Philippines - Maria Cristina Falls Hydro Power Expansion Project

RESTRICTED Report No. TO-335c This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION APPRAISAL OF THE MARIA CRISTINA FALLS HYDRO POWER EXPANSION IN MINDANAO PHILIPPINES October 29, 1962 Department of Technical Operations  CURRENCY EQUIVALENTS US $1 = Peses (P) 4 P 1 = US$0.25  APPRAISAL OF 'EE TARIA CRISTIMTA FALLS HYDRO POWJER EXPANSION IN M4INDANAO PHILIPPINES TABLE OF CONTENTS Page SU,MARY i I. INTRODUCTION 1 II, TSHE BORROWER 1 III. THE POW.ER TIMRT 2 Mindanao (Agus Grid) 2 Luzon Grid 3 IV. THE PROJECT 4 General Description 4 Cost Estimate 4 Rate of Expenditure and Method of Finance 5 Schedule of Construction 6 Engineering and Supervision of Construction 6 V. JUSTIFICATION FOR THE PROJECT 6 VI. FINANCIAL ASPECTS 6 Rates 7 Present Financial Position 8 Earnings Record 10 Financing Plan 10 Estimated Future Financial Position 11 VII. CONCLUSIONS 12  LIST OF ANNEXES Annex 1. Mindanao (Agus) Grid - Load and Energy Forecast Annex 2. Agus Grid - M'indanao - Load and Capacity Development Annex 3. National Power Corporation - IManila - Balance Sheets 1961-62 to 1971-72 Annex 4. National Power Corporation - Manila - Income Statements 1961-62 to 1971-72 Annex 5. National Power Corporation - Hi'anila - Sources and Applications of Funds 1960-61 to 1971-72 Annex 6. National Power Corporation - M4anila - Net Cash from Operation Contributed towards Expansion 'Lap  APPRAISAL OF THE 1ARIA CRISTINA FALLS HYDRO POTJER EXPANSION IN IJNDANAO PHILIPPINES SUN'IARY i. The National Power Corporation (NPC) has asked the Bank for a loan of $3.7 million to cover the foreign exchange cost of a project which would increase by 50 MW the capacity of the existing (2 x 25 MW{) Maria Cristina Falls hydro station on Ilindanao. The total cost of the project is estimated to be $7.1 million. ii. This would be the Bank's third loan to NPC. Both previous loans were for hydro power projects on Luzon. The project for which the first loan was made was successfully carried out within the total cost estimate. The second project is under construction. iii. The NPC management and staff would carry out this project without consultants. They are qualified to do so. The project is relatively simple, consisting of a single unit addition to an existing station plus minor river regulatory works and transmission. No problems should be experienced in meeting the scheduled completion date of Pmcen>ber 1964. The cost estimate, which is based on good pricing data and adequate allowances for contingencies, is equivalent to $142 per kw installed. This is a very low price for a pro- ject wfhich would add 50 W of 100 firm capacity to the system as wiell as transmission facilities. iv. The project is needed to meet load growth of industrial consumers. No alternative source of power could provide the required energy as economi- cally. v. NPC's financial position has been weak. W4hile it is improving, it is not realistic to assumme that it would reach desired levels until the rate structure between NPC and its main customer, the Nianila Electric Company (which accounts at present for about 703 of NPC's total revenues), is allowed to be increased. As 14anila Electric has a contract which reouires a three year notice for cancellation, it may take three years for rate adjustments to be made. Of course, it is possible that such adjustments could be made sooner, but it has been assumed in this report that they would not. vi. On this basis, the rate of return on NPC's net fixed power assets in operation, which averaged 5.4% over the past four years, would average a- bout 6.6/O' during the next four years (fiscal years 1962-65) and then improve to 9% in 1966 and remain above 8% through 1972. NPC's ability to provide financing from earnings for its future construction program would show corres- ponding improvement. vii. Given this improving situation, the project would be suitable for a loan of $3.7 million for a term of 18 years including a grace period of 2'- years on amortization payments.  APPRAISAL OF THE MtRIA CRISTINA FALLS HYDRO POWER EXPANSION IN MINDANAO PHILIPPINES I. INTRODUCTION 1. The National Power Corporation (NPC) has applied for a loan of $3.7 million to cover the foreign exchange cost of a 50 I4W expansion to its ICaria Cristina Falls hydro plant in 'Iindanao. The total cost of the project is es- timated to be $7.1 million. This report covers its appraisal. 2. The Bank has previously made two loans to NPC. The first, of $21 million in 1957, later reduced to $18.5 million, (183 PH) was for the Binga hydro project in northern Luzon. The second, of $34 million in 1961 (297 PH) was for the Angat hydro project near Manila. The Binga project was completed on schedule within the total original cost estimate. The Angat project is now under construction. 3. The Bank had considered including the foreign exchange cost of the Maria Cristina expansion with the Angat loan in 1961. The project was des- cribed in the Angat appraisal report (Report TO 298 b of October 5, 1961). However, since it appeared at the time that there would be a delay of six to eight months before the industrial demand which justifies the expansion would be confirmed, the decision on the Maria Cristina loan was deferred. 4. The power market is developingn rapidly on ;Vindanao. It now appears that NPC will have to proceed within a year with construction of a second sta- tion upstream from Maria Cristina as well as with the immediate installation of the 50 U1 addition to Maria Cristina. 5. This report is mainly related to power developments on Vindanao and to updating financial projections on total NPC operations. It is supplemental to the Angat report which contains background information on NPC and its long range program. II. THE BORROIAER 6. NPC is a Government owned entity with authorized stock capital of P 250 million. It has borrowing power of up to P 500 million including $100 million equivalent in foreign exchange to be guaranteed by the President of the Philippines. 7. The General Manager is appointed by the National Power Board, sub- ject to the approval of the President of the Philippines. The NPC management and staff are competent to carry out the project without outside assistance. 8. NPC's major investment is in its Luzon properties which constitute the Luzon grid. I'.ost of its operating revenues accrue from the Luzon grid, and, within the grid, the largest percentage of revenues are derived from the  - 2 - Manila Electric Company (ERIdLCO). Ieralco is the retail distributor in Yanila and vicinity. It also owns generating facilities but depends on large bulk power purchases from NPC to supply its franchise area. Meralco, a former hold- ing of General Public Utilities of the U.S., was sold early this year to the Meralco Securities Corporation, a Philippine investment group. 9. The relative importance of the three spheres of NPC's operations (Luzon, Mlindanao and all other) can be judged from the following comparison of electric plant assets as of June 30, 1961 and of energy sales for the fiscal year 1961. Gross Fixed Assets Energy Sales Location (P Millions) (kwh millions) Luzon Grid 244 830 1 Yindanao (Agus Grid) 12 154 All other 15 41 III. THE POZER TUAR13T Mindanao (Agus Grid) 10. The market served by the Agus grid is largely industrial. It is supplied by the existing two-unit (2x25 'Y.r) Maria Cristina station. Major customers include the National Steel and Shipyard Corporation (NASSCO), the Mlarcelo Fertilizer Company and Maria Cristina Chemical Industries (M11CCI). These customers accounted for a demand of 34 IN on the 50 191' total capacity in 1961. Two new customers, the MIindanao Portland Cement Company (I'.CC) and the Central Philippines i,illing Corporation will increase the load to 39 TTTbe- fore the end of 1962. The station will be fully loaded by early 1964. 11. The system load is expected to reach 59 BMM by mid 1965 and increase to 93 TiM the following year. This sharp increase is due to expansion plans by some of the existing customers and establishment in the area of new cus- tomers. Two of these, which account for the major part of the increase in demand, are described below: 12. The Ifarindukue Iron Mining Company: This company is planning to de- velop a base metal complex with copper fabricating facilities near NPC's laria Cristina station. Akmonium sulfate fertilizer would also be produced. The development is expected to be undertaken in two phases, the fertilizer plant first and a copper/zinc reduction and fabricating plant second. 13. The development has been studied and tested by Marindukue and its consultants since early 1959. A U.S. Ex-Im Bank credit was applied for in late 1959 and, in January 1961, Ex-Im issued a letter of commitment for a loan of $13 million dependent among other things upon large scale pilot trials. These trials were completed and accepted by Ex-Im in January 1962. Cost estimates for the complete development with process design based on the pilot runs wiere completed in MTarch 1962. The new, and for the first time complete, estimate tJ Sales to iHeralco were 681 million kwh or 8Z2 of NPC sales on Luzon (66% of sales from all NPC operations).  -3- totalled about $27 million plus P 45 million. These estimates are now being studied by Ex-Im. 14. Meanwhile, $12 million of the original $13 million credit Will be available for iimedia