TERNOR S'A'

1
TERNOR S.A.

• Country Panama
• IIC Financing US3.0 million
• Borrower Térmica del Noreste, S.A. (Ternor)
• Project
• Description Purchase and modernization of 13
  small power plants located in the northeastern
  region of Panama that form the isolated
  systems to generate electricity to sell to the
  power distribution company. The project was
  implemented in two phases. The first phase
  involved the acquisition of the existing plants
  as well as their immediate improvement and
  renovation. The second phase involved the
  substitution of the existing diesel equipment for
  heavy fuel oil (bunker) equipment in the
  largest plant, which represented nearly 45
  of the total generation of the Company.

2
IICs ROLE

• Decentralization of economic activities The area
  of concession encompassed isolated systems not
  interconnected to the national electrical grid.
  The project also involved relocating a power
  plant from an urban area to an industrial area.
• Complementing the IDBs rural electrification
  program The project complemented Panamas rural
  electrification program, which connected small
  villages to the distribution grid, and which was
  partially financed by the IDB.
• Know-How Transfer The project was implemented by
  professionals with experience in electricity
  projects in Panama. The design was contracted out
  to MAN BW of Denmark. Man BW belongs to
  Germanys MAN Group, one of Europes leading
  suppliers of capital goods and the worlds
  leading manufacturer of stationary electricity
  generators.
• Fuel Efficiency The change in technology allowed
  for better fuel efficiency, lower fuel and
  maintenance costs, and a more reliable system.
• Strengthening a new regulatory framework Law 6,
  dated February 1997, restructured the regulatory
  framework of the electricity sector in Panama.
  These regulations were based on proven energy
  systems implemented in other Latin American and
  OECD countries, and were designed to foster
  stable and transparent rules and encourage
  efficiency improvements while allowing for
  adequate returns.

3
RISK AND ISSUES

• Demand The available capacity price and the
  electricity sale price are established in the
  PSA. However, the amount of electricity purchased
  by Electra is dependent on the demand, resulting
  in possible downturn in revenues. Consideration
  The risk of a downturn in revenues is remote
  considering that electricity consumption is
  relatively inelastic and consumption of
  electricity generated by Ternor is anticipated to
  grow beyond natural growth associated with growth
  in population and GDP as a result of the rural
  electrification program. Additionally, as part of
  Ternors revenues, the Company would be able to
  service its debt as the minimum payment exceeded
  debt service payment.
• Business Interruption The largest plant, which
  represents around 45 of the total energy
  generated by the Company, is located in Darien,
  which is a poor an low-density area of Panama
  bordering Colombia. Insurgent activity in the
  region could interfere with business operations.
  Consideration There are not known reports of
  incidents of this kind in the area where the
  project is located. The Companys insurance
  policy has a loss of profit clause.

4
RISK AND ISSUES

• Fuel All generators in the 13 power plants use
  fuel. Consequently, the most relevant aspects in
  the plants operations are related to fuel
  availability, transportation, and price. Ternor
  has a fuel purchase agreement. The fuel is
  transported to all locations, with the exception
  of Santa Fe, by river or sea transport.
  Transportation to Santa Fe is by truck. Ternor
  has contracts with three transportation
  companies two sea/river companies and one
  trucking company. Mitigant The PSA indexes the
  price paid for the energy to the cost of diesel,
  hedging the diesel price variation. The three
  transportation companies are well established and
  have been operating for many years. There are
  other alternative companies in case Ternor needs
  to replace one of the companies.
• Generation Cost Prior to the project, Ternor was
  the most expensive generator in the system. This
  is mainly because i) Ternor is a small generator
  with plants operating in 13 isolated locations
  ii) it had not yet implemented a program to
  relocate the generating units among the plants in
  the most efficient configuration and iii) it
  used diesel only. Consideration To increase its
  efficiency, taking a systematic approach, the
  Company completed the upgrade of its generating
  units and worked in their relocation. With
  respect to the fuel, the replacement of the
  diesel units in the Santa Fe plant by bunker
  units, as called for in the project, will
  significantly increase Ternors overall
  efficiency as around 45 of the Companys
  generation will be using a lower priced fuel.