Mexico - Fourth CFE Power Project

R E ST R ICTE D Report No. TO-327a 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 It may not be published nor may it be quoted as representing the Bank's views.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 1962-65 INVESTMENT PROGRAM OF THE COMISION FEDERAL DE ELECTRICIDAD MEXICO June 12, 1962 Department of Technical Operations  CURRENCY EQUIVALENTS 1 US$ = IZ. 50 Pesos 1 Peso = 0. 08 US$ 1 million Pesos = 80, 000 US$  M E x I C O APPRAISAL OF THE 1962-65 INVESTMENT PROGRAM OF THE COMISION FEDERAL DE ELECTRICIDAD TABLE OF CONTETS SUMMARY i- iii I. INTRODUCTION 1 A. History and Function of the Comision 1 B. Previous Bank Lending to Comision 2 C. Recent Changes in the Cwnership and Structure of the Mexican Power Sector 2 D. Preliminaries to the Present Proposal for Further Lending 4 II. THE 1961-70 CONSTRUCTION vROCIRAM 5 A. The Main Objectives 5 B. The Projection of the Electric Power Demand 7 C. The Planning 9 D. Engineering, Design and Supervision 10 E. Award of Contracts 11 Equipment 11 Civil Works 13 F, Costs of the Program and Forecast of Expenditures 13 III. ORGANIZATION AND MANAGEENT 15 IV. THE NEW TARIFFS 16 V. FINANCIAL ASPECTS iS A. Past Operating Results 1s B. Present Financial Position 18 C. The Plan Proposed for Financing the Completion of the 1962-65 Investment Program 20 D. Estimated Future Operating Results 24 E. Estimated Future Financial Position 25 F. Proposed Main Financial Covenants 25 Debt Limitation Covenant 26 Tariff Covenant 26 VI. CONCLUSION 27  ANNEXES 1. The 1961-70 Expansion Program Tables 1-11 - Estimated Peak Loads, Capability and Generation; Projects and Forecast of Expenditures Table 12 - Miscellaneous Small Systems - Projects and Forecast of Expenditures 2. Estimated Cost of Construction and Forecast of Expenditures for the Ten-Year Program 3. Construction Expenditures and Financing Obtained for 1962 and 1963 4. Income Statements 1959-1970 5. Actual Balance Sheets 1959-1961 6. Long-Term Debt Yncurred by 'Nacional Financiera for the Comision's Investment Program 196165 7. Forecast rf Suar-ces and Apnlications of Funds 1962-1970 8. Estimated Balance Sheets i'QC2-19,70 9. Contribution from the Comision's Own Resources Towards the Cost of its Expansion MAP  SMARY i. Since mid-1959 the Bank has been discussing with the Government of Mexico and the Comision Federal de Electricidad the possibilities of further financing of the Comision's expansion program. The Comision's unsatisfactorY financial situation and prospects had, however, precluded Bank lending until early this year, when the Government introduced new, substantially higher, nationwide tariffs which improved the finances not only of the Comision but of the entire Government-owned electric power sector. These steps enable the Comision to incur considerable further debt, and the purpose of this renort is to apDraise a request for new Bank lending to it in the amount of US$130 million. Together with the other funds available to it, this would complete the financing of the Comisionts 1962-65 construction program. ii. The Comision has grown very rapidly since the Bank began lending to it in 1949. Its capacity now stands at 1,175 1M; and will reach at the end of 1965 some 3,725 MW, representing roughly 80% of the total capacity then installed in Mexico. Furthermore, it will control the operation of a substantial part of the balance of the installed capacity through affiliated companies. Although the Comision is distributing directly an increasing percentage of its generation, some two-thirdsare still being sold in block to various distributors, principally Mexlight and Impulsora. iii. The Comision's 1062-65 program is designed to provide all the new generating canacity needed in the country to: i) meet the normal future load growth (including that of all the other companies); ii) create for the first time an adequate spare caDacity; and iii) replace the relatively modest amount of electric power that is now being imported from the United States for several cities along the border. In addition, the Program Drovides for the exoansion of distribution and rural electrification in areas that the Comision serves directly. This exolains the large addition of some 2,550 IN to the Comision's capacity during 1062-65. The total con- struction exoenditures during that neriod are estimated at Pesos 5,435 million, equivalent to UJSA435 million. iv. The program is designed to meet a nrojected growth of demand resulting for the Deriod 1961-65 in an increase of sales for the country as a whole of 13% per year. Both the methods used in the orojection, and this overall result appear reasonable. v. The nlanning of the orogram, using a system-by-system approach and based on the above forecasts of demand, has generally been done in a careful and competent manner. There is, however, room for improvement in this regard, and the Government and the Comision have agreed during negotia- tion that in the planning to be done during 1962-65 they would take a number of specific steps with that objective. It has also been agreed that during the neriod 1962-65 no major plant would be added to the orogram and no major changes made in it without the prior agreement of the Bank. vi. The total cost of the program is quite firm. The unit costs, esoecially of the thermal plants and transmission lines, are comparatively low. The costs of the hydro plants also appear to be reasonable.  - ii - vii. The engineering and design for all the facilities included in the program has in the first instance been done by the Comision's own staff, but it had all the majordesigns reviewed by competent consultants. The Comision agreed to considerably strengthen and extend this outside review. viii. In the purchasing of equipment the Comision as a rule uses inter- national competitive bidding. However, with the development of an electric equipment industry in Mexico, the Government and the Comision have instituted recently a Drocedure under which the latter allows electrical equipment produced in Mexico (in part with imported components) a certain "Buy-Mexican" differential. It was agreed during the negotiations that for the orders to be placed during 1962-65 this practice would be modified in several important resDects, which should reduce the cost of the equipment Durchases to the Comision but still give the Mexican producers an adequate stimulus for further fgrowth. ix. The Comision's civil works have in the past been awarded entirely to Mexican contractors, part,y on the basis of competition and oartly on the basis of negotiations. It was agreed, however, that all aiwards of civil works above pesos 20 million would during 1962-65 be made on the basis of inter- national comDetitive bidding, and that several steos would be taken to make this procedure effective. x. All the above-mentioned commitments regarding planning, engineering and design, and award of contracts,at-oly to all of the Comision's actions in these fields for the entire 1962-65 Deriod, although the proposed new Bank loan would be largely disbursed by the end of 1963. These commitments would thus not only affect orojects directly financed during 1962-63 but many that would be started during 1