Peru - Huinco Hydroelectric Project

RETURN TO R--0TS T RESTRICTED W.Ji T H IN ReportN o. TO-243a ONE WEEK This report was prepared for use within the Bank. It must not be published nor may it be quoted as representing the Bank's views. The Bank assumes no responsibility for the accuracy or completeness of the contents of the report. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT APPRAISAL OF HUINCO HYDROELECTRIC PROJECT LIMA LIGHT AND POWER COMPANY (EMPRESAS ELECT RICAS ASOCIADAS) PERU June 14, 1960 Department of Technical Operations COPI CURRENCY EQUIVALENTS U.S. $ 1 - 28 Soles 1 Sol - $0.036 1 Million Soles - $35,714 TABLE OF CONTENTS PAGE Summary 1 ii I INTRODUCTION 1 II THE BOROER4 1 General 1 Organization and Management 1 Associated Company 2 III EXISTING INSTALLATIONS 2 IV PWTFRYARKET 3 V CONSTRUCTION PROGRAM 4 VI THE PROJECT 5 Yarcapomacocha Diversion 5 Huinco Hydro Power Plant 6 General 6 Description 6 Design and Engineering 7 Construction 8 Present Status 8 Schedule of Construction 8 Cost Estimate 9 VII FCONOMIC ASPECTS 10 VIII FINANCIAL ASFECTS 10 Electric Pcuer Legislation 10 Present Financial Position 11 Earnings Record 13 Financing Plan 13 Estimated Future Earnings 16 Interest Coverage and Earnings Test 16 Net Tangible Assets Test and Debt/ 17 Equity Ratio IX CONCLUSIONS 17 LIST OF ANNEXES 1 Records and Forecasts of Operations 2 Records and Forecasts of Power Sales 3 Construction Program 4 Installed Capacity and System Peak Load 5 Technical Details of Project 6 Huinco Hydro Plant, Construction Schedule 7 Estimated Cost of the Project 8 Main Provisions of Electrical Industry Law 9 Typical Monthly Electricity Bills 10 Actual and Forecast Balance Sheets 1955 - 1966 11 Details of Funded Debt 12 Actual and Forecast Income Statements 1955 - 1966 13 Forecast Sources and Applications of Funds 1960 - 1966 Map Apraisal of Huinco Hydroelectric Project Summary Lima Light and Power Company - Empresas Electricas Asociades (Lima Light) has asked the Bank to consider a loan of $24 million equivalent to help finance the construction of the first stage of the Huinco hydro- electric plant (120 NW) and the associated Marcapomacocha diversion tunnel. The total cost of this project is estimated at $49.5 million equivalent, of which $4.2 million equivalent had been incurred by the end of 1959. ii. Lima Light is a privately owned public utility responsible for supplying power in the Greater Lima area, and with head office in Lima. About 65% of its share capital, which amounts to about $16.7 million equiv- alent, is owned by a Swiss group of public utility holding companies and banks. iii. The management and organization of Lima Light are good. As of March 1960, Lima Light and Hidrandina, a company controlled by the same financial group as Lima Light, operated generating plants with a combined capacity of 184 NW. Total power sales amounted, in 1959, to 619 million kwh. Based on conservative forecasts, sales are estimated to increase to 1,356 million kwh in 1969. iv. To meet the increase in power demand,Lima Light has prepared a general construction program to be carried out during the ten year period 1960-1969. This program includes construction of the Marcapomacocha water diversion scheme, addition of 20 NW of thermal and 240 NW of hydro capacity and expansion of transmission and distribution facilities. The total cost of the program, excluding interest during construction, is estimated at $66 mil- lion equivalent. The program and its estimated cost are reasonable. v. The project proposed for Bank financing consists of the first stage of the Marcapomacocha diversion and the Huinco plant with an initial capacity of 120 NW. The project is technically sound and satisfactory arrangements have been made for its execution. Its estimated cost is reasonable. The Huinco plant would produce power at a lower cost than could be produced by a possible alternative thermal plant. vi. The present financial position of Lima Light is sound. Its power rates are satisfactory. Its earnings record is good. Under its proposed financing plan, Lima Light would finance about40% of its requirements for the next five years from its own resources and sales of new share capital and about 60% from borrowings, including the proposed Bank loan. Financial forecasts show that based on conservative assumptions and present rate levels, the sound financial position of the Company would be maintained in future years. - ii - vii. The project would be suitable for a Bank loan of e24 million equivalent with a term of 25 years including a grace period of 5 years. APPRAISAL OF HUINCO HYDROELECTRIC PROJECT PE RU I. INTRODUCTION 1. Lima Light and Power Company - Empresas Electricas Asociadas (Lima Light) has asked the Bank to consider a loan of $24 million equivalent to help finance the construction of the first stage of the Huinco hydro- electric plant (120 IM) and the associated Marcapomacocha water diversion scheme. The total cost of this project is estimated at $49.5 million equivalent, of which $4.2 million equivalent had been incurred by the end of 1959. The project is scheduled to come into operation in 1964 and is designed to meet the increasing demand for power in Lima and its surrounding area. 2. The appraisal of the project and of Lima Lightts operations and finances is based on comprehensive documentation prepared by the Company and on information obtained by a Bank mission which visited Lima in February 1960. II. THE BORROWER General 3. The borrower would be Lima Light and Power Company, a privately owned public utility corporation responsible for supplying power in the Greater Lima area, and with head office in Lima. 4. The Company was originally incorporated in accordance with Peruvian laws in 1910 under the name Lima Light Power & Tramway Company. The name was changed in 1935, when the streetcar operations and associated properties were transferred to a separate company. 5. Lima Lightts present concession was granted by the Government in 1956. It is valid for a period of 50 years and gives the Company the exclu- sive right for generation and distribution of power within its area of opera- tions. 6. At the end of 1959 Lime Light had an authorized share capital of Soles 500 million of which Soles 466.8 million was subscribed and paid in. About 65% of the shares are owned by a Swiss group of public utility holding companies and investment banks. The balance of the shares is widely distri- buted and a large number is held by shareholders in Peru. Organization and Management 7. The shareholders of the Company are responsible for the major decisions affecting the Company. These decisions include in particular sale and disposal of property, issue of share capital and incurrence of debt. - 2 - 8. The Board of Directors is responsible for the execution of reso- lutions adopted at the shareholders meetings. It consists of 15 members including 3 alternates. A majority of the Directors is resident in Lima. 9. Two General Mvanagers, one concerned chiefly with engineering and the other with finance, are jointly responsible for the operation of Lima Light. They are assisted by five Ianagers in charge, respectively, of depart- ments for generation and transmission, distribution, personnel and commercial services, purchasing and stores, and financial administration. In 1959, the Company had a total of about 1850 employees and workers. 10. The Company has a good and experienced management and an efficient organization. Its relationship with Peruvian authorities is good. Asnociatea Company 11. The financial group which controls Lima Light also holds a controlling interest in an associated Company, Energia Hidroelectrica Andina (Hidrandina) S.A. This Company was established in 1946 with head office in Lima for financing, construction and operation of power plants. The instal- lations owned by Hidrandina form part of the Lima Light power system. Pur- suant to a long term renewable contract between the two companies, Lima Light purchases all power generated by the Hidrandina plants and pays to Hidrandina annual amounts sufficient to cover the total cost of operations as determined by law. The provisions of this contract are reasonable. III. EXISTING INSTALLATIONS 12. The total generating capacity of the Lima Light power system in March 1960 was 184 IvI, installed in three hydro plants and one thermal plant. Plant Capacity Owner Yloyopampa hydro 63 iNW Hidrandina Huampani hydro 30 hW Hidrandina Callahuance hydro 67 W Lima Light Santa Rosa thermal 24 1W Lima Light 13. The hydro plants are located on the Santa Eulalia river.2/ (See attached map). The total head developed by the three plants is 1235 meters. Seasonal regulation of the Santa Eulalia is provided by a number of up stream reservoirs with a total capacity of 75 million cu. meters. 14. The Santa Rosa thermal plant consists of one 10 MW gas turbine unit installed in 1949 and three steam turbine units with a total capacity of 14 1vW. The latter units are all over 30 years old and serve only as stand by capacity. 2/An old 10 N hydro plant (Yanacoto) was taken out of operation in March 1960 upon the commissioning of the Huampani plant. - 3 - 15. The transmission line network consists of 368 kilometers of 64 kv lines and 118 kilometers of 30 kv lines connecting the generating plants with three main substations which have a total transformer capacity of 179.2 MVA. The distribution network consists of 641 kilometers of cables and 413 kilometers of overhead lines operating at 10 kv and 2.3 kv, and 1,681 kilometers of cables and 721 kilometers of overhead lines operating at 220 volts. The network also includes 455 substations, 86 cebins and 562 pole transformers. 16. A part of the distribution network is public property but is operated by Linu Light. This applies to certain primary lines and distribu- tion transformers financed partly from direct payments by consumers and partly from an extension fund administered by the Company. Lima Li,ght is permitted under present rate legislation to charge as operating costs its annual contri- butions to this extension fund. 17. Low tension feeders and house connections excluding meters are also public property. These installations are paid for directly by the parties requiring them. They are however maintained by the Company. In addition to maintenance costs the Company is permitted to include in its operating costs a charge of 0.5% per annum on the value of these installations. 18. Total energy production in 1959 amounted to 720 million kwh. Losses in the system, including the Company's own consumption were 14%. The load factor of the system was 53%. The system is well maintained and operated. IV. POWER iARKLT 19. The concession area served by Lima Light covers about 420 square kilometers. In 1959 the population was estimated at 1.3 million or about 14% of the total population of Peru. The area is the main administrative, coimercial and industrial center of the country. The total number of con- sumers at the end of 1959 was over 192,000 including about 6,800 industrial consumers. The main industries served included plants producing textiles, cement, rubber goods, paper, vegetable oil, fertilizer, glasswares and shoes. 20. Total power sales during the six year period 1954-59 increased from 401.1 million kwh to 619 million kwh, or by an average annual rate of about 10%. The peak load during the same period increased from 104.2 PW to 155 i-;W or at about the same rate as sales. The load factor on the system improved slightly from 50.5% to 532a. (See Annex 1). 21. A breakdown of sales by cetegories during this period shows that industrial and commercial sales increased at a somewhat higher annual rate (12.7% and 10.5% respectively) than the average, while residential and public lighting sales increased at a lower rate. The share of total sales for major categories of consumers in 1959 was 40% for residential, 41.5% for industrial, 9% for commercial, 5.5% for public lighting and 4%o for traction including bulk sales to a company which distributes power in the small town of Ancon north of Lima. (For details see Annex 2). -4- 22. In the forecast of sales prepared by Lima Light, an increase of 10% is assumed for 1960, based on recent monthly sales records which show an increase of at least this magnitude compared with records for the same months in 1959. For the following years the Company estimates total sales to increase at an average annual rate of 8%. 23. Industrial sales are expected to continue to increase at a higher rate (10%) than the average. This seems reasonable in view of the recent enactment of an Industrial Promotion Law, which provides a number of benefits designed to stimulate industrial expansion in Peru. 24. Sales to commercial and residential consumers are estimated to increase at average annual rates of 7% and 8% respectively, with somewhat more than half of the increase accounted for by connection of new consumers and the balance by an increase in sales per consumer. 25, Based on these forecasts total sales would increase from 680 million kwh to 1,356 million kwh over the 10 year period 1960-69. With allowance for losses, total generation required in 1969 would amount to 1,590 million kwh. A small improvement of the system load factor is expected over the period, renching 54% in 1969; the system peak load in this year would then be 335 EW. 26. The forecast of future sales, energy requirements and system peak load is based on conservative assumptions and it would not be unreasonable to expect sales to be somewhat higher than estimated. The reason for this is that there exists within the Company's concession area a number of indus- trial enterprises operating their own power plants with a total capacity estimated at 32 PQW. Several of them have expressed interest in obtaining supplies from Lima Light, but the Company has hesitated in making commitments for major supplies of firm power before the Huinco plant comes into operation. In addition, an extension of the Company's area of concession is also being considered to include urban areas now under development.- V. CONSTRUCTION PROGRAM 27. In order to meet the estimated increase in power demand, Lima Light has prepared a general construction program to be carried out during the ten year period 1960-69. It consists of two parts, the first to be carried out during 1960-64, and the second during 1965-69. 28. The first part includes the expansion of the existing Santa Rosa thermal plant by installation of two 10 NW gas turbine generators, the com- pletion of the first stage of the harcapomacocha water diversion scheme and the construction of the Huinco hydroelectric plant with an initial capacity of 120 Md. The second part includes the second stage of the iarcapomacocha diversion and the expansion of the Huinco plant to total capacity of 240 IW. 29. Both parts of the program include necessary extensions to the Companyts existing transmission and distribution network. 30. The total cost of the construction program is estimated at $66 million equivalent of which $48 million would be incurred during 1960- 64 and $18 million during 1965-69. These estimates do not include interest charges during construction and the costs of distribution installations which would be financed by the extension fund and by direct payments by the parties requesting the installations. Total investments for these works are estimated at about t1.6 million annually. 31. The costs have been realistically estimated and include a reasonable allowance for contingencies. (Details of the program and schedule of expenditures are given in Annex 3). 32. The generating capacity to be provided by the program and existing capacity would be sufficient to meet the estimated demand through- out the neriod 1960-69. In 1963 and the first half of 1964, before the first unit of the Huinco plant would come into operation, only a small margin of reserve capacity would be available. If sales should increase at a higher rate than estimated, some reduction of the evening peak load might be required during this period. 33. In order to meet the system load after 1969 further construction work would have to be started at the latest in 1968. Lima Light has already made preliminary studies of future hydro developments but no firm plans have yet been made. Consequently no provision for additional works to be carried out during 1968 and 1969 has been included in the program cost estimates. 34. A comparison between available generating capacity and estimated peak load is given in Annex 4. Details of estimated plent operations, losses and sales are included in fnnex 1. VI. THE PROJECT 35. The project proposed for Bank financing consists of the first stage of the Marcapomacocha diversion and the Huinco hydro plant with an initial capacity of 120 MW. jrca-pomacoche Diversion 36. The Parcapomacocha basin is located on the eastern slope of the Andes mountain range. The diversion scheme consists of structures to collect the water resources of this basin above an elevation of about 4300 meters and of a tunnel through the mountain range to conduct the water into the Santa Eulalia river basin. 37. The first stage of this scReme includes the construction of two small concrete gravity dams regulating the outflow from natural lakes, in- take works on the Cuevas, Antacasha and Sangrar rivers, a five kilometer long canal and the ten kilometer long diversion tunnel. The two lakes would pro- vide a total useful storage capacity of 10 million cu. meters. These reser- voirs would assure the diversion of a minimum of 2 cu. meters/sec, which would be discharged into the Canchis river, a tributary to the Santa Eulalia river. - 6 - The additional flow would benefit the proposed Huinco plant and would increase the production capacity of existing hydro plants downstream by 140 million kwh. 38. The second stage of the scheme, to be carried out during the period 1966-69, would include works providing additional storage capacity of 110 million cubic meters. After completion,the minimum flow through the diversion tunnel would be increased to 6 cu.meters/sec. Huinco Hydro Power Plant General 39. The Huinco plant would be located on the Santa Eulalia river some 65 kilometers northeast of Lima. This river is formed by a number of tribu- taries raising in the Andes mountains. A total of 27 natural lakes are located in the upper reaches of the Santa Eulalia basin. Existing dams at the outlets of 15 of these lakes provide regulating reservoirs with a total useful capac- ity of 75 million cu,meters. At Chosica, the Santa Eulalia flows into the Rimac river which flows through Lima and discharges into the Pacific at Callao. (See attached map). 4o. The drainage area above Sheque, the site of the intake for the Huinco plant, is about 400 square kilometers. The natural flow of Santa Eulalia at Sheque, based on 20 years records, varies between a maximum of 130 cu. meters/sec and a minimum of 1.1 cu.meters/sec. With the regulation pro- vided by the existing reservoirs the minimum flow is at present 6 cu.meters/ sec. It would increase to 8 cu.meters/sec when the first stage of the Marcapomacocha diversion comes into operation. This would be sufficient for the operation of the initial two units to be installed in the Huinco plant. After completion of the second stage of the diversion, the minimum flow of the Santa Eulalia river would increase to 12 cu.meters/sec., permitting the operation of four units in the Huinco plant. Description 4l. A 40 meter high concrete arch dam would be constructed at Sheque where two tributaries, the Canchis and the Acombamba, join to form the Santa Eulalia. The reservoir would have a capacity of 800,000 cu. meters designed for weekly regulation. The dam would be provided with a free overflow spill- way and a bottom discharge tunnel. 42. Both tributaries carry a considerable amount of silt. The Acombamba would therefore be diverted into the Canchis by a short tunnel and a silt sluice would be constructed on the right bank of this river. The flood water and the silt removed by the sluice would be conducted through a 800 meter long diversion tunnel, with a capacity of 200 cu.meters/sec, and discharged into the Santa Eulalia below the dam. The total flood discharge capacity of 480 cu. meters/sec. provided by the diversion tunnel, the spillway and the bottom dis- charge would be about 3.5 times the highest flood on record. 43. From the reservoir the water would be conducted through a 13 kilo- meter long concrete lined pressure tunnel with a capacity of 24 cu. meters/ sec. A valve chamber and a surge tank would be constructed at the - 7 - lower end of the tunnel. The penstock connecting the pressure tunnel with the underground powerhouse would consist of a 600 meter long steel pipe mounted above ground in the upper section and a 1400 meter long steel lined pressure shaft in the lower section. 44. The powerhouse cavern would have a semi circular section and would be lined with concrete. The cavern would provide space for four generating units. At present two units would be installed, each consisting of 60 kM generator and a Pelton type turbine which would operate under a net head of 1200 meters. Two transformer banks, each consisting of three single phase units would also be installed in the powerhouse. 45. The water would be discharged through a 1 kilometer long tailrace tunnel into the Santa Eulalia river above the intake for the existing Callahuanca plant. A by-pass canal would provide a direct connection between the tailrace and the Callahuanca intake tunnel. An access tunnel to the powerhouse would be constructed parallel to the tailrace tunnel. 46. The outdoor switchyard would be located on the left river bank. It would be connected to the Santa Rosa substation in Lima by a 65 kilometer long 220 kv double circuit transmission line. A 50 kv transmission line would be constructed to connect the Huinco and the Callahuanca plants. An extension would be made to the Santa Rosa substation including the installa- tion of two transformer banks, each consisting of three single phase 220/60 kv units. (A summary of technical data is given in Annex 5). Design and Tnineering 47. The design of the Iarcapomacocha diversion has been prepared by the Company's own civil engineering staff, a small group of experienced and well qualified engineers. This group also carried out the preliminary studies and prepared the initial plans for the Euinco plant. Because of the size of this project, the Company retained, in 1957, the services of the Swiss con- sulting firm hotor Columbus to review the plans and prepare the detailed design. The present general design of the project was developed after an extensive study of possible alternatives. 48. A geological survey, drillings and excavation of test pits have been carried out and show that the rock conditions in general are favorable. 49. Only preliminary plans have been made by the consultant for the concrete arch dam at Eheque because the construction is not scheduled to be started before the middle of 1961. Additional drillings and exploratory tunnels are being made on the dam site to obtain the necessary data for the detailed design of the structure. The Company and its consultants have agreed to submit the final plans to the Bank before construction work is started. There is no reason to expect any difficulties considering the consultant firmts experience in the design and execution of dams of this type, the size of the dam and the favorable rock conditions established by the preliminary investi- gations. - 8 - Construction 50. The Company's chief civil engineer would be responsible for the execution of the works. For the detailed supervision of the construction work, he would be assisted by qualified personnel made available by the consultants. 51. The civil construction work would be carried out by Peruvian contractors under force-account contracts. All construction equipment and materials required for the project would be purchased by Lima Light. This arrangement is dictated by the need for a construction force able to work at the high elevation at which the project is located. Under the prevailing conditions and based on Lima Light's experience from the construction of its existing hydro plants, the arrangements are the most suitable for the efficient execution of the work at the lowest cost. Bids on international basis would be invited on all major pieces of electrical and mechanical equipment with the exception of two main generator units. An order for these has already been placed with a Swiss supplier. In addition to having obtained a reasonable price, the Company took into consideration that all its generators have been delivered by this supplier which also has established a permanent service organization in Peru. The purchase of the generator would not be financed by the proposed Bank loan. Present Status 52. The work on the tarcapomacocha diversion was started in 1958. At the end of 1959, some 50% of the work had been completed. The proposed loan would finance the foreign exchange cost of the remaining part. 53. Access roads required for the construction of the Huinco plant have been completed. The main civil works and equipment specifications have been prepared, permitting bids to be invited as soon as the financing for the project has been assured. Schedule of Construction 54. The completion of the first stage of the Marcapomacocha diversion is scheduled for the latter part of 1962. The construction of the Huinco plant is estimated to require about 5 years. The completion would mainly depend on the time required for the excavation of the powerhouse cavern, pressure shaft and pressure tunnel. It would be reasonable to expect the two generating units to come into operation respectively in Pugust and December 1964. (A detailed schedule of construction is given in Annex 6). -9- Cost Estimate 55. The estimated costs of the project are: (for details see Annex 7) Foreign Exchange Local Currency Total Million Dollars lillion Soles Mill. 1rcapomacocha Diversion Civil Works 1.98 119.74 6.25 Huinco Plant (120 N) Civil Works 10.39 350.32 22.90 Equipment 4.85 13.40 5.33 Transmission Line and Substation 2 19.70 3.58 Subtotal 20.10 503.16 38.06 Engineering 1.90 6.86 2.15 Contingencies 1.92 65.00 4.24 Interest during Construction 5.00 5.00 Total Costs 28..2 .5252 Expenditures before December 31, 1959 1.20 95.64 4.24 56. The proposed loan of $24 million would cover 83% of the foreign exchange costs and 49% of the total costs of the project. The loan would include $2.5million to cover a part of interest charges during the construc- tion period. 57. The estimated costs of the civil works are based on wages and prices in effect at the end of 1959. Equipment costs are based on quotations obtained from qualified manufacturers and include allowances for freight, insurance and erection charges. Reasonable contingency allowances of 10% on foreign exchange costs and 15% on local currency costs have been added toihe cost estimates. 58. The capital cost of the Huinco plant per installed kw for the first stage with an installation of 120 MW including transmission would amount to $380. The additional cost of expanding the plant to its full capacity of 240 INW is estimated at $6.8 million. Including this cost and a reasonable share of the cost of the varcapomacocha diversion, which also will benefit the existing plants downstream of Huinco, the unit capital cost would be reduced to $220/kw. This is a low cost for a plant designed to provide firm peaking power to the system. 59. The cost of power to be produced by the Huinco plant and delivered at the main substation in Lima would amount to Soles 0.22/kwh (8 mills/kwh) based on an installation of 120 VW and an annual production of 460 million kwh. With the increase in capacity to 240 Md and an annual production of 750 million kwh the cost would be reduced to Soles 0.17 (6 mills/kwh). These - 10 - cost calculations are based on operation, maintenance and overhead costs of Lima Light's existing hydro plants, straight line depreciation allowance of 3% and financial charges according to the contemplated financing plan. VII. ECONOMIC ASPECTS 60. The construction of the Huinco plant forms a logical next step in the development of the hydro resources of the Santa Eulalia river. It would provide at a reasonable cost the additional power required to meet the in- crease in demand in the power system operated by Lima Light. 61. The alternative to the Huinco plant would be a modern thermal plant of equivalent capacity which could be constructed at a site located on the coast north of Callao. Since the Huinco plant would be expanded to its full capacity of 240 MW within a relative short period after the initial two units are put in operation, an alternative thermal plant would also have to be planned with this capacity. This thermal plant could be constructed at a lower capital cost than the Huinco plant, but the difference would be more than offset by the inherently higher operating costs for the thermal plant. The present price paid by Lima Light for fuel oil is Soles 700/ton ($0.60/ million BTU). Assuming a more realistic oil price of $0.hO/million BTU, to take into account the size of the alternative thermal plant and its location close to a port, the unit operating cost (operation, maintenance, depreciation and fuel), excluding financial charges, would exceed the 6 mills/kwh estimated for the production cost of the Huinco plant including financial charges. In these circumstances it was not found necessary o 7me a detailed economic comparison. 62. The construction of the Marcapomacocha diversion scheme would at a reasonable cost provide additional water in the Santa Eulalia river during the dry season and make possible a higher power production in the Huinco plant and existing plants downstream. In addition it would help to meet the growing need for drinking water in Lima. After 1969, when the second stage of the diversion is scheduled for completion, water would also be available for irrigation of an area of about 5000 hectares south of Lima. VIII. FINANCIAL ASPECTS Electric Power Legislation 63. The supply of electric power in Peru is regulated by the Electric Industry Law of July 1955. The law's provisions regarding power rates and financial policies are sound, in accordance with its stated purpose to stimu- late private investment in the industry. (A summary of the main provisions is given in Annex 8). 64. Power rates are established by the National Tariff Commission, which consists of seven members appointed by the President according to rules design- ed to ensure the competence of the members and a reasonable degree of indepen- dence of the Commission. Rate revisions and revaluations of assets are made every three years or, at shorter intervals, at the request of either the Minis- ter of Development and Public Works or the Concessionaire, if existing rates generate more or less than the permitted return. - 11 - 65. Installations are revalued by appraisal on the basis of replacement costs. Corresponding adjustments are made in the Concessionairets accounts for depreciation reserves, foreign currency obligations and equity. 66. Costs which can be charged to operations include all operating expenses, purchased power, straight line depreciation at rates established by the National Tariff Commission (with a maximum of 5% annually), interest, taxes, and exchange losses on amortization of foreign debt, if any. The per- mitted return is 11% on common share capital and reserves invested in the business. This return consists of an M2-o dividend to be distributed to the shareholders, and of a 3.% "commercial profit". On the preferred share capital, which the Company intends to raise in connection with the financing of the Huinco project and which would be denominated in U.S. dollars, the Tariff Commission has approved a dividend of 8% and a "commercial profit" of 19%. Dividends and interest are tax exempt. The commercial profit is subject only to taxes in existence when the law became effective. 67. The present rates of Lime Light are satisfactory. In 1959 they resulted in an average revenue of Soles 0.47/kwh (U.S. mills 16.8/kwh). (Details of present rates and typical monthly bills are given in Annex 9). Present Financial Position 68. The financial statements of Lima Light are audited by Price Waterhouse and Company. 69. Condensed balance sheets for the years ended December 31, 1955 through 1959 are shown in Annex 10. As of December 31, 1959, fixed assets, valued at replacement cost, totaled Soles 1,254 million ($44.8 million). Deducting the depreciation reserve of Soles 503 million ($18.0 million), net fixed assets were Soles 751 million ($26.8 million). 1fter the Electric Industry Law became effective, assets in operation and the corresponding reserve for depreciation have been revalued twice, in 1955-56 by almost 100% and in 1959 by about 27%. Allowances for depreciation in each of the past three years, were made at a conservative rate of about 4%. 70. The capitalization at the end of 1959, resulted in a debt/equity ratio of 39/61,as shown below (in millions): US $ % Soles equiv. of total Share Capital: 18,843,750 Shares, 376.9 13.5 45.0 Soles 20 par Provisional Certificates for 90.0 3.2 10.7 Capital Increase Retained earnings (net of dividends 42.6 1.5 5 payable) Total Equity 509.5 18.2 60.7 continued -12 - us $ % Soles eguig of total Long Term Debt 15 year - $US Sinking Fund Debentures Series A 7% 1972 162.8 5.8 19.3 Series B 7% 1973 166. 6.0 30. Total Long Term Debt Outstanding 329.6 11.8 39.3 Total Capitalization 839.1 30.0 100 The provisional certificates were issued in 1956 for the amount of the in- crease in equity reflecting the initial revaluation of assets. They are being converted into ordinary shares at the rate of Soles 22.5 million annu- ally over the eight year period 1956-63. 71. The debt, entirely in foreign exchange, was issued under an indenture dated July 1, 1957 (Series A) and a supplemental indenture dated November 1, 1958 (Series B). A summary of the main provisions is given in Annex 11. Most of the issues was placed in Switzerland and largely with the group of holding companies which controls Lima Light. Both issues are secured by a first floating charge on all property, present and future. The Bank would obtain the same security for the proposed loan. 72. The issue of additional debentures is limited, under the indenture, by earnings and assets tests which require a) that actual net income for a recent 12 month period be at least 150% of annual interest charges on existing and proposed debentures, and b) that net tangible assets at the time of the proposed issue be not less than 150% of debentures and other funded debt outstanding and proposed. These tests provide an effec- tive safeguard against excessive indebtedness and an incentive to maintain adequate earnings. 73. As will be seen in paras. 91 and 92 below, forecasts indicate that, on the basis of the proposed financing plan, -hich provides for additional equity, Lima Light could borrow over the next five years a total of $32.5 mil- lion including the proposed Bank loan, and could meet the above tests. Dis- bursements procedures in connection with the proposed Bank loan, provide that Lima Light shall deliver debentures meeting these tests each time a disburse- ment is made. 74. In order to obtain a portion of the funds to construct the Moyopampa hydro plant, the entire output of which is sold to and distributed by Lima Light, Hidrandina issued $10 million 20 year sinking fund 7% bonds in 1951. Of these, $7.3 million were outstanding as of December 31, 1959. The power contract between the two companies provides that Lima Light will purchase all power generated by Hidrandina at a cost representing Hidrandina's total operating expenses, including depreciation, interest, dividends and net profits as specified by the Electric Industry Law. As part of the payments under this power purchase agreement, Lima Light assigned to the trustee - 13 - for the bonds the revenues from certain of its power sales contracts. Therefore, from a legal standpoint, this assignment of revenues constitutes a prior charge on Lim Light's revenues for debt service on the bonds. However, amounts so paid to the trustee are deducted from payments due from Lima Light to Hidrandina for supply of nower. Since Lima Light will continue to need and purchase the power produced by Hidrandira, payments to the trus- tee are in effect payments for power. Furthermore, the debentures to be obtained by the Bank (and consequently the proposed Bank loan) will be secured on the same basis as the publicly issued debentures, which recognize the ex- istence of the technical priority in favor of the Hidrandina bonds. 75. Over the three year period through 1959, Lima Light's equity rose from Soles 385 million ($13.7 million) to Zoles 509.5 million ($18.2 million). Of this increase Soles 76.2 million reflected the revaluation of assets carried out in 1959 and Soles 15 million the conversion of old debt into share capital. The balance of about Soles 33.3 million was contributed from retained earnings. Earnings Record 76. The earnings record of Lima Light is good. Earnings statements for recent years are summarized in Annex 12. Net income before interest increased from Soles 33.5 million ($1.2 million) in 1956 to Soles 67.6 million ($2.4 million) in 1959, producing a return on total net fixed assets of 8 to 9% annually. The return in 1959 was 9.1%. 77. Lima Light has a long record of dividend payments. Up to 1956, cash dividends of 7%o on the par value were paid for several years. Starting in 1956 dividends were paid net of taxes at the rate of S-%, in accordance with the provisions of the Electric Industry Law. In addition stock is distributed from time to time to incorporate into share capital the re- valuations of assets and retained earnings. Financing Plan 78. A forecast of sources and applications of funds for the seven years through 1966 is given in Annex 13. During the five year period ending 1964, when the Huinco plant would start operation, plant additions including interest charged to construction (as shown in Annex 12), and provision for increase in working capital would amount to about $54 million equivalent (Soles 1,513.5 million). This program would more than double the fixed assets of the Company, presently valued at about $44.8 million equivalent (Soles 1,254 million). 79. In working out a financing plan the following main considerations had to be taken into account: a) a substantial contribution from Lima Light's own resources would be necessary in order to meet the tests of the existing indenture (see para 72); in view of the size of the projected expansion, these would have to obtained both from new share capital and retained intemal earnings. - 14 - b) new stock and debt issues would have to be apportioned over the construction period of the project and would have to take into account both the Company's requirements and a realistic assessment of its ability to raise the proposed amounts in the capital market. 80. Under the proposed plan, Lima Light would finance about 40% of its requirements from its own resources and sales of new share capital, and about 60% from borrowings, as shown below (in millions): 1960 1961 j6 1 l96 Total U16 f Soles 24i. total Net cash generated 60.8 57.8 60.3 57.8 72.0 308.7 11.0 20.4 (including Soles 17.7 million available as of December 31, 1959) Common Stock 33.0 - - 65.0 - 98.0 3.5 6.5 Preferred Stock 168.0 - - - - 168.0 6.0 11.1 Advances from 22.5 - - 1.0 12.1 35.6 1.3 2.4 Hidra,. na Sub-total 284.3 57.8 60.3 123.8 84.1 610.3 21.8 40.4 Proposed IBRD Loan 53.2 254.0 145.8 116.0 103.0 672.0 24.0 44.4 Debenture Issues 84.0 84.0 - - 42.0 210.0 7.5 13.9 Suppliers' Credit 21.2 - - - - 21.2 .7 1.3 Sub-total 158.4 338.0 145.8 116.0 145.0 903.2 32.2 59.6 Total 442.7 395.8 206.1 239.8 229.1 1513.5 54.0 100.0 Additions to Plant 343.3 366.1 362.4 242.7 199.0 1513.5 54.0 and Working Capital 81. New share capital would be issued for Soles 266 million ($9.5 mil- lion), or 17.6% of total requirements, in three tranches. Two of these would be in the form of common stock of Soles 33 million ($1.3 million) in 1960 and Soles 65 million ($2.2 million) in 1963. The third tranche would be in the form of preferred stock; the total amount of Soles 168 million ($6 million) would be issued in 1960. The management of Lima Light is reasonably assured that it can sell the new common stock in Peru, mainly to its own consumers. The preferred stock, to be denominated in U.S. dollars, would largely be placed with the present shareholders and particularly the Swiss holding group. The Company has obtained the necessary permission by the Peruvian authorities to issue preferred stock up to an amount of $10 million and an assurance that no currency restrictions would be imposed on the payment of dividends. The - 15 - subscription of the initial stock issues (Soles 33 million of common and Soles 168 million equivalent of preferred) would be made before the proposed Bank loan is made effective. 82. Cash earnings (including depreciation), after deduction of interest chargeable to operations, taxes, amortization of existing and proposed debt and cash dividends.are expected to contribute about Soles 309 million ($11.0 million), or 20.4% of total requirements. 83. The long term borrowings contemplated are: a) a proposed Bank loan of $24 million (Soles 672 million). For the purpose of financial forecasts an interest rate of 6% and a term of 25 years,with first repayment in 1965, have been assumed. b) public issues of two new series of debentures, one of $6 million (Soles 168 million) to be sold in 1960 and 1961 and one of $1.5 million (Soles 42 million) to be sold in 1964. In the financial forecasts an interest rate of 7% and a term of 15 years, including a grace period of two years, have been assumed. As in the case of the preferred stock, Lima Light would rely on Swiss inves- tors to subscribe for the proposed issues, but plans also to sell a portion in Peru. Of the first of the two new series of debentures, $3 million would be sold before the proposed Bank loan is made effective. Lima Light plans to sell the remaining $3 million of this series during 1961. It would, however, before the proposed Bank loan is made effective, obtain a firm undertaking from its largest shareholder, Cie. Sud-Americaine dtElectricite (Sudelectra) of Zurich that this holding company would purchase by the end of 1961 an aggregate principal of $3 million of the debentures if they are not otherwise sold. The financial resources of Sudelectra are sufficient to fulfill this obligation. 84. Hidrandina would provide 2.4% of the capital requirements including: a) Soles 22.5 million ($0.8 million) representing chiefly repayment of advances made by Lima Light to Hidrandina; b) long term advances of about Soles 13 million ($0.5 million) representing Hidrandinals estimated cash generation in excess of its requirements. Before the proposed Bank loan is made effective, a contract would be signed by the two companies obligating Hidrandina to make these funds available to Lima Light. 85. Finally, Lina Light has obtained a 7 year suppliers credit at an interest rate of 626 of about $1 million equivalent (Soles 28 million) in connection with the purchase of generator units for the Huinco plant. After - 16 - allowing for an initial payment, Soles 21.2 million would be available. 86. It is to be noted that under the proposed schedule of financing, Lima Light must obtain temporarily in the two years 1962 and 1963 an addi- tional maximum amount of Soles 30.1 million ($1.1 million). Lima Light should not experience any difficulty in obtaining short term bank loans or advances to cover this requirement. 87. The financing plan proposed by Lima Light is realistic and forms a reasonable basis for an estimate of Lima Light's financial position over the next five years. Of the total amount of about $17 million to be raised in the capital market in the form of new stock and debentures, $13.2 million would be firmly assured before the proposed Bank loan is made effective. This leaves a balance of $3.8 million to be raised in 1963 and 1964. Taking into consideration the good financial record of Lima Light and the size of the amount involved, it is reasonable to expect that it can raise the funds when required. Estimated Future Earnings 88. Forecast income statements for the seven years ending 1966 are shown in Annex 12. Net income before interest is estimated to increase from Soles 67.6 million ($2.4 million) in 1959 to Soles 140.4 million ($5.O million) in 1964, the scheduled year of completion of the Huinco plant, and to Eoles 171.6 million ($6.1 million) in 1966. This forecast is based on conservative assumptions of increase in power sales. In addi- tion a small gradual increase of the average revenue per kwh would be neces- sary in order to obtain the permitted return. This increase, which would amount to 4% in 1964 compared with 1959, could be accomplished by small adjustments to the existing rate structure. If power sales were to increase at a slightly higher rate than assumed, these adjustments would not be required. 89. Over the seven year period, the return on net fixed assets in operation would average about 10.5% and the return on total net fixed assets, including work in progress, would average 7.7%, ranging between 6.4% and 8.8%. Interest Coverage and Earnings Test 90. Net income before interest would cover interest charges, in the corresponding year, at least 2.0 times except in 1962 and 1963, when the coverage would be 1.8 times. 91. It is estimated that on the basis of the proposed financing plan and earnings forecasts described in this report, the 150% earnings test required in the indenture would be met throughout the period. This is shown by the table below, which indicates that the annual interest charges on all existing and proposed new debt in each of the years 1960 to 1964, would be covered at least 150% by the previous years net income before interest. - 17 - 959 1960 1961 1262 1 1964 195 (in millions of oles) Net income before interest 67.5 87.0 101.5 108.8 116.5 140.4 Interest charges 27.1 48.5 .32 .64- 652. .212 Ratio: % 249 179 171 170 168 196 Net Tangible Assets Test and Debt/Equity Ratio 92. As an approximation, the following table indicates that, through the period, the 150% net tangible assets test would be met with a margin: 1260 1961 1962 1963 194_ Net fixed assets 1,045,3 12358.9 1,662.2 1,833.8 1,933.0 1,931.8 Net other assets 3_Q 4 170.1 1 _ 67.3 82.0 Total 1,185.7 1,529.0 1,676.0 1,849.7 2,000.3 2,013.8 Long Term Debt 479.4 800.0 919.4 1,003.4 1,114.4 1,088.4 Ratio: % 247 191 182 184 179 185 93. As a result of the sizeable expansion program proposed, the debt/ equity ratio of Lima Light would change from 39/61 at the end of 1959 to a maximum of 56/44 in 1964. It would gradually improve thereafter to reach 52/48 in 1966, as shown in Annex 10. IX. CONCLUSIONS 94. The project to be carried out by Lima Light and proposed for Bank financing, is technically sound. The estimated cost of the project is reasonable. 95. The project is necessary to provide the capacity required to meet the conservatively estimated increase in power demand in the area served. The Huinco plant would produce power at a lower cost than could be produced by any possible alternative plant. 96. The management of Lima Light is good. Its staff with the assis- tance of the consultants already retained, is well qualified to execute the project. 97. The present financial position of Lima Light is sound. Its financing plan for the substantial expansion to be carried out over the next five years, is realistic. The main part of the funds required in addition to the proposed Bank loan would be firmly assured.before the loan is made effective. It is reasonable to expect that the relatively small balance, which would be needed towards the end of the period, could be raised by the Company. Financial forecasts show that Lima Light's earnings, with power rates at their present level, would be satisfactory and that the sound financial position would be maintained in future years. 98. The project is suitable as the basis for a Bank loan of $24 million equivalent with a proposed term of 25 years including a grace period of 5 years. LIMA LIGHT AND POMSR COMPANY Records and Forecasts of operations RECORDS 124 125. 1956 1957 1958 159 Total Sales (mill. Kwh) 401.1 432.7 478.4 526.3 564.0 619.0 Losses including own cona2mption 67.7 77.3 11 822. 90.0 101.0 Total generation 468.8 510.0 559.5 608.6 654.0 720.0 Hydro 435.9 476.0 552.0 580.0 633.0 706.0 Thermal 34 30.0 .55 286 ZL,0 14.0 Peak Loan (MW) 104.2 113.2 120.1 130.2 140.0 155.0 Load factor () 50.5 51.5 53.0 53.3 53.0 53.0 FOREASTS 1960 1961 1962 1963 1964 196 1966 iZ 196 6 Total Sales (mill. Kwh) 680 734 792 855 923 997 1,077 1,163 1,256 1,356 Losses including own consumption 10 121 130 143 152 163 181 197 24 234 Total generation 790 855 922 998 1,075 1,160 1,258 1,360 1,470 1,590 Callahuanca hydro 340 366 395 1l 350 320 336 345 363 380 Moyopampa hydro 350 370 392 396 350 320 336 345 363 380 Huampani hydro 90 100 100 136 125 110 120 130 140 150 Huinco hydro 210 410 466 540 604 680 Santa Rosa thermal 10 19 35 55 40 - - - - - Peak Load (MW) 168 181 195 211 228 246 266 287 310 335 Load factor (%) 53.5 54.0 54.0 54.0 54.0 54.0 54.0 54.0 54.0 54.0 Note: The hydro generation has been estimated on the basis of average stream flow and a reasonable program of operation of individual units. AINEX 2 LIMA LIGHT AND POWER CCMPANY Records and Forecasts of Power Sales (millions of Kwh) RECORDS Percentage Share 4195 1 1959 Residenti al 137.1 153.5 190.6 204.9 228.7 249.1 40 Comercial 34.2 37.0 40.1 43.5 48.3 55.6 9 Industrial 179.0 193.0 196.7 223.2 229.4 258.5 42 Traction 27.2 24.2 24.2 26.6 25.2 21.6 3.5 Public Lighting 23.6 25.0 26.8 28.1 31.3 33.4 5.0 Bulk Sales 1.1 1.6 0.5 Total Sales 401.1 432.7 478.4 526.3 564.0 619.0 100 Percentage increase over previous year (%) 13.9 7.9 10.6 10.0 7.2 9.8 FOREGAST 1960 1961 1962 1963 1964 1965 196L 1967 196 Residential 270 292 311 330 352 375 398 425 452 4180 Comercial 61 65 70 75 80 86 92 98 105 112 Industrial 289 315 346 381 419 461 507 556 610 671 Traction 22 22 22 22 22 22 22 22 22 22 Public Lighting 36 38 41 44 47 50 54 58 62 66 Bulk Sales 2 2 2 3 3 3 4 4 5 5 Total Sales 680 734 792 855 923 997 1,077 1,163 1,256 1,356 Percentage increase over previous year (%) 10 8 8 8 8 8 8 8 8 8 LDA LIGHT AND POWER COMPANY Construction Program Total 1960 1961 1262 1963 14 1965 1966 1267 1968 1969 1960-69 (million Sales) PAlRT I Marcapomacocha Diversion Stage 1 92.8 65.0 30.1 95.1 Huinco hydro plant Stage 1 (120 MW) 26.0 173.9 290.9 267.4 162.6 118.4 15.6 1,028. Santa Rosa thermal plant gas turbo generator units No. 2 and No. 3 (20MW) 39.5 14.0 53.5 Transmission and distritution 55.0 14.0 42.8 30.8 32.2 174.8 Sub-total 333.4 335.0 324.2 193.4 15096 15.6 11352.2 PART II Marcapomacocha Diversion 25.0 50.0 25.0 20.0 120.0 Stage 2 Huinco hydro plant Stage 2 (120MW) 45.2 76.2 44.1 22.0 4.2 191.7 Transmission and distribution 34.0 36.0 38.0 40.0 42.0 190.7 Sub-total 79.2 137.2 132.1 87.0 66.2 501.7 Grand total 333.4 335.0 324.2 193,4 150.6 94.8 137.2 132.1 87.0 66.2 105S3.9 ANNEX 4 PERU - LIMA LIGHT AND POWER COMPANY INSTALLED CAPACITY AND SYSTEM PEAK LOAD (MEGA WATTS) 600 0 500 0 4D44 MW INSTALLED CAPACITY /00- 3, 00 n324 MW 300 2264 MW r- 24 200 M0apmp33 w 64M 0 o 0 Yaaot 0 w 20 .. ,. MJP KLA 3001 Callahuanco 36 MW 184MW Moyapompo 63 mw Yonccoto 10 MWPEKLD Santo Rosa 24 MW 133 MW 100 '55 '56 '57 '58 '59 '60 '61 '62 '63 '64 '65 '66 '67 '68 '69 S ACTUAL »_ C FOREGAST IBRD- Economic Staff 1605 A NTNFX 5 Page 1 Lima Light and Power Company Technical Details of Project Marcapomacocha Diverstion 1st Stage Reservoirs. Lake Huarmicocha on Rio Cuevas, concrete gravity dam, maximum level 4624 meters, minimum level 4615 meters, capacity 2 million cu. meters. Lake Sangrar on Rio Sangrar, concrete gravity dam, maximum level 460 meters, minimum level 4b38 meters, capacity 8 million cu. meters. Diversion Structures. On Ric Antacasha at elevation 4361 meters. On Rio Cuevas at elevation [357 meters. On Rio Sangrar at elevation 4351 meters. Diversion Canal. Total length between intake on Rio Antacasha and tunnel inlet 2.6. kilometers, capacity 6 cu. meters/sec. Main Tunnel. Length 10 kilometers, maximum capacity 10 cu. meters/sec, elevation at inlet 4330 meters, elevation midway 4335 meters, elevation at outlet h322 meters. Huinco Hydro Plant Structures at Sheque. a. Concrete diversion weir on Rio Acobamba. b. Tunnel, about 600 meters long, diverting the water of Rio Acobamba into Rio Canchis. c. Intake structure on Rio Canchis with gates and trashracks. d. Silt trap on right bank of river. e. Flood water by-pass canal and tunnel on left bank of river. Length of tunnel about 800 meters and capacity 200 cu. meters/sec. A"NNE2 5 Page 2 Structures at Sheque contd. f. Single curvature concrete arch dam across Rio Santa Eulalia. Height above riverbed about 40 meters. Crestlength about 110 meters. Free overflow spillway with capacity of 250 cu. meters/sec. Bottom discharge tunnel with capacity of 30 cu.meters/sec. Crest level 3154 meters a.s.l. Maximum reservoir level 3150 meters a.s.l. Minimum reservoir level 3127 meters a.s.l. Capacity of reservoir 800,000 cu. meters. Pressure Tunnel. Intake on left bank of reservoir. Total length 13 kilometers with five intermediate adits. Concrete lined over total length with diameter of 3 meters. Maximum capacity 24 cu. meters/sec. Surge Tank and Valve Chamber The surge tank consists of: Two chambers and a connecting shaft, all to be excavated in rock. Valve chamber at termination of pressure tunnel and equipped with a safety valve. Penstock. Upper part about 600 meters long steel pipe, 2.50 meters inside diameter, mounted above ground. Lower part, about]400 meters long, steel lined shaft, diameter decreasing to 2.20 meters at lower end. Slope of pen- stock 80%. Powerhouse. Underground cavern, concrete lined, 111.5 meters long, 32 meters wide and 21 meters high and with a semi-circular section. Access tunnel, semi-circular, 7.30 meters wide and 5.30 meters high. Tailrace tunnel, horseshoe-section 5.75 meters wide and 6 meters high with maximum capacity h6 cu. meters/sec. Both tunnels 1 kilometer long. By-pass canal about 500 meters long to connect tailrace with existing intake for Callahuanca plant. Equipment. 2 Turbines, horizontal shaft twin wheel Pelton, discharge at full load 5.8 cu. meters/sec. 2 generators, 85 MVA capacity each at 75% power factor, 14 kv generating voltage. Page 3 Equipment (contd.) 2 transformer banks of three single phase units with one spare, 1 kv/220 kv and 90 MVA each bank. Auxiliary equipment, 500 kva diesel group, three 600 kva transformers, two 75 tons travelling crane. Maximum static head, 1273 meters. Average net head, 1200 meters. Transmission Line. 65 kilometers long, double circuit, 220 kv, steel towers, "Aldrey" conductors, steel ground wire. Santa Rosa Step-down Substation. 6 single phase 220 kv/60 kv transformers forming two banks of 90 MVA capacity. PERU Annex 6 HUINCO HYDRO PLANT CONSTRUCTION SCHEDULE LIMA LIGHT and POWER COMPANY 1959 1 1960 1961 1962 1963 1964 1965 911CLl( 2345 6789 i1II2 3456 789ou 12 3 i557setoi 234(5 6789 I (12345678910\ -223 PRELIMINARY WORKS Access road to Sheque intake and tunnel shafts II Access road to underground powerhouse Electrical power supply to the work sites SHEQUE INTAKE and RESERVOIR Equipment installation for aggregate preparation Diversion of Sacea River Gate inlet and diversion of Canchis River ........ Grit chanber, sand trap and tailrace Ili Dam PRESSURE TUNNEL and SURGE TANK Equipment installation for aggregate preparation Excavation Concrete lining Grouting PENSTOCK (bare and in rock sector) Valve chamber II1 Penstock: supports and anchor blocks Penstock erection and protective coating Nl Penstock in rock sector: excavation Penstock: steel lining 1 R Penstock: grouting and protective coating UNDERGROUND POWERHOUSE Pilot shaft and trial borings mom Excavation I I Concrete lining a lE Machinery foundations Finishing and installation works Mechanical and elecrical erection TAILWATER TUNNEL ACCESS TUNNEL TO UNDERGROUND POWERHOUSE Excavation Concrete lining Grouting OUTDOOR SWITCH YARD TRANSMISSION LINE a TRIALS -- Pressure tests Operational trial period First Unit official operation Second Unit official operation APRIL 1960 IB RD-676 Page 1 LIMA LIGHT AND POWER COviPANY MARCAPOMACOCHA DIViRSION STAGE I Cost Estimate Foreign Local Exchange Currency Total mill US$ mill. Soles mill. US Access road 0.04 14.95 0.57 Construction camp and equipment 0.52 3.48 0.64 Diversion tunnel 1.40 70.65 3.92 Diversion dams 0.02 10.50 0.40 Canals - 8.80 0.31 Engineering and overhead 11.36 0.41 Contingencies 0.12 11-40 053 Total 2.10 131.14 6.78 Expenditures before Dec. 31, 1959 0.90 Balance 1.20 61.50 3.40 ANNEX 7 - 2 - Pago 2 HUINCO HYDROFLFCTRIC PLANT STAGE I Cost Fstimate Foreign Local Exchange Currency Total Mill.US$ Mlill. Soles vdill. Us$ Civil Works Land and preliminary works 0.19 30.80 1.29 Diversion structures and silt trap 0.34 31.90 1.48 Sheque dam 0.78 43.30 2.33 Pressure tunnel 3.58 132.59 8.30 Surge tank and valve house 0.28 4.44 0.A4 Penstock, pipe section 0.77 4.58 0.93 Penstock, shaft section 2.89 35.40 4.16 Powerhouse 0.96 51.50 2.80 Access and tailrace tunnels 0.59 30.80 1.69 Cwitchyard 0.01 6.65 0.25 Pernanent housing - 2.44 0.09 iiechanical Equipment 1.92 5.35 2.11 Electrical Equipment 2.93 8.05 3.22 Transmission line 1.38 12.40 1.82 Receiving substation 1.50 .2.3 1.76 Subtotal 18.12 407.50 32.67 Consultant services 1.90 6.86 2.15 Contingencies 1.80 53.60 3.71 Interest during construction 5.00 5.00 Subtotal 26.82 467.96 43.53 Credit for rest value of construction equipment .24.08 0.86 Total Cost 26.82 443.88 42.67 Foreign exchange cost financed by Company 1.2 1.52 Local currency expenditures before December 31, 1959 26.0 0.93 Balance 25.17.88 1.22 ANNEX 8 Page 1 LIM1A LIGHT AND POWER COMPANY Main Provisions of Electrical Industry Law National Tariff Commission Tariffs for sale of electricity are established by the National Tariff Commission which consists of seven members. The Chairman is appoin- ted by the President of Peru for a term of four years. The other six members are appointed for two year terms and represent respectively the Department of Industries and Electricity (Ninistry of Development and Public Works), the Department of Taxes, the National School of Engineering, the National Society of Industries, the Electrotechnical Association of Peru and the Association of Peruvian Electrical Companies. The terms of appointment may be extended. The members must be professionally qualified and, with the exception of the member representing the Association of Electrical Companies, must not have a direct or indirect financial interest in electric public utility enterprises. Regular tariff revisions are carried out every three years. Additional revisions can be made at the request of either the Department of Industries and Electricity or the Concessionaire. The Commission shall reach a decision within a period of 60 days. This may be extended to 90 days in complex cases. Tariffs established by the Commission become effec- tive after a period of 15 days unless an application for reconsideration has been made either by the Department of Industries and Electricity or the Concessionaire concerned. The Commission must act on any such application within 30 days. Revaluation of Assets The assets of a Concessionaire are defined to include all fixed and movable property necessary for the operation of the concession, intangible assets like promotion, surveys, options, contracts and other expenses related to the organization of the concession, interest and other financial charges during construction and working capital in an amount not exceeding three months revenues from sale of power. At the time of each tariff revision the assets are revalued on the basis of an appraisal made by the Commission to determine the replacement value of fixed and movable property and intangible assets. Experts nominated by the Ministry of Public 1,Torks and the Concessionaire shall present to the Commission independent appraisals. The adjustments to be made in the Concessionaire's accounts to reflect the new value of the assets shall be made in the following order: a. Depreciation reserves are adjusted in the same proportion as the assets are revalued. - 2 - ANNFX 8 Page 2 b. Foreign currency obligations expressed in Peruvian currency are adjusted in the same proportion as the assets are revalued. The difference between the amount obtained and the obligation converted at the current rate of exchange shall be reflected in an "Exchange Equalization Account". c. The balance remaining is used to adjust the Concessionairets equity capital. Determination of Tariffs The tariffs are established at a level sufficient to produce revenues to cover all operating costs and a return of 111% on the capital invested by the Concessionaire. The return consists of an annual dividend of 8-% and a "commercial profit"of 3%. 2;/ Operating costs include salaries, wages, social benefits, adminis- tration, cost of fuel and materials used for maintenance, cost of purchased power, interest, foreign exchange losses, depreciation allowance, contri- bution to Extension Fund and all taxes. The depreciation allowance shall be based on the useful life of the individual pieces of property. Total depreciation shall not exceed 5% of the total value of the property. Tax and Other Privileges Public utility companies enjoy the following privileges: a. Interest on bonds and the fixed dividend of S-% are exempt from existing and future taxes. b. Dividends paid out of the 3% commercial profit are subject only to the income and unemployment taxes which were in effect in 1955. c. Equipment and materials to be used for public electric services shall be exempt from customs duties unless the articles are produced in sufficient quantity and of quality in Peru. d. If free exchange is not available to meet foreign currency obligations, the Government shall provide the necessary foreign money at the official exchange rate. / On the preferred share capital a return of 92% has been established, consisting of a 8% dividend and a 1i% "commercial profit". ANNEX 9 LIYA LIGHT AND POWER COMPPNY Typical Nonthly Electricity Bills Class of Consumer Consumption Load Bill Average Rate kwh kw So1e soles/kwh mills/kwh Residential - light 14 - 5.60 0.40 14.3 Residential - light 50 - 38.53 0.77 27.5 Residential - combined 150 - 62.91 0.42 15.0 Combined Commercial 85 Neon 0.14 Light 0.35 90.28 1.07 38.0 Small industrial 1,180 6 437.46 0.37 13.2 Combined industrial 1,455 Light 1.5 Iotors 5 644.12 0.44 15.7 Industrial 14,500 50 3915.00 0.27 9.6 LIMA LI(IM & POMER CCPANY Lima - Peru ACTUAL AND FORECAST BALANCE SHEETS 1955-1966 IN MILLIONS OF SOLES ACTUAL FOREC AST AS AT DECEMBER 31 AS AT DEMWBER 31 13 12 125 122 126 1961 162 12 1964 1965 126 ASSETS Fixed Assetov 422.10 741.53 733.97 B08.95 1,068.66 1,116.8 1,406.1 1,434.1 1,476.9 2,671.9 2,719.7 2,753.7 Leess Reserve for Depreciation./ 167.27 331.l 350.92 377.l 502.78 5149 567.4 626.5 692.6 71.1 867. ..0 Net Fixed Assets in Operation 254.83 410.32 383.05 431.18 563.ft 601.9 838.7 807.6 784.3 1,900.8 1,852.6 1,764.7 Work in Progress 65.03 1L9 . 9.u43.4 520.2 a 19.5 32.2 79.2 182, Total Net Fixed Assets 254.83 410.32 448.08 510.08 750.86 1,045.3 1,358.9 1,662.2 1,833.8 1,933.0 1,931.8 1,947.1 Current and Other AvseteV 69.09 76.76 171.80 227.75 146.83 140.4 170.1 13.8 15.9 67.3 82.0 75.8 Deferred Assets 1.77 - 3.50 37.12 12.49 19.8 15.4 .4 .0 52 5.0 . TOTAL ASSETS 487.Afs08 62.38 910.18 L2Ld jo"~ 1.683.' 1.856.7 2,05.5 2,018.8 2,027.9 LIABILTrwS Equity Ordinary Shares 18.00 202.50 225.00 262.50 376.87 432.4 454.9 486.5 574.0 574.0 585.5 585.5 Preferred Shares- - - - - 168,0 168.0 168.0 168.0 168.0 168.0 168.0 Provisional Certificates for Capital Inc-asel- 157.50 135.00 112.50 90.00 67.5 45.0 22.5 - - - - Contributions from H randina - - - - - - - - 1.0 13.1 24.8 35.5 Reserves and Surplus: 43r 25.03 37. 35.10 42.65 58,2 76.5 70 110.3 136.0 152.1 182.7 Total Equity 223.90 385.03 397.42 410.10 509.52 726.1 744.4 764.0 853.3 891.1 930.4 971.7 Long Tem Debt Mortgage Bonds 36.56 43.97 21.6 6.65 - - - - - - - - Debentures - - 114.96 300.00 329.56 405.0 471.6 448.9 420.4 431.9 427.2 417.4 Proposed IBRD Loan - - - - - 53.2 307.2 453.0 569.0 672.0 654.2 635.3 Suppliers' Credit - - - - - 21.2 21.2 17.5 14, 10.5 7.0 3 Total Long Term Debt 36.56 43.97 136.57 306.65 329.56 479.4 800.0 919.4 1,003.4 1,114.4 1,088.4 1,056.2 Current Liabilities 54.02 36.50 71.93 42.36 61.60 - - - - - - - Deferred Liabilities and Provisions 11.21 .5 17.4 15.84 9.50-- TOTAL LIABILITIES 325.69 487.08 62.8 7749 910.18 !.?5W 1,544.4 1,683.4 1.856. 2.02.9 Rate of Exchange (Soles per US$) 19 19 19 25 27.8 28 28 28 28 28 28 28 Debt/lquity Ratio 14/86 10/90 26/74 43/57 39/61 40/60 52/48 55/45 54/46 56/44 54/46 52/48 I/ The substantial increase of fixed assets in operation and reserve for depreciation in 1956 and 1959 over the previous year reflect mostly revaluations of assets. 3/ Include in 1959: a) Soles 36 million worth of inventories, of which about Soles 17 aillion pertaining to construction. b) Soles 17.0 million worth of advances to Hidrandina, mostly in connection with the construction of the Huampani plant, to be repaid in 1960 by Hidrandina along with Soles 5.5 million renresenting the purchase of the Tanacoto plant to be retired by Lima Light when Huampani is cmmissioned. These figures are still subject to adjustments. After 1959, current and other assets are shown after deductions of current and other liabilities, / These certificates were issued in 1956 for the amount of additional equity which resulted from the first revaluation of assets. They will be converted in ordinary shares over an eighit year period ending in 1963 at the rate of Soles 22.5 million per year. j/ Adjusted to reflect the position after appropriations and payment of cash dividends. ANNEX 11 Page 1 LIA LIGhT AiD POVLR COMPANY Details of Funded Debt: 7% Debentures Series A and B Series A Series B Amount $6,000,000 46,000,000 Date July 1, 1957 November 1, 1958 Maturity July 1, 1972 November 1, 1973 Interest At 7%. Principal and interest payable in US currency at Schroder Trust Co., New York or, at the option of the holder, in such dollars or the equivalent thereof in Swiss francs at pre- vailing appropriate rate of exchange at Privatbank & Verwaltungsgesellschaft, Zurich, Switzerland. Trustee Schroder Trust Co., New York: Privatbank & Verwaltungsgesellschaft, Zurich, bwitzerland, co-trustee. Denominations Coupon, 0100, 6500 and 01,000 Callable As a whole or in part on any interest date on at least 90 days notice, at a premium from 1959 to 1967 including (Series A) and from 1960 to 1968 including (Series B); thereafter at 100. Callable for sinking fund on at least 10 days' notice at 100. Sinking Fund Semi-annually beginning November 30, 1959 (Series A), March 31, 1961 (6eries B), equal to 0355,233 for interest and principal of each series. Security Secured by a first floating charge on all property present and future. Additional Debentures may be issued provided opinions and certificates are supplied that the following tests are met: 1)"The net income of the Company before interest and income taxes for the twelve months ending with any calendar month (not more than four months prior to the date of the application for the authentication and delivery of additional Debentures) specified in such certificate, has been not less than 150l' of the aggregate amount of the annual interest ANNEX 11 Page 2 -2- charges on all Debentures outstanding under this Indenture on the date of such application and the additional Debentures applied for and all other funded indebtedness of the Company;" 2) "The net tangible assets of the Company, com- puted as at the end of the twelve-month period specified in such certificate pur- suant to subdivision (1) above, are at least equal to 150% of the aggregate principal amount of all Debentures outstanding under this Indenture on the date of such application and the additional Debentures applied for and all other funded indebtednEss of the Company." It should be noted that assets and income must be translated into dollars for the purpose of these tests. Dividend Restrictions Company may not pay cash dividends in excess of net in-ome after December 31, 1956. Purpose Refund outstanding Expansion debentures and bonds program Tax Status Free from Peruvian taxes LIMA LIGHT & POWER COKPANY Lima - Peru ACTUAL AND FORECAST INCOME STATM S 1-1966 --- - - -ACT UAL - - - --- - - ----- - -F 0 R E C AS T5 - - -- YEARS ENDED DECEMBER 31 YEARS ENDING DECEMBER 31 195 a_%_ 1957Z 198 95 1960 126_1 3-962 1963 1964 1965 16 Sales (Millions of KWH) 433 478 526 564 619 680 734 792 855 923 997 1,077 Average Revenue per KWH sold (Cent of Soles)!/ 34.66 38.82 42.69 44.75 47.08 48.0 48.5 48.5 49.0 49.0 49.0 49.0 IN MILLIONS OF SOLES OPERATING REVENUES 150.10 185.54 224.57 252.41 291.42 326.4 356,0 384.1 419.0 452.3 488.5 527.7 OPERATING COSTS Operating Experlses 61.31 79.08 97.28 112.38 116.88 122.3 128.9 141.1 156.5 153.8 142.4 154.7 Cost of Purchased Power (Hidrandina S.A.)Z/ 37.16 48.67 49.53 54.63 60.05 71.6 73.8 73.4 72.9 72.6 72.7 72.5 Depreciation 19.00 24.27 29.36 33.98 42.75 43.4 52.5 59.1 66.1 78.5 96.0 121.9 Depreciation o0p8stomers Installation 0.87 3.17 3.5 1.7 1.7 2.0 2.0 2.0 2.0 Extension Fundd/ . 7.50 5.00 1.00 0.6 3.0 3.0 5.0 5.0 5. -0 Total Operating Costs 117.47 152.02 183.67 20686 233. 241.4 259.9 278.3 302.5 311.9 318.1 36.1 OPERATING INCOME 32.63 33.52 40.90 45.55 67.57 85.0 96.1 105.8 116.5 140.4 170.4 171.6 OTHER INCOME - - - - - 2.0 5.4 3.0 - - - NET INCOME BEFORE INTEREST 32.63 33.52 40,90 45.55 67.57 87.0 101.5 108.8 116.5 140.4 170.4 171.6 Interest Payable 4.55 4.59 3.98 11.35 18.95 27.1 48.5 59.3 64.0 69.5 71.7 69.9 Interest Charged to Construction (Credit) - - - (3.88) (4.40) (9.9) (31.1) (38.2) (44.3) (27.1) - - Financial Expenses - - 4.27 2.57 4.40 7.9 8.6 8.0 5.4 3.9 1.6 1.4 Taxes 14.15 5.08 2.30 1.57 2.28 3.0 3.6 3.8 4.4 4.6 4,7 4.9 Total Income Deductions 18.70 9.67 10.55 11.61 21.23 28.1 29.6 32.9 29.5 50.9 78.0 76.c NET PROFIT 13.93 23.85 30.35 33o94 46.34 58.9 71.9 75.9 87.0 89.5 92.2 29429 LESS: Cash Dividends 12.60 17.21 19.12 23.63 32.03 42.0 52.1 54.8 62.2 62.2 63.2 63.2 Retained Surplus 0.63 5.78 10.27 9.19 13.01 15.6 18.3 19.6 23.3 25.7 27.6 30.6 Directors Bonuses 0.70 0.86 0.96 1.12 1.30 1.3 1.5 1.5 1.5 1.6 1.6 1.6 Returm on net fixed assets in operation 12.8 8.2 10.7 10.6 11.9 14.4 12.1 13.4 14.8 7.4 9.2 9.7 Return on net fixed assets, including work in progress 12.8 8.2 9.1 8.9 9.0 8.3 7.5 6.5 6.3 7.3 8.8 8.8 I/rrom 1960 en, this figure shows the average revenue necessary - on the basis of the conservative sales forecast in this report - to meet operating costs, interest and other fixed charges, and the 11j% return on equity permitted by the tariff legislation. The increase represents 2% in 1960 and a maximum of 4% in 1963 above the average revenue for 1959. Lima Light has indicated that such increase in average revenue wculd be secured should sales not progress faster than assumed here. /In accordance with its exclusive purchase contract with Hidrandina, Lima Light pays for power purchased the total of the operating costs, interest and fixed charges and net profit of Hidrandina as determined by the tariff legislation. The substantial increase after 1959 of the cost of purchased power reflects the operation of Hidrandina's Humapani plant commissioned in 1960. /Represent depreciation charges on distribution works financed by customers, owned by the public and supervised by Lima Light. The depreciation cash is used, under control by the Ministry of Industry, for meeting Lima Light costs of supervision, administration and maintenance of the works, and for reinvestment in distribution. LIMA LIGHT & PCVJER COtPANY Lima - Peru FORECAST SOURCES AND APPLICATIONS OF FUNDS 1960 - 1966 IN MILLIONS OF b0LES 196 1961 1962 1963 194 96 11o66 SOURCES OF FUNDS Internal Cash Generation Net income before interest 87.0 101.5 108.8 116.5 140.4 170.4 171.6 Depreciation -9sA 52.5 59.1 66.1 78.5 96.0 . Total 130.4 154.0 167.9 182.6 219.9 266.4 293.5 Borrawings Proposed IBRD Loan 53.2 254.0 145.8 116.0 103.0 - - New Debentures (Series C & E) 84*0 84.0 - - 42.0 28.0 28.0 Total 137.2 338.0 145.8 116.0 145.0 28.0 28.0 Suopliers' Credit 21.2 - - - - - - Contributions from Hidrandina* 22.5 - - 1.0 12.1 11.7 10.7 New Share Capital - Ordinary 33.0 - - 65.0 - - - - Preferred 1,0 - - - 20 0 - -- 65.0 --- Total Sources of Punds 512.3 492.0 313.7 364.6 376.0 306.1 332.2 APPLICATINS OF FUNDS Additions to Plant Huinco I Stage 173.9 290.9 267.4 162.6 118.4 15.6 Marcanonacocha I Stage 65.0 30.1 Other Generation 39.5 - 14.0 - - 45.2 101.2 Distribution etc...... 55.0 14.0 42,8 30.B 32.2 34.0 36.C Total Additions to Plant 333.4 335.0 324.2 193.4 150.6 94.8 137.2 Interest Existing Debt (Series A & B) 23.1 22.3 21.1 19.7 18.3 16.7 15.0 IBRD Loan 1.8 14.5 25.0 31.9 37.6 40.3 39.2 New Debentures (Series C & E) 1.5 10.3 11.8 11.3 12.7 14.0 15.3 Short tenm & Suppliers' Credits 0 1.4 1.4 1.1 0.9 0.7 0.4 Total Interest 27.1 48.5 59.3 64.0 69.5 71.7 69.9 Amortization Existing Debt 8.6 17.4 18.6 20.0 21.4 23.0 24.7 IBRD Loan - - - - 17.9 18.9 New Debentures - - 4.1 8.5 9.1 9.7 13.1 Suppliers' Credit - - 3.7 3.5 3.5 3.5 3.5 Total Amortization s.6 17.4 26.4 32.0 34.0 54.0 60.2 Cash Dividend and Bonuses 43.3 53.6 56.3 63.7 63.8 64.8 64.8 Taxes 3.0 3.6 3.8 4.4 4.6 4.7 4.9 Financial Expenses 15.2 4.2 - 5.0 2.1 1.4 1.4 Provision for Working Capital - - - ,0 15.0 5.0 - Total 61.5 61.4 60.1 78.1 85.5 75.9 71.1 Total Application of Funds 430.6 462.3 470.0 367.5 339.6 296.4 33e.4 Surplus or (Deficit) 81.7 29.7 (156.3) (2.9) 36.4 9.7 (6.2) Cash Balance Beginning of Tear 17.7 99.4 129.1 (27.2) (30.1) 6.3 16.0 Cash Balance End of Year 99.4 129.1 (27.2) (30.1) 6.3 16.0 9.8 Number of Times Interest on Long Tenm Debt Covered by Net Income Before Interest 3.2 2.1 1.8 1.8 2.0 2.4 2.5 - Number of Times Debt Service Covered by Internal Cash Generation 3.6 2.3 1.9 1.9 2.1 2.1 2.2 The amount shown in 1960 represents the reimbursemsent of advances previously made by Lima Light to Hidrandina, and the sale of the retired Yanaeoto Plant by Lima Light to Hidrandina. From 1963 onwards, Hidrandina would make to Lima Light equity contributions for the surplus of cash generated from its operations. LIMAP LIH and LOE COMPAN EXISTNGPOPOED FTtR BAR , COCHA Cosapolca DiversLon~~So Moneteo.PN/ * / gobomba j MATUCANA Peue CANTA eSurco 11Hudchampa Auhsha Cocochocrc; OG CALLAHUANC PERU LIMA LIGHT and POWER COMPANY MYOPA MPA 4 COSICA EXISTING PROPOSED FUTURE Hydro Plants YANACOTd-* COOMBIA Diversion Tunnels HUVAMPANd rjÄ Chöaciacayo ECI.UADOR Canals '.31 Tran,sformer Stations BRAZIL Tr~sission Lines•·-60K Concession Area LIMA Catchment Area f Reservoirs 130 0 5 10 15 20Km -Vjtorfe Alocongo eANCON LURIN I jROSA det SUR \ OCHORILLOS BRSt CALLAO MARCH 960 IBRD-669