Ana María Ruz – January 23 th , 2013

Financing ESCOsKnowledge for the Promotion & Establishment of an ESCO Industry in JamaicaAgreement No. C0037-12 Based on Final Report of the consultancy that Fundación Chile contractedfrom Gerens S.A., as part of the program “Promotion of Market Opportunities for Clean Energies” (hereinafter the “Program”), co-financed by IDB-MIF (ATN/ME-9862 CH). Ana María Ruz – January 23th, 2013

Contents Introduction Energy Efficiency and Energy Renewable projects Public / Private Financing options Testing the feasibility of project financing

Introduction • Transferring the knowledge of program “Promotion of Market Opportunities for Clean Energies” co-financed by IDB-MIF (ATN/ME-9862 CH). • Because of the existence of a gap between the formulation of EE and/or NCRE projects from the technical point of view and the evaluation needed for presenting them to finance agencies for their financing • Fundación Chile contracted Gerens to make the exercise of : • Taking Energy Efficiency and Energy Renewable projects (Energy Audits developed by Chilean ESCOs) • Analyze Public and Private Financing options • Testing the real feasibility of project financing

Contents Introduction Energy Efficiency and Energy Renewable projects Public Financing options Testing the feasibility of project financing

EE and ER projects Regional Projects MetropolitanRegionProjects 35 projects from different economic sectors, like the wine production sector, fruit production sector, fisheries sector, hotel sector, paper manufacturing sector, among others “Promotion of Market Opportunities for Clean Energies” co-financed by IDB-MIF (ATN/ME-9862 CH) 2007 – 2011.

EE and ER projects

EE and ER projects General observations on the review of the studies or energy audits Clearly a learning curve was experienced in the preparation of the studies and Reports presented to FCH. (It is reflected in the length of the studies, where privileging their quantity gives way to privileging their quality and where there was increasingly better topic structuring). Despite these advances, from a non-technical viewpoint, the little utilization of energy use statistics (e.g. energy use per production unit, per worker, per plant or property size, etc.) is conspicuous, such that the consultants began to develop a database so that in the future benchmarking could be done between companies, markets or economic sectors. Less frequently, the presentation of the results is “unfriendly” for decision making. Weak financial evaluation of the investment measures proposed, which is reflected by the lack of financial indicators (for example, only the VPN is calculated and other indicators like the IRR or payback are not reported) and/or calculation details. Weak or nonexistent description of the companies’ commercial and financial information, such as product, market, economic sector, equity, number of workers, etc. This observation, which is important for the Program’s objectives, partly shows that the ESCOs are more interested in performing the audit and receiving the income from their assistance, than in financing the map of detected opportunities which is what ii occurs in the classic ESCO model and which is being implemented in Chile as a Program product.

Public Financing options EE line of financing was operating and/or available through the BICE and Itau Banks (during its almost two years of operations no financing operation was processed).

Public Financing options General observations about the projects for their financing from third parties In general, the size of the projects is small, considering the transaction costs associated with the risk analysis performed by the bank or other third party potential financers such as investment funds. Some recommended investment measures are “substitutes” and not “complements”, which reduces even more the project’s size.

Public Financing options Conclusions Project selection stage for presentation for third party financing • Heterogeneity of beneficiary companies (size, sector, location, etc.), implies very dissimilar EE/NCRE interests. • The hierarchical level of the technical counterparts makes decision-making difficult • inside the companies “promising projects”. In many cases the people responsible for a company’s energy area are very interested in carrying out projects, but, they can not the authorization for searching third party financing. • The fact that in Chile subsidies, for EE and potential NCRE audits, as well as for conceptual or basic engineering and/or investments, are limited to once per company, unlike what happens in countries like Canada and the U.S., has the following implications: • Incentives can be provided for the preparation of a very general map of EE opportunities, for which the beneficiary companies must invest additional resources to pinpoint their potential savings for each one of the energy sources that are used or alternatively, they can forget about the subject. • Also, incentives can be provided for these studies to be carried out by ESCOs that have expertise in some energy areas, producing very strong results, but that do not have so much expertise in others, generating weaker results and so eventually they do not coincide with the best company opportunity.

Testing the feasibility of project financing Note: Figures in Ch$, 1USD = 472 Ch$

Testing the feasibility of project financing Projects that were presented to financing entities belong to the following companies: Cecinas La Española S.A.: Company operating since 1975, whose business consists of the production and commercialization of sausages and hamburgers. In 1980 it began operating the SOFRIA brand and its main sales channels focus on the big distributors, wholesalers and institutions. The company currently produces a line of breaded, shaped, sliced and cubed sausages. ContadorFrutos S.A.: A family company founded in 1968 and located in Region IV (Coquimbo). Its business focuses on the production and export of fruits to international markets. Its main exported product is table grapes (97% of its business) and includes the varieties Crimson, Sugraone and Red Globe. Exportadora Río Blanco Ltda.: A company founded in 1981 and like the above company, its business is based on the production and export of fresh table grapes. It has fields in Region III to Region VII with its own installations and plants. To date 60% of its production is its own and it expects to reach 75% in the future.

Testing the feasibility of project financing The financial analysis focused on results indicators and the debt used by the bank for the credit analysis to decide on the project financing for the companies. Namely: • EBITDA (Earnings before interests, taxes, depreciations and amortizations). It is a result indicator and corresponds to the generation capacity of a company’s operating cash and is calculated as Operational Result plus Depreciations. • EBITDA margin/Sales: Result indicator that shows the cash operating margin of every peso sold by the company. • Interest coverage ratio: Debt indicator that is mathematically calculated as times EBITDA/interest. This ratio measures the number of times that the operational utility (EBITDA) covers the interest. • Leverage: Debt indicator that is expressed as times Debt finance/Equity. The leverage measures the company’s level in relation to its equity.

EBITDA and EBITDA margin /Sales (2007-2009, M$ dic-09) 1,87% EBITDA/Ventas promedio (2007-2009) • It had negative results in 2007. 2008 - 2009 recovered “blue” results, although with very low margins compared to its historical average. • The new commercial policy allows to forecast an EBITDA of about MCh$ 200 for the current fiscal year, with a two digit margin, • EBITDA associated with the implementation of the EE project (MCh$ 90)

FinancingDebtIndicators LeverageDebtfinance/Equity Interestcoverage Times EBITDA / Interest • Very narrow interest coverage, since the 1.36 index means that for every peso that the company must pay in interest, it generates 1.36 pesos of operating cash, that is, it has only 0.36 pesos to repay its debt. • Historically has not had any third party financial debt (almost no leverage in 2007 and 2008). In 2009, however, as a result of investments the company lease backed its plant /for about MCh$ 600), which increased its leverage by 0.4 times its equity.

Debt Long and short term 2007-2009, M$ dic-09) 598.700 • Theyhavespaceforfinancing EE investmentwith Long termdebt

To summarize, the above analysis deals with a company in a recovery and growth phase, and if its sales forecast is fulfilled, and it recovers the margins and savings from the EE Project, then it is a solvent company. Given its debt indicators, it is capable of increasing its debt without compromising its solvency. Because of the above, bank financing of MMCh$260 was requested to carry out the EE investment. The financing was requested in UF, at 8 years with one grace period. UF : unit of accountused in Chile, 1 UF = 22.800 Ch$

Cecinas La Española is not in its client portfolio There was knowledge of the products’ commercial brand or trade name, but not of the company, although they are executives in the agribusiness and foods sector. In fact, their client portfolio includes competitors of Cecinas La Española and, therefore, they were very familiar with its market A review of the company’s operational and financial information (debt indicators), showed that despite the low level of debt relative to its patrimony (leverage of 0.4), the low level of operating cash generation or EBITDA during recent years (MMCh$ 106 in 2008 and MMCh$ 68 in 2009) and consequently its low covered interests, an additional debt of MMCh$ 260 like the one being requested, following the close to MMCh$ 600 debt undertaken in 2009, greatly compromised its debt service capability. This diagnosis not only was done at the time the Gerens consultants made their presentation together with the company’s financial advisor, but also in light of the EBITDA’s growth outlook for this year (estimated at MMCh$ 200) and the marginal EBIDTA associated with the materialization of the EE Project (estimated originally in a pre-engineering study at MMCh$ 400 annually).

Relative to the EE project’s savings, they were surprised by its size (about 30% of the total operating costs) and asked for more information about its validity and certification. These questions were answered with information about the FCH-MIF Program. These costs were re-estimated, amounting to around MMCh$ 90 In light of the above information, the Bank BICE executives noted that the only way that the credit application would pass the credit risk analysis stage, to be presented potentially to the bank’s credit committee, would be if the company’s partners or owners had different collateral other than the company´s assets (e.g., real estate) and/or financial (e.g., fixed-time deposits), in accordance with the bank’s risk policy. So, the conclusion is that Bank BICE, despite not having an entity that validates and/or certifies EE Project results, not only omitted the company’s outlook with and without the EE, from its preliminary credit risk analysis, but it also rejected the collateral that the economic unit has and that are not security for or mortgaged by the leaseback operation (e.g., machines, production lines, among others). The conclusion of this application is that Bank BICE is only willing to initiate the company’s risk evaluation if and only if satisfactory off-company and off-project guarantees are provided.

Cecinas La Española is part of its client portfolio • Carried out the 2009 leaseback operation and it also provides working capital financing via factoring • Banco de Chile knows more about the company´s history and its debt behavior than Banco BICE, and more importantly, because it is the owner of the assets associated with the leaseback operation. Given that the banking business is not implementing properties under guarantee, it is more willing to award financing for projects that will improve results, when backed by the economic unit’s assets • When presenting the project information, the executives expressed their concerns: • o What kind of investments is involved in the EE project? Do they cover changes in the already existing production processes or the incorporation of new fixed assets? The reply was that for this particular case, they cover the second alternative. • o What assurance is there that the resources requested are actually used in the EE investment project and who certifies that the associated savings estimated by the audit are actually achieved. In reply, they were told about the objectives and scope of the FCH-MIF Program, and of FCH’s aim of becoming a technical agency and independent certifier.

Based on the above, the executives expressed interest in analyzing the project financing, as a function of the company´s low debt level with regard to their equity and in the leasing mode. This last point is highly important, because since it is a rental with a commitment to buy, the bank, strictly speaking, is the owner of the assets and, therefore, if a default in the payment occurs, its execution is simpler than the alternative of assets that are used as security and/or are mortgaged. This mechanism also ensures better implementation of the EE project, and, therefore, a greater EBITDA The Banco de Chile people asked for sales information (last two months) and Financial Results for this year (pre-balance as of June), in order to perform the risk analysis after which it will be decided if it goes on to the approval committee. It is not known if the operation was finally carried out since at this time the company’s General Manager could not be contacted.

EBITDA and EBITDA margin /Sales(2002-2009, M$ dic-09: 2010-2012, M$ corrientes) • 12,4% EBITDA/Ventas promedio (2002-2008) In 2009 it experienced very negative results, as a result of: water supply cuts (because of supply water way break out) low calibers because of the advanced age of its orchards and The drop in demand from Europe associated with financial crisis

DebtIndicators LeverageTimes Debtfinance/Equity InterestcoverageTimes EBITDA / Interest • Leverage por sobre el nivel histórico, requiere recuperar capital de trabajo. • Company’s delicate financial situation. Over the last two years the cash generation has note even been able to cover the interest on its debt, which came to about Ch$ 13,200 million at the end of 2009 • the resources needed to cover the 2009 losses and even more the investments made to renew its orchards. This debt is backed by a mortgage on the owners’ farms, assets that are not in the analysis of the company’s results. If those are included, the leverage indicator will be a little less than 3 times, which in any case is still extremely high

Debtcomposition (M$ dic-09) • About half of the MM$ 13,200 of debt expires in less than a year (short term), and consists mainly of loans to exporters (SAPs), that finance its operation’s working

AssetsWaranties • Total debt=MM$ 9.746,2 WarantyDebt= MM$ 7.893,8 ondetail: • Fundo Recoleta 144 Ha. Plantadas con uva de mesa. MM$ 1.708,6 • Fundo Camarico, Plantaciones de uva de mesa (Parcela Nº 3 San Ramón), Plantaciones de Chirimoyas y limones. MM$ 2.654,7 • Campo las Totoras, Plantaciones uva de mesa MM$ 3.175,4 • San Julián MM$ 355,1

In summary, A very financially stressed company, that needs short term debt restructuring and new working capital, so that it can go ahead with its recovery plan. The EE project does not contribute much to its EBITDA generation, since the annual estimated savings are only MM$ 32. Nevertheless, it asked for financing of MM$60 including MM$6 for working capital), from two banks, in dollars and at 12 years.

ContadorFrutos is part of its client portfolio The executive explained that he had just come from a meeting with the company’s principal partner and given its fragile financial situation, they were not in a position to increase their creditor exposure (before revealing the amount of the EE project’s investment) During the presentation of the company’s Prospectus and its EE project, it was revealed that Banco BICE is leading a syndicate operation (that is, trying to include the participation of all the creditor banks with or without collateral) for financial restructuring, which means moving its short term debt to long term, subject to compliance over time with a series of financial indicators (covenants), that these consultants do not know Given the restructuring operation scenario, the manager noted that the EE project’s credit application (MMCh$ 60) was less compared to the operation that it is leading and that, given the expected impact on the EBITDA, they were willing to incorporate the financing into the business closure with the other creditor banks Banco BICE continued negotiating the restructuring of liabilities with the other creditor banks, which we believe is more in answer to the conditions or covenants, than whether or not it is approved. So, given the size of the . operation syndicated by the banks, which we estimate to be around MCh$ 7,000 (MMUS$ 14), there should not be any bigger problems in adding the EE project’s requirements. Note:The non-compliance of the covenants established in debt contracts, with no agreement between the parts, means the demand for immediate payment of the respective debts

ContadorFrutos is part of its client portfolio It is not among the banks that have on- or off-balance collateral. That is, it has short term debts for working capital granted on just the signature of its legal representatives. The answer to the project’s presentation is that they are not willing to increase their exposure in the company aside from the syndicated restructuring that Banco BICE is designing and negotiating.

EBITDA and EBITDA margin /Sales(2006-2009, MM$ dic-09: 2010, MM$ corrientes) 11,48% EBITDA/Ventas promedio (2006-2009) • 2008- 2009, affectedbyfinancial crisis onKorean and englishmarkets. • EBITDA 2010 projectedonhistoricalaverage *: Al 31 de Marzo de 2010.

DebtIndicators InterestcoverageTimes EBITDA / Interest LeverageTimes Debtfinance/Equity • The debt indicators reveal the company’s excellent financial position, with covered interest more than 7 times higher in the last two years of the international crisis and credit and leverage 1 time lower. *: Al 31 de Marzo de 2010.

DebtComposition (2006-2009, MM$ dic-09; 2010 MM$ Corrientes) 28.990 26.046 25.059 18.019 17.503 • 88% of its total debt, close to MMCh$ 29,000 as of March 2010, is concentrated in short term, typical seasonality of a fruit export company whose production occurs over a period of a few months with sales throughout the year. So, these debts are SAPs (Structural Adjustment Programs) that finance the company’s working capital.. *: Al 31 de Marzo de 2010.

Exportadora Río Blanco has the best production and debts of the 3 cases analyzed. A credit of MMCh$90 was asked, including MMCh$20 for working capital, in dollars at 5 years.

The financing required for the EE project (MMCh$ 90) would be arranged • immediately. • Banco BICE stated that once the approval was reported, those responsible for the company’s financing would negotiate the interest rate for this potential operation. • Meanwhile, Banco de Chile commented that the amount of the EE Project investment was much less than the company’s cash generation capacity and that they thought it would be financed internally (operating cash and/or corporate debt). • After Banco BICE and Banco de Chile announced their willingness to finance the EE project without collateral guarantees but as part of the financing lines that the company has, those responsible for its implementation reported that the project is in the itemized engineering and supplier quotations stage, which it will finance with the company’s own resources.

Testing the feasibility of project financing Conclusions testing of EE project financing • First, the credit instruments for facilitating the implementation of EE projects designed by the Chilean public sector had no result, unlike the NCRE financing line, which is bigger and more attractive to banks. • This financing problem, among others, is associated with the following elements and/or variables: • Information asymmetries between engineering companies and beneficiary companies of measures and investments in EE and/or NCRE, associated with the quality certification of the proposals and the measurement and verification of the energy savings. As noted above, this certification, measurement and validation, is one of the variables that could facilitate bank financing. • ESCO companies’ lack of capital that prevents them from financing the investments. If it is already difficult for the beneficiary companies of the EE projects to obtain financing on their own cash flows, it is even harder for the ESCOs, that in Chile are in the infant industry stage and that are evolving from a core business of providing engineering services to being EE project investors and implementers. • Due to the regulatory system, in Chile the bank only loans against collateral from the companies and/or against the equity of its owners, and does not finance projects and new companies with no history. The above was clearly demonstrated in the case of the company Cecinas La Española with BICE Bank and it is one of the limits to developing the ESCOs industry in Chile, particularly in this transition stage of changing its business model, since for logical reasons they do not have the collateral outside the projects themselves to finance all or part of their portfolio of projects.

Testing the feasibility of project financing Conclusions testing of EE project financing • According to a high level management executive in the energy projects area of one of the banks registered to operate CORFO’s EE line, • the main causes of not using it is because of the low investment amount of the projects relative to the transaction costs associated with its risk analysis and the legalization of contracts (about US$ 300,000), • the companies’ lack of collateral and/or the reticence of their owners to guarantee credits with guarantees that are exogenous to the company and the project. • As a result of this work, no line of financing could be obtained from the bank to implement EE projects.

Agosto 2010 Financiamiento Proyecto EECecinas La Española ANEXOS

Balance GeneralM$ dic-2009

Estado de ResultadosM$ dic-2009 42

Agosto 2010 Financiamiento Proyecto EECecinas La Española

ANEXOS Financiamiento Proyecto EEContador Frutos Mayo 2010

Balance GeneralM$ dic-2009

Estado de ResultadosM$ dic-2009

Proyección Estado de Resultados(M$ Corrientes)

Garantías

Financiamiento Proyecto EEContador Frutos Mayo 2010

Ana María Ruz – January 23 th , 2013