Philippines - Angat Hydroelectric Project

R E S T R I C T E D Report No. To-298b This report was prepared for use within the Bank. It may not be published nor may it be quoted as representing the Bank's views. The Bank accepts no responsibility for the accuracy or completeness of the contents of the report. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT APPRAISAL OF THE ANGAT HYDROELECTRIC PROJECT THE NATIONAL POWER CORPORATION PHILIPPINES October 5, 1961 Department of Technical Operations  ASSUMED CURRENCY EQUIVALENTS 1 Us $ = 3 Pesos (Ps) 1 Peso = 33-1/3 US cents 1 million Pesos = 333,333-1/3 US $  APPRAISAL OF THE ANGAT HYDROELECTRIC PROJECT THE NATIONAL POWER CORPORATION PHILIPPINES TABLE OF CONTENTS Page No. SU4ARY i I. INTRODUCTION 1 II. THE BORROWER 1 Existing Facilities 2 III. THE POWER 2MARKET 3 Luzon Grid 3 The EMindanao Island System 4 Other Operations 4 IV. THE NPC EXPANSION PROGRAM 4 Luzon Grid Expansion 5 The Mindanao System Expansion 6 V. THE SALES FORECAST 7 Luzon Grid 7 The Mindanao Island System 8 VI. THE PROJECT 8 The Angat Hydroelectric Development 8 Cost Estimate 9 Rate of Expenditure and Method of Finance 10 Engineering and Supervision of Construction 10 Schedule of Construction 11 VII. JUSTIFICATION OF THE PROJECT 11 VIII. FINANCIAL ASPECTS 11 present Finanpial Position 13 Earnings Record 1 Rates 14 Financing Plan 15 Estimated Future Financial Position 16 Debt Limitation Covenant 17 IX. CONCLUSIONS 18  TABLE OF CONTEMTS Page 2 ANNEXES 1. Xeralco Past and Forecast Sales 2. Provincial Past and Forecast Sales 3. Luzon Grid Past and Forecast Sales 4. iIindanao (Agus) Grid Past and Forecast Sales 5. Isolated Operations Past and Forecast Sales 6. Summary - NPC Total Sales 7. Load and Capacity Curves - Luzon Grid 8. Load and Capacity Curves - llindanao (Agus) Grid 9. Details of Expansion Program 10. Detailed Description of Project 11. Angat Cost Estimate 12. Hydro Thermal Comparison 13. Balance Sheets 1957-58 to 1971-72 14. Income Statements 1957-58 to 1971-72 15. Net Cash from Operation Contributed towards Expansion 1957-58 to 1964-65 16. Sources and Applications of Funds 1960-61 to 1971-72 aIAP  APPRAISAL OF THE ANGAT HYDROELECTRIC PROJECT THE NATIONAL POWER CORBORATION PHILIPPITES SUT214ARY i. The National Power Corporation (NPC) asked the Bank to consider a loan to help finance the cost of two power developments, the Angat hydro- electric development (206 NW) on Luzon and the addition of 50 !1W to the existing Maria Cristina Falls hydro station on Mindanao. Both proposed undertakings were appraised but as there will likely be a delay of six to eight months before the market for the energy from the I4indanao expansion is clearly established it was agreed with NPC that only the Angat project would be submitted as a basis for a loan at this time. The total cost of the Angat project is estimated at about$62.8 million equivalent, including interest during construction, of which ji34 million would be in foreign cur- rencies. ii. In 1957 the Bank made a loan of ~j21 million to NPC, later reduced to $18.5 million, to assist in financing the Binga hydroelectric project in Northern Luzon. The project was completed about on schedule and has been in full operation since early 1960. iii. NPC is a Government-owned Corporation with an authorized capital stock of Ps 250 million. It is responsible for planning and providing major power facilities to meet the country's requirements, except in Manila where this responsibility is exercised by the Manila Electric Corporation (I'leralco) which is also NPC's principal customer. iv. The management and technical staff of NPC are experienced and ca- pable of carrying out the projects under review. v. The project proposed for Bank financing is necessary to meet the forecast demand requirements of the Luzon grid serving MAanila and the most populated areas of Luzon. The estimated cost of the project is realistic and reasonable and the investment in the proposed facilities is justified. vi. NPC's financial position was unsatisfactory. By converting all local bonded indebtedness into equity at the end of fiscal year 1960-61 and by capitalizing interest thereon for the next ten years the Government has improved NPC's cash position so that it would be able to finance from re- tained earnings (including depreciation) about 23% of the proposed expansion program 1961-65. The level of earnings would still remain low, however, and NPC and the Government have agreed during negotiations that they would take action to remedy this situation before the end of the current fiscal year. vii. Both satisfactory rate and debt limitation covenants were agreed upon during negotiations. viii. The project would be suitable for a Bank loan of '34 million equiva- lent, including interest during construction of 1j.8 million, for a term of 25 years including a grace period of 3-1/2 years on amortization payments.  APPRAISAL OF ThE ANQGAT HYDROEIECTRIC PROJECT THE NATIONAL PATER CORPORATION PHILIPPINES I. INTRODUCTION 1. This report covers the appraisal of the 206 MW Angat hydroelectric project on Luzon. The project would be carried out by the National Power Corporation (NIPC) at a total cost which is estimated to be equivalent to about $62.8 million including interest during construction on proposed foreign and local currency borrowings. 2. NPC has requested a Bank loan of $34 million equivalent to cover the foreign currency cost of the project including interest during construction of ;4.8 million. 3. This report is based on data furnished by NPC to Bank missions which visited the Philippines in July 1960 and April 1961, on various data and re- ports received at the Bank through July 1961 and on discussions with NNPC management during Bank visits in December 1960 and August 1961. 4. The Borrower would be NPC, an autonomous government-owned corporation with headquarters in Manila. NPC is responsible for planning and providing power facilities with which to meet the countryts requirements, except in ijanila where it sells electricity wholesale to the MIanila Electric Company (Meralco) which distribut-es it in the metropolitan and surrounding area. Arrangements for the sale of this company by the General Public Utilities Corporation, a holding company with headquarters in New York and the present owner, to the Meralco Securities Corporation, a Philippine investment group, were announced in Jane 19'11. The sale is subject to approval of the US Securities and Exchange Conmission and to c;-rtain arrangaments being com- pleted by the Philippine group ind is not y:it final. There is no reason to believe that it will not be consummated, however. 5. The Bank has previously made one loan to NPC to assist in financ- ing the Binga hydroelectric project. This loan (183-PH) for $521 million was made in November 1957. It was later reduced to $18.5 million. The project consisted of a rockfill dam arid power plant on the Ango River in northern Luzon with 100 EW instailled capacity plus transrmissfon to Manila. It was completed on schedule and has been in operation since early 1960. II. THE BORROWER 6. NPC is a Government-owned corporation established by Commonwealth Act No. 120 of 1936. Subsequent amen. ments to this Act fixed the corporate life of NPC until December 31, 2000 and converted it into a stock corporation with an authorized stock capital of Ps 250 million.  - 2 - 7. NPC is administered by the National Power Board, composed of five members all appointed for a term of three years by the President of the Philippines with the consent of the Commission on Appointments of the National Assembly. The members of the Board elect a chairman and a vice- chairman from among themselves. 8. NPC is authorized to borrow up to Ps 500 million, subject to the approval of the President of the Philippines upon the recommendation of the National Economic Council. Within the limits of this total borrowing power, NPC has been authorized by Republic Act No. 357 as amended by Republic Act No. 813 and Republic Act No. 2055 to borrow up to $100 million equivalent in foreign exchange, to be guaranteed by the President of the Philippines. NPC is exempt from all duties and taxes except real property tax. It has the power to acquire property and to exercise the right of eminent domain. 9. The General Manager of NPC is appointed by the National Power Board subject to the approval of the President of the Philippines. The management is experienced and capable. The operational and technical staff have proven ability and are capable and competent of carrying out the pro- ject under review. Existing Facilities 10. NPC's major power facilities and operations are concentrated in two systems: (a) Luzon Island System (Luzon Grid) The Luzon grid is a system of high and low voltage transmission lines extending from Baguio in the north to below Manila in the south. The main lines, or circuits, originate at NPC hydro sta- tions and terminate in Manila; the lower voltage circuits tap from the main lines at various points and extend into the market area. NPC owns these transmission facilities. Power is supplied to the grid by NPC hydro plants (211 MiW) and Mleralco thermal plants (219 HW). Neralco also owns one small (15 IN) hydro plant which is connected to the grid and has under construction one 60 1NW thermal addition which is scheduled to be connected to the grid in December 1961. The Angat plant would be connected to this grid. (b) The Mindanao Island System (Agus Grid) This system is supplied by the existing 50 NVW Maria Cristina hydroelectric plant owned by NPC. It serves industrial develop- ment primarily and is, of course, physically separate from the Luzon grid. NPC also operates fourteen small hydro plants with a total ca- pacity of about 10 IV! and two diesel powered plants with a capacity of about 1.5 MW. These facilities, which represent only a small part of NPC's total plant facilities, serve local isolated load centers in various loca- tions throughout the Philippines.  -3- III. TXiE POWER MARKET 11. The relative importance of each of the operations mentioned in the preceding paragraph can be seen from the following comparison of sales by NPC, for the year ended June 30, 1961. Sales (millions of kwh) Installed Maximum Percent Capacity Demand System Total of Total MiW MW Luzon grid 830 82 211 168 Agus grid 158 15 50 35 All others 1/ 32 3 11 - 1,020 100 Luzon Grid 12. Meralco System: The major power market within the Luzon grid is the Manila metropolitan area served by Meralco. In 1960-61 Meralco pur- chased 82% of the energy sold by NPC from the grid, or approximately 67% of the total energy sold by NPC from all its operations. Growth of energy and demand in the Meralco system has been at a very rapid rate during the past ten years increasing slightly more than 31 times, or at an average annual rate of about 13%. Although the rate of growth was even more rapid during the last five years of the period the forecasts used in this report are based on estimates prepared by Heralco which, for rate of growth, average about l11% annually. The forecast is probably conservative but is acceptable for purposes of this report. 13. The forecast is shown in Annex 1, together with details of energy use by category of consumer. In sur'iary, the maximum demand and gross en- ergy requikre.ents of the iMeraLco system are expected to increase about 3.3 times and 3.0 times resnectively by 1972. The corresponding average growth rates would be about lll,% and 102%. 14. Provinc-ial System: The market area of the Luzon grid, exclusive of the M4eral o system, is referred to as the provincial system. NPC sells power and energy at present to some 50 small utilities plus military and other load certers connected to the system and plans to gradually extend its transmission facilities to other utilities and load centers within the geo- graphical ar-a of the grid. The locations of the loads still to be con- nected are highly favorable to economical line extensions. 15. The forecast of demand and energy requirements for the provincial system is shown in Annex 2. The program of service extensions mentioned above plus reasonable estimates of incireasing power utilization within the areas connected result in a forecast of load growth which averages about 12:1% annually over the next eleven years. 1/ Estimated  - 4 - 16. A consolidated market forecast for the Luzon grid as a whole is shown in tabular form in Annex 3 and graphically (load growth) by Annex 7. The forecast shows that: (a) Total system energy requirements for the Luzon grid are expected to increase from 1,959 million kwh in 196o-61 to 5,874 million kwh in 1971-72, an average annual increase of 10-1/2%. (b) Total system demand would increase during the same period from 381 MTiW to 1,266 ivJw, an average annual increase of 11-1/2%. The Mindanao Island System 17. The market served by the Agus grid, supplied by the existing 50 viW Maria Cristina hydro station, consists of steel mills owned by the National Shipyard and Steel Corporation (NASSCO), a carbide plant owned by Maria Cris- tina Chemical Industries Incorporated, an ammonium sulphate fertilizer plant sold by NPC in 1960 to the Mercelo Tire and Rubber Corporation and the fran- chise area of the Iligan Electric Company. The load on the system reached about 35 MWT in 1960. 18. A planned cement plant by the Mindanao Portland Cement Company, a line extension to Cagayan de Oro City and a mineral development by the Marinduque Iron Mines are expected to completely utilize the existing plant by 1962-63. Demand at that time is forecast to reach L5 MT. NASSCO has plans which would, in addition, increase the steel mill demand from 8 to 60 Dill and annual energy requirements from 18 to 430 million kwh in 1966-67. The above pattern of suddenly applied industrial loads is reflected in the forecast shown in Annex 4 which indicates that system demand would increase seven times during the next eleven years, from 35 Mnu in 1960-61 to 254 MW in 1971-72. As could be expected, the forecast shows a series of block in- creases rather than a normal growth pattern. This forecast is also shown graphically by Annex 8. Other Operations 19. The operations of the many small hydro and diesel plants owned by the Corporation and not interconnected because of physical or economical factors can be expected to increase at a modest rate in the future. Al- though the financial results from these small isolated operations remain insignificant compared with those of the Corporation's other activities, a market forecast has nevertheless been prepared and is shown in Annex 5. The revenues and costs associated with this category of the Corporation's business have been included in the financial forecasts discussed later. IV. THE NPC EXPANSION PROGRAM 20. The basic assumptions for the formulation of NPC's expansion pro- gram are that NPC will be responsible for the installations of all additional capacity needed to meet the demand of the Luzon grid after the completion of the 60 MW thermal addition now under construction by MYeralco (paragraph 20) and after the completion of one other 60 HW thermal addition wJhich Meralco has said it would construct for completion in December 1962, and tlat it will  - 5 - add to capacity in Mindanao as rapidly as necessary to meet increased de- mand of the Agus grid. It would also be necessary to add a small amount of new capacity to the aggregate capacity of the isolated plants but this category of NPC operations is insignificant relative to other NPC opera- tions. Discussion of the expansion program in this report is therefore confined to the Agus and Luzon grids. The financial projections, however, include provisions for a modest expansion in the category of small plant operations. 21. Although Meralco has not agreed that NPC would be solely responsi- ble for future capacity additions to the grid after the completion of Angat, it has agreed to re-examine the program for future plant additions so that, by early 1962, the responsibility for the next phase of capacity expansion can be determined. For the purpose of this report it has been assumed that NPC would bear the entire cost of the future expansion program. This is probably a very conservative assumption but the only practical one in the circumstances. Luzon Grid Expansion 22. The expansion program planned for the Luzon grid would add 886 M4W of new generation capacity to the system by the end of 1972. Of the total, 510 1MW would be thermal capacity and 376 rNW would be hydro capacity. This is in addition to the 60 MA thermal unit being constructed by Meralco which is scheduled for completion in December 1961. 23. The starting and completion dates and the nameplate and effective capacity of each of the units in the expansion program and their approximate costs are shown in Annex 9. The effect of the expansion program is related graphically to the expected load growth in Annex 7. 24. The cost assumed to be borne by NPC for the Luzon grid expansion program through 1972, including necessary transmission facilities but ex- cluding interest during construction, is estimated to be the equivalent of about $233 million of which about $145 million would be in foreign exchange. This cost obviously indicates an order of magnitude rather than an absolute value. 25. Means might be found to utilize existing and planned capacity more efficiently after the completion of Angat if a study of system operating characteristics should indicate, for example, an advantage in using system hydro capacity more for peaking than has been the practice in the past. Such a study is being made by NPC and Meralco at the present time. 26. Participation in the Marikina project is not included in the pres- ent NPC expansion program nor in the financial projections of this report. The project has been proposed as a joint undertaking by the National Water  - 6 - and Sewer Authority (NWSA), the Government and NPC. Its assumed costs have been apportioned by an arbitrary allocation of benefits in the ratio of 42.2% to NWSA for domestic water supply, 23.3% to Government for flood con- trol and 34.5% to NPC for power. Its benefits appear marginal at best, how- ever, and the project would be difficult to justify on any sound basis even at the presently estimated cost of Ps 108 million. Construction would be difficult and this estimate would very likely be exceeded by a large margin. 27. The main justification for the project by its supporters is that it would provide a new source of domestic water supply for Manila. A power installation of about 68 MW has also been proposed but the power output would probably be governed by the other purposes of the project and at best would be limited by water conditions to less than a 25% annual plant factor. The new source of water supply would probably not be needed until the mid 1970's if Angat is constructed as proposed. In the circumstances, NPC's participa- tion in the project if constructed earlier, can only be judged by the terms of NPC's covenants to the Bank at such time as firm costs and plans for the project financing are known. The Mindanao System Expansion 28. The expansion of the Mindanao System to meet the estimated increase in demand discussed in paragraph 18 would utilize the excellent potential of the Agus River, the ultimate development of which is estimated to be about 750 MW with some regulation of the outflow of Lake Lanao, the source of the Agus River. The first step would consist of the addition of a third unit of 50 MW capacity to the existing two unit (2 x 25 iMw) Maria Cristina Falls station. 29. This 50 MW addition would be needed to meet the increased power demand of the steel mill expansion. However, since it will take slightly longer to complete the new steel facilities than it will NPC to complete the Maria Cristina addition, NPC will not start its construction until financial arrangements for the steel mill expansion are completed. The expansion is expected to be financed primarily through an Export Import Bank loan of $62.3 million but the loan, although announced, will not be- come effective until certain legislation is passed by the Philippine Con- gress. The legislation can not be acted upon until Congress reconvenes in January and it is not at this time certain that full support for the meas- ures required for the Export Import Bank loan will be forthcoming. NPC had originally asked to have about $3.8 million included in the proposed loan to cover the Maria Cristina expansion. However, for the reasons sta- ted above, it was decided to defer consideration of a Bank loan for this purpose until the steel mill expansion is firmly financed or until justi- fied by other load growth. 30. Shortly after the completion of the third unit at the Maria Cris- tina Falls station and depending on industrial expansion on the island, a second station (Agus No. 2) is planned to be constructed with two 50 NW units installed. Engineering investigations are well advanced and the project could be carried out in about three years after financing was  -7- arranged. Cost would be very reasonable, equivalent to about 1WI?* million or about $172 per kilowatt installed. 31. The two plants would have 200 141W (nameplate) capacity of which 188 NW would be useable 100% of the time. 32. After the completion of Agus No. 2 plant NPC plans to install a fourth unit of 50 UI in the Maria Cristina Falls station provided the in- crease in demand requires it. 33. The total expenditures on the Mindanao System envisaged through 1972 are estimated to amount to the equivalent of about $46 million of which about ?15 million would be in foreign exchange. 34. In summary, during the period from 1961 to 1972 NPC plans to add 1086 MIW to its two grid systems consisting of 886 MW on the island of Luzon and 200 SW on the island of Mindanao. About 10 MlW would also be added in the category of small plant operations. This expansion is estimated to cost the equivalent of about $i;284 million exclusive of interest during con- struction of which about $160 million would be in foreign exchange. The first step would be the project proposed for Bank financing. V. THE SALES FORECAST 35. The expansion program discussed in the previous chapter will per- mit NPC to supply the forecast demand and energy requirements of both grid systems. Luzon Grid 36. The amount of power and energy to be supplied by NPC to Nleralco through calendar year 1965 is closely fixed by a iMemorandum of Understanding which was agreed upon by the two parties in April 1961. The basic objec- tive of the memorandum was to reach agreement on the principle of operation of plants connected to the Luzon grid. This principle, as quoted from the memorandum, is - "Operate all of the NPC and ieralco generating and related transmission facilities as one common system in order to obtain optimum ef- ficiency and economy to the common system". 37. The principles of the memorandum discussed above result in esti- mated sales of power and energy by NPC to iIeralco which increase from 681 million kwh and 136 mW in 1960-61 to 3,367 million kwh and 820 INW in 1971-72. The proportion of Meralco's total energy requirements supplied by NPC would increase from about 38% to 63% during the same period. Further details are shown in Annex 1. 38. Estimates of power and energy sales to consumers in the provincial area are based on the program of service connections discussed in paragraph 14. The forecast is shown in Annex 2. 39. The preceding estimates have been combined into a forecast of NPC power and energy sales for the Luzon grid as a whole as shown in Annex 3. MPC sales would increase from 830 million kwh in 1960-6). to 3,912 million kwh in 1971-72 according to tile forecast. Total energy requirements  - 8 - of the grid are forecast to increase at an average annual rate of about lo1N. IPC's energy sales, howTever, due to its expansion program, are forecast to increase during the same period at an average annual rate of about l5,. The Mindanao Island System 4o. NPC sales from the Agus grid are expected to coincide with increas- ing requirements for power and energy in the market area as discussed in para- graph 18 and showem in Annex 4. 41. A summary of total forecast NPC energy sales through 1971-72 in- cluding those from its non-interconnected plants is shown in Annex 6. The composite average annual rate of increase is expected to be about 161-: which could very well prove conservative. VI. THE PROJECT The Angat Hydroelectric Development 42. The proposed development is located on the Angat River about 40 kilometers northeast of Manila and 712 kilometers upstream of the existing Ipo Dam which is the present principal domestic water source for I4anila. The dam site, which is excellent, is at the upper end of a 12 kilometer long loop in the river. In the length of this loop the river falls about 30 me- ters and it is this natural head with the head from a 125 meter high earth and rockfill dam that would be utilized for power production. The dam would form a reservoir with useable storage of about 580 million cubic meters. 43. A pressure tunnel about 1,400 meters long, cutting across the short base of the loop, would carry water from the intake structure behind the dam to a powerhouse located at the lower end of the loop in which four 50 '1T units would be installed. A secondary powerhouse wJith an initial installation of 6 1IJ would be located at the outlet of one of two diversion tunnels used during construction. This secondary installation would utilize the hydro potential of water diverted into the Ipo reservoir. 44. The energy output from the development in an average water year would be about 673 million kwh. The powier installation would total 206 1suJ and firm power of 147 14W would always be available with the operationa' regime planned for the reservoir. These values would not change materially in the future even though diversion to the Ipo reservoir might increase, as the sec- ondary powerhouse would be constructed to allow for future expansion. 45. Both irrigation and flood control benefits would be made possible by the project if tentative plans of the Government are carried out. Irri- gation benefits would result from an assured 12 month water supply which would be made possible by construction of a small regulating dam further domnstream. The Ministry of Public Works would be responsible for the con- struction of the re-regulating dam and irrigation works. -larginal flood control benefits would also accrue without prejudice to the power aspects of the project if, by increasing the height of the dam, a flood control pool above the power pool were provided. The Government is investigating this  aspect of the project. Although it is unlikely that the Government would in- sist on providing for this very marginal flood control feature it has, on the other hand, not clearly indicated that it would not. 46. To provide assurance that the project would not be affected by a subsequent major design change, the proposed Loan Agreement contains an appropriate covenant which requires the Bank's approval for any major design changes. 47. The present layout of the project is based on a conventional sur- face powerhouse. This feature is being further studied, however, with the hope that geological features will permit a design modification to an under- ground powerhouse. This could permit considerable savings in the cost of water conductors and associated items. Further details of the project are given in Annex 10. Cost Estimate 48. The Angat development, including transmission facilities to Manila, is expected to cost the equivalent of about $i62.8 million. This includes interest during construction of $5.3 million and contingencies of about 15% on both foreign and local estimated costs plus a contingency of about 10% on the local cost estimate to cover possible local price increases. The foreign exchange component would total $?34 million. Since NWSA has agreed to con- tribute Ps 21.5 million toward the local costs in return for future water benefits, the total cost to NPC would be about !55.7 million equivalent. This is equal to about $270 per installed kilowatt of capacity. 49. A condensed cost estimate is shown below; a more complete estimate is shown in Annex I1. Cost (in $ thousands) Item Foreign Local Total Civil Works 1/ 14,615 19,932 34,547 Equipment 6,048 433 6,481 Transmission 2,855 4