Nicaragua - Thermal and Power Distribution Power Projects

RETURN TO R E S T R I C T E D REPORTS DESK R e p o r t N o. T.O. 59-b WITHIN ONE WEEK This document was prepared for internal use in 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 THERMAAL POWER PROJECT IN NICARAGUA June 29, 1955 DEPARTMENT OF TECHNICAL OPERATIONS  CURRENCY EQUIVALENTS (selling rates) U.S. $1 7.05 Cordobas 1 Cordoba = U.S. $ 0.14 1 million Cordobas = U.S. $ 141,844  T AB LE OF CONTE N TS Page Summary i I. Introduction 1 II. The Existing Bank Loan to Nicaragua for Power 1 III. Present Installations and Production 1 Ins tallation Production 2 IV. The Power Market 2 V. Hydro Power Possibilities 4 VI. The Project 5 Description 5 Cost of the Project & Construction Schedule 7 VII. Method of Financing the Project 7 VIII. Rate of Withdrawal of the Loan 8 IX. Organization and Management 8 Emrpresa de Luz y Fuerza 6 Tnstituto de Fomento 9 X. Present Rates, Revenue and Cost of Production 10 Rates 10 Average Revenue and Average Costs 11 XI. Capital Structure and Current Financial Position 12 XII. Earnings Recori 12 XIII. Estimated Future Financial Results 12 Future Financial Position 12 Rate Policy 13 Estimated Future Earnings 13 Forecast of Cash Flow 14 Debt Service Coverage 14 Security 14 XIV. Conclusions and Recommendations 14  SUMMARY THERMAIL POWER PROJECT NICARAGUA This report covers an appraisal of a project for the construction of a new thermal power plant, new transmission lines to serve fifteen communities and the expansion of the distribution systems in Managua and the communities to be served by the transmission lines. In September, 1953, the Bank made a loan of h450,000 to provide the foreign exchange required for the addition of a 3,000 Kw generating unit to the existing diesel power station of the government-owned power company in Managua, the Empresa Nacional Luz y Fuerza. The loan was for ten years. It has been entirely disbursed and the unit has been in operation since November, 1954. This addition brought the installed cap- acity of the plant to 10,160 Kw. Tho unit was necessary to meet the rapidly growing demand for power in Managua pending a more thorough study of the power requirements of the whole country. Such a study was made by consultants satisfactory to the Bank and the project now submitted follows closely the recommendations of the consultants. The project consists of the construction of a 30,000 Kw thermal plant in Managua, 110 miles of 69 Kv and 57 miles of 13.2 Kv transmission lines, the expansion of the distribution system in Managua and the commu- nities tq be served by transmission lines. It is estimated to cost the equivalent of t1,0.8 million,$7.5 million of which would be in foreign ex- change. The project is estimated to be completed by 1957. It would serve an area containing the country's three largest cities, its chief port, most of the railroad mileage, most of the country's comrercial, industrial, financial and government activities and a large part of its best ag- ricultural land. At present most of the small utility systems in the project area are not adequately serving their communities, but before they can, their distribution systems must be completely renovated and expanded. This will require a sizeable investment. Without long-term credit, there are few of the small utilities who could make the investment. The problem of credit for the private utilities could be solved by making simultaneously with a loan to the Empresa Nacional, another loan to the Instituto de Fomento to cover the foreign exchange cost of the distribution systems in the smaller communities, and permitting Fomento in turn to make this amount available to the utilities concerned. As the privately owned utilities would be responsible for the ex- pansion of their systems, they would supply most of the local currency re- quired for this work but if necessary they would also borrow some of their local currency requirements from Fomento.  ii Local currency required for the remainder of the project would be provided through advances from the Nicaraguan Government which would be in the nature of additional equity in the Empresa Nacional. The Empresa Nacional company will sell energy wholesale to the fifteen communities served by the transmission system and at retail in Mianagua. The income of the Empresa Nacional from its expanded sales would amply cover interest and amortization of the proposed Bank loan and other loans of the company, a minimum of 1.4 times. The company is in a sound financial condition. Its debt/equity ratio as at December 31, 1954, was about 1 to 3 and its current assets were about twice the current liabilities. on the cnmpletion of the project in 1957, the debt/ equity ratio of the company will be about 1.2 to 1. The company has agreed to limit its future borrowing, without the prior approval of the Bank, to an amount which would keep its debt/equity ratio no greater than 2 to 1. The project is considered suitable for Bank loans equivalent to $7.5 million (4;7.1 million for Empresa and $0.4 million for Fomento). A term of twenty years is appropriate for the loan to both institutions. The construction schedule indicates about a three year grace period on amortization payments.  THERMAL POWER PROJECT, NICARAGUA. Is INTRODUCTION. 1. This report covers an appraisal of a project consisting of the construction of a new 30,000 kw'r thermal power plant in Managua, the largest city in Nicaragua, new transmission lines to supply about 15 communities with energy from the new thermal plant in Managua and the rehabilitation and expansion of the distribution systems in Managua and the communities to be served by the transmission lines. The project is estimated to cost the equivalent of about $10.8 million. The Bank has been requested to finance the foreign exchange requirements of the project, estimated at the equivalent of $7.5 million. II. THE EXISTING BANK LOAN TO NICARAGUA FOR POWER. 2. In September, 1953, the Bank made a loan of $450,000 (Loan 82 Ni) to the Republic of Nicaragua to provide the foreign exchange required for the addition of a diesel generating unit of 3,000 kw to the existing diesel power station of the "Empresa Nacional de Luz y Fuerza," the Government- owned power company in Managua. The local costs were the equivalent of about $50,000. The loan was for ten years and the interest rate was 4-3/4%. The company is responsible for the local currencv equivalent of the service on the loan. The loan has been entirely disbursed and the unit has been in oneration since November, 1954. The addition of this unit brought the install- ed capacitv of the plant to 10,160 kwir. 3. The installation of the diesel unit was considered necessary to meet the rapidly growing demarid for power in the Managua area pending a more thorough study of the total powrer requirements of the whole country and the formulation of a long range program to meet these requirements. The study was made by consultants satisfactory to the Bank and the prciect now submitted follows closelv the recommendations of the consultants. III. PRESEN:T INSTALLATICNS iAND PRODUCTION. Installations. 4. Electric energy is supplied to the public at present by about 25 generating plants. The installed capacityr of these plants in January, 1955, totalled about 15,700 k-r. In addition there were numerous industry owned opower plants. The installed canacity of the industrial plants vras about 10,000 k:w. The total capacity installed in the entire country was, therefore, about 25,700 lkw. Of the total, about 850 kwr was hydro, 150 kw was steam and the remainder, 24,700 kw,was diesel. The largest of the 25 companies supnlying power to the public was the Empresa Nacional Luz y Fuerza in Managua with 10,160 kw installed. The installations in the other companies ranged from 10 kn, to about 1,500 kw. 5. Energy is distributed commercially at a frequency of 60 cycles and 110 volts. Except for two rural lines of 7.2 kv and 12.5 kv extending a few miles out of Managua, there are no transmission lines in Nicaragua.  -2 Production. 6. Probably over half of the electric energy produced in Nicaragua is generated in Managua. In 1954, the Managua plant of the Empresa de Luz y Fuerza generated 28.8 million kwh and industrially-owned plants probably produced 9 to 10 million kwh. The generation in other parts of the country is not known. Production by the Managua company is estimated to reach about 33 million kwh in 1955. IV. THE POWER MARKET 7. Over 75% of the population of Nicaragua, which according to the 1950 census was 1,053,189, lives on the western or Pacific coastal plain which comprises about one-fourth of the country. The proposed Droject will serve an area (hereafter referred to as the Project Area) which has a popu- lation of about 475,000 or roughly about 47% of the total population in 1950. 1j (See Map). The Project Area contains the country's three larger cities, its chief oort, most of the railroad mileage and practically all of the country's industrial, commercial, financial and governmental activities and a large part of its best agricultural land. 8. Of the 25,700 kw of generating capacity installed in Nicaragua 23,965 kw are in the Project Area. Managua XJ with 13,871 kw installed in oublic utility, water works and industrial plants is the load center of the area. Of the 10,094 kw in the remainder of the project area 5,084 kw are in public utility plants and 5,010 kw are in industrial plants or coffee fincas. 9. With minor excentions there has never been, in recent years, adequate canacity installed in any city in the Project Area. The consultants -vwho studied the powrer market observed: "Most of the utility systems are not adequately serving their communities. Historically, plants have operated practically at peak and their distribution systems have operated overloaded." 10. The only enterprise in the Project Area from wrhich complete statistical data wTere obtainable was the Empresa Nacional in Managua. The records show that its plant has been loaded to capacity from 1946 to mid- 1954 and has had reserve generating capacity only for short periods follow- ing the installation of new units in 1948, 1949, 1953 and 1954. The full capacity of the 3,000 kw.T unit financed by the Bank in 1954 has not yet been absorbed owing to limited capacity in the distribution system. New trans- 2/ In 1953 the total ponulation w,lras estimated to be 1,135,000. 2/ In 1953 the population was estimated at 133,200.  - 3 - formers (now on order) together With minor changes in the distribution system will soon enable the olant to deliver its peak capability. 11. Since 1946 loads larger than 25 kw could be connected to the Managua system only after making special arrangements and all large industrial loads ,/ have been required to shut down between the hours of 5 p.m. and 4 a.m. Of the 18,275 consumers served by the iManagua svstem in January, 1955, 16,738 were residential consumers and 7,040 of these were provided unLmetered lighting service at flat monthly rates. Limiting devices cut off their service if the loads exceeded that of two 50-watt bulbs. 12. In spite of these limitations, the load on the Managua plant during the period 1946 to 1954 increased at an average rate of about 15% per annum compounded. 13. Consumption of energy in the period increased in line with the load on the system. The table below shows the sales of energy to various classes of consumers in Managua in 1946 and 1954. Sales in Thousands of Kwh Class of Consumer 1946 % 1954 Residential 2,622 36.7 10,488 41.2 Commercial 448 6.3 1,085 4.2 Industrial |/ 2,512 35.2 10,763 42.3 Government 617 8.6 1,699 6.7 Street Lighting 873 12.2 1,207 4.7 Other 69 1.0 194 _0.9 Total 7,141 100.0 25,436 100.0 The consultants estimated that in addition to the consumption of about 25.4 million kwh in Managua, industry-owned generating plants in the Project Area produced about 20 million lkrh. Thus in 1954 the consumption in the Project Area approached about 60 million kwh or about 126 kwrh per capita 2/ indicating an extremely lowJ rate of consumption. 14. If ample power were available from the Empresa Nacional, undoubtedly the industries and commercial establishments in Managua which now operate their own diesel units would buy their power rather than continue to generate it because their rroduction expense is high and it is very difficult to obtain the proper technical help for adequate maintenance and operation of their units. The high investment and operating costs of the generating units and the lack of even medium-term credit for generating units (or any other investments) is a great deterrent to the expansion of existing industries and the establishment of new ones. ~/ In 1954, 45 industries were classified ns large. They consumed 8.8 million kw!h or about 37% of the total sales. T/ This compares with about 2,500 kwrh per capita in the United States.  - 4 - 15. Production costs in the Project Area outside of Mianagua are even higher than in Managua and technical help is even more difficult to obtain. The small privately-owned utilities no- supplying the various communities in the Project Area have indicated their interest in buying transmitted power from a central station in Managua, provided it can be purchased at a reason- able price and their resale rates are permitted to be at a level which would earn fair returns on their investment. 16. The load on the Empresa Nacional's Plant reached 6,750 kw in 1954. It would have been at least 8,750 kw if the distribution facilities had been adequate to handle the demand. By the end of 1957, the demand is expected to reach the full canacity of the plant, about 10,000 kw, even with the existing limitations. 17. When ample tower becomes available in 1958, it is expected that limitations on consumption wFill be removed and that a number of the industrial and commercial establishments now generating their orn povwer will buy power from the Empresa Nacional. As a conseouence, the demand in Managua is expect- ed to reach 14,500 kw in 1q58. The demand in the other communities in the Project Area is expected to reach 7,500 kIT by 1958. (At present, the demand on the public utility plants alone is estimated at about 5,000 kw and instal- lations in industrial establishments and coffee fincas total about 5,000 ikw). The total load on the system in 1958, therefore, is expected to be 22,000 kw, and it is estimated to increase to about 45,500 kw by 1963 or at a rate of about 15% per annum compounded. This has been about the average rate of increase since 1946 in Managua in spite of limitations. After 1963 the demand for electricity is expected to continue to increase, but perhaps at a rate somewhat less than 15%. The sale of energy in the Project Area, including Managua, is estimated to reach about 62.5 million kwjh in 1958 and to increase to about 148e6 million in 1963. Hydro power is planned to be available in 1963. (See Annex B). 18. As pointed out in paragraph 23, the system will have a generating capacity of 43,560 kh