Mexico - Second Mexican Light and Power Project

RETURN TO REPORTS DESK R E S T R I C T E D WITHIN Report No. TO-140-a ONE WEEK This report was prepared for use within the Bank. In making it available to others, the Bank assumes no responsibility to them for the accuracy or completeness of the information contained herein. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT EXPANSION PROGRAM THE MEXICAN LIGHT AND POWER CO., LTD. July 30, 1957 Department of Technical Operations  CURRENCY EQUIVALENTS One U.S.$ _ 12.50 Pesos One Peso 8 Cents (U.S.) U.S. $1 Million = 12,500,000 Pesos Pesos 1 Million = U.S. $80,000  TABLE OF CONTENTS Page Summary I. Introduction 1 II, The Company 1 Organization and Management 1 Projects Financed by Earlier Bank Loan 1 Present Facilities 1 Service Area 2 Financial Position 2 III. Projects Proposed for Financing 3 Description 3 Construction Schedules 4 Estimated Costs and Currencies Required 5 Capital Expenditures and Sources of Funds 6 Power Market 6 IV. Financial Prospects 7 Basis of Estimates for Future Position 7 Depreciation 9 Profits 9 Dividend Policy 9 Cash Position 9 Pro-Forma Balance Sheets 10 Debt/Equity Ratio 10 Debt Service 10 Security 10 General 10 V. Economic Justification 11 VI. Conclusions and Recommendations 12 (For Appendices see following page)  TABLE OF CONTENTS (Cont'd) List of Appendices A. Capitalization at December 31, 1956 B. Condensed and Rounded Profit and Loss Accounts 1953-1956 C. History and Financial Development D. Condensed Balance Sheets 1953-1956 E. Construction Cost Estimate F. Estimated Currency Requirements G. Lecheria Extension - Estimated Cperating Cost H. Power Market and Generating Possibilities I. List of Plants K. Available Capacity and Peak Load 1951-1961 L. Energy Froduction and Requirements 1951-1961 M. Estimate of Earnings, Source and Application of Funds 1957-1961 N. Tariff Rates 0. Actual and Estimated Interest Coverage 1953-1961 P. Condensed and Rounded Pro forma Balance Sheets as at December 31, 1959 and 1961 Map  EXPANSION POGRAM THE MEXICAN LIGHT AND POWER CO.. LTD. SUMMARY 7Iis report covers an appraisal of a project for the expansion of the electric power system operated by The Mexican Light and Power Co., Ltd. (Mexlight) and serving Mexico City and surrounding districts. In April 1950, the Bank made a loan of $26 million to this company to provide the foreign exchange required for an expansion program which in- cluded the installation of 155,600 kw of generating capacity and additions to the company's transamission and distribution networks. The loan has been entirely disbursed and all. work was completed by December 1955. The present project, for which the Bank has been asked to consider a loan of $11 million, consists of the installation of an 82,400 kw generating unit in the existing Lecheria Thermal Plant, the modification of two generating units in the Nonoalco Thermal Plant increasing their capacity by a total of 12,500 kw and various additions to the companyts transmission and distribution networks. The project is scheduled to be completed by the end of 1958. The cost of the project is estimated at $22.5 million equivalent of which $11 million will be required in foreign exchange. To finance the local currency cost of the project the company has obtained a loan of $8 million equivalent from Nacional Financiera, a Govern- men4 .gency, and the balance of the funds required will be available from the company's own resources. Because of unavoidable delays in obtaining a loan from the Bank the company has obtained an interim credit of $4 million from four New York banks to make it possible to carry out the construction work as scheduled. The project is technically sound. Conservative estimates of the future demand for power in the area served by the company show that the expansion program is well justified. The management of the company is good and appropriate steps have been taken for the engineering, execution and operation of the project. The financial position of the company is satisfactory. Financial forecasts show that the proposed loan should have adequate interest and debt service coverage and that the company could service its entire debt, includ- ing subordinated loans. The project is suitable for a Bank loan of $11 million equivalent; a term of 20 years with a period of grace of about two years would be appropriate.  EXPANSION PROGRAM THE MEXICAN LIGHT AND POWER CO., LTD. I. INTRODUCTION 1. In June, 1949 the Bank made a loan of $10 million to the Comision Federal de Electricidad (CFE) which was relent to the Mexican Light and Power Company Ltd. (Mexlight) pending a financial reorganization of the company, which the Bank considered necessary before a direct loan could be made. In April, 1950, after completion of this reorganization, a loan of $26 million was made directly to the company. The earlier loan was fully repaid out of the proceeds of the later loan. 2. The Bank has now been asked to consider a new loan of $11 million equivalent to cover the foreign exchange costs of an expansion program con- sisting of the addition of an 82,500 kw generating unit to the existing Lecheria Thermal Plant; the modification of two generating units in the Nonoalco Thermal Plant increasing their capacity by a total of 12,500 kw; and additions to the company's transmission and distribution systems. 3. This report covers an appraisal of the company and the projects proposed for Bank financirg. It is based on information received from the company and discussions with interested parties both in Washington and Mexico, II. THE COMPANY Organization and Management 4. The company is established under the laws of Canada with head office in Toronto. The main operational functions are, however, carried out in the company's general office in Mexico City. The company's Board of Directors is made up of 20 members, including businessmen prominent in Mexico, United State4 Canada, England and Belgium. The management of Mexlight is experienced and well-qualified for the administration and operation of the company. Projects Financed by Earlier Bank Loan 5. The Bank funds were used to cover the foreign exchange costs of an expansion program which included the addition of 155,600 kw of generating capacity and corresponding additions to the transmission and distribution systems. All of the work on Bank-financed projects was completed by December, 1955. The loan was fully disbursed in June, 1956. Present Facilities 6. At the end of 1956, the company had four wholly owned operating subsidiaries, whose plants and distribution networks form an interconnected system, which again is connected with the Miguel-Aleman system operated by CFE. The Mexlight system has a total generating capacity of 490,100 kw in- cluding 177,000 kw thermal capacity, the CFE plants have a total capacity of  - 2 - 216,500 kw. The Mexlight system has one 137 km double circuit 220 kv line; 1,502 km of 85 kv, 60 kv and 44 kv lines as well as 5,190 km of overhead and underground distribution lines. The total capacity of receiving sub- stations is 843,750 kva. 7. The losses in the system amount at present to about 18.5% of total energy distributed. While still high, steady improvements have been made over the last years, mainly by installation of meters to reduce the unauthor- ized tapping of energy. The load factor is about 0.59, reflecting the high industrial consumption. The location of the principal facilities of the system is shown in the attached map. Service Area 8. Mexlight and its subsidiaries serve the Federal District, about half of the State of Mexico, important parts of the States of Hidalgo, Morelos and Guerrero and relatively small areas of the States of Puebla, Michoacan, Guanajuato and Queretaro (see attached map). The estimated population served is about 4.3 million in approximately 400 towns and villages. The principal city served is Mexico City which, with about 4 million inhabitants, is the largest population center of the Republic. Other important cities served are Toluca, C-uernavaca and Pachuca. The area covers approximately 12,000 square miles. 9. The market served by the company is well diversified. Its over 620,000 customers include high and low tension industrial consumers, mines, commercial enterprises, public services and residential consumers. In 1956, 53.',io of the sales were to industrial consumers and mines, 18% to commercial and small industrial consumers and 15% to domestic consumers. The balance represents sales to public services and tramways. Major industries in the area include textiles, metallurgy, cement, paper, rubber goods, engineering products, electrical appliances and oil pumping installations. Financial Position 10. As of December 31, 1956, the capitalization of Mexlight was approximately as follows: Equity $ 74.7 million 55% Long-term debt 62.1 million 45% Total $136.8 million 100% (Details are given in Appendix A) The largest single shareholder is the Belgian Corporation, Sofina, which with its associated companies holds about 35% of the outstanding shares. The remainder is distributed among some 2,500 shareholders in England, United States, Canada and Mexico.  - 3 - 11. Summaries of profit and loss accounts for 1953-1956 are given in Appendix B. In these years the company had earnings of between 5% and 6% of the book (equity) value of the common shares, except in 1954 when the devaluation of the peso reduced the dollar equivalent of the earnings to under 3% on the shares. Based on the current market value of the common shares, however, the earnings were of the order of 10% to 12%. 12. Dividends on preferred shares were paid early in 1954 for a period covering the second six months of 1953 and have continued on a semi-annual basis. After 41 years of interruption a cash dividend of 25