Nicaragua - Sixth Power Project

RESTRICTED Report No TO-530a 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Bank and its affiliated organizations They do not accept responsibility for its accuracy or completeness The report may not be published nor may it be quoted as representing their views INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION EMPRESA NACIONAL DE LUX Y FUERZA SIXTH POWER PROJECT NICARAGUA May 31, 1966 Projects Department  CURRENCY EQUIVALENTS U S $1 = 7 Cordobas (C $ 7) C $ 1 = U S 14 cents C $ 1 = U S $142, 857  NICARAGUA EMPRESA NACIONAL DE LUZ Y FUERZA SIXTH POWER PROJECT TABLE OF CONTENTS Page No SUMMARY 1 I INTRODUCTION 1 II THE BORROWER 1 ITI THE POWER MARKET 2 TV THE PROJECT 3 Background 3 Project Elements 3 V. FINANCIAL ASPECTS 5 Power Rates 5 Present Financial Position 6 Past Earnings Record 8 Accounts Receivable 8 Proposed Financing Plan 8 Estimated Future Financial Position 9 'TI. CONCLUSIONS 10 ANNEXES 1 Load Forecast 2 Capacity Forecast 3 Balance Sheets December 1963-1965 LL Income Statements 1963-1972 5 Sources and Applications of Funds 1963-1972 6 Balance Sheets 1965-1972 MAP This report is based on the findings of a mission in January 1966 Lo Nicaragua composed of Messrs E B Arnold and H C Hittmair  NICARAGUA EMPRESA NACIONAL DE LUZ Y FUERZA SIXTH POWER PROJECT SUMIARY 1 The Bank has been asked to consider a loan of US$5 0 million to the Empresa Nacional de Luz y Fuerza (ENALUF) to cover the foreign e.xchange costs of a project consisting of the installation of a 15 NW gas turoine in ENPLUF's interconnected system, the expansion and improvement of the transmission and distribution system, the purchase of line construction equipment, engineering and a new head office building. The total cost of the project including contingencies and engineering would amount to about US$7 3 million equivalent, all of whicn would be disbursed during the three years 1966 through 1968. ii The additional generating capacity is urgently needed to meet reserve capacity requirements and to firm up ENALUF's peaking capability The transmission ties with the Western zone of the interconnected system require strengthening because existing transmission line limitations would not allow the forecast 1967 peak load in this area to be met from present generating sources ill The project has been soundly planned by ENALUF assisted by competent consulting engineers who would be retained for future special assignments iv The cost estimates are reasonable and are based on firm contracts for the main items of equipment included in the project Contracts already placed have been awarded after international bidding procedures satisfactory to the Bank The same procedures would be followed for any future contracts to be financed under the proposed Bank loan. v ENALUF s present financial situation and its performance during recent years are satisfactory When the last Bank loan to the company was made in 1960, its financial situation was inadequate and it was operating at a loss. High load growth, adequate rates, Government equity contribu- tions and improved management have transformed ENALUF into a financially viable entity. VI The project would be suitable for a Bank loan of US$5 0 million for a term of 20 years including a grace period on amortization of about three years  NICARAGUA EMPRESA NACIONAL DE LUZ Y FUERZA SIXTH POWER PROJECT I. INTRODUCTION 1 This report covers the appraisal of a project forning about half of the expected capital investment program for the years 1966 through 1968 of the Empresa Nacional de Luz y Fuerza (ENALUF) The project is estinated to cost the equivalent of about US$7 3 milliton excluding interest charges A loan of US$5 0 milli-on equivalent would be appropriate 2 ENALUF, a Government-owned power corporation, serves the major population centers in Nicaragua through an integrated transmission network supplied from hydro and thermal power sources and also operates a number of small isolated systems System operation is generally good and the management is capable 3 Since 1953 the Bank has made five loans totalling US$22 05 million equivalent for power in Nicaragua, of which US$482,000 remained undisbursed as at the end of March 1966 Three of these loans were to ENALUF and two to the Government but these latter two totalled only US$850,000 equivalent Of the total, US$4 2 million had been repaid as of the end of March 1966 The undisbursed amount is required for payments this year to suppliers on completion of guarantee periods The projects for which previous loans were made have been successfully completed 4 The proposed project consists of a 15 MW peaking power addition, transmission and distribution system extensions, construction equipment, engineering, and the construction of a new headquarters building Part of the procurement has been made and prices are well established The project would be carried out during the three years 1966 through 1968 II THE BORROWER 5 ENALUF, an autonomous public corporation engaged solely in the electric power business, has a four man Board of Directors appointed by the President of Nicaragua The company provides almost the total public supply of electric energy in Nicaragua The chief management officers are the General Manager, Assistant General Manager and Financial Manager The Chairman of the Board serves in a full time capacity as well Since 1960 the three key management officers and Chairman have provided satis- factory management of the utility 6 ENAIUF has in the past benefitted from the employment of manage- ment consultants and still retains a U S. firm of consultants for advice or special studies when particular problems arise Its accounts are audited annually by Arthur Andersen & Co of Chicago in accordance with arrangements satisfactory to the Bank  - 2- 7 The last project financed with the help of a Bank loanVYwas a fairly ambitious venture for Nicaragua and ENiALUF, and for this reason was followed with particular interest in the Bank Although problems were encountered during its construction, it was completed on the original schedule without substantial cost overruns With this experience the management of ENAIJUF would be capable of carrying out the relatively smaller project now proposed as a basis of a Bank loan III. THE POWER MIARKET 8 ENAIJUF provides service to all main load areas throughout the Western half of the country from its interconnected network, the greater portion of the energy being supplied directly to the consumer with only about 20 percent being supplied to distribution companies Gross genera- tion has increased from about 50 million kwh in 1958, the first year in which there was an interconnected system with adequate generat3on capacity,, to about 238 million kwh in 1965 This represents an average annual rate of growth of about 25 percent, the system peak demand increased during the same period from about 10 MtI to 48 MiW This high growth rate in power consumption resulted from the development of an integrated transmission network replacing isolated and inefficient generating sources and a generally high rate of economic growth throughout the country, particularly since 1961. 9 In 1965 a ten-year market projection for the interconnected system was prepared by ENALUF's consultants (Electroconsult) as a necessary part of a study aimed at determining the need for short range generation additions. The interconnected system lends itself to convenient analysis by separation into three geographical- regions and for each, past trends in consumption by category of consumer, population growth, expected industrial developments and other factors were considered Forecasts were prepared by two methods with the lower projection of demand and energy requirements finally being used by the consultants to evaluate the need for additional generation capacity during the next few years The same forecast was used, after adjustments for trends occurring in the latter part of 1965, for the fi- nancial projections in this report 10 Gross power and energy requirements are forecast to increase about 16 percent in l96tb and 13 percent in 1967, resulting in an average rate of about 11 percent during the next seven years On this basis the peak demand would increase to about 100