Peru - Matucana Power Project

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 The report may not be published nor may it be quoted as representing their views.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 MATUCANA POWER PROJECT OF EMPRESAS ELECTRICAS ASOCIADAS LIMA LIGHT AND POWER COMPANY PERU August 25, 1967 cts Department  CURRENCY EQUIVALENTS US$1 = Soles 26. 82 S/. 1 (1 Sol) = US$0.037 1 Million Soles = US$37, 286 WEIGHTS AND MEASURES Metric System One kilometer (km) = 0. 6214 miles One square kilometer (km ) = 0. 3861 square miles FINANCIAL YEAR Calendar Year  TABLE OF CONTEN1TS Page No. SUMMARY i-ii 1. INTRODUCTION 1 2. THE ELECTRIC POWER SECTOR IN PERU 1 3. THE BORROWER 3 Organization and Management 3 Associated Companies h Existing Installations 6 4. POWER MARKET 6 5. THE PROJECT 8 Hydrology 8 Geology 9 Characte.,stics 9 Construc t,i on 9 Procurement and Disbursement 9 Cost Estimate 9 Economic Justification 11 6. FINANCIAL ASPECTS 11 Electric Power Legislation 11 Present Financial Position 13 Insurance 15 Auditors 15 Financial Services 15 Taxes 16 Guarantee Commission 16 Earnings Record 16 Depreciation 16 Dividend Record 16 Funds for Public Domain Installations 16 Financing Plan 17 Future-Earnings 20 F- turea-Financial Position 20 Debt Limitation Tests 20 7. CONCLUSIONS 20 This report is based on the findings of a mission to Peru in March-April 1967 composed of Messrs. R.V. Sear and C. de Beaufort and upon subsequent discussions with the negotiating team from Lima Light which visited the Bank in August 1967.  LIST OF ANNEXES 1. The Miantaro Project 2. Load Forecast and System Operation 3. List of Goods and Services to Be Financed from Loan Funds 4. Balance Sheets 1962-1971 5. Long Term Debt outstanding at December 31, 1966 6. Income Statements 1962-1971 7. Sources and Applications of Funds Statements 1967-1971 8. Financial Ratios 1962-1971 Map 1 - Existing and Proposed Poaer Plants in Central Peru Map 2 - Proposed Transmission Lines for iviantaro Interconnected System Nap 3 - Empresas Electricas Asociadas Schematic Plan of Hydro- electric Generating Plants and Water Collection System  APPRAIAL CO THE MATUCANA PWER PROJECT 0, EM4PESAS ELECTRICAS ASOCIADAS (LIU LIGHT) PERU SUMMARY i. Empresas Electricas Asociadas - Lima Light and Power Company (Lima Light), a privately owned electric utility company serving the greater Lima-Callao area in Peru, has requested a loan of US$17.5 million equivalent to finance part of the total construction cost of US$50.5 million, including interest during construction, of the Matucana Power Project comprising the 120 T Miatucana hydroelectric plant and related transmission and distribu- tion system expansion. The loan would be guaranteed by the Government of Peru. ii. Three previous loans were made by the Bank to the Company viz: Loan 260-PE (1960) for US$24 million for stage one of the Huinco hydroelectric project, Loan 365-PE (1963) for US$15 million for stage two of the Huinco hydro.electric project and Loan 464-FE (1966) for US$10 million for trans- mission and distribution system expansion during 1966-68. The two stages of the Huinco project were completed satisfactorily in 1966 and work under Loan 464-PE is progressing satisfactorily and on schedule. iii. The Project is needed to meet forecast increases in power demand on the Company's system during 1971-73. The demand forecast is realistic, it is based upon a long experience of accurate forecasting, and shows that the project would be fully utilized by 1973, iv0 The Government has signed contracts for the construction of the Mantaro (684 MW) hydroelectric project which is scheduled for service in 1973 at which time Lima Light would meet further increases in system demand by purchasing power produced by this project. v0 The Company's management and staff are competent and with the assistance of consultants are capable of satisfactorily undertaking construc- tion of the project. vi, Since 1946 Lima Light has been associated with Energia Hidro- electrica Andina (Hidrandina) S.A., a privately owned generating company which sells all its power under contract to Lima Light, At the Bank's suggestion Lima Light has re-examined its relationship with Hidrandina and, as a result, plans to acquire from Hidrandina two power plants and other properties that are an integral part of Lima Light's system. The transfer would take place in stages during the period 1967 through 1971, The total purchase price is estimated at US$14-5 mlllion0 vii. The earnings of the Company have been satisfactory and its financial position is expected to remain sound* Power rates are based upon the provisions of the Electric Industry Law which permits the Company to earn a satisfactory return on its equityo  - ii - viii; The financing plan for the construction period of the project is satisfactory, Nlet earnings would contribute 27$5 percent towards financing the total requirements and sales of shares and customers' contributions would bring the contribution from sources other than borrowings to 65e,6 percent. ix. The Matucana project would represent about 49 percent of total requirements under the financing plan, The proposed loan would finance imported goods procured through international bidding, consulting services and interest during construction for the project and would contribute 37 percent towards its total costs. xO The project would be suitable for a Bank Loan of US$17$5 million equivalent with a term of 25 years including a grace period of five years.  APPRAISAL CF THE MATUCANA POWER PROJECT CTY EMIEESAS ELECTRICAS ASOCIADAS (LIMA LIGHT) PERU 1. INTRODUCTION 1.01 This report appraises the Matucana hydroelectric project of Empresas Electricas Asociadas - Lima Light and Power Company (Lima Light), which would consist of the 120 1MW Matucana hydro plant located on the Rimac river about 80 kn from Lima (see Map 1), a double circuit 220 KV steel tower transmission line to convey the power to the city, 220 KV substations and associated distribution system expansion. 1.02 The estimated total cost of the project would be about US$50.5 million equivalent and the Bank has been requested to finance US$17.5 million representing the cost of imported goods procured through international competitive bidding, consulting services and US$1,5 million of interest during construction. 1.03 The project has been approved by the National Planning Institute of the Peruvian Government as being acceptable in the national development plan. The Government of Peru will guarantee the loan. L.04 This report is based on the findings of a mission to Peru in March-April 1967 composed of Messrs. R,V, Sear and C. de Beaufort and upon subsequent discussions with the negotiating team from Lima Light which visited the Bank in August 1967. 2e THE ELECTRIC POWER SECTOR IN PERU 2.01 The electric power generating plants in Peru may be grouped under the following four main categories: Installed Capacity in MW (a) Private companies serving the public 580 (b) Captive plants in private industry and mining 696 (c) Government owned autonoacus corporations 163 (d) Small goverment owned plants supplying rural population centers (Servicios Electricos Nacionales, SEN) Li Total 1470  - 2 - 2.02 Lima Light and its associate Energia IHidroel6ctrica Andina S.A. (HIDMIAMNA) combined, is the largest of the private companies and accounts for 85% or 492 MW of the generating capacity in that category. 2.03 The Government has in the past participated in the electric sector through its autonomous regional development corporations which have con- structed a total of about 163 IMR of plants within their own territories. The Government has also been constructing small plants and systems to provide some service to the many small rural population centers scattered throughout the country. Servicios Electricos Nacionales (SEN), which obtains its funds from the national budget, was formed in 1966 under the Yinistry of Public Works to take over and operate these small plants and systems. It has also undertaken to continue the construction of such small rural plants for the Government and to promote a program of rural electri- fication. At present some 200 plants with a total capacity of only 31 MW are operated by SEN. 2.34 In 1961 the Government formed the Mantaro Corporation (C0OM-AdN) for the purpose of developing the N4antaro valley and in particular the electric power potential of the Mantaro river. A contract was signed with a consortium of European firms to construct and partially finance the Mantaro power scheme. However, this contract was cancelled in 1966 and a new contract signed the same year with a group of Italian firms to construct and partially finance the first stop (68 4 .',) M the p. o,jct, at what a:e claimed to be more advantageous conditions for Peru. See Annex 1. 2.05 This is the Government's fi:st major project in the power field and would include about 1,000 km of 220 kv transmission lines to connect thce MIantaro power plant with Cerro de Pasco, Lima, Ica and M,1arcona to form an interconnected system for Central Peru. See Hap 2. 2.06 The N;antaro project is scheduled for completion in 1973 and although it appears technically feasible some final design details still remain to be clarified. It would therefore be reasonable with a project of this large size, located in a relatively inaccessible part of the high Andes, for Lima Light to make provision for additional capacity in the event that the project is delayed, since the power demand forecast for its system shows that the Matucana plant would be fully loaded at about the time I4antaro is presently scheduled to be ready for service. 2.07 Lima Light is therefore making preliminary studies of several hydroplants which might be built should they be needed. The oil companies are also actively pursuing the further exploration and proving of natural gas sources, in the Aguaytia region, which may provide an economical fuel source for a thermal plant. Thus, in the event of Mantaro being delayed one of these other alternatives could be constructed, although this decisicn need not be taken until 1968-69 when more will be known of the progress at MMantaro and of the availability of adequate quantities of natural gas.  - 3 - 3. THE BORROWER 3.01 The Borrower would be Empresas Electricas Asociadas - Lima Light and Power Company, a privately owned public utility corporation responsible for supplying electric service in the Greater Lima area. Its head office is situated in Lima, The loan would be guaranteed by the Government of Peru as was the case in previous Bank loans to Lima Light, 3.02 The Company was originally incorporated under Peruvian laws in 1910. Lima Light's present concession was granted by the Peruvian Govern- ment in 1956. It is valid for a period of 50 years and gives the Company the exclusive right to generate and distribute power within the concession area. Since 1956 the concession area, principally Greater Lima and the port of Callao, has been increased on five occasions at the Government's request to bring it from less than 500 kmZ to its present area of 2,850 km2. 3.03 At the end of 1966 Lima Light had outstanding SI 1 billion of common shares and $10 million of preferred shares, Until recently the majority of the share capital was owned by a Swiss group of public utility holding compani-es and bauks. The sales of shares in Poru have gradually increased Peruvian ownerphip to over 3,000 shareholders who hold about 58% of the stock. However, the Swiss group, holding about 32% of the stock, in effect still controls the Company, The remaining 10% of the stock is held by other investors outside Peru. 3.04 The Bank has made three previous loans to Lima Light: (i) Loan 260-FE (1960) for US$24 million for the first stiage of the Huinco (120 Mr3) hydro plant and the Marcapomacocha diversion. The project was completed satisfactorily. (ii) Loan 365-PE (1963) for US$15 million for the second stage of the Huinco (120 MW) hydro plant and the Marcapomacocha diversion and distribution system expansion. The project was completed satis- f actorily in 1966. (iii) Loan 464-FE (1966) for US$10 million for transmission and distri- bution system expansion during 1966-68. Satisfactory progress is being made on this project which is on schedule and about 30 per- cent complete. 3.05 Lima Light's performance under the three previous loan agreements has been satisfactory. Organization and Mangement 30o6 Lima Light's Board of Directors has 15 members, including the General Manager and three alternate directors, A majority of the directors reside in Lima, 3.07 The General Manager is the Chief Executive of the Company, He is assisted by an Associate General Manager and four departmental managers in charge of planning and new works, operations, commercial services, and general administration and finance0 The Associate General Maunager is in charge of the department of general relations and the Secretariat. At the  - 4 - end of 1966, the Company had 3,176 regular employees serving 293,000 customers, giving a satisfactory average of 135 customers per employee 3.08 The Company has a satisfactory organization and its relationship with the authorities and public is good. The top management is experienced, and in fulfillment of the conditions agreed to under Loan 464-PE (1966), steps are being taken, with the assistance of consultants, to improve the efficiency of operations involved in the middle level of supervision. Associated Companies Hidrandina 3e09 Energia Hidroelectrica Andina (Hidrandina) S.A. with its Head Office in Lima was established in 1946 by the Swiss holding group (paragraph 3.03) which still owns the majority of its shares, for the purpose of financing, constructing and operating hydro-power plants, At that time Lima Light had a closed mortgage securing its debt which prevented it from obtaining loans in the substantial amounts required to finance the expansion of its generating facilities,, 3.10 Hidrandina constructed two hydro plants, Moyopar.pa and Huampani and all power generated by these plarnts is purchased by Lima Light0 3.11 During negotiations for loan 464-FE the Bank suggested that Lima Light should re-examine its relationship with Hidrandina, in vi..w of the fact that the latter company's power plants and other properties are an integral part of Lima Light's system, In making this suggestion the Bank also took into account that Hidrandina, by constructing a plant 1/ in another concession area, was about to serve other interests in addition to those of Lima Light, This would require arrangements for the division of Hidrandina's expenses between two separate systems, Moreover, transfer of the Moyopampa and Huampani plants to Lima Light, would eventually result in an increase in the latter's net internal cash generation (paragraph 3.15)l 3.12 Towards the end of 1966 the Company submitted the following plan to the Bank for the acquisition of Hidrandina properties: Property to be Proposed Date transferred of Transfer Stage 1 Rimac River Derivation June 30, 1967 Stage 2 Huampani Power Plant June 30, 1968 Stage 3 Moyopampa Power Plant 1970 or 1971 1/ Construction started in March 1965 on a hydro plant on the Pativilca river, about 1l0 miles north of Lima.  - 5 - The price to be paid by the Company would be the residual book value of the assets at the time of transfer. The total amount involved is esti- mated at $14.5 million. The Company has confirmed that the need for funds to assure that the Matucana Project will be carried out has priority over its purchase of Hidrandina assets. Until all the properties are acquired by Lima Light the new contract dated January 4, 1967 regulates Lima Light's purchases of Hidrandina power. 3.13 The Swiss group that controls Hidrandina takes the attitude that its properties may only be sold if they can be substituted by other investments in electric power0 The proceeds from the sale of the Rimac River Derivation are being used by Hidrandina to finance construction of the Pativilca plants A payment of Si 50 million to be made in 1967 on account of the sale of the Huampani plant will be used for the same purpose0 Further payments on account of the Huampani plant will be made in annual installments and would probably be invested by Hidrandina in Pativilcals distribution system, Preliminary consideration is being given to other investment possibilities which would permit the sale of the Moyopampa plant. 3.14 Depreciation on Hidrandina's properties, which would be acquired by Lima Light, is now paid for by Lima Light as part of the cost of power purchases. From the date of each transfer of properties this depreciation will become a non-cash cost charge and be an additional source of funds in Lima Light's cash flow. On the other hand Lima Light will have to bear the costs of the operation and maintenance of the properties, an increase in its cr-erhead expenditure and of dividends and debt service on new shares and debentures placed to finance the acquisition. On balance, Lima Light's cash flow should improve as the result of each transfer and assuming that the additional cash flow during the acquisition period will be used to help pay for the last two stages of the transfer of properties, the acquisition program would be financed as follows: Sales of preferred shares Si 133.2 million Sales of common shares 63.5 I Sales of debentures 50.1 " Additional cash generated under the acquisition program during the period 1967 through 1971 112.6 " Limra Light's internal cash generation 31.6 " Total purchase price SZ 391.0 million 3.15 After the completion of the acquisition program, in 1971, the anmual net increase in Lima Light's cash flow is estimated to amount to S/ 63 million (US$203 million).  -6- 3.16 Prior to each transfer of assets, the Borrower will cbtain the Bank's agreement with the manner in which such transfer would be financed. The Borrower has also agreed to consult with the Bank should any problems arise in the execution of the acquisition program. This arrangement is satisfactory to the Bank. Atelsa 3.17 In 1965 Atencion Electrica S.A. (ATELSA) was founded to operate the portions of the distribution system owned by Lima Light which are located in the more remote and ner parts of its concession area and in the newly settled low income areas inside Lima. Atelsa has provided a means of operating these service areas in an economical manner by using the more rudimentary methods and facilities required in the initial development of new areas. Lina Light would not be able to do this under its labor agreements and other regulations. Atelsa obtains its revenues from fees and commissions paid it by Lima Light for services rendered. The principal shareholder in Atelsa is Latinalux (paragraph 6.21). Existing Installations 3.18 The generating capacity of the system was 485 Yd at the end of 1966, installed in one thermal plant (68 IV) and six hydro plants (417 W). Of this total only about 115 IjB was installed prior to 1955; since then 370 FI has been added including 240 MZI during 1965 and 1966 in the Huinco hydroelectric plant. See Maps 1 and 3 for plant locations. 3.19 The transmission and distribution system has been expanded continuously to meet increased demand and to transport power from the hydro plants to the load center in the Lima-Callao service area. This system is in good condition and is adequate to meet present system requirements. Bank Loan 464-PE (1966) was made to finance the transmission and distribution system expansion for 1966-68. This work is progressing satisfactorily. 4. PaIER MARKET 4.01 The population in the Company's concession area (greater Lima and Callao) is about 2,800,000 or 24 percent of the total population of Peru, The area is the main administrative, commercial and industrial center and principal power market of Peru. It contains 85 percent of the power capacity serving the public and about 20 percent of the captive plants, or about 42 percent of all the power capacity in the country,  4,02 The following figures for 1966 illustrate the extent of this market: Maximum Demand 291 M Annual Increase in Maximum Demand with respect to 1965 11.9% Annual Average Load Factor 59.3% Installed Capacity 485 MiW System Losses 10.4% Total Power Generation 1,423.1 GWh Increase in Generation over 1965 11.8% Classification and Number of Customers and Energy Sold: Classification Number of Increase Energy Sold Increase Customers In millions of kwh 1965 1966 % 1965 1966 % Residential 214,844 229,961 7.0 390 422 7,9 Commercial 53.,448 56,146 5e0 250 279 11.2 Industrial 3,518 3,753 6.7 441 506 14.5 Public Lighting 691 _ 791 14-5 54 62 14.8 Total 272,501 290,651 6.7 1.135 1,269 11.8 4,03 The Mantaro project being built by the Government would start to create a power market for central Peru which would include Lima Light's present market. The Government plans to construct the first stage of Mantarc (342 MW) for service in 1973 and, as demand develops, to install three additional 114 ItV units to complete the project to its full capacity of 684 HW, estimated to meet market requirements for the Central region until about 1978-80. 4.04 The immedia-te problem is to satisfy Lima Light's existing power market until Mantaro is available. This market had an average annual rate of growth of about 10% during the past 20 years increasing to 12% in 1966 and 14% during the first 6 months of 1967. 4.05 The method of load forecasting used by Lima Light is based upon a continuous review of the market trends and provides a satisfactory basi.s to determine the generating capacity needed to meet system demand economi- cally. See Annex 2 for further detail, Resulting from the forecast the  - 8 - average rate of growth is about 10 percent per annum and at this rate it is estimated the existing system generating capacity would be fully utilizcd by 1970, A plant of about 100 NW capacity would then be required for service in 1971, to meet forecast demand until 1973 when it too would be fully loaded and the N4antaro project should be in operation to supply further market needs. h.o6 The Government proposes to complete construction of the Lima - lca section of its 220 kV transmission system by 1968-69 and has asked Lima Light to sell power to this transmission system until Mantaro is in service. Initially the power demand will not be very large, about 10-20 MW, but the Government's purpose in making power available to the Ica area is to foster its general development and to permit the conversion of the existing irrigation pumping load, estimated at 40 M., now served by high cost captive diesel plants to purchasing power from the Mantaro system. The Mantaro project would also be available to serve the demands of mining companies in the area. 5. THE PROJECT 5.01 The Matucana project would consist of: (a) an intake and sand trap on the Rimac river at Tamboraque, (b) a 20 km free flow tunnel 3 meters in diameter from the intake to the forebay, (c) a 1,700 meter long steel penstock to convey the water from the forebay to the power station, (d) a power station in which two 60 M@ turbine-generator units operating under a head of 960 meters would be installed, (e) an 80 kim, 220 kV double circuit steel tower transmission line to connect the power plant to Lima, (f) 220 kV substation expansion in Lima to receive the power from the Matucana plant, (g) Distribution system expansion during 1969-70. 5002 The proposed Matucana power plant and Lima Light's existing plants are all located on the Santa Eulalia and Rimac rivers. See iHap 3e Hzdrology 5-03 Since the water of the Rimac river has been used in the Company's plants for over 30 years and continuous detailed records are available, the. expected flowT can be predicted reliably.  -9- Geology 5.04 The geological formations in which the Hatucana tunnel is to be built are in the same general area as the existing plants. Therefore the geology is well known and no unexpected problems are anticipated. Characteristics 5.05 Matucana would be essentially a run of the river plant since no storage reservoir can be built. However, the forebay is designed to provide 30,000m3 of pondage which is sufficient to provide some peaking capacity during the morning and evening peak hours. The plant would have a maximum capacity of 120 M1J and a firm generation of 440 Gwh annually. Construction 5.06 The plant would be constructed, in the same manner as the existing plants, by using local contractors and subcontractors under the supervision of Lima Light's consultants, Motor. Columbus, who designed the project. This arrangement has been satisfactory in the past and is acceptable for the proposed project, particularly since the principal item of civil works is tunnelling in which Peruvian contractors have considerable experience. The construction program is reasonable and provided contracts are placed as scheduled the project should be in operation in 1971 as planned. Procurement and Disbursement 5.07 The proposed loan would be used to finance the foreign exchange costs of equipment, consulting services and interest during construction. It would not finance the work carried out by local contractors. All goods to be financed with the loan would be procured in accordance with the Bank's normnal standards for international competitive bidding. Peruvian suppliers may compete in that bidding, and would be allowed a 15 percent margin of preference over the CIF landed cost (excluding customs duties), but if they were successful Lima Light lwould use resources other than the Bank loan to finance purchases from them. If the actual costs of the goods financed by the loan turned out to be less than estimated, the Bank would be able to exercise its right to cancel the undisbursed balance. Cost Estimate 5.08 The total cost of the project, including interest during construc- tion is estimated at S/ 1,364.4 million, US$50.5 million equivalent, of which about US$16.0 million equivalent would be the cost of imported services and goods procured through international bidding and US$1.5 million equivalent of interest during construction due to the Bank. 5.09 The estimate prepared by Lima Light with the assistance of the consultants is based upon known costs of the Hluinco plant, completed in ll9O6 adjusted for cost increases anticipated by the time the actual work is carried out and variations in cost due to the physical differences in the two projects. The estimate is realistic and satisfactory. In view of this up to date knowledge of construction costs, the overall contingency item {f about 10 percent which has been included in the cost estimate, is conside.Led adequate.  - 10 - 5.10 A Sunmary of Project costs follows and a List of Goods and services to be financed from the proposed loan is attached as Annex 3e Local Total I tem Currency Foreign Exchang Cost US$ S 0SI. Equivalent U (i n m i 1 1 i o n s) 1. Preliminary Works 44.1 0.3 0.01 44