Nicaragua - Eighth Power Project

RESTRICTED Report No. PU-92a This report is for official use only by the Bank Group and specifically authorized organizations or persons. It nay not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION APPRAISAL OF THE EIGHTH POWER PROJECT - NICARAGUA (NICARAGUA-HONDURAS INTERCONNECTION) EMPRESA NACIONAL DE LUZ Y FUERZA June 2, 1972 Public Utilities Projects Department  CURRENCY EQUIVALENTS Currency Unit = Cordoba (C$) C$l = 100 centavos C$1 = IUSl14.29 C$1,000,000 = US$142,857 US$1 = C$7.00 USo1 = 7 centavos US mill 1 = 0.7 centavo UNITS AND MEASURES kW = kilowatt MW = megawatt = 1,000 kW kWi = kilowatt hour GIt = gigawatt hour = 1,000,000 kkt kV = kilovolt kVA = kilo volt-ampere MVA = mega volt-ampere m = meter = 3.28 ft km = kilometer = 0.621 knm2 = square kilometer = 0.386 sq mi Jll3 = cubic meter = 35.3 cu ft FISCAL YEAR ENALtUF's Fiscal Year Ends December 31 ACFUNYMS AND ABBREVIATIONS ENALUF - Empresa Nacional de Luz y Fuerza ENEE - Empresa Nacional de Energia Electrica (Honduras) CABEI - Central American Bank for Economic Integration USAID - United States Agency for International Development Kreditanstalt - Kreditanstalt fur Wiederaufbau CACM - Central American Common Market INSTITUTO - Instituto Nacional de Energia Electrica ELC - Electroconsult, Milan, Italy Kuljian - Kuljian Engineers/Contractors, Philadelphia, Pa., USA  APPRAISAL OF THE EIGHTH POWER PROJECT - NICARAGUA (NICARAGUA-HONDURAS INTERCONNECTION) EMPRESA NACIONAL DE LUZ Y FUERZA TABLE OF CONTENTS Page No. SUMMARY AND CONCLUSIONS i 1. INTRODUCTION 1 2. THE POWER SECTOR 2 General 2 Characteristics of the Sector 2 ENALUF's Facilities 3 Geothermal Development 4 3. INTERNATIONAL INTERCONNECTION 5 Legal Aspects and Power Contract 6 4. THE PROGRAM AND PROJECT 7 ENALUF's Expansion Program 7 Description of Project 7 Cost of the Project 7 Engineering and Construction 8 Procurements and Disbursements 9 Project Supervision 9 Environment 9 5. JUSTIFICATION 10 Forecast of Sales and Demand 10 Interconnection 10 Puerto Somoza Station 11 6. THE BORROJER 12 Management 12 Organization and Staffing 12 Operations 13 Design and Construction 13 Electric Power Tariffs 13 Fuel Price Adjustment Measure 13 7. FINANCE 14 Introduction 14 Capital Structure and Financial Position 14 Earnings Record 15 Financing Plan 16 Future Earnings 18 Future Financial Position 19 8. A(iEEMENTS REACHED AND RECOMMENDATIONS 20 This report was prepared by Messrs. W. F. Ktpper and V. Nercissiantz.   APPRAISAL OF THE EIGHTH POWER PRLOJECT - NICARAGUA (NICARAGUA-HONDURAS INTERCONNECTION) EMPRESA NACIONAL DE LUZ Y FUERZA LIST OF ANNEXES 1. Generating Plant and Power Loans 2. Description of Project 3. Estimated Cost of Project 4. Estimated Schedule of Loan Disbursements 5. Historical and Forecast Electrical Data 6. Power Expansion Studies 7. Electric Power Rates 8. Actual Balance Sheets 9. Actual Income Statements 10. Forecast Balance Sheets 11. Forecast Income Statements 12. Forecast Sources and Applications of Funds 13. Forecast Financial Ratios 14. Long Term Debt Maps Nicaragua Honduras   APPRAISAL OF THE EIGHTH POWER PROJECT - NICARAGUA (NICARAGUA-HONDURAS INTERCONNECTION) EMPRESA NACIONAL DE LUZ Y FUERZA SUMMARY AND CONCLUSIONS i. This report covers the appraisal of the Eighth Power Project of the Empresa Nacional de Luz y Fuerza (ENALUF) of Nicaragua, an autonomous Government corporation responsible for the supply of practically all public power in Nicaragua. ENALUF has requested assistance from the Bank and the Central American Bank for Economic Integration (CABEI) in jointly financing the project. Because the project involves interconnection with the power system of Empresa Nacional de Energia Electrica (ENEE) of Honduras, this report is related to the appraisal of the Fifth Power Project of ENEE. ii. The cost of the project is estimated to be US$34.7 million. The Bank would provide a loan of US$24 million and CABEI, US$6.1 million. The Bank loan would finance US$20.4 million (about 85%) of the foreign exchange com- ponent of the project and US$ 2.1 milion interest during construction. CABEI would finance the balance - US$3.6 million (about 15%)- of the foreign exchange component, US$2 million of the local cost and US$0.5 million of interest on its own loan. iii. The proposed Bank loan would also cover the foreign exchange part, amounting to US$1.5 million, of cost overruns resulting from unexpected geo- logical problems with the Santa Barbara hydro project, which is currently being completed; Loan 543-NI has been fully drawn down. iv. The Bank, since 1953, has assisted in financing practically all of ENALUF's expansion in generation and transmission through seven loans, totaling US$42.3 million. The Seventh Project will be completed by the middle of 1972. All projects are operating satisfactorily. The United States Agency for International Development (USAID), through ENALUF, has assisted Nicaragua since 1969 in financing a large program of village electrification. v. The Project includes: a) a new 100 MW steam-electric station at Puerto Somoza on the Pacific coast,and associated 230 kV transmission facilities; b) a 230 kV interconnection with the system of ENEE to provide for the interchange of large blocks of power between Nicaragua and Honduras; c) a 138 kV transmission ring around Managua, the capital of Nicaragua, and an extension of the present 138 kV system to the north of the country; and  - ii - d) management consultant services to further improve ENALUF's organization and administration. vi. Honduras has an abundance of attractive hydroelectric sites whose potential capacity far exceeds the nation's current demand for power. The interconnection component of the project would permit trans- fers of thermal energy from Nicaragua to Honduras from 1975 through 1977; from 1978 onwards the interconnection would be expected to provide Nicaragua with large amounts of Honduran hydroelectric power. The most promising hydro project in Honduras is El Cajon,from which Nicaragua would obtain power at lower cost than from the thermal plants it would have to install if Honduran hydroelectric power could not be imported. vii. Because ENALIF will be selling power to ENEE initially, its current capital requirements are larger than they would be without inter- connection. Subsequently the situation will be reversed, ENALUF1s capital requirements will be smaller, and ENEE's larger, because of the construction of El Cajon. viii. Consultants would carry out the design and construction super- vision of the project. ix. Procurement would follow the Bank's Guidelines. Manufacturers from Central American Common Market countries would be given a preference of either 15% of the CIF price or 50% of the import duty, whichever is lower. The project is expected to be completed by early 1976. X. ENALTJF's financial position and earnings are satisfactory and are expected to remain so. xi. With the agreements reached,the project is a suitable basis for a Bank loan of US$24 million equivalent with a term of 24 years including four and one half years of grace.  APPRAISAL OF THE EIGHTH POWER PROJECT - NICARAGUA (NICARAGUA-HONDURAS INTERCONNECTION) ENPRESA NACIONAL DE LUZ Y FUERZA 1. INTRODUCTION 1.01 The Empresa Nacional de Luz y Fuerza (ENALUF) of Nicaragua has requested a Bank loan jointly with the Central American Bank for Economic Integration (CABEI) to assist in financing its 1972-1976 expan- sion program. A loan of US$24 million is proposed to cover part of the foreign exchange cost of the project, the total cost of which is about US$34.7 million. The loan would be made to ENALUF with guarantee of the Republic of Nicaragua, for a period of 24 years, including a grace period of four and one half years. A CABEI loan of US$6.1 million would cover the balance of the foreign exchange cost and some of the local cost (see para- graphs 7.13 and 7.14 for details). Both loans would also cover interest dur- during construction covering approximately the 1972-1974 period, limited to respectively US$2.1 million and US$0.5 million. Disbursements from the proposed Bank loan and by CABEI would be made on a 85/15% basis. 1.02 The proposed project, which was appraised simultaneously with the Fifth Power Project of Enpresa Nacional de Energia Electrica (ENEE) of Honduras, would include the Nicaraguan part of an interconnection between the two countries and sufficient thermal capacity not only to meet Nicaraguan requirements up to 1978, but in addition some of Honduras' requirements. Because ENALUF will be supplying power to ENEE, ENALUF's current capital requirements are larger, and ENEE's smaller, than they would be without interconnection. In the next phase of the development program, this situation is expected to be reversed. 1.03 The proposed loan would also cover the US$1.5 million foreign exchange part of cost overruns on the Santa Barbara hydroelectric project (Loan 543-NI) currently being completed. Excavating highly fractured rock resulted in a larger than expected overbreak in the tunnel which re- quired more supports than estimated. The dam also had to be relocated because of unforeseen foundation conditions. The additional cost of this project is now estimated at about US$4.5 million above the original cost estimate of US$21.8 million. ENALUF is covering the US$3.0 million of local expenditure overrun from its own resources. 1.04 The Bank has made seven loans to ENALUF since 1953, aggregating US$42.3 million, which have assisted in financing practically all of ENALUF's expansion in generation and transmission (see Annex 1). All projects have been completed and are operating satisfactorily, except for 138 kV trans- mission facilities associated with Santa Barbara which are expected to be substantially completed by June 1972. 1.05 This report is based on feasibility studies prepared by ENALUF's consultants, Electroconsult (ELC) of Italy and Kuljian Engineers/Contractors (Kuljian) of the U.S. and on information supplied by ENALUF and'ENEE during an appraisal by Messrs. W. F. Kiipper and V. Nercissiantz, who visited Nicaragua in October 1971 and February 1972. They cooperated closely with Messrs. Hui Huang and John E. Graves who appraised ENEE's project.  - 2- 2. THE POWER SECTOR General 2.01 About 90% of Nicaragua's 2 million inhabitants live on the fertile Pacific Slope of the country, which constitutes less than 30% of its area of 148,000 km2. The country's economy depends primarily on the exports of bananas, coffee and cotton and, as a consequence, its economy, and demand for power, are sensitive to weather conditions and to variation in supply and demand in the international markets for these crops. In 1967-1969 Nicaragua suffered downswings in economic activity, but in 1970-1971 economic activity resumed. GDP per capita is currently estimated to be about US$435. 2.02 Although an industrial latecomer in the Central American Common Market (CACM), development of industry has been quite brisk and industrial power requirements have risen correspondingly, this being one of the main reasons for ENALUF's rapid expansion through the sixties (see Annex 6). Sales for commercial and industrial purposes, representing 4C% of all electricity produced in the country in 1965, rose to 54% in 1970. Characteristics of the Sector 2.03 Practically all of the electricity supplied to the public in Nicaragua is generated and distributed by ENALUF. There are still some 30 small private companies and municipal entities, but in the next three years practically all of these are expected to be absorbed by ENALUF or merged into distribution cooperatives which are now being created (see paragraph 2.05). Industry operated about 28% of the installed capacity in 1970, but as ENALIF continues to expand the relative importance of captive plant will decrease. In 1970 installed capacity and annual generation was as listed below. - - - - -December 1970- Capacity Generation NW XGWh X ENALUF 118 70 509 81 Other Public Supply Companies 4 2 6 1 Captive Industrial Plant 47 28 112 18 169 100 627 100 2.o4 In 1970 about 30% of the population was being provided with elec- tricity and at the present rate of expansion about 40% will be supplied by 1975. Per capita generation, 245 kWh in 1970, is the second highest Central America:  -3- 1970 kWh/Capita Costa Rica (estimated) 500 Nicaragua 245 El Salvador 174 Guatemala 124 Honduras 116 2.05 In 1969 ENALUF undertook to set up a system of three cooperatives for an ambitious program of village electrification costing US$15.5 million, for which the US Agency for International Development (USAID) provided a loan of US$10.2 million, the Government made grante totaling C$22 million (US$3.2 million) and ENALUF would provide C$14.8 million (US$2.1 million), most of it in kind. ENALTJF is obliged to supervise procurement and the erection of equipment and to train technical and administrative person- nel for the cooperatives. The three cooperatives are expected to be con- nected to ENALUF's system this year. In 1971 a fourth cooperative was added to the program, scheduled for completion in 1974, for which USAID made a loan of US$4.3 million, the Government is granting about C$8 million (US$1.1 million) and for which ENALUF would provide, most of it in kind, C$8.8 million (US$1.3 million). The total funds and interest during con- struction are being relent to the cooperatives on terms similar to the USAID terms, i.e., for a period of 35 years, including a grace period of 10 years and an interest rate of 2.5%. ENALUF as debtor to USAID will carry the debt service responsibility, but the actual funds for the debt service payments will come from the cooperatives. ENALUF is permitted to retain as an additional equity contribution that portion of the cooperatives' debt service payments which corresponds to the Government grants. The Government will contribute, should it be necessary, any additional funds and services that ENALUF may need to bring the program to a successful conclusion. 2.06 Upon completion of the network for the fourth cooperative in 1974, ENALUF would be meeting all public electricity requirements through an inte- grated system covering the Pacific Slope. It is estimated that by 1974 about 23,000 cooperative consumers (about 10% of total consumers) will be served by a network having a length of about 2000 km, and would constitute a demand of some 18 MW and annual sales of about 45 GWh. 2.07 Although an inventory is being made of Nicaragua's hydro resources, the identification of major sites is in its early stages and for the next decade ENALUF's requirements will have to be met mainly by thermal plants, unless it is able to import hydro power from its neighbors, Honduras and Costa Rica. The interconnection to be financed by the proposed loan would permit such importation from Honduras (see paragraph 3.01). ENALUF's Facilities 2.08 ENALUF's 1972 generating capacity of 198 MW in its central,  -4- integrated 138 kV, system is made up as follows: MW Diesel 13 Gas Turbine 15 Steam 70 Hydro 100 Total 198 ENALUF's generating facilities, and the Bank loans that assisted in fi- nancing most of them, are shown in Annex 1. Under the various Bank loans, distribution facilities were extended and a 138 kV transmission system was constructed. 2.09 ENALUF also owns and operates six small independent systems (with aggregate installed capacity of 10 MW), four on the Pacific Slope and two on the Atlantic Coast. The four on the Pacific Slope will be absorbed by the cooperatives. The two Atlantic Coast systems will re- main isolated but their generating capability will be supplemented by transferring to them some of the newer diesels from the Pacific Slope. 2.10 Historical demand, generation and sales for ENALUF's central system are shown in Annex 5. The annual increase in generation, which averaged an impressive 23% from 1958 (the first year of central system operation) to 1966, declined to a still substantial 14% for the period 1966-1971. The load factor increased from 54% in 1966 to about 65% in 1971 (which may be somewhat overstated due to peak hour lowering of volt- age during the recent dry years). Maximum demand for the period 1966- 1971 increased from 56 MW to 92 MW or about 11% annually. ENALUF present- ly has about 80,000 customers. Geothermal Development 2.11 For some years ENALUF has been investigating the possibilities of geothermal developments, and preliminary explorations in the neighborhood of the Mcmotombo volcano have established that favorable steam conditions exist. The United Nations Development Programme (UNDP) is financing a feasibility study of this development in which the Bank has expressed "special interest". The conditions appear to be similar to the Ahuachapan geothermal field in El Salvador, an attractive site now being developed. It is probable that a 30 MW geothermal plant will be justified for the early 1980's when ENALUF's additional generation requirement can not be met from El Cajon.  - 5 - 3. INTERNATIONAL INTERCONNECTION 3.01 Technically and economically, the most attractive of the many undeveloped hydroelectric sites in Honduras is at El Cajon, where a capacity of 450 MW or more could be installed to generate an average of about 1,300 GWh annually at low cost (about 6.4 US mills per kwh). 3.02 ENEE's maximum demand (51 MW in 1971) is about half of ENALUF's maximum demand (92 MW in 1971) and the Honduras market would not be suf- ficiently large to absorb El Cajon's potential until the mid-1980s. 3.03 A high-voltage interconnection between the two systems would therefore benefit both. By providing a larger market for power from El Cajon, it would enable ENEE to develop this site sooner than would other- wise be economically feasible. Prior to the completion of El Cajon, the link would enable ENEE to obtain power from ENALJUF, thereby minimizing ENEE's immediate need for new generating facilities. With El Cajon completed, ENALUF would be provided with large amounts of low-cost hydro power through the mid-1980s, thus permitting Nicaragua to invest less in generation and incur operating costs lower than they would otherwise have been. 3.04 ENALUF's system would be extended from Leon to the border by a 230 kV line, about 70 km long, to meet a similar line which ENEE would construct as part of its Fifth Power Project (see maps of Nicaragua and Hondures). Interconnection at 230 kV is the best technical and economic voltage for the distances involved and the amounts of power to be transmitted. 3.05 As part of the proposed project, ENALTUF would build a new steam power station at Puerto Somoza with two 50 MW units to be commissioned by the end of 1974 and 1975, respectively. These units would enable ENALUF, in addition to meeting its own load growth, to supply ENEE from the end of 1974, when the interconnection would be completed, until El Cajon is commissioned in 1978, with energy which would have a lower cost of production than any ENEE could provide itself. ENEE, under its Fifth Power Project, would construct a new 24 MW diesel electric station, i.e., only about 50% of the additional capacity which would be required without inter- connection between now and 1978. The supply of power from ENALUF would be sufficient not only to supply ENEE's incremental requirements but also to allow ENEE to place its old diesel facilities on standby for most of this period and thereby reduce fuel costs. 3.06 With El Cajon completed, all of ENEE's thermal facilities would be put on standby and ENALUF's thermal generation would also be greatly reduced, thereby permitting further savings of fuel for both utilities. 3.07 Even if El Cajon were not completed as currently projected, the interconnection would still benefit both utilities by reducing their operating costs and investment programs (as detailed in paragraph 5.06).  - 6 - 3.08 As indicated in Annex 6, which describes the feasibility study of the interconnection as carried out by ELC and modified by the two utilities, each system's firm capability (installed capacity less capacity of the largest unit in the system) would be able to meet at least 79% of its peak demand in case of interruption of the interconriec- tion, which is acceptable. Legal Aspects and Power Contract 3.09 Both Nicaragua and Honduras have agreed that it is necessary for the two countries to conclude a treaty which will allow the inter- connection and the interchange of power and also authorize the two companie to negotiate a power contract for the interchange. The treaty has already been signed but not yet ratified. Both countries' legislative bodies will ratify the treaty before disbursements will be made from the loan in respect of those parts of the Project directly related to the interconnection, i.e., all of the 230 kV transmission lines and the 230/138 kV substations at Tiscapa and Leon. 3.10 The two utilities are expected to sign, early in June, a contract satisfactory to the Bank for the supply of power from Nicaragua to Honduras during the first years after interconnection. No disbursement will be made from the loan in respect of those parts of the Project directly related to the interconnection until this contract becomes effective. The supply of El Cajon power from Honduras to Nicaragua will be the subject of another contract, to be negotiated after the completion of the feasibility study, when the cost of the power plant and of its energy will be better known.  -7- 4. THE PROGRAM AND PROJECT ENALUF's Expansion Program 4.01 ENALUF's program for the next five years would comprise, in addition to the project (below), the completion of the transmission for the Santa Barbara project (Loan 543-NI),expansion of distribution net- works, a large program of village electrification, and studies for future geothermal and hydroplants. This program covers the period 1972- 1976, by the end of which the project would be completed. The loan would be fully drawn down in early 1977. The estimated total cost of the program is C$417 million (US$60 million equivalent). Description of the Project 4.02 The two maps show the facilities to be executed in both countries under the respective projecta. The project for Nicaragua (see Annex 2 for full description) would include: - a 100 MW steam-electric station at Puerto Somoza on the Pacific Coast; - a 230 kV transmission system to connect the Puerto Somoza station to ENALUF's system and to the system of ENEE of Honduras; - a 138 kV ring around Managua, the capital of Nicaragua; - a 138 kV line to extend ENALUFts service area in the northern part of the country; and, - management consultants' services to assist ENALUF in im- proving its organization and administration. Cost of the Project 4.03 The estimated cost of the project is C$242.6 million (US$34.7 million), as ahown in the following table. A more detailed breakdown of cost is shown in Annex 3 and details of the financing plan are discussed in paragraphs 7.12 through 7.24.  - 8 - C$ thousand US$ thousand Project Cost Local Foreign Total Local Foreign Total Puerto Somoza 46,830 103,320 150,150 6,690 14,760 21,45() 230 kV and 138 kV Transmission 12,180 38,430 50,610 1,740 5,4y0 7,23 Engineering 3,430 13,510 16,940 490 1,930 2,420 Management Consultants 350 1,050 1,400 50 150 2),- Contingency - Physical 7,210 9,800 17,010 1,030 1,400 .214.3i Contingency - Price - 6,510 6,510 -30 9 Total 70,000 172,620 242,620 10,000 24,660 34,660 Proposed Bank and CABEI Financing (in US$1000 equivalent) Interest Total Interconnection Project Santa Barbara Durin, New Foreign Local Cost Construc- Borrow- Exchange Currency Overruns tion incs IBRD Loan 20,400 - 1,500 2,100 ?>4,OOO CABEI Loan 3,600 2,000 - 500 6,1(-ic0 Previous CABEI Loan* 660 - - - ENALUF Funds - 8,ooo 3,000 - 24,660 10,000 24,00 2o, 1 To finance project preparation. }4.04 The cost estimates for the Puerto Somoza steam-electric plant are based on Kuljian's estimates reflecting recent contract prices for similar plants around the world. ELC prepared the cost estimates for the 230 kV 2nd 138 kV transmission systems. The estimates have been adjusted to reflect the revaluation of other currencies with respect to the US dollar. To cover increases in cost due to unforeseen difficulties which might arise during the construction of the project, a physical contingency allowance of about 8% has been included for local costs and 7% for foreign costs. An allowance of 4.5% of the local and foreign exchange cost has heen added to cover possible price increases. Engineering and Construction 4.0o5 Engineering design and supervision of construction of the Puerto Somoza plant and for the 230 kV transmission facilities to connect this plant to the existing 138 kV facilities at Leon and Managua would be carried out by Kuljian. Electroconsult would design and supervise the construction of the 230 kV interconnection facilities both in Nicaragua and Honduras under two similar contracts, one to be signed with ENALUF and one with ENEE. Under a separate contract Electroconsult would design and supervise the construction of the extensions to ENALUF's 138 kV facilities. ENALUF has agreed to continue to employ consultants acceptable to the Bank and CABEI, for engineering and supervision of its major facilities.  -9-_ Procurements and Disbursements 4.o6 All contracts for the works to be financed from the proposed loan (except consultants' services) would be awarded on the basis of inter- national competitive bidding consistent with the Bank Guidelines and CABEI's procurement rules. In the light of the Central American Agreement on Fiscal Incentives to Industrial Development (1969), manufacturers from the Central American Common Market (CACM) would be allowed a preference of either 15% of the CIF price or 50% of the import duty, whichever is the lower. The items for which CACM countries could be competitive under this arrange- ment include cement, reinforcing steel, fuel, tires, conductors, cable, and welding rods; the total cost of these items to be procured for the project is not expected to exceed U $0.1 million equivalent. 4.07 On the basis of the proposed joint "85/15" financing plan, the Bank would control disbursements for the CIF cost of imported equipment and of the foreign exchange cost of services. The Bank would act on behalf of CABEI in reviewing and processing all withdrawal applications substantiated by supporting documentation and will disburse its 85% share and notify CABEI to pay its 15% share. (US$660,000 for engineering services are being financed by CABEI under a separate loan and would not be eligible for payment from the Loan Account.) In addition (and outside of the 85/15% cost-sharing with C.ABEI), the Bank would also disburse against civil works and equipment contracts up to US$ 1.5 million to cover the foreign expenditures for Santa Barbara cost overruns. US$2.1 million will finance interest and other charges on the Bank loan. ENALJUF would be reimbursed retroactively for (i) payments made on contracts for the Santa Barbara project subsequent to the complete draw down of Loan 543-NT on May 17, 1972, and (ii) payments not exceedii