Current Assets 43.01 52.11 63.25 67.98 63.61 65.92 69.45 73.35 76.45 Fixed Assets 79.33 96.33 116.33 116.33 116.33 116.33 116.33 116.33 116.33 Other Assets 54.06 54.06 54.06 54.06 54.06 54.06 54.06 54.06 54.06 Total Assets 176.40 202.50 233.64 238.37 234.00 236.31 239.83 243.74 246.84 Current Liabilities 4.10 4.10 4.10 4.10 4.10 4.10 4.10 4.10 4.10 Long Term Debt 3.39 3.39 3.39 3.39 3.39 3.39 3.39 3.39 3.39 Equity and Reserves 140.09 160.19 183.29 186.39 189.49 192.59 195.69 198.79 201.89 Minor Interest 11.22 11.22 11.22 11.22 11.22 11.22 11.22 11.22 11.22 Annual Net Income 17.59 23.59 31.63 33.26 25.80 25.01 25.43 26.24 26.24 Total Liabilities and Equity 176.40 202.50 233.64 238.37 234.00 236.31 239.83 243.74 246.84 - 52 - HGV CHACABUQUITO HYDRO POWER PROJECT Table 5.A.2 (ii) HGV Financial Projections with CERC Income -Scenario 2- (US$ million) 2000 2001 2002 2003 2004 2005 2006 2007 2008 Income Statement Total operating Revenues 31.07 34.70 42.74 43.42 33.06 32.71 32.35 32.54 32.54 Regular Revenues 31.07 34.70 41.40 38.77 28.41 28.06 27.65 27.84 27.84 Chacabuquito Revenues 0.00 0.00 1.34 4.65 4.65 4.65 4.70 4.70 4.70 Total Operating Cost 15.25 14.50 13.10 11.95 10.36 10.98 11.10 11.24 11.24 Regular Costs 15.25 14.50 13.00 11.48 9.89 10.51 10.63 10.77 10.77 Chacabuquito Costs 0.00 0.00 0.10 0.47 0.47 0.47 0.47 0.47 0.47 Operating Margin 15.83 20.20 29.64 31.47 22.70 21.73 21.25 21.30 21.30 Adm. and Sales Expenses 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 Operational Results 14.83 19.20 28.64 30.47 21.70 20.73 20.25 20.30 20.30 Net Non Operating Income 6.39 7.60 7.60 7.63 7.63 7.63 7.63 7.63 7.63 Income Before Taxes 21.22 26.80 36.24 38.10 29.33 28.36 27.88 27.93 27.93 less: Income Tax 2.77 2.20 3.60 3.63 2.32 2.15 2.24 2.49 2.49 Minor interest participation 0.85 1.00 1.00 1.00 1.00 1.00 0.00 -1.00 -1.00 Net Income 17.59 23.60 31.64 33.47 26.01 25.21 25.64 26.44 26.44 Flow of Funds SOURCES Net Income 23.60 31.64 33.47 26.01 25.21 25.64 26.44 26.44 plus Depreciation 3.10 3.10 3.10 3.10 3.10 3.10 3.10 3.10 Gross Internal Generation 26.70 34.74 36.57 29.11 28.31 28.74 29.54 29.54 Capital Inflow 17.00 20.00 0.00 0.00 0.00 0.00 0.00 0.00 Borrowing 0.00 Total Sources 43.70 54.74 36.57 29.11 28.31 28.74 29.54 29.54 USES Investments 17.00 20.00 0.00 0.00 0.00 0.00 0.00 0.00 Debt Service payments Payment of Dividends 17.60 23.60 31.64 33.47 26.01 25.21 25.64 26.44 Variation of Working Capital 9.10 11.14 4.93 -4.36 2.31 3.53 3.90 3.10 Total Uses 43.70 54.74 36.57 29.11 28.31 28.74 29.54 29.54 Balance Sheet Statement Current Assets 43.01 52.11 63.25 68.18 63.81 66.12 69.65 73.55 76.65 Fixed Assets 79.33 96.33 116.33 116.33 116.33 116.33 116.33 116.33 116.33 Other Assets 54.06 54.06 54.06 54.06 54.06 54.06 54.06 54.06 54.06 Total Assets 176.40 202.50 233.64 238.57 234.20 236.51 240.03 243.94 247.04 Current Liabilities 4.10 4.10 4.10 4.10 4.10 4.10 4.10 4.10 4.10 Long Term Debt 3.39 3.39 3.39 3.39 3.39 3.39 3.39 3.39 3.39 Equity and Reserves 140.09 160.19 183.29 186.39 189.49 192.59 195.69 198.79 201.89 Minor Interest 11.22 11.22 11.22 11.22 11.22 11.22 11.22 11.22 11.22 Annual Net Income 17.59 23.59 31.63 33.46 26.00 25.21 25.63 26.44 26.44 Total Liabilities and Equity 176.40 202.50 233.64 238.57 234.20 236.51 240.03 243.94 247.04 - 53 - HGV CHACABUQUITO HYDRO POWER PROJECT Table 5.A.3 (i) HGV Financial Projections with CER Income -Scenario 1- and a 15-year loan (M U$S) 2000 2001 2002 2003 2004 2005 2006 2007 2008 Income Statement Total operating Revenues 31.07 34.70 42.74 43.22 32.86 32.51 32.15 32.34 32.34 Regular Revenues 31.07 34.70 41.40 38.77 28.41 28.06 27.65 27.84 27.84 Chacabuquito Revenues 0.00 0.00 1.34 4.45 4.45 4.45 4.50 4.50 4.50 Total Operating Cost 15.25 14.50 13.10 11.95 10.36 10.98 11.10 11.24 11.24 Regular Costs 15.25 14.50 13.00 11.48 9.89 10.51 10.63 10.77 10.77 Chacabuquito Costs 0.00 0.00 0.10 0.47 0.47 0.47 0.47 0.47 0.47 Operating Margin 15.83 20.20 29.64 31.27 22.50 21.53 21.05 21.10 21.10 Adm. and Sales Expenses 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 Operational Results 14.83 19.20 28.64 30.27 21.50 20.53 20.05 20.10 20.10 Net Non Operating Income 6.39 7.60 7.60 7.63 7.63 7.63 7.63 7.63 7.63 Income Before Taxes 21.22 26.80 36.24 37.90 29.13 28.16 27.68 27.73 27.73 less: Income Tax 2.77 2.20 3.60 3.63 2.32 2.15 2.24 2.49 2.49 Minor interest participation 0.85 1.00 1.00 1.00 1.00 1.00 0.00 -1.00 -1.00 Interest Long Term Debt 1.30 1.21 1.12 1.04 0.95 0.86 Net Income 17.59 23.60 31.64 31.97 24.60 23.89 24.40 25.29 25.38 Flow of Funds SOURCES Net Income 23.60 31.64 31.97 24.60 23.89 24.40 25.29 25.38 plus Depreciation 3.10 3.10 3.10 3.10 3.10 3.10 3.10 3.10 Gross Internal Generation 26.70 34.74 35.07 27.70 26.99 27.50 28.39 28.48 Capital Inflow 17.00 20.00 0.00 0.00 0.00 0.00 0.00 0.00 Borrowing 18.50 Total Sources 43.70 54.74 53.57 27.70 26.99 27.50 28.39 28.48 USES Investments 17.00 20.00 0 0 0 0 0 0 Debt Service payments 0.00 0.00 0.00 2.53 2.44 2.35 2.27 2.18 2.09 Amortization 1.23 1.23 1.23 1.23 1.23 1.23 Interest 1.30 1.21 1.12 1.04 0.95 0.86 Payment of Dividends 17.60 23.60 31.64 31.97 24.60 23.89 24.40 25.29 Variation of Working Capital 9.10 11.14 20.70 -5.51 1.16 2.37 2.76 1.96 Total Uses 43.70 54.74 53.57 27.70 26.99 27.50 28.39 28.48 Balance Sheet Statement Current Assets 43.01 52.11 63.25 65.45 59.94 61.10 63.47 66.23 68.19 Fixed Assets 79.33 96.33 116.33 116.33 116.33 116.33 116.33 116.33 116.33 Other Assets 54.06 54.06 54.06 72.56 72.56 72.56 72.56 72.56 72.56 Total Assets 176.40 202.50 233.64 254.33 248.83 249.99 252.36 255.12 257.08 Current Liabilities 4.10 4.10 4.10 4.10 4.10 4.10 4.10 4.10 4.10 Long Term Debt 3.39 3.39 3.39 20.66 19.43 18.20 16.96 15.73 14.50 Equity and Reserves 140.09 160.19 183.29 186.39 189.49 192.59 195.69 198.79 201.89 Minor Interest 11.22 11.22 11.22 11.22 11.22 11.22 11.22 11.22 11.22 Annual Net Income 17.59 23.59 31.63 31.96 24.59 23.89 24.39 25.29 25.38 Total Liabilities and Equity 176.40 202.50 233.64 254.33 248.83 249.99 252.36 255.12 257.08 - 54 - HGV CHACABUQUITO HYDRO POWER PROJECT Table 5.A.3 (ii) HGV Financial Projections with CER Income -Scenario 2- and a 15-year loan (US$) million 2000 2001 2002 2003 2004 2005 2006 2007 2008 Income Statement Total operating Revenues 31.07 34.70 42.74 43.42 33.06 32.71 32.35 32.54 32.54 Regular Revenues 31.07 34.70 41.40 38.77 28.41 28.06 27.65 27.84 27.84 Chacabuquito Revenues 0.00 0.00 1.34 4.65 4.65 4.65 4.70 4.70 4.70 Total Operating Cost 15.25 14.50 13.10 11.95 10.36 10.98 11.10 11.24 11.24 Regular Costs 15.25 14.50 13.00 11.48 9.89 10.51 10.63 10.77 10.77 Chacabuquito Costs 0.00 0.00 0.10 0.47 0.47 0.47 0.47 0.47 0.47 Operating Margin 15.83 20.20 29.64 31.47 22.70 21.73 21.25 21.30 21.30 Adm. and Sales Expenses 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 Operational Results 14.83 19.20 28.64 30.47 21.70 20.73 20.25 20.30 20.30 Net Non Operating Income 6.39 7.60 7.60 7.63 7.63 7.63 7.63 7.63 7.63 Income Before Taxes 21.22 26.80 36.24 38.10 29.33 28.36 27.88 27.93 27.93 less: Income Tax 2.77 2.20 3.60 3.63 2.32 2.15 2.24 2.49 2.49 Minor interest participation 0.85 1.00 1.00 1.00 1.00 1.00 0.00 -1.00 -1.00 Interest Long Term Debt 1.30 1.21 1.12 1.04 0.95 0.86 Net Income 17.59 23.60 31.64 32.17 24.80 24.09 24.60 25.49 25.58 Flow of Funds SOURCES Net Income 23.60 31.64 32.17 24.80 24.09 24.60 25.49 25.58 plus Depreciation 3.10 3.10 3.10 3.10 3.10 3.10 3.10 3.10 Gross Internal Generation 26.70 34.74 35.27 27.90 27.19 27.70 28.59 28.68 Capital Inflow 17.00 20.00 0.00 0.00 0.00 0.00 0.00 0.00 Borrowing 18.50 Total Sources 43.70 54.74 53.77 27.90 27.19 27.70 28.59 28.68 USES Investments 17.00 20.00 0 0 0 0 0 0 Debt Service payments 0.00 0.00 0.00 2.53 2.44 2.35 2.27 2.18 2.09 Amortization 1.23 1.23 1.23 1.23 1.23 1.23 Interest 1.30 1.21 1.12 1.04 0.95 0.86 Payment of Dividends 17.60 23.60 31.64 32.17 24.80 24.09 24.60 25.49 Variation of Working Capital 9.10 11.14 20.90 -5.51 1.16 2.37 2.76 1.96 Total Uses 43.70 54.74 53.77 27.90 27.19 27.70 28.59 28.68 Balance Sheet Statement Current Assets 43.01 52.11 63.25 65.65 60.14 61.30 63.67 66.43 68.39 Fixed Assets 79.33 96.33 116.33 116.33 116.33 116.33 116.33 116.33 116.33 Other Assets 54.06 54.06 54.06 72.56 72.56 72.56 72.56 72.56 72.56 Total Assets 176.40 202.50 233.64 254.53 249.03 250.19 252.56 255.32 257.28 Current Liabilities 4.10 4.10 4.10 4.10 4.10 4.10 4.10 4.10 4.10 Long Term Debt 3.39 3.39 3.39 20.66 19.43 18.20 16.96 15.73 14.50 Equity and Reserves 140.09 160.19 183.29 186.39 189.49 192.59 195.69 198.79 201.89 Minor Interest 11.22 11.22 11.22 11.22 11.22 11.22 11.22 11.22 11.22 Annual Net Income 17.59 23.59 31.63 32.16 24.79 24.09 24.59 25.49 25.58 Total Liabilities and Equity 176.40 202.50 233.64 254.53 249.03 250.19 252.56 255.32 257.28 - 55 - HGV CHACABUQUITO HYDRO POWER PROJECT Table 5.A.4 HGV Estimated Debt Service Projection for External Financing (M U$S) Period Pending Total Annual Amount Annual Interest Year Interest Amortization Number Balance Installments 0 18.50 0.00 0.00 0.00 18.5 7% 2003 1 18.50 1.30 1.23 2.53 2004 2 17.27 1.21 1.23 2.44 2005 3 16.03 1.12 1.23 2.36 2006 4 14.80 1.04 1.23 2.27 2007 5 13.57 0.95 1.23 2.18 2008 6 12.33 0.86 1.23 2.10 2009 7 11.10 0.78 1.23 2.01 2010 8 9.87 0.69 1.23 1.92 2011 9 8.63 0.60 1.23 1.84 2012 10 7.40 0.52 1.23 1.75 2013 11 6.17 0.43 1.23 1.67 2014 12 4.93 0.35 1.23 1.58 2015 13 3.70 0.26 1.23 1.49 2016 14 2.47 0.17 1.23 1.41 2017 15 1.23 0.09 1.23 1.32 Total 0 10.36 18.50 28.86 - 56 - HGV CHACABUQUITO HYDRO POWER PROYECT Table 5.B HGV Financial Indicators (US$ million) Scenario 1 Scenario 2 Scenario 1 Scenario 2 Basic Case and Basic Case and Basic Case and Basic Case and Basic Case and Basic Case and Basic Case and Basic Case and Basic Case Basic Case CERCs CERCs & Loan CERCs CERCs & Loan CERCs CERCs & Loan CERCs CERCs & Loan 0 -17.00 -17.00 -17.00 -17.00 -17.00 1 -18.94 -18.80 -18.80 -18.80 -18.80 EIRR 9.8% 10.2% - 10.3% - 2 3.82 3.98 22.48 4.19 22.69 3 3.82 3.98 1.45 4.19 1.66 FIRR - - 11.2% - 11.4% 4 3.82 3.98 1.54 4.19 1.75 5 3.82 4.03 1.67 4.24 1.88 Disc Rate 8% 8% 8% 8% 8% 6 3.82 4.03 1.76 4.24 1.97 NPV 6.52 7.97 8.75 8.39 9.17 7 3.82 4.03 1.85 4.24 2.06 8 3.82 4.03 1.93 4.24 2.14 Disc Rate 10% 10% 10% 10% 10% 9 3.82 4.03 2.02 3.82 1.81 NPV -0.75 0.51 2.57 0.95 3.00 P 10 3.82 4.03 2.11 3.82 1.90 11 3.82 4.03 2.19 3.82 1.98 Disc Rate 12% 12% 12% 12% 12% E 12 3.82 4.03 2.28 3.82 2.07 NPV -5.56 -4.46 -1.46 -4.02 -1.03 R 13 3.82 4.03 2.36 3.82 2.15 I 14 3.82 4.03 2.45 3.82 2.24 15 3.82 3.82 2.33 3.82 2.33 O 16 3.82 3.82 2.41 3.82 2.41 D 17 3.82 3.82 2.50 3.82 2.50 18 3.82 3.82 3.82 3.82 3.82 19 3.82 3.82 3.82 3.82 3.82 20 3.82 3.82 3.82 3.82 3.82 21 3.82 3.82 3.82 3.82 3.82 22 3.82 3.82 3.82 3.82 3.82 23 3.82 3.82 3.82 3.82 3.82 24 3.82 3.82 3.82 3.82 3.82 25 3.82 3.82 3.82 3.82 3.82 26 -8.18 -8.18 -8.18 -8.18 -8.18 27 / 50 3.82 3.82 3.82 3.82 3.82 - 57 - HGV CHACABUQUITO HYDRO POWER PROYECT Table 5.B.1 HGV Financial Indicators (US$ million) Sensitivity Analysis (Sales Plus 5 %) Scenario 1 Scenario 2 Scenario 1 Scenario 2 Basic Case and Basic Case and Basic Case and Basic Case and Basic Case and Basic Case and Basic Case and Basic Case and Basic Case Basic Case CERCs CERCs & Loan CERCs CERCs & Loan CERCs CERCs & Loan CERCs CERCs & Loan 0 -17.00 -17.00 -17.00 -17.00 -17.00 1 -18.87 -18.74 -18.74 -18.74 -18.74 EIRR 10.3% 10.8% - 10.9% - 2 4.03 4.19 22.69 4.40 22.90 3 4.03 4.19 1.66 4.40 1.87 FIRR - - 12.0% - 12.2% 4 4.03 4.19 1.75 4.40 1.96 5 4.03 4.24 1.88 4.45 2.09 Disc Rate 8% 8% 8% 8% 8% 6 4.03 4.24 1.97 4.45 2.18 NPV 8.77 10.20 10.98 10.65 11.43 7 4.03 4.24 2.06 4.45 2.27 8 4.03 4.24 2.14 4.45 2.35 Disc Rate 10% 10% 10% 10% 10% 9 4.03 4.24 2.23 4.03 2.02 NPV 1.03 2.27 4.32 2.72 4.78 P 10 4.03 4.24 2.32 4.03 2.11 11 4.03 4.24 2.40 4.03 2.19 Disc Rate 12% 12% 12% 12% 12% E 12 4.03 4.24 2.49 4.03 2.28 NPV -4.12 -3.03 -0.04 -2.58 0.41 R 13 4.03 4.24 2.57 4.03 2.36 I 14 4.03 4.24 2.66 4.03 2.45 15 4.03 4.03 2.54 4.03 2.54 O 16 4.03 4.03 2.62 4.03 2.62 D 17 4.03 4.03 2.71 4.03 2.71 18 4.03 4.03 4.03 4.03 4.03 19 4.03 4.03 4.03 4.03 4.03 20 4.03 4.03 4.03 4.03 4.03 21 4.03 4.03 4.03 4.03 4.03 22 4.03 4.03 4.03 4.03 4.03 23 4.03 4.03 4.03 4.03 4.03 24 4.03 4.03 4.03 4.03 4.03 25 4.03 4.03 4.03 4.03 4.03 26 -7.97 -7.97 -7.97 -7.97 -7.97 27 / 50 4.03 4.03 4.03 4.03 4.03 - 58 - HGV CHACABUQUITO HYDRO POWER PROYECT Table 5.B.2 HGV Financial Indicators (US$ million) Sensitivity Analysis (Sales Minus 5 %) Scenario 1 Scenario 2 Scenario 1 Scenario 2 Basic Case and Basic Case and Basic Case and Basic Case and Basic Case and Basic Case and Basic Case and Basic Case and Basic Case Basic Case CERCs CERCs & Loan CERCs CERCs & Loan CERCs CERCs & Loan CERCs CERCs & Loan 0 -17.00 -17.00 -17.00 -17.00 -17.00 1 -18.99 -18.86 -18.86 -18.86 -18.86 EIRR 9.1% 9.6% - 9.7% - 2 3.60 3.77 22.27 3.97 22.47 3 3.60 3.77 1.24 3.97 1.44 FIRR - - 10.3% 10.6% 4 3.60 3.77 1.33 3.97 1.53 5 3.60 3.82 1.46 4.02 1.66 Disc Rate 8% 8% 8% 8% 8% 6 3.60 3.82 1.55 4.02 1.75 NPV 4.17 5.65 6.44 6.06 6.85 7 3.60 3.82 1.64 4.02 1.84 8 3.60 3.82 1.72 4.02 1.92 Disc Rate 10% 10% 10% 10% 10% 9 3.60 3.82 1.81 3.60 1.59 NPV -2.59 -1.30 0.75 -0.88 1.17 P 10 3.60 3.82 1.90 3.60 1.68 11 3.60 3.82 1.98 3.60 1.76 Disc Rate 12% 12% 12% 12% 12% E 12 3.60 3.82 2.07 3.60 1.85 NPV -7.06 -5.93 -2.94 -5.51 -2.51 R 13 3.60 3.82 2.15 3.60 1.93 I 14 3.60 3.82 2.24 3.60 2.02 15 3.60 3.60 2.11 3.60 2.11 O 16 3.60 3.60 2.19 3.60 2.19 D 17 3.60 3.60 2.28 3.60 2.28 18 3.60 3.60 3.60 3.60 3.60 19 3.60 3.60 3.60 3.60 3.60 20 3.60 3.60 3.60 3.60 3.60 21 3.60 3.60 3.60 3.60 3.60 22 3.60 3.60 3.60 3.60 3.60 23 3.60 3.60 3.60 3.60 3.60 24 3.60 3.60 3.60 3.60 3.60 25 3.60 3.60 3.60 3.60 3.60 26 -8.40 -8.40 -8.40 -8.40 -8.40 27 / 50 3.6 3.60 3.6 3.60 3.6 - 59 - HGV CHACABUQUITO HYDRO POWER PROYECT Table 5.B.3 HGV Financial Indicators (US$ million) Sensitivity Analysis (CERCs Plus 5 %) Scenario 1 Scenario 2 Scenario 1 Scenario 2 Basic Case and Basic Case and Basic Case and Basic Case and Basic Case and Basic Case and Basic Case and Basic Case and Basic Case Basic Case CERCs CERCs & Loan CERCs CERCs & Loan CERCs CERCs & Loan CERCs CERCs & Loan 0 -17.00 -17.00 -17.00 -17.00 -17.00 1 -18.94 -18.80 -18.80 -18.80 -18.80 EIRR 9.8% 10.2% - 10.4% - 2 3.82 3.99 22.49 4.21 22.71 3 3.82 3.99 1.46 4.21 1.68 FIRR - - 11.2% - 11.5% 4 3.82 3.99 1.55 4.21 1.77 5 3.82 4.04 1.68 4.26 1.90 Disc Rate 8% 8% 8% 8% 8% 6 3.82 4.04 1.77 4.26 1.99 NPV 6.52 8.04 8.82 8.48 9.27 7 3.82 4.04 1.86 4.26 2.08 8 3.82 4.04 1.94 4.26 2.16 Disc Rate 10% 10% 10% 10% 10% 9 3.82 4.04 2.03 3.82 1.81 NPV -0.75 0.58 2.63 1.03 3.08 P 10 3.82 4.04 2.12 3.82 1.90 11 3.82 4.04 2.20 3.82 1.98 Disc Rate 12% 12% 12% 12% 12% E 12 3.82 4.04 2.29 3.82 2.07 NPV -5.56 -4.40 -1.41 -3.95 -0.96 R 13 3.82 4.04 2.37 3.82 2.15 I 14 3.82 4.04 2.46 3.82 2.24 15 3.82 3.82 2.33 3.82 2.33 O 16 3.82 3.82 2.41 3.82 2.41 D 17 3.82 3.82 2.50 3.82 2.50 18 3.82 3.82 3.82 3.82 3.82 19 3.82 3.82 3.82 3.82 3.82 20 3.82 3.82 3.82 3.82 3.82 21 3.82 3.82 3.82 3.82 3.82 22 3.82 3.82 3.82 3.82 3.82 23 3.82 3.82 3.82 3.82 3.82 24 3.82 3.82 3.82 3.82 3.82 25 3.82 3.82 3.82 3.82 3.82 26 -8.18 -8.18 -8.18 -8.18 -8.18 27 / 50 3.82 3.82 3.82 3.82 3.82 - 60 - HGV CHACABUQUITO HYDRO POWER PROYECT Table 5.B.4 HGV Financial Indicators (US$ million) Sensitivity Analysis (CERCs Minus 5 %) Scenario 1 Scenario 2 Scenario 1 Scenario 2 Basic Case and Basic Case and Basic Case and Basic Case and Basic Case and Basic Case and Basic Case and Basic Case and Basic Case Basic Case CERCs CERCs & Loan CERCs CERCs & Loan CERCs CERCs & Loan CERCs CERCs & Loan 0 -17.00 -17.00 -17.00 -17.00 -17.00 1 -18.94 -18.81 -18.81 -18.81 -18.81 EIRR 9.8% 10.2% - 10.3% - 2 3.82 3.98 22.48 4.17 22.67 3 3.82 3.98 1.45 4.17 1.64 FIRR - - 11.1% - 11.4% 4 3.82 3.98 1.54 4.17 1.73 5 3.82 4.02 1.66 4.22 1.86 Disc Rate 8% 8% 8% 8% 8% 6 3.82 4.02 1.75 4.22 1.95 NPV 6.52 7.89 8.68 8.29 9.08 7 3.82 4.02 1.84 4.22 2.04 8 3.82 4.02 1.92 4.22 2.12 Disc Rate 10% 10% 10% 10% 10% 9 3.82 4.02 2.01 3.82 1.81 NPV -0.75 0.45 2.50 0.86 2.91 P 10 3.82 4.02 2.10 3.82 1.90 11 3.82 4.02 2.18 3.82 1.98 Disc Rate 12% 12% 12% 12% 12% E 12 3.82 4.02 2.27 3.82 2.07 NPV -5.56 -4.51 -1.52 -4.10 -1.11 R 13 3.82 4.02 2.35 3.82 2.15 I 14 3.82 4.02 2.44 3.82 2.24 15 3.82 3.82 2.33 3.82 2.33 O 16 3.82 3.82 2.41 3.82 2.41 D 17 3.82 3.82 2.50 3.82 2.50 18 3.82 3.82 3.82 3.82 3.82 19 3.82 3.82 3.82 3.82 3.82 20 3.82 3.82 3.82 3.82 3.82 21 3.82 3.82 3.82 3.82 3.82 22 3.82 3.82 3.82 3.82 3.82 23 3.82 3.82 3.82 3.82 3.82 24 3.82 3.82 3.82 3.82 3.82 25 3.82 3.82 3.82 3.82 3.82 26 -8.18 -8.18 -8.18 -8.18 -8.18 27 / 50 3.82 3.82 3.82 3.82 3.82 - 61 - HGV CHACABUQUITO HYDRO POWER PROYECT Table 5.B.5 HGV Financial Indicators (US$ million) Sensitivity Analysis (Investment Plus 5 %) Scenario 1 Scenario 2 Scenario 1 Scenario 2 Basic Case and Basic Case and Basic Case and Basic Case and Basic Case and Basic Case and Basic Case and Basic Case and Basic Case Basic Case CERCs CERCs & Loan CERCs CERCs & Loan CERCs CERCs & Loan CERCs CERCs & Loan 0 -17.85 -17.85 -17.85 -17.85 -17.85 1 -19.94 -19.80 -19.80 -19.80 -19.80 EIRR 9.2% 9.6% - 9.8% - 2 3.82 3.98 22.48 4.19 22.69 3 3.82 3.98 1.45 4.19 1.66 FIRR - - 10.4% - 10.6% 4 3.82 3.98 1.54 4.19 1.75 5 3.82 4.03 1.67 4.24 1.88 Disc Rate 8% 8% 8% 8% 8% 6 3.82 4.03 1.76 4.24 1.97 NPV 4.80 6.23 7.02 6.67 7.45 7 3.82 4.03 1.85 4.24 2.06 8 3.82 4.03 1.93 4.24 2.14 Disc Rate 10% 10% 10% 10% 10% 9 3.82 4.03 2.02 3.82 1.81 NPV -2.39 -1.14 0.91 -0.70 1.35 P 10 3.82 4.03 2.11 3.82 1.90 11 3.82 4.03 2.19 3.82 1.98 Disc Rate 12% 12% 12% 12% 12% E 12 3.82 4.03 2.28 3.82 2.07 NPV -7.14 -6.04 -3.05 -5.61 -2.62 R 13 3.82 4.03 2.36 3.82 2.15 I 14 3.82 4.03 2.45 3.82 2.24 15 3.82 3.82 2.33 3.82 2.33 O 16 3.82 3.82 2.41 3.82 2.41 D 17 3.82 3.82 2.50 3.82 2.50 18 3.82 3.82 3.82 3.82 3.82 19 3.82 3.82 3.82 3.82 3.82 20 3.82 3.82 3.82 3.82 3.82 21 3.82 3.82 3.82 3.82 3.82 22 3.82 3.82 3.82 3.82 3.82 23 3.82 3.82 3.82 3.82 3.82 24 3.82 3.82 3.82 3.82 3.82 25 3.82 3.82 3.82 3.82 3.82 26 -8.78 -8.87 -8.87 -8.78 -8.78 27 / 50 3.82 3.82 3.82 3.82 3.82 - 62 - HGV CHACABUQUITO HYDRO POWER PROYECT Table 5.B.6 HGV Financial Indicators (US$ million) Sensitivity Analysis (Investment Minus 5 %) Scenario 1 Scenario 2 Scenario 1 Scenario 2 Basic Case and Basic Case and Basic Case and Basic Case and Basic Case and Basic Case and Basic Case and Basic Case and Basic Case Basic Case CERCs CERCs & Loan CERCs CERCs & Loan CERCs CERCs & Loan CERCs CERCs & Loan 0 -16.15 -16.15 -16.15 -16.15 -16.15 1 -17.94 -17.82 -17.82 -17.80 -17.80 EIRR 10.3% 10.8% - 10.9% - 2 3.82 3.98 22.48 4.19 22.69 3 3.82 3.98 1.45 4.19 1.66 FIRR - - 12.1% - 12.3% 4 3.82 3.98 1.54 4.19 1.75 5 3.82 4.03 1.67 4.24 1.88 Disc Rate 8% 8% 8% 8% 8% 6 3.82 4.03 1.76 4.24 1.97 NPV 8.24 9.67 10.45 10.11 10.89 7 3.82 4.03 1.85 4.24 2.06 8 3.82 4.03 1.93 4.24 2.14 Disc Rate 10% 10% 10% 10% 10% 9 3.82 4.03 2.02 3.82 1.81 NPV 0.90 2.14 4.20 2.59 4.64 P 10 3.82 4.03 2.11 3.82 1.90 11 3.82 4.03 2.19 3.82 1.98 Disc Rate 12% 12% 12% 12% 12% E 12 3.82 4.03 2.28 3.82 2.07 NPV -3.97 -2.89 0.11 -2.44 0.55 R 13 3.82 4.03 2.36 3.82 2.15 I 14 3.82 4.03 2.45 3.82 2.24 15 3.82 3.82 2.33 3.82 2.33 O 16 3.82 3.82 2.41 3.82 2.41 D 17 3.82 3.82 2.50 3.82 2.50 18 3.82 3.82 3.82 3.82 3.82 19 3.82 3.82 3.82 3.82 3.82 20 3.82 3.82 3.82 3.82 3.82 21 3.82 3.82 3.82 3.82 3.82 22 3.82 3.82 3.82 3.82 3.82 23 3.82 3.82 3.82 3.82 3.82 24 3.82 3.82 3.82 3.82 3.82 25 3.82 3.82 3.82 3.82 3.82 26 -7.58 -7.58 -7.58 -7.58 -7.58 27 / 50 3.82 3.82 3.82 3.82 3.82 - 63 - Chile: PCF Chacabuquito Hydroelectric Power Project Annex 2: Project Processing Schedule Project Schedule Planned Actual Time taken to prepare the project (months) First Bank mission (identification) 8/8/01 8/8/01 Appraisal mission departure January 02 January 02 PCF Negotiations January 02 January 02 Signing February 02 Prepared by: Eduardo Zolezzi/Dana Rysankova Preparation Assistance: Isabelle Kim Bank staff who worked on the project includes: Name Specialty Eduardo Zolezzi Task Manager, Sr. Power Engineer Nelson de Franco Co-Task Manager, Principal Power Engineer Juan David Quintero Environmental Specialist Dana Rysankova Economist Isabelle Kim Team Assistant PCF Team: Ken Newcombe Sr. Advisor Chandra Shekhar Sinha Sr. Environmental Specialist Chile Chile: PCF Chacabuquito Hydroelectric Power Project Annex 3: Documents in the Project File Documents in Project File additional to PAD annexes: 1. Environmental and Social Assessment Study (prepared by HGV) 2. PCF Project Information Note (prepared by HGV) 3. PCF Project Concept Note (prepared by PCF) 4. PCF Project Risk Assessment (prepared by PCF) 5. Letter of Endorsement for the Project of CONAMA 6. Chile: Country Assistance Strategy 7. HGV: Annual Reports 1999, 2000 8. CDEC-SIC: Annual Report 2000 9. Statistical Information of CNE at www.cne.cl 10. Statistical Information of CDEC-SIC at www.cdec.cl - 65 - Chile: PCF Chacabuquito Hydroelectric Power Project Annex 4: Statement of Loans and Credits Difference between expected Original Amount and actual in US$ Millions disbursements Project FY Purpose IBRD IDA Cancel. Undis Orig Frm ID Rev'd P055481 1999 CL-HIGHER EDUCATION 145.45 0.00 0.00 107.66 50.21 0.00 P055480 1999 CL MUNIC DEVT II 10.10 0.00 0.00 9.00 7.58 0.00 P063386 1999 CL-MILLENNIUM INSTITUTIONS (LIL) 5.00 0.00 0.00 0.63 0.63 0.00 P006661 1995 THIRD RD SCTR 120.00 0.00 0.00 7.14 7.14 7.14 Total: 280.55 0.00 0 0.00 124.44 65.56 7.14 . 0 0 o STATEMENT OF IFC's Held and Disbursed Portfolio MAY-2001 In Millions US Dollars Committed Disbursed FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic 1991/93 Aconcagua 0.00 0.45 0.00 0.00 0.00 0.45 0.00 0.00 1991/94 BOMASA 0.00 2.80 0.00 0.00 0.00 2.80 0.00 0.00 CBT 0.00 14.00 0.00 0.00 0.00 14.00 0.00 0.00 1999 CBTI 0.00 0.00 1.70 0.00 0.00 0.00 1.70 0.00 1999 Escondida 0.00 0.00 18.32 0.00 0.00 0.00 14.57 0.00 1989/91/99 FEPASA 13.78 0.00 0.00 5.70 13.78 0.00 0.00 5.70 1996 ING-MLF-Nature F 1.20 0.00 0.00 1.80 1.20 0.00 0.00 1.80 1990 Moneda Mgt 0.00 0.13 0.00 0.00 0.00 0.13 0.00 0.00 1994/96/97 Pangue 0.00 2.82 0.00 0.00 0.00 2.82 0.00 0.00 1993 Pionero Fondo 0.00 9.33 0.00 0.00 0.00 9.33 0.00 0.00 1994 Proa Fund 0.00 7.34 0.00 0.00 0.00 7.34 0.00 0.00 1996 San Antonio 35.00 3.70 0.00 65.00 12.25 3.70 0.00 22.75 2000 Total Portfolio: 49.98 40.57 20.02 72.50 27.23 40.57 16.27 30.25 No Approvals Pending Commitment - 66 - Annex 5: Country At A Glance Latin Upper- POVERTY and SOCIAL America middle- Chile & Carib. income Development diamond* 2000 Population, mid-year (millions) 15.2 516 647 Life expectancy GNI per capita (Atlas method, US$) 4,610 3,680 4,620 GNI (Atlas method, US$ billions) 70.1 1,895 2,986 Average annual growth, 1994-00 Population (%) 1.4 1.6 1.3 Labor force (%) 2.0 2.3 2.0 GNI Gross per primary Most recent estimate (latest year available, 1994-00) capita enrollment Poverty (% of population below national poverty line) 21 .. .. Urban population (% of total population) 86 75 76 Life expectancy at birth (years) 76 70 69 Infant mortality (per 1,000 live births) 10 30 28 Child malnutrition (% of children under 5) 1 9 .. Access to improved water source Access to an improved water source (% of population) 94 85 87 Illiteracy (% of population age 15+) 4 12 10 Gross primary enrollment (% of school-age population) 101 113 107 Chile Male 103 .. 106 Upper-middle-income group Female 100 .. 105 KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1980 1990 1999 2000 Economic ratios* GDP (US$ billions) 27.6 30.3 66.3 70.5 Gross domestic investment/GDP 21.0 25.1 21.1 21.7 Trade Exports of goods and services/GDP 22.8 34.6 29.0 31.8 Gross domestic savings/GDP 16.9 28.4 23.2 22.8 Gross national savings/GDP 13.5 23.2 21.1 20.1 Current account balance/GDP .. -1.6 -0.1 -1.4 Domestic Interest payments/GDP 3.3 4.5 3.1 3.9 Investment savings Total debt/GDP 43.8 63.4 57.0 60.2 Total debt service/exports .. 27.1 15.2 15.8 Present value of debt/GDP .. .. 54.2 .. Present value of debt/exports .. .. 179.1 .. Indebtedness 1980-90 1990-00 1999 2000 2000-04 (average annual growth) GDP 4.2 6.8 -1.1 5.4 5.0 Chile GDP per capita 2.5 5.2 -2.4 4.0 3.8 Upper-middle-income group Exports of goods and services 6.9 9.4 6.9 7.5 7.2 STRUCTURE of the ECONOMY 1980 1990 1999 2000 Growth of investment and GDP (%) (% of GDP) 40 Agriculture 7.3 8.7 11.6 11.4 Industry 37.4 41.5 36.8 37.5 20 Manufacturing 21.5 19.6 17.4 17.4 0 Services 55.3 49.8 51.7 51.0 -20 95 96 97 98 99 00 Private consumption 70.7 61.9 65.0 65.1 -40 General government consumption 12.5 9.8 11.8 12.2 GDI GDP Imports of goods and services 27.0 31.4 27.2 30.8 1980-90 1990-00 1999 2000 Growth of exports and imports (%) (average annual growth) 30 Agriculture 5.9 4.2 -0.7 7.6 Industry 3.5 6.0 2.7 4.5 20 Manufacturing 3.4 4.6 -0.7 4.3 10 Services 2.9 5.2 -0.7 5.0 0 -10 95 96 97 98 99 00 Private consumption 2.0 7.4 -3.1 4.1 General government consumption 0.4 3.9 2.5 3.5 -20 Gross domestic investment 6.4 8.9 -25.5 13.7 Exports Imports Imports of goods and services 1.8 11.0 -14.3 10.1 Note: 2000 data are preliminary estimates. * The diamonds show four key indicators in the country (in bold) compared with its income-group average. If data are missing, the diamond will be incomplete. - 67 - Chile PRICES and GOVERNMENT FINANCE 1980 1990 1999 2000 Inflation (%) Domestic prices 15 (% change) Consumer prices 35.1 26.0 3.3 4.0 10 Implicit GDP deflator 28.8 21.2 3.5 4.1 5 Government finance (% of GDP, includes current grants) 0 Current revenue .. 20.6 22.5 23.7 95 96 97 98 99 00 Current budget balance .. 2.5 2.5 3.7 GDP deflator CPI Overall surplus/deficit .. 0.8 -1.5 0.1 TRADE 1980 1990 1999 2000 Export and import levels (US$ mill.) (US$ millions) Total exports (fob) 4,706 8,373 15,616 18,158 25,000 Copper 2,125 3,810 5,889 7,347 20,000 Fruits 340 757 1,212 1,122 Manufactures 1,751 2,739 7,152 8,172 15,000 Total imports (cif) .. 7,742 15,137 18,089 10,000 Food .. .. .. .. 5,000 Fuel and energy .. 1,208 1,799 2,890 Capital goods .. 2,137 3,270 3,702 0 94 95 96 97 98 99 00 Export price index (1995=100) .. 77 67 73 Import price index (1995=100) .. 88 111 122 Exports Imports Terms of trade (1995=100) .. 88 60 60 BALANCE of PAYMENTS 1980 1990 1999 2000 Current account balance to GDP (%) (US$ millions) Exports of goods and services .. 10,222 19,406 22,087 0 94 95 96 97 98 99 00 Imports of goods and services .. 9,173 18,056 21,209 -1 Resource balance .. 1,049 1,350 878 -2 Net income .. -1,731 -1,881 -2,404 Net current transfers .. 197 453 538 -3 Current account balance .. -485 -78 -989 -4 -5 Financing items (net) .. 2,853 -605 1,186 Changes in net reserves .. -2,368 683 -198 -6 Memo: Reserves including gold (US$ millions) .. 5,358 15,013 15,211 Conversion rate (DEC, local/US$) 39.0 305.1 508.8 535.5 EXTERNAL DEBT and RESOURCE FLOWS 1980 1990 1999 2000 (US$ millions) Composition of 2000 debt (US$ mill.) Total debt outstanding and disbursed 12,081 19,226 37,762 42,469 IBRD 163 1,860 877 808 A: 808 B: 7 IDA 21 14 8 7 G: 9,921 Total debt service 2,706 2,772 5,210 4,048 IBRD 25 249 181 185 D: 12,390 IDA 0 1 1 1 Composition of net resource flows Official grants 9 73 14 0 Official creditors -145 294 -83 -106 E: 494 Private creditors 2,234 1,187 -3,666 2,261 Foreign direct investment 213 590 4,366 -1,103 Portfolio equity 0 320 130 -261 F: 18,849 World Bank program Commitments 74 130 161 0 A - IBRD E - Bilateral Disbursements 14 251 43 48 B - IDA D - Other multilateral F - Private Principal repayments 9 120 111 116 C - IMF G - Short-term Net flows 5 132 -68 -67 Interest payments 16 130 71 70 Net transfers -11 1 -139 -138 Development Economics 9/26/01 - 68 - Chile: PCF Chacabuquito Hydroelectric Power Project Annex 6: Environmental and Social Assessment Executive Summary Introduction The proposed run-of-the-river Chacabuquito Hydroelectric Project in Chile involves the continued use of tailrace water from Hidroeléctrica Aconcagua, S.A.'s existing 39 MW Los Quilos plant (much of this water has been used upstream at the 81 MW Aconcagua hydroelectric plant -- the other Hidroeléctrica Aconcagua S.A. asset). Additional electricity production will be supplied to meet industrial and commercial demand from sectors and activities such as electricity distribution (Chilquinta Los Andes ­ San Felipe), automobile (Automotora Franco Chilena), melting (Fundición Chagres), cement (Cemento Melon) and mining (Codelco-Andina). The project will require improved access to the south bank of the Rio Aconcagua. Two new bridges will be built, existing "roads" will be upgraded (for example, the existing road to the head of the penstock which is near an existing public quarry), and new roads built (alongside the canals and a .5 km road to the larger of the two spoils or waste disposal sites). This annex summarizes the findings of the following technical and environmental assessment carried out by Hidroeléctrica Guardiavieja, S.A., HGV: environmental studies (Declaración de Impacto Ambiental-Proyecto Central Hidroeléctrica Chacabuquito y Proyecto Sub Estación Eléctrica y Linea de Alta Tensión, EDIC Ingenieros Limitada).); hydrological studies (Estudio Hidrológico Caudales Medios Mensuales Río Aconcagua y Río Colorado; Estudio Hidrológico de Crecidas de Quebradas); geotechnical studies (Estudio Geotécnico para la construcción de los túneles de aducción). The Environmental Assessment Report (EA) was submitted to the World Bank for review and it conforms fully to Bank policy guidelines regarding environmental and social issues. As designed this category B project complies with the World Bank`s environmental and social safeguard policies. Environmental Assessment Process and Legal Framework Chilean Law 19.300 of 1994, effective in 1997, established an Environmental Impact Assessment System (SEIA) in the country. This system requires projects to either prepare a full scale EIA or, for projects with lesser or insignificant impacts, an Environmental Impact Statement (DIA) would be required. Review and clearance of all EIAs or DIAs is a perquisite for an environmental license issued by the National Commission for the Environment (Comision Nacional del Medio Ambiente, CONAMA). In 1996, the project was granted a waiver such that it would not be required to follow the SEIA from the Regional CONAMA (Comisión Regional del Medio Ambiente de la V Region de Valparaiso). Nevertheless, in October 2000, an Environmental Impact Statement was produced by the project sponsors. Perhaps the most environmentally and socially sensitive issue associated with the proposed project will be hydrological imbalance along the 10 km stretch of the Aconcagua River between the intake and the plant discharge. Although environmental or ecological considerations are not explicitly included in the current Chilean Water Code (Codigo Nacional de Aguas), during the last five years Chile has introduced the concept of environmental demand in the allocation of water rights. This concept is also included in the Environmental Impact System Law. New proposals to modify the Water Code have included issues such as minimum ecological flows for the preservation of water resources and biodiversity, specially of endangered or endemic species. The General Water Directorate (Dirección General de Agua, DGA) is the public entity in charge of the definition of these minimum ecological flows. A Bank project under preparation (Chile Water Resources Management Project) would support DGA in the definition of methodologies for establishing minimum water flows for the conservation of freshwater biodiversity. DGA requested that the Chacabuquito project sponsors estimate minimum ecological flows for the stretch the Aconcagua River that would be affected by the project. In-depth hydrological analysis was carried out and minimum - 69 - ecological flows were determined using a wide range of methodologies. DGA established a minimum of 3 m 3/s as a minimum flow for that stretch of the river. Environmental Setting The project will be located on the Rio Aconcagua, 10 km upstream of Los Andes (Region V), Chile (see Figure 1). A necessary and important element of the EA was the baseline research that analyzed the physical, ecological, and social characteristics of the project area. Although the project area is not highly complex particularly from the socio-economic and ecological perspectives, an environmental baseline was needed to highlight locations of highest potential impact. The watershed has been long intervened by human settlements, mining activities and hydroelectric projects that date over 40 years. The region is served by an international highway with heavy traffic (3,600 vehicles per day on average). Camp sites, hotels and other recreational areas have sprawled along the highway. In addition to the highway, the area is crisscrossed by power transmission lines, a railroad from the copper mines upstream, and irrigation canals that feed agricultural activities in the valley downstream. The most relevant characteristics of the project`s area of influence which supports the assurance of minimum potential impacts are: Hydrology: The Aconcagua River Watershed rises up to 6.140 m to the Nevado del Juncal. The watershed is enclosed in a steep canyon that lowers to a 190 km long valley before its discharge into the Pacific Ocean. Snow melting in the spring and summer influences the large fluctuations in water flows that are characteristic of the river (see Figure 2). The Juncal and Colorado rivers are the main upstreams affluent to the Aconcagua. They present abundant water flows and are currently being used for the Los Quilos and the Guardia Vieja run-of-the-river power plants. The Colorado stream has excellent water quality while the Juncal presents symptoms of copper pollution from mining activities upstream. All of the flow of the Juncal is almost completely used up downstream of the Guardia Vieja for the Los Quilos Plant. However, the river recovers rapidly because of a series of streams and groundwater recharge. Flora and Fauna: The vegetation of the area of the project has been reduced to a few patches of riverine vegetation and some scrubs of dry forest with some remnants of native vegetation. Foreign species have also been introduced along the area. There are no known critical natural habitats in the area of the project. The project will not dam any part of the river, consume water through the process or affect by construction activities or operation the overall surface water balance, groundwater recharge areas, wetlands or any other aquatic ecosystem. There will not be any transbasin transfer of water. Only two species of concern as defined by the National Forestry Commission, Corporación Nacional Forestal (CONAF) still can be seen in the area, especially on the southern side of the river: Guayacán (Porlieria chilensis) and Algarrobo (Prosopis chilensis). Some individuals were identified in the area of the proposed tunnels. - 70 - Figure 1: Chacabuquito Hydroelectric Power Project and Watershed Location Project Area Aconcagua River LosQuilos Powerhouse - 71 - Figure 2: Mean Water Flows ­ Aconcagua River at Los Quilos (Source: DGA) 50 45 Mean flow, m3/s 40 35 30 25 20 15 10 5 0 JULY MAY JANUARY JUNE OCTOBER FEBRUARY MARCH APRIL NOVEMBE SEPTEMBE DECEMBE AUGUST R R R Because of the continuous disturbances in river flows from the existing power plants, especially the pollution from the Codelco copper operations upstream, the Rio Aconcagua is devoid of any fish life. Native species such as Pocha, Bagre and Pejerrey have all but disappeared from the area. The introduction of foreign species (Trucha café, Trucha arcoiris, Dorado and Carpa) for aquiculture has also contributed to the loss of freshwater biodiversity of all rivers in the watershed. Trout can still be found in the stagnant areas and bends of the Colorado River upstream. Social Aspects: The host environment is semi-arid, scrub forest and thinly populated with the exception of the narrow river valley. No extensive agriculture is practiced in this area and there are no indigenous people. Communities along the river have a piped potable water supply system from a rural system that takes water from the upper watershed. Rural electrification coverage is almost 100% in the area. Hence, the removal of 21 m 3/s of water from the Rio Aconcagua for an additional 10 km will not result in any significant ecological or social impact. The water rights for the Chacabuquito project (issued by DGA) include the obligation to release 18 m 3/s to the Rio Aconcagua to meet the water requirement for an existing downstream power plant and to provide water in the river to satisfy downstream agricultural needs (a program separate from that of the Los Quilos Canal). The project includes a water supply program for the downstream agricultural community fashioned after the existing program at the Los Quilos project. Project Description The schematic of Figure 3 presents the proposed project. Except for the new regulating reservoir (Las Vizcachas), all project facilities will be on the south bank of the Rio Aconcagua downstream of the existing Los Quilos plant. Canals and tunnels will take the 21.5 m3/s from the Los Quilos plant over a distance of approximately 10 km to a 440 m long and 137 meter head penstock to the 25 MW Chacabuquito power house. From the power house, the 21.5 m3/s will be discharged back to the Aconcagua River at Chacabuquito to meet the project's water right requirement to supply 18 m3/s to a downstream existing hydro plant and to satisfy irrigation users. The diversion works will be located upstream the intake of the Los Quilos Canal (1.25 m3/s maximum; 0.5 m3/s average) which takes Aconcagua River water at Los Quilos to agricultural communities downstream. - 72 - Figure 3: Chacabuquito Hydroelectric Power Scheme ESQUEMA CENTRAL CHACABUQUITO TUNEL CHACABUQUITO L = 2178 m CANAL ADUCCION L = 313 m CAMARA DE CARGA TUNEL LOS QUILOS CANAL ADUCCION TUBERIA DE PRESION L = 787 m L = 1162 m L = 545 m H = 137 m SIFON CANAL ADUCCION CASA DE MAQUINAS L = 8775 m KM 10 de Los Andes CANAL COLECTOR RIO ACONCAGUA CENTRAL LOS QUILOS KM 20 DE LOS ANDES CAMINO INTERNACIONAL CUADRO RESUMEN CANALES 10.250 m TUNELES 2.965 m TUBERIA 545 m ALTURA DE CAIDA 137 m POTENCIA 25 MW The water flow previously carried by the stretch of the Los Quilos Canal that will be closed as Chacabuquito starts operation will also be transported by the project`s canals and tunnels to the vicinity of the penstock where it will be again returned to the Los Quilos Canal through which it will continue downstream to meet the agricultural demands. The project includes a new 500 m, 110 kV transmission line to tie with the existing transmission line connecting the two existing projects to the Sistema Inter-conectado Central (SIC) west of Los Andes. Two new bridges to the south bank to access the project are under construction and short new roads will need to be constructed and existing roads upgraded (for example, the existing road up to the head of the penstock). The project`s main characteristics are summarized in the following Box. (Figure 3). Two disposal sites for construction wastes, earth cuts and tunnel materials (approximately 600,000 m3 total, of which 350,000 m3 total of which will be used as earth fill and base material for the project`s main infrastructure) have been identified: one belonging to the Los Quilos Powerhouse and a second one near the Chacabuquito powerhouse. The Los Quilos site covers an area of 3.5 ha atop of a soccer field which would be rehabilitated after raising the level up to 3 meters. The second site covers an area of 3.3 ha belonging to the municipality. A site restoration and revegetation program will be implemented at this site. The international road from Los Andes to Mendoza in Argentina is the main road in the entire area. Additionally, there are some secondary and rural roads that connect settlements and camps along that highway. Most of these roads will be used during construction of the project. However, the construction and future maintenance of canals and other infrastructure on the southern side of the Aconcagua river will require the construction of two bridges across the river and the upgrading of some of these roads. The selection of bridge sites was based on technical considerations (stability of river embankments), the needs of the project (access to sites) and the requests of local population living on the southern part of the river that saw these bridges as an improvement to their mobility. Environmental Impacts Water Quality and Quantity: Run-of-the-river projects are considered benign to water quality. No major changes in water quality are expected from the Chacabuquito plant. In addition, ongoing agricultural practices in the valley and pollution from upstream mines are the main cause of the deterioration of water quality for the entire watershed. The water intake needed for the project and the proposed further use of the Los Quilos power plant discharge will affect water flows and water levels in an approximately 13 km stretch of the Aconcagua River between the Los - 73 - Quilos Plant and the Chacacubuito power plant discharge. Chilean legislation now requires the definition of a minimum ecological flow to avoid or minimize severe impacts on aquatic ecosystems. The project commissioned a specific study to analyze and propose minimum ecological flows in that stretch of the Aconcagua River. Although there is limited experience in the application of methodologies for determining minimum ecological flows in any river, it is generally accepted that minimum ecological flows represent those flows that maintain the sustainability` of a given aquatic ecosystem and its biological functions. Several methodologies, based on a wide diversity of criteria and mathematical models, have been used both nationally and internationally. These methodologies still suffer from a high degree of uncertainty and subjectivity and are further limited by the complex interactions between water flows and the functions of aquatic ecosystems. However, these methodologies have proved to be useful in many similar situations. The following table presents the estimated minimum ecological flows for the Aconcagua River based on the most commonly used methodologies, in addition to estimates carried out by DGA in 1993. - 74 - Table 1: Minimum Ecological Flows for the Aconcagua River Methodology Estimated Minimum Ecological Flow, Q (m3/s) Tennant Method 2,00 Establishes a minimum of 10% of mean annual flow in order to guarantee fish survival Wet Perimeter 1,30 Based on flow and wet perimeter of the river which guarantees sufficient aquatic habitat for fish (spawning, migrations, feeding, etc.) Swiss Legislation 2,29 Establishes mean annual flow that is exceeded 347 times per year Minimum depth for fish survival 0,84 Based on predominant species; in this case a 20 cm minimum depth was established for endemic species (that have but all disappeared from the river); 20 cm has been commonly used in Chile. DGA study, 1993 3,70 Stretch of the Aconcagua River: Río Colorado ­ San Felipe Based on its above referenced study and analysis, considering the baseline conditions of the river (low biodiversity, multiple users, sources of pollution), the DGA established a minimum ecological flow of 3 m3/s (Official resolutions in project files). This minimum flow is considered adequate and any potentially negative impacts on aquatic biodiversity are further minimized by the presence of a major affluent to the Aconcagua downstream from the intake. In addition to several minor streams, the Colorado River has a mean monthly flow of 11.6 m 3/s, and discharges water of excellent quality just 1 km downstream from the Chacabuquito intake. A favorable impact from this situation would be the improvement of water quality in that stretch of the river as the higher polluted discharge from the Los Quilos plant would be delivered further downstream. Hydrological balances for the entire watershed for the winter and summer seasons are presented in Figures 4 and 5 and provide assurance that hydrological impacts will be kept at a minimum and the stretch of the river will always have sufficient water. Biodiversity Impacts: Three potential impacts were identified: (i) clearing of native vegetation; (ii) clearing of trees of some ecological concern; and (iii) increasing hydrological imbalance in the river. The project will entail clearing of some vegetation (18 ha in the right of way of canals) which includes individual trees of some species of concern. Thus the impact of the project on biodiversity will be minimal. However, as required by Chilean laws, adequate compensation measures will be implemented. Freshwater biodiversity will not be affected (almost non-existent anyway) while the minimum ecological flow required by the DGA will guarantee that riverine vegetation remains unchanged along the 10 km stretch. Impact on fisheries was also deemed of low magnitude and importance as native species have all but disappeared from the watershed. Although scarce, most trout (an introduced species) fishing takes place in areas upstream of the project. Biological activity along the Aconcagua River is almost non- existent. Social Impacts: Careful selection of Right-of-Way (ROW) alignments for all canals, penstock and transmission lines avoided any major need for resettlement of families. Most of the ROW traverse steep slopes of the canyon on the southern part of the river. Only one dwelling will have to be relocated and the project will build a new house on a site within the same lot. The construction of the two access bridges over the Aconcagua is seen by all communities (namely, Villa Aconcagua) as perhaps the most positive impact of this project. Existing crossings only allow for pedestrian traffic while the new ones will allow all modes of transportation. The new short access roads from the bridges to the canals will be maintained by the project sponsors. - 75 - Construction of civil works will not entail significant inflow of new workers to the area. Project constructors will have to hire local workers as much as possible and no worker`s camps will be allowed. Bus transportation from villages and Los Andes to work sites will be the responsibility of the contractor. Food services will also be contracted with local restaurants near the work sites. Land uptake has been kept to a minimum. In addition to land already owned by Hidroeléctrica Aconcagua, S.A., land had to be either acquired or compensated for from four private landowners and a Region V holding (.5 ha). All agreements have been completed in accordance with the Electricity Act (all were negotiated without the involvement of the courts). One individual in the vicinity of the penstock will be moved 100 m. His "lean-to shack will be replaced with a brick house. There are no indigenous people in the project area. - 76 - Figure 4: Chacabuquito Hydroelectric Power Project - Winter Hydrological Balances DIAGRAMA UNIFILAR DIAGRAMA UNIFILAR NORTE NORTE RIORIO ACONCAGUA ACONCAGUA ( INVIERNO ) ( INVIERNO ) O O D D MA I TEN RA MA I TEN RA LO O OL O RIO C RIO C EL EMBALSE VIZCACHAS EL EMBALSE VIZCACHAS ( PROYECTO ) ( PROYECTO ) I I AP AP GU O GU BOCATOMA O BOCATOMA LO T ER LO T ER ADUCCION ADUCCION BLANCO BLANCO IL EL IL EL AL ES AL ES g g se NC se NC 1,1 1,1 m3/seg m3/seg 3/ 3/ JU JU m m OJOS DE AGUA OJOS DE AGUA 6 6 O O 0, RI 0, ( 1,5 m3/seg )m3/seg ) ( 1,5 0,5 m3/seg m3/seg 0,5 RI 0,6 0,6 m3/seg m3/seg ES AYES 0,2 0,2 m3/seg m3/seg AY ON ON CHAC CHAC 0,5 0,5 m3/seg m3/seg PEÑ PEÑ 1,2 1,2 m3/seg m3/seg S S EL EL 0,3 0,3 m3/seg m3/seg LO LO 3,9 m 3,9 3/seg m3/seg /seg /seg 4,2 m3 4,2 m3 15,1 15,1 m3/seg m3/seg 2,0 2,0 10,9 10,9 m3/seg m3/seg * * FUTURA FUTURA BOCATOMA UNIFICADA m3/ seg m3/ seg CENTRAL LOS QUILOS CENTRAL LOS QUILOS BOCATOMA UNIFICADA REGANTESREGANTES 3,2 3,2 m3/seg m3/seg 3,4 3,4 m3/seg m3/seg 3,9 3,9 m3/seg m3/seg 10,9 10,9 m3/seg m3/seg 0,3 CENTRAL CHACABUQUITO 0,3 m3/seg m3/seg CENTRAL CHACABUQUITO VILCUYA VILCUYA ( PROYECTO ) ( PROYECTO ) RI RI 2,3 2,3 m3/seg m3/seg O HORNITOS O O HORNITOS CENTRAL ACONCAGUA0,3 m3/seg m3/seg JUNC CENTRAL ACONCAGUA JUNC 0,3 4,2 4,2 m3/seg m3/seg 2, 2, BOCATOMA BOCATOMA 0 EMBALSE GUARDIA EMBALSE GUARDIA VIEJA VIEJA 0 AL AL g m ADUCCION CHACABUQUITO g m ADUCCION CHACABUQUITO se se 3/ 3/ 3/ ( PROYECTO ) 3/ se ( PROYECTO ) se m m g 0 g 0 1, 1, ) ) AL AL NC NC JU JU 0, 0, 5 O 5 eg ) O m ( eg ) ( 5,2 m3/s 5,2 m3/s RI m RI 3/ 3/ se se g g eg 5,2 5,2 m3/seg m3/seg /seg m3/s m3 RI RI R 0,8 0,8 /seg m3/s eg O O 9,4 9,4 m3/seg m3/seg m3 0,5 0,5 A CO A ACO g) g) 3/se 5 m3/se 1,5 m 1, NCA NCA GU GU UA A BOCATOMA BOCATOMA 0,7 m3/seg m3/seg 0,7 ADUCCION ADUCCION JUNCAL JUNCAL 1,5 1,5 m3/seg m3/seg BOCATOMA BOCATOMA POLVAREDA ADUCCION ACONCAGUA ADUCCION ACONCAGUA ESTERO ESTERO POLVAREDA ( ( 0,2 0,2 m3/seg m3/seg 2, 2, RI 7 RI 7 7 O m O m LOS S 3/ 3/ ILLO /s se BLAN IL eg BLAN g RIEC ) RIEC ) ) CO CO 0, 0, 5 5 m m 3/ 3/ se se g g EMBALSE LOS EMBALSE LOS LEONES LEONES RI RI O O DE DE LO LO S S LE LE O O NE NE 2,7 S S 2,7 m3/seg m3/seg BOCATOMA BOCATOMA ADUCCION ADUCCION BLANCO BLANCO g 3/seg5 m3/se 0,5 m 0, EMBALSE PIUQUENITOS EMBALSE PIUQUENITOS ( SOLO FUNCIONA EN ( SOLO FUNCIONA EN INVIERNO )INVIERNO ) TUNEL DE TUNEL DE DESVIO DESVIO LOS LEONES-ANDINA LOS LEONES-ANDINA BOCATOMA BOCATOMA 2,2 2,2 m3/seg m3/seg EMBALSE PIUQUENITOS EMBALSE PIUQUENITOS - 77 - Figure 5: Chacabuquito Hydroelectric Power Project -Summer Hydrological Balances DIAGRAMA UNIFILAR NORTE RIO ACONCAGUA ( VERANO ) 19 m3/seg O D MA I TEN RA O OL RIO C EL EMBALSE VIZCACHAS ( PROYECTO ) I AP GU O BOCATOMA LO TER ADUCCION BLANCO IL EL AL ES NC 3,2 m3/seg JU OJOS DE AGUA O ( 7 m3/seg ) 1,5 m3/seg RI 1,5 m3/seg AYES 1 m3/seg 35,6 m3/seg ON CHAC 1,0 m3/seg PEÑ 13,5 m3/seg S EL 69,6 m3/seg 1,0 m3/seg LO eg m3/s 48,6 21 m3/seg * FUTURA BOCATOMA UNIFICADA CENTRAL LOS QUILOS REGANTES 3,2 m3/seg 14 m3/seg 21 m3/seg 1 m3/seg CENTRAL CHACABUQUITO VILCUYA ( PROYECTO ) RI 10,8 m3/seg O HORNITOS CENTRAL ACONCAGUA JUNC 0,8 m3/seg 2, BOCATOMA 0 EMBALSE GUARDIA VIEJA AL g m ADUCCION CHACABUQUITO se 3/ ( PROYECTO ) 3/ se 14 m3/seg m g 1 2, ) AL NC JU 32 ,1 O ) ( 12 m3/seg RI m 3/ se g 18,6 m3/seg RI O 21 m3/seg /se g ACO seg ) 6,6 m3 m3/ 22,1 NCA 14 m3/seg GU A BOCATOMA 15,5 m3/seg ADUCCION JUNCAL ) /s eg m3 ,1 29 3 m3/seg BOCATOMA ADUCCION ACONCAGUA ESTERO POLVAREDA ( 0,2 m3/seg 9 RI m O 3/ S se ILLO g BLAN ) RIEC CO * EN LA ACTUALIDAD LOS REGANTES EXTRAEN LOS MISMOS 16 m3/seg, MEDIANTE UNA SERIE DE BOCATOMAS RUSTICAS, DISPUESTAS EN EL SECTOR EMBALSE LOS LEONES RIO DE LO S LE O NE S BOCATOMA ADUCCION BLANCO EMBALSE PIUQUENITOS ( SOLO FUNCIONA EN INVIERNO ) TUNEL DE DESVIO LOS LEONES-ANDINA BOCATOMA 24 m3/seg EMBALSE PIUQUENITOS - 78 - On the north bank, just downstream of the Los Quilos plant there is a regulating reservoir. At this point, water is stored at night and released in early morning to offset the impact of the peaking plant on river flow and to meet the Los Quilos water right obligation to satisfy downstream agricultural water requirements. This practice will be continued when the Chacabuquito plant is complete. In agreement with water users downstream, an additional regulating reservoir will be constructed (Las Vizcachas) on the north bank just downstream of the Chacabuquito plant, and an additional intake will direct water from the Aconcagua River to an existing 1.8 km canal terminating at the new reservoir. It will operate similarly to the existing reservoir upstream near Los Quilos (which will be decommissioned after initiation of operations). The company and the "Junta de Vigilancia Rio Aconcagua" have extended their existing agreement in this area (Agreement in project files). Construction Impacts: The construction of civil works (channels, penstock, power plant) will entail potentially negative impacts, albeit of temporary nature, on communities and surrounding natural habitats. The proper management of excavation materials, river and drainage crossings, and the reduction of nuisances such as dust, noise, increased traffic, pedestrian safety, will necessitate careful engineering planning, close supervision, and a continuous and intense community information program. All environmental requirements for construction will be part of an Environmental Construction Manual which will be enforced by the engineering supervision firm. These specifications will be disseminated and explained to local communities. Cultural Heritage: Neither channels and transmission lines alignments, nor the power plant site affect sites of historical or archaeological value. An archaeological survey carried out for those sites did not identify any evidence of potential or chance findings. The report was validated by the Chilean Archeological Agency. The projects will not generate visual impacts that could affect the tourist or scenic value of the area. The proposed channels are aligned in parallel to existing linear projects (railroad, irrigation canals, and transmission lines). Canals will be located on the southern part of the river, quite a distance from the well traveled international road. The powerhouse facilities will be located at a site scarcely visible from the international highway. Community and Stakeholder Consultation Extensive consultation and negotiations have taken place with downstream water users (Junta de Vigilancia Rio Aconcagua and other water user associations) concerning the need to relocate the compensatory reservoir. An agreement (in project file) was reached to build a new compensatory reservoir downstream the Chacabuquito power plant. Hidroeléctrica Guardia Vieja SA will cover the cost of construction and maintenance of this compensatory reservoir. Individual agreements were reached with each property owner (also in project files). All in all, consultations have been extensive with the owners of the Los Quilos Canal, the downstream farmers, and the affected landowners. The latter consultations resulted in several reroutes for the canals (for example, at entrance to the "Tunnel Chacabuquito"). Environmental Management Plan The EA report recommends a number of measures to mitigate environmental impacts during the construction and implementation phases. Minimum Ecological Flow: Perhaps the most important environmental measure for the project. Guardia Vieja S.A. is required by law to keep this minimum flow in the stretch of Aconcagua River affected by the project. This requirement will be monitored by DGA. Land Acquisition and Compensation: The land acquisition/compensation process has been completed. Details are shown in the following Box 1. - 79 - Box 1: Details of land acquisition and compensation plan 15 ha of land owned by a neighbor will be impacted by the canals (he owns 50,000 ha in the area); 9 ha of land owned by another neighbor will be impacted by the canals (he owns 200 ha in the area, and 2,000 ha elsewhere); 0.5 ha of land belonging to Region V will be impacted by the canals; Along the penstock, one individual will be relocated. He will be moved 100 meters to a site selected by his family and a brick home will replace his existing "lean-to," within his own parcel; At the power house site, 3 ha were bought from a private owner (and a new road built to its existing house); and, 3 ha for the large spoil area are privately owned (the spoils will be resoiled and the restored area will be suitable for agriculture. (The restored small spoil area will become a soccer field.) Reforestation Plan: In addition, any tree removed due to construction activity needs to be compensated for by adhering to the CONAF requirement of planting three trees for every tree cut. However, the density of trees is quite low. A Management Plan for Clearing of Vegetation and Reforestation for the Chacabuquito Project (Plan de Manejo de Corata y Reforestación en Obras Civiles, Proyecto Chacabuquito, January 2001) was approved by CONAF in February 2001 (the Plan and the official resolution are in project files). The Plan requires the reforestation of 18 ha in an area owned by the project sponsors but selected by CONAF within the Los Andes municipality. All reforestation will be carried out with native vegetation, including species of concern, for a total estimated of 28,000 trees to be planted. The Plan establishes the protection of riverine vegetation along two streams that cannot be cleared during construction activities. Cutting of algarrobo and guayacan will be avoided as possible, and these trees will have to be clearly identified prior to initiation of construction activities. Environmental Management during Construction: All environmental and social mitigatory measures to be implemented during the construction phase are part of the technical specifications that will be included in bidding documents and construction contracts. These specifications have already been prepared for all construction activities (burrow pits, transportation of materials, river crossings, and protection of properties) and include specific prohibitions for: (i) cutting of trees outside the approved ROW for construction, firewood or any other purposes; (ii) hunting of birds, mammals or any fauna in the area; (iii) oil changes and maintenance of equipment and vehicles in or near streams (they can only be carried out in maintenance yards; the contractor`s bid will include how contingencies from oil or lubricant spills will be dealt with); (iv) depositing earth cuts and any other construction waste outside the two approved disposal sites; and (v) fires (contractor should have fire control equipment in each work front). Before the closing of any work front, the specifications require the implementation of a site restoration and revegetation plan, clean up, repair of any damage to fences or other infrastructure, revegetation of riverine vegetation, and decompacting of soils. Implementation Capacity The EMP will be implemented by HGV through its contractors and will be enforced by a construction inspection firm contracted by the project sponsors. Environmental specialists will be hired as needed. All activities will be controlled by the HGV Chief Engineer. - 80 -