Guatemala - Guacalate Power Project

ASK, 44f4 i 70/ RESTRICTED Report No. TO-625a 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 The report may not be published nor may it be quoted as-representing their views.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 THE INSTITUTO NACIONAL DE ELECTRIFICACION GUACALATE POWER PROJECT GUATEMALA June 3, 1968 Projects Department  CURRENCY EQUIVALENTS US$1 = Quetzal 1 Q 1 = US$1 Q0.01 = I Centavo = one U.S. cent (10 mills) Fiscal Year ends December 31 WEIGHTS AND MEASURES EQUIVALENTS One Kilometer (km) = 0. 622 miles One kilowatt (Kw) = 1000 watts One Megawatt (Mw) = 1000 kilowatts One gigawatthour (Gwh) = One million Kilowatthours (kwh)  GUATEMALA THE INSTITUTO NACIONAL DE ELECTRIFICACION GUACALATE PMWER PROJECT TABEE OF CONTENTS Page No. SUMMARY i 1. INTRODUCTION 1 2. THE BORROWER 1 History and Purpose 1 The Construction Program 2 Existing Facilities 2 Organization and Management 3 3. POWER MARKET 3 Central Region 3 Outlying Regions 4 4. THE PROJECT 5 Description of the Project 5 Justification for the Steam Plant 6 Atitlan Studies 7 Estimated Cost of the Project 8 Procurement and Construction 9 Operating Personnel 10 5. FINANCIAL ASPECTS 11 Accounting and Audits 11 Tariffs - General 11 Tariffs - Central Region 12 Tariffs - Outlying Regions 13 Present Financial Position 12 Past Operating Results 16 Proposed Financing Plan 16 Estimated Future Operating Results 18 Estimated Future Financial Position 18 6. CONCLUSIONS AND RECOMMENDATIONS 19 This report has been based on information supplied by the Instituto Nacional de Electrificacion to a mission consisting of Messrs. J. Beach, J. Fish, and A. A. M. Onslow of the Bank, wrhich visited Guatemala in September-October 1967, supplementing data collected by a mission consisting of Messrs. J. Beach and D. I. Miller of the Bank which visited Guatemala in June, 1967. Supplementary information was provided by INDE during negotiations.  GUATEMAJA TI3E I.NSTIT`UTO NACITONAL DIE EI.ECTI-E'ICACION LIST OF ANNEXES Annex 1. Historical and Forecast Maximum Demands and Plant Installation Program - Central System 2. Generation Forecast - Central System 3. Detailed Description of the Project 4. Income Statements - 1962-1967 5. Balance Sheets - 1961-1967 6. Estimated Income Statements - 1968-1971 7. Sources and Applications of Funds - 1968-1971 8. Forecast Balance Sheets - 1968-1971 MAP  GUATETMA INSTITUT0 NAC'0' NAL DE hlICTflIFICACION GUACALATEI-T 7R PROJECT SUIYIARY i. This report covers the appraisal of a project consisting of the installation of a 33-Mw steam-electric generating set at the Guacalate plant site near Escuintla and the provision of consulting services for the proposed Atitlan hydroelectric development. ii. A Bank loan has been requested by the Ingtituto Nacional de Elec- trificacion (INDE) to cover the foreign exchange cost of the Project the total cost of which is estimated to be the equivalent of US$8.9 million. The loan would be for the equivalent of US$7.0 million including interest during construction. This will bring the Bank's participation in INDE's current generation expansion program to US$22 million equivalent, or 68% of the total cost of US$32.5 million equivalent. iii. The proposed borrower, the Instituto Nacional de Electrificacion, is an autonomous agency of the Government of Guatemala. This would be the second loan to INDE. The previous loan of US$15 million equivalent, 487-GU signed March 10, 1967, was for the Jurun-Marinala hydroelectric project. iv. The Project is required to enable INDE to meet the forecast load growth and to improve system reliability and efficiency. It is technically sound, the estimated cost is reasonable, and the construction schedule is realistic. v. INDE would be capable of managing the construction of the Project with the assistance of consultants. Satisfactory operation of the Project would be assured by the employment of supervisory personnel to be provided by the contractors while training INDE's operating staff. vi. The Project costs would not adversely affect INDE's financial position. Existing tariffs would provide sufficient revenues so that INDE should continue to earn at least a 9% rate of return after 1969. vii. The potential benefits of the proposed Atitlan project are large. The pre-investment studies should be accelerated and should consider the possible advantages of interconnection with El Salvador. viii. The Project would be suitable for a Bank loan of US$7.0 million equivalent, for a period of 23 years including a grace period of about three years. i  GTJATEMALA THE INSTITUTO NA TOh-L DE EKI.CTRTFICACION GUACALATE POW-ER PROJECT 1. INTRODUCTION 1.01 This report covers the appraisal of a Project including installa- tion of a 33-Mw steam-electric generating unit, and consultants' services for studies and preliminary design of the Atitlan hydroelectric scheme. The Project forms the second stage of the expansion program of the Instituto Nacional de Electrificacion (INDE), a government-owned corporation responsible for development of power resources in Guatemala. 1.02 INDE has requested from the Bank a loan to cover the foreign exchange costs of the Project amounting to US$7.0 million equivalent including interest during construction. The total cost of the Project is estimated to be the equivalent of US$8.9 million. 1.03 The proposed loan would be the second Bank loan to INDE and would increase the Bank's participation in INDE's current generation-expansion pro- gram to US$22 million equivalent, or 68% of the total estimated cost of US$32.5 million. The first loan of US$15.0 million equivalent is being used as part of the financing for the Jurun-Marinala project and related facili- ties, the first stage of INDE's development program. This first loan, Loan 487-GU, was signed March 10, 1967, but did not become effective until November 14, 1967 due to extended consideration by the National Assembly. No delays in ratification are foreseen for the proposed loan. Disbursements under Loan 487-GU were more than US$2 million an of April 30, 1968, and the Pro- ject is proceeding satisfactorily and is expected to be completed as scheduled. 1.04 This report is based on information supplied by the Instituto Nacional de Electrificacion to a mission consisting of Messrs. J. Beach, J. Fish, and A. A. M. Onslow of the Bank, which visited Guatemala in September- October 1967, supplementing data collected by a mission consisting of Messrs. J. Beach and D. I. Miller of the Bank which visited Guatemala in June, 1967. Supplementary information was provided by INDE during negotiations. 2. THE BORROWER History and Purpose 2.01 The Borrower would be the Instituto Nacional de Electrificacion (INDE), an autonomous government agency created by Decree No. 1987 in May 1959 with full authority to develop Guatemala's electric power resources "for the general benefit of the nation." To this end it is permitted to generate, transmit, distribute, buy and sell electric energy. The decree also gave INDE the responsibility to regulate the power industry; although as discussed in para.5.O7 INDE is taking steps to divest itself of the regulatory func- tion.  - 2 - 2.02 Electricity generated by INDE is wholesaled to distributors. Oper- ations are conducted in four reglons of the country (see map) but 80% of INDE's sales are to the Empresa Electrica de Guatemala ("EEG" - a subsidiary of the American and Foreign Power Company) which serves the principal load center in and around Guatemala City in the Central Region. The proposed Pro- ject will augment INDEts capacity in this region. 2.03 Although the authority was established in 1959, because of the time required to form the organization and to turn over existing generating facilities,INDE did not become active until 1961. Before this date no single organization in Guatemala was responsible for the control of the power industry. Some of the functions of such an organization had been carried out by the Department of National Electrification which formed part of the Ministry of Public Works. The Department did not have any well-defined jurisdiction and in general its activities were confined to investigation of future hydroelectric projects and the provision of electric generati6n.facili- ties in some of the smaller communities, including operation of the Santa Maria system in the Western Region. The Construction Program 2.04 Decree No. 275 of September 1964 detailed the construction program which INDE was to undertake and gave authority to the Minister of the Treasury and Public Credits to provide such finance as was necessary. The projects specified were the Los Esclavos and El Porvenir hydro plants then under construction in the Central and Western Regions respectively, a gas turbine plant at Guacalate, the Jurun-Marinala hydroelectric scheme, and the study of the future development of Lake Atitlan. 2.05 INDE has since accepted the responsibility for providing all new generating capacity required to supply the public-service systems in the country, and the current generation-expansion program includes, in addition to the specified projects, a second gas-turbine unit, a 5000-kw diesel plant intended for the Atlantic region, and the proposed 33-Mw thermal plant. The future program now being studied would comprise additional generating capacity as required including the construction of Atitlan, transmission grids to interconnect the Central, Eastern and Western systems, a possible inter- connection with El Salvador, and distribution extensions in the outlying regions. Existing Facilities 2.06 The major facilities owned and operated by INDE comprise hydro plants at Los Esclavos (13 Mw), the three Michatoya plants (12 Mw), Santa Maria (5.8 Mw) and Rio Hondo (2.4 Mw); a diesel installation at San Felipe (2.4 Nw) in the Western Region, a 500-kwq diesel set at Puerto Barrios, and the gas turbine unit at Guacalate (12.5 Mw). The second ,2.5-Mw gas turbine unit at Guacalate is to be placed in commercial operation in June, 1968. The Michatoya plants (in the Central system) were transferred to INDE from EEG on November 14, 1967, under the terms of a purchase agreement negotiated in connection with the Jurun-Marinala project.  - 3 - 2.07 The Jurun-1Marina'La hydro project will have a capacity of 60 Mw when it is completed in 1970. Transmission lines and substations being construct- ed as part of that project will interconnect the Guatemala City load center with INDE's plants in the Central Region, including Guacalate, site of the proposed steam unit. Organization and Management 2.08 INDE's Board consists of five directors and three alternates. The members of the Board are appointed for indefinite terms by the Chief of Government through the Minister of Communications and Public Works. The five directors must include three engineers, one lawyer and an economist. All members participate in Board meetings but only the five directors are per- mitted to vote. In the absence of a director his powers are delegated to the alternate of the same profession. 2.09 Under the terms of the Jurun-Marinala loan, INDE was to employ consultants for assistance in reorganizing and strengthening INDE's management structure. Through no fault of INDE, delays have occurred in meeting this re- quirement but a contract has now been signed with Middle West Service Company and the Consultants have started work, so progress in this connection is sat- isfactory. There are no substantial shortcomings in INDE's present organiza- tion, but the Consultants' advice will enable INDE to meet the needs for changes in its management structure resulting from the rapid growth of the physical plant. 3. POWER MARKET Central Region 3.01 Guatemala City is the load center of the Central Region. BEG, operating under a 50-year concession granted in 1922, distributes power in Guatemala City and the adjoining provinces of Sacatepequez and Escuintla. EEG now has 53 Mw of generating capacity and INDE 37.5 Mw of capacity in this region. EEG does not intend to install further capacity since INDE has now assumed the responsibility for meeting generation needs. Daily operation of the system in the Central Region is controlled by an EEG dispatcher at Laguna, guided by generation schedules established by a coordinating commit- tee composed of EEG and INDE. 3.02 The load in the Central Region has experienced a recent growth of 12% to 14% per year. The peak demand in December 1966 was 86 Mw, an increase of 17.5% from December 1965. Per capita consumption in 1966 was 323 kwh, still among the lowest for principal population centers in Latin America. Generally, supply and distribution facilities have been made available to serve all potential customers within the service area and there was no signi- ficant unsatisfied demand, but in the last half of 1967 some load shedding through circuit interruption and deliberate lowering of voltage and frequency on peak was necessary to compensate for maintenance shutdowns of EEG generat- ing units. All generating units were returned to service by the end of the year but this situation, plus an end-of-year lull in general economic activi- ty, resulted in a 1967 peak demand of 89 Mw, only a 3% growth over 1966 although energy sales were up 8%. Normal growth is expected in 1968 as the capacity shortage will be relieved temporarily when INDE's Guacalate No. 2 gas turbine is placed in service.  -h - 3.03 Several projections of load growth in the Central Region have been made by INDE and INDE's consultants. These show annual growth rates of 12% to 14% and all are substantially in agreement. The forecasts reflect the sustained industrial development and new residential construction in Guate- mala City, and the general growth of the economy in the metropolitan area. These trends are expected to continue. Industrial sales accounted for 42% of total sales in 1966 and 1967, up from 314% in 1964. Residential sales are 31% with the remainder divided about equally between commercial sales and consumption for public uses (street lighting, government buildings, etc.). INDE has adopted the demand figures shown in Annex 2 for planning purposes, and these are considered reasonable. 3.04 Demand and energy requirements in the Central Region are expected to double by 1972, from the present 89 Mw to 176 Mw, and from 420 Gwh to 829 Gwh. The effect of the present peak-suppression should be temporary and demand and sales should recover to predicted values shortly after restric- tions are removed. In the decade after 1972, demand and energy are predicted to increase threefold to 610 Mw and 2,710 Gwh in 1982. 3.05 Annex 1 is a graph showing the forecast growth in demand. The curve has a curious step characteristic indicating that most of the load growth each year takes place in the last quarter. The increase in construc- tion activity at the end of the rainy season probably accounts for this and it must be taken into account for the proper scheduling of generating capa- city additions. 3.06 The annual load factor has held steady at about 53% throughout the past few years. INDE has assumed that the load mix will not change appre- ciably and has used a load factor of 54% for the load forecasts. This assumption is reasonable. Outlying Regions 3.07 Electricity consumption in the outlying regions (Western, Eastern, and Atlantic) accounts for only 20% of total usage in the country and was only 33 kwh per capita in 1966. INDE supplies about 80% of this amount; the remainder is generated by small municipal plants and independent suppliers. Total installed capacity serving public systems is about 25 Mw. About 30% of INDE's gross income is from sales in these regions. Although this per- centage is not expected to increase, load development in these regions will be a significant factor in INDE's future operations. 3.08 IDtE plans to develop an integrated grid supplying the Eastern, Western, and Central Regions. The Eastern Region will be interconnected with the Central system by sub-transmission lines now under construction around Los Esclavos. By the time these lines are completed there will be a deficiency of generating capacity in this region so about 20 million kwh will be imported from the Central System in 1970. The Western Region will be connected to the Central system as part of the Atitlan project, but additional generating capacity may be required in this area before the interconnection is established. No provision has been made in the financial plan for this ca- pacity since the scope and timing would depend on the scheduling of Atitlan.  3.09 The Government has instructed INDE to accelerate the expansion of electrical systems in the rural areas, and IiDE has prepared a construction program for the Eastern and Western Regions that would result in an increase in demand from the present 5,100 kw to 19,000 kw in 1972. However, as yet the economic feasibility of the entire program has not been justified, so for purposes of this report a reduced program has been assumed (seepara. 5.25). It is forecast that this moderate program would result in load increases of 12% per year in these regions. 3.10 INDE has contracted with a Guatemalan firm of consulting engineers to prepare a load growXth and expansion study for the Atlantic Region, in- cluding the new port facility at Puerto Matias de Galvez near Puerto Barrios. Estimates of demand and sales are not yet available for the expanded service area in this region, and so,for purposes of this report, sales forecasts are based on a continuation of the historical annual growth rate of 5%. This assumption is conservative. The 5000-kw diesel generating plant planned for Puerto Matias de Galvez, to be financed in part from proceeds of the Jurun-Marinala loan, has not been purchased pending completion of the new study, but the Bank has agreed to INDE's request to purchase the units for temporary installation in the Central Region. 3.11 Electric power in the northern half of the country is confined to a few small installations at administrative centers. The area is a sparsely-populated jungle lowland without significant prospect for develop- ment. Similarly, the remainder of the country outside the four regions considered is mostly mountainous with little need for electricity. Although substantial mineral resources are thought to exist, at present there are no known plans for mining, agricultural, or industrial developments requiring significant amounts of power located outside the four geographical regions discussed above. 4. THE PROJECT Description of the Project 4.01 A detailed description of the Project is given in Annex 3. The map shows the location of the proposed steam plant and the general arrange- ment of the system. The Project would consist of: (i) A steam-electric generating station with one 33-Mw unit to be constructed at INDE's Guacalate generating plant site near Escuintla, about 50 km south of Guatemala City, and (ii) Consultants' services for site investigations, studies and design of the first stage of the Atitlan hydro- electric project.  -6- Justification for the Steam Plant 4.02 Annex 2 indicates the anticipated system operation thlrough 1982 including the 33-Mw unit and assuming that both the Jurun-Marinala hydro plant and the steam unit come into service in 1970. The forecast shows that the proposed steam unit is needed to provide. base-load capacity through- out the period, including the year of initial operation, and also that, even with this unit, the reserve position will not be fully satisfactory until Atitlan is in service. 4.03 Under present schedules initial operation of the last units at Jurun-Marinala and the proposed steam plant will be nearly concurrent. By continuing the diesel units in base-load service, it would be possible to defer the steam unit for several months. However, INDE's decision to proceed on the present schedule is reasonable because if the steam unit were delayed, fuel cost savings of $100,000 per month would be foregone and no capacity would be available as reserve for emergencies and to allow for shutdowns for essential maintenance. 4.04 In the pre-investment report prepared by INDE's consultants, the 33-Mw unit size was selected as being the nearest standard rating above the 1968 capacity-shortage estimate of 25 megawatts. The construction schedule anticipated in that report has not been met so the unit will not be available to fulfill this requirement. However, the forecast operating plan (Annex 2) shows that the 33-Mw size is a reasonable choice, since if a smaller unit were selected additional capacity would be required before initial operation of the Atitlan project, while a larger standard-size unit (45 or 60 Mw) would not be fully utilized after completion of Atitlan. The selected steam con- ditions of 59.8 kg/cm2 at 482C (850 psi, 900F) are standard for this size unit and appropriate for the anticipated fuel cost and operating conditions. 4.05 The consultant's report also included a comparison between the steam unit and equivalent gas-turbine capacity. There are no other practi- cal alternatives. The steam unit showed a substantial economic advantage, as would be expected for the anticipated operating conditions. Installation of another gas turbine prior to completion of the steam plant has been proposed by EEG as necessary to avoid restricting growth in 1969. However, from INDE's standpoint the investment in a third turbine would not be justified. A program for system operation during this period has been developed by INDE, with the assistance and concurrence of EEG. This pro- gram contemplates temporary installation in the Central System of the diesel units to be purchased for use in the Atlantic region. The program is acceptable to the Bank. 4.06 The plant will use No. 6 heavy oil ("Bunker C" or residual) as fuel. The probable fuel source will be a refinery located about 2 km south of the plant site but INDE is also negotiating with a second firm which intends to construct a refinery on the Pacific Coast about 50 km from Guacalate. An adequate supply of fuel for the proposed plant will be available from either of these refineries or other suppliers within the country. Firm prices for fuel have not yet been established. Since the  - 7 - principal advantage of the Guacalate site is the anticipated saving in fuel transport cost, it is important to be certain that INDE will benefit from these savings. INDE has agreed to obtain commitments for fuel supply at a maximum price which will be sufficiently below the existing price to justify locating the plant as planned, before placing orders for equipment for the steam plant. This procedure is acceptable to the Bank. Atitlan Studies 4.07 The 400-Mw Atitlan hydroelectric scheme has been selected by INDE as the next stage in the development program. It is described briefly in Annex 3. This project was considered in the 1962 U.N. Special Fund study carried out by Acres International Limited, for which the Bank was executing agent, and feasibility studies have just been completed by Verbund-Plan (Austria) and SOFRELEC (France). Other reports include those by the con- sulting engineering firms of Harza and Electro-Watt, and INDE's own extensive preliminary studies. The overall project has been amply justified (Verbund- Plan estimates a unit cost of 8 mills/kwh, substantially less than the cost of equivalent thermal generation), but the details have not yet been established. The project entails the diversion of at least four rivers, several power-plant sites, and various unusual features so that the complete information necessary to delineate the project has not yet been available. The studies financed as part of this proposed project will provide the remaining information and carry the work through preparation of bidding documents for the first-stage facilities. 4.08 None of the previous investigations has considered the operational economics of the system as a whole and it is probable that a first-stage Atitlan development more intensive than that now proposed can be justified. In addition to the work outlined above, this should be considered in the studies forming part of the proposed 'Project. To assure this, INDE has agreed that the consultants selected and their terms of reference would be subject to the Bank's approval. 4.09 The Subcommittee on Electrification of the Committee of Economic Cooperation of the Central American Isthmus has prepared certain studies on the possibilities and advantages of interconnection between the national electrical grids of the various Central American republics. This Subcom- mittee recently completed a comprehensive report on interconnection between Guatemala and El Salvador. According to the report, the principal advan- tages of such an interconnection would be the savings resulting from maximum utilization of low-cost thermal energy from El Salvador and a more- intensive first-stage development at Atitlan. The two operating authorities (INDE and CEL--Comision Ejecutiva Hydroelectrica del Rio Lempa, El Salvador) are discussing a low-capacity interim interconnection to assist INFDE in meeting its 1968 peak, but it is unlikely that this can be accomplished in time to be of benefit since it has been determined that legislative action by both countries would be required to provide a legal basis for the interconnection. Interconnection would not be a substitute for the proposed Guacalate No. 3 steam unit since El Salvador will not have large amounts of surplus energy until about 1972. The cost of permanent inter- connecting lines and terminals is estimated at about US$3.1 million equiva- lent (Guatemala $2.0, El Salvador $1.1 million). Since this represents  - 8 - only a small percentage of the cost of the future power projects in each country and in view of the probable benefits, the Bank should encourage steps leading to interconnection. In particular, interconnection should be evaluated in the detailed planning for Atitlan and the necessary facilities included in the program at appropriate stages, if justified. INDE has agreed to require such a study as part of the consultant's work for Atitlan. Estimated Cost of the Project 4.1o The Broject is expected to cost the equivalent of US$8.9 million. The foreign exchange component, including interest during construction, is estimated to be US$7.0 million equivalent. A cost summary is given below. Estimated Cost (Quetz les or US$, thousands) 1 Foreign Local Total 1. Steam Plant, 33-Nw Site improvement and foundations 230 550 780 Structures 590 180 770 Steam generator 1,220 170 1,390 Turbine-generator and auxiliaries 1,300 .90 1,390 Electrical equipment 530 70 600 Contingencies. 380 130 510 Sub-Total 7,250 1,190 5, 4740 2. Consultants' Services Steam plant 174 45 219 Atitlan 2 076 665 2,741 Sub-Total 1,900 8,400 3. Interest During Construction 500 - 500 Total 7,000 1,900 8,900 4.11 The cost estimate for the steam plant is based on actual bid prices which have been received for the main equipment andcivil works, plus an allowance for supervisory services during the first year of commercial operation. There should be no difficulty in constructing the plant within the estimated cost. No allowance has been made for the cost of land since the site is already owned by INDE. The local-cost component for this Project appears low, but this is due in part to the extensive site work already performed by INDE and charged to the Guacalate No. 2 gas-turbine project. The unit cost would be the equivalent of US$165 per kilowatt, which is quite reasonable. 1/ US$1 = Quetzal 1  - 9 - 4.12 The cost shown for consultanst services for the Atitlan studies is based on a detailed estimate prepared by INDE. The work includes a study of possible lake-sealing methods and a substantial amount of exploration tunneling in addition to the usual geologic and seismic investigations, studies and design. Originally, INDE had planned to purchase the necessary equipment and perform much of the site investigation work with its own forces but INDE has now decided to include this work in the basic studies contract. This is acceptable to the Bank. The cost for the total Atitlan development would be about US$80 million and an allowance of US$2.7 million for initial engineering work is reasonable. The cost of the first stage project of about 150 Mw would be about US$45 million. Procurement and Construction 4.13 Contracts for all work other than consultants' services financed by the proposed loan would be awarded on the basis of international competi- tive bidding. Consultants' services would be obtained in accordance with conventional procedures as approved by the Bank. Disbursements would be for the foreign currency costs of imported equipment and services only. Expenditures prior to the date of the loan would not be eligible for re- imbursement, and should the Project be completed for less than estimated costs, any undisbursed amount of the proposed loan would be cancelled unless there were good grounds for applying savings to additional works. 4.14 INDE has retained the Swiss firm, Electro-Watt, of Zurich, for engineering services and supervision of construction of the steam plant. Specifications and bidding documents for the plant have been prepared and bids have been received and are being evaluated. The bidding documents are acceptable to the Bank. During negotiations INDE agreed that during the construction of the Project it will continue to employ consultants satis- factory to the Bank. 4.15 The estimated construction schedule for the steam plant requires 22 to 24 months from time of firm order to initial operation. This is considered to be a reasonable schedule since no unusual problems of site conditions, labor or transport are foreseen. It is assumed that contracts will be awarded in July 1968 so September 1, 1970, has been agreed as a reasonable date for start of commercial operation. 4.16 INDE is presently negotiating insurance cover for the various risks incurred by them. This insurance would be extended as required to include the proposed Project. 4.17 INDE is preparing to invite proposals for the Atitlan studies, and expects that the consultants would start work by the end of September 1968. The definitive site investigations and preparation of bid documents for the first construction contract are expected to take one year, with the remaining work to be completed in the following year. It is essential that this schedule, or a similar one, be met if the first Atitlan unit is to commence operation late in 1973 as required by the operating plan. INDE  - 10 - has agreed to accelerate the selection of consultants so that this schedule can be realized. Operating Personnel 4.18 INDE's present operating staff is familiar only with gas turbine, diesel and hydro machines. Additional personnel, skilled in steam plant operating techniques, will be needed to operate the new plant. This operating force must be developed through recruitment and training of new local staff or by hiring expatriates. INDE has prepared a training program which includes, in cooperation with C.EoL. in El Salvador, a period of apprenticeship for INDE personnel at C.E.L.s Acajutla steam plant, as well as instruction at the manufacturers' works and during the construction phases of the new unit at Guacalate. Full-time supervisory operators during the first year of commercial operation will be provided under a supplemen- tary agreement being negotiated by INDE with the equipment supplier. This program for providing operating personnel is acceptable to the Bank.  - 11 - 5. FINANCIAL ASPECTS Accounting and Audits 5.01 In the past INDE did not follow normal public utility accounting practices. Its records and statements were maintained in a manner related to "fund accounting" whereby all charges were applied against gross income irrespective of whether the charge was an operating expense or a capital expense. Depreciation was charged for office equipment, transportation and other miscellaneous equipment, and also for a small part of the Santa Maria regional system. Thus no depreciation had been charged for Guacalate, Los Esolavos, Rio Hondo system and the majority of the Santa Maria system. The result was that INDE's fixed assets were recorded at almost their original cost plus major rehabilitation cost. 5.02 In accordance with one of the conditions of Loan No. 487-GU, a firm of consultants has been advising INDE on changes which were necessary to set up its accounts in accordance with accepted accounting practices. Starting with fiscal year 1968, accounting procedures will be in accordance with their recommendations, and fixed assets have been revalued to reflect proper depreciation, and such values are used in the accounts as of January 1, 1968. 5.03 INDE's accounts were audited for the first time for the year 1966 and unfortunately owing to the late appointment of the auditor (April 1967) the result was not as comprehensive as one could have wished. The same auditor has been reappointed for audit of the 1967 accounts, who has presented his report in a form satisfactory to the Bank. 5.04 Under the provisions of Loan 487-GU INDE's financial statements are to be certified annually by an independent auditor acceptable to the Bank and copies transmitted to the Bank within four months of the end of the financial year. A similar clause has been included in the proposed Loan. Tariffs - General 5.05 The principles of a tariff policy have never been fully developed in Guatemala, and the tariffs charged by utilities have not been subjected to an effective control by any regulatory agency. In the past tariff privi- leges, including the supply of free energy to several towns, have been grant- ed in two of INDE's outlying regions. In the Central Region, EEG's conces- sion contract allows this private company to set its own rates although as a matter of policy they consult with the Government on.any proposed changes. 5.o6 When INDE was organized, regulatory functions were included in its charter, but lack of a defined program and qualified personnel prevented INDE from performing these functions. It is realized both by the Government and by INDE that the latter cannot combine indefinitely the Oiqpction of a tariff regulatory body with that of generating and supplying bulk power, although for the present it is necessary for INDE to fulfill this role in view of the lack of any feasible alternative.  12 - 5.07 As a condition of signing toan h87-GU, INDE was required to make arrangements acceptable to the Bank for the services of suitably qualified experts to organize a regulatory agency and to train the necessary person- nel. As a result, a study has been started by the U.N. Economic Committee for Latin America (CEPAL), which recent4y issued a prelliriary report cover- ing part of the terms of reference, namely background studies and the basis for laws covering the electricity supply industry. The progress in this respect is satisfactory, and no new conditions are proposed. Tariffs - Central Region 5.o8 Empresa Electrica de Guatemala (EEG) is INDE's principal customer in the Central System and they have recently signed an interim sales contract which fixes the price to be paid by EEG until December 31, 1968. A long- term contract will have to be negotiated before this date, and will become effective January 1, 1969. The principle upon which INDE has been negotiating with EEG is that a minimum rate of return of 10% will be earned by INDE on the average net value of its fixed plant used in the generation and trans- mission of power to EEG. This rate of return is calculated after charging rates for normal depreciation based on historic costs of the fixed assets in operation, actual costs of operation, maintenance and fuel and a reason- able proportion of INDE's central office overhead. The estimated deprecia- tion rates are based on different rates for diesel, gas turbine, hydro and transmission facilities and give a composite rate of approximately 3%, which is reasonable. 5.09 The interim sales contract with EEG provides for a maximum demand charge of Q2.50 per kw of demand per month, plus an energy charge of QO.0125 per kwh for the first 7 million kwh per month or for 80 kwh per kw of demand, if the latter figure should be higher. QO.008 per kwh is to be charged for the following 200 kwh per kw of demand and Q0.005 per kwh for any excess. An adjustment clause allowing for increased cost of fuel is included. 5.10 This tariff yields an average return of about QO.017 per kwh, which is reasonable from the viewpoint of both INDE and BEG. It is suffici- ent to enable INDE to achieve its required rate of return. It still permits EEG to earn a reasonable rate of return on its investment, since EEG has introduced a surcharge on retail sales, which surcharge comes into operation if the average cost of purchased power exceeds QO.0135 per kwh, a figure related to EEG's average generating cost. At present the rate of surcharge is 5%. 5.11 Over the last few years EEG has been able to finance a large proportion of its capital expansion program from its own internal cash generation and has paid cash dividends of increasing amounts. In the six years 1961 through 1966 EEG has earned the following rates of return on its average net fixed plant in operation (less plant financed by customers' contributions in aid of construction):  - 13 - Year Average Net Operating Revenues Percentage Plant (thousands of Quetzales) Rate of Return 1961 21,508 2,342 10.9 1962 21,809 2,759 12.7 1963 22,9h8 2,996 13.1 1964 24,230 3,347 13.8 1965 25,000 3,386 13.5 1966 26,142 3,480 13.3 5.12 EEGts debt/equity ratio in 1961 was 15/85 which was reduced to a ratio of 12/88 by the end of 1966 (debt Q3.1 million, equity Q23.7 million). Its long-term debt consists mainly of about Q2.9 million, 6% mortgage bonds due and payable April 1, 1971. This represents approximately 95% of its long-term debt outstanding. Other recent borrowings have been medium-term loans from suppliers. 5.13 This satisfactory financial position of EEG has been strengthened by the sale to the Government of the Michatoya System and it follows that it should be able to finance future capital expenditures for distribution facilities estimated at Q1.5 million to Q2 million annually, without recourse to substantial borrowing. Tariffs - Outlying Regions 5.1h Steps were previously taken to eliminate the concessional tariffs in the supply of electricity by INDE in the two outlying regions. An Agree- ment on the Santa Maria System (Western Region) was concluded in 1966, but that on the Rio Hondo (Eastern Region) was only recently agreed. 5.15 The original draft proposal on the Rio Hondo system was that there would be an agreement for 50 years from September 1, 1965, under which INDE would sell to the Municipality of Zacapa as from January 1, 1966, 600 kw of power with a plant factor of 50% at the generating cost of QO.0138 per kwh, the balance of the consumption being paid for in accordance with INDE's ordinary tariff for such consumers. The M5unicipality would credit to INDE the sum of Q161,000 representing the estimated cost of electricity from July 26, 1963, to December 31, 1965. This amount would be settled by handing over to INDE the rights, etc. of Rio Hondo I. The Government in turn undertook as from March 1967 to reimburse INDE the difference between the tariff charged to the Municipality of Zacapa and the tariff which should be charged. 5.16 This agreement was never ratified by the Municipal Council and a new agreement was proposed which was substantially the same except in that the agreement is not for a limited period, and the Municipality did not have to pay for any electricity until March 1, 1968, but as from that date would pay the ordinary tariffs charged by INDE. As compensation for this the Government, at no cost to INDE, paid to the Municipality of Zacapa the sum of Q150,000. This new agreement is in certain respects more advantageous to INDE, provided the Municipality settles its accounts promptly, which, we are assured, will be the case.  - 14 - 5.17 To insure that reasonable rates of return would be realized during the construction period, INDE and the Government, under the terms of Loan 487-GU, agreed that until December 31, 1970, INDE would realize a minimum rate of return of 10% on the net assets in its central region. Also, begin- ning 1971, tariffs would be maintained at levels to enable it to earn a minimum of 9% on its average net fixed assets for its total system after allowing for normal operating charges and straight line depreciation at a minimum rate of 0-2%. The ultimate aim of this tariff agreement is to earn an overall rate of return of 9% on all net fixed assets. From Annex 6 it will be seen that this should be achieved from fiscal year 1968 onwards. On the other hand, the forecast shows that the outlying regions would only contri- bute Q938,000 in the years 1968 and 1969 to the total net operating income. It is not until 1970, that the annual net operating income from these regions exceeds Q600,000. During negotiations INDE and the Government have agreed not to reduce tariffs in the outlying regions during the period of construc- tion and to maintain tariffs at a level to enable INDE to realize - (a) a 10% minimum rate of return on the average net assets in its Central Region until December 31, 1969, and (b) a 9% minimum rate of return on all its average net assets thereafter. Present Financial Position 5.18 The financial statements of INDE have been substantially rearranged for the purposes of this report. The revised balance sheets for 1961-1967 are shown in Annex 5. The main adjustments include the calculation of depreciation and also the capitalization of exploration and planning costs, which had been largely charged against operating income. LDE has recently reviewed the valuations of its assets and also its depreciation policies. These have been incorporated in the balance sheet as of December 31, 1967, shown in Annex 5. 5.19 On this basis INDE's position as of December 31, 1967, would have been as follows:  - 15 - ASSETS Ihousands of Quetzales Gross Plant in Service 17,099 Less: Depreciation Reserve 2,428 Net Plant in Service 14,671 Work in Progress 4,403 Total Fixed Assets 19,074 Exploration and Planning 1,215 Investments 124 Current Assets 4,556 Total Assets 24,969 LIABILITIES Government Capital Contributions 19,785 Government Grants 342 Surplus 829 Total Equity 20,956 Long-term Loans 3,596 Current Liabilities 417 Total Liabilities 214,969 Debt/Equity Ratio 15/85 5.20 INDE's capitalization consists mainly of equity contributions received from the Government upon which no interest is payable by INDE. These contributions have been made in the form of fixed assets or cash contributions for capital construction. Provision for part of the necessary funds was arranged with the Bank of Guatemala at an annual interest rate of 3% by the Government who issued Q15 million of bonds to INDE after approving INDE's expansion program. INDE was then free to convert their bonds into cash at the Bank of Guatemala as and when money was needed for the approved program. As of June 30, 1967, Q14.3 million had been obtained in this way. This method of financing will not be followed in future. It is proposed, now that the Q15 million have been utilized, that future Government contri- butions will have to be voted annually in the Government's budget. During negotiations an assurance was received from the Government that any funds necessary to complete the Project will be provided by it. 5.21 In June 1964 INDE incurred its first long-term debt, obtaining a 20-year loan from the Inter-American Development Bank in the sum of US$3-15 million. The purpose of this loan was to finance the foreign cost of the  16 - Los Esclavos project. The loan carries an interest rate of 5-3/4% with a commitment charge of 3/4% on the undrawn balance. After a three-year period of grace semiannual amortization payments of US$90,000 began in June 1967. As of December 1967 the balance outstanding was US$2.7 million and a further US$250,000 was receivable. Past Operating Results 5.22 Annex 4 shows past income statements as revised for the purpose of this report (paragraph 5.18). Although INDE was officially created in June 1959, its operations did not start until September 30, 1961, when the Government transferred two existing small systems and other assets to its ownership. INDE's Santa Maria system (previously a state-owned entity) has operated at a profit in spite of the fact that government establishments received a 50% discount and the municipality of Quezaltenango, which accounted for 42% of the total energy sales, paid only a fraction of cost for its power consumption. INDE's Rio Hondo system operated at a deficit during 1962-64 because many of the towns served had been receiving free energy. In 1965 gross revenue for the system was substantially increased because an amount of Q161,000 was included as compensation to be credited for free energy delivered to the municipality of Zacapa during the period from June 1963 through December 31, 1965. The retroactive compensation distorts INDE's actual performance for that year. 5.23 In the past, operating revenues were not sufficient to cover INDE's central office overhead, which includes the cost of planning, programming and execution of the country's power expansion program, and therefore the Government made yearly appropriations from the Treasury to cover these central office expenses. No such annual appropriations have been necessary since that made in 1965. Proposed Financing Plan 5.24 A forecast of Sources and Applications of Funds 1968 through 1971 is shown in Annex 7. The projections are based on the forecast income statements presented in Annex 6 and on the estimated capital ex- penditure program for the same period consisting of: (a) Completion of the Jurun-Marinala Project; (b) The proposed Project; (c) Atitlan, which will probably be the next expansion of the Central System, and (d) Expansion in the outlying regions. The financing for the period can be summarized as follows:  - 17 - Financial Requirements: In thousands of Q Construction Expenditures (excluding capitalized interest): Loan 487-GU Project - Balance 19,341 Proposed Project 8,h00 Atitlan (part) 18,715 Outlying systems 2,484 Total construction expenditures 48,940 Debt service (including capitalized interest) 6,335 Increase in working capital 341 Total 55,616 Would be Met From: Internal cash generation 16,121 Borrowings: Balance of IDB loan 250 Balance of IBRD Loan 487-GU 13,9h4 Proposed Loan 7,000 Foreign Loan for Atitlan (part) 12,228 Total Borrowings 33,h22 Government Contributions 6,073 Total 55,616 5.25 Under an agreement signed in making Loan 487-GU, INDE undertook, except with prior agreement of the Bank, to restrict normal development expenditure outside that Project to not more than Q500,000 in any twelve months. INDE has developed a program for considerable expansion of the outlying systems. This will be submitted to the Bank later together with the overall financing plan. It has been agreed during negotiations that during 1968 the sum of $98h,000 may be expended for such development, and, except as the Bank shall otherwise agree, the amount will remain at Q500,000 during 1969 through 1971, and this is reflected in Annex 7. 5.26 The financing proposed is as follows: (a) IBRD Loan 487-GU for $15 million at an interest rate of 6% per annum for a term of 25 years, including a grace period of four years. (b) The proposed loan of IZ$7 rmillion would be obtained in 1968. For the purposes of financial forecasts an interest rate of 6k% and a term of 23 years, including a grace period of about three years, has been assumed.  - 18 - (c) A future foreign loan at an interest rate of 06% to cover the foreign exchange costs of the Atitlan Project. (d) Government contributions from the National Budget to make up any deficit in the annual requirement. 5.27 Internal cash generation, after meeting debt service would finance about 20% of total capital requirements. This is acceptable in view of the short period during which INDE has been operating, thus precluding the possibility of building up large cash surpluses, and in view of the large development program. The remaining 80% would be financed,68% from borrowings and 12% from Government contributions. During negotiations assurances were obtained that no repayment of Government contributions will be required and that no interest or dividend payments on these amounts will be made without prior approval of the Bank. Estimated Future Operating Results 5.28 Forecast income statements of INDE for the years 1968 through 1971 are shown in Annex 6. They reflect future earnings as follows: (a) Central System: Based on the existing contract with EEG through 1968. For the years thereafter a new contract should be negotiated to allow a return of at least 10% in 1969 on the average net assets employed in the Central System and a minimum of 9% for 1970 onwards on the total average net assets employed by INDE. (b) Outlying systems: Based on the new tariffs introduced in 1967. 5.29 Based on these assumptions the net income from INDE's total opera- tions would provide interest coverage of between 1.6 and 3.0 times during 1968 through 1971. Internal cash generation would cover total debt service between 2.1 and 3.2 times during the same period. Estimated Future Financial Position 5.30 Forecast balance sheets for the years 1967 through 1971 are shown in Annex 8. It is estimated that INDE's total fixed assets would increase from Q20.1 million in 1967 to Q71.3 million in 1971. Work in progress (mainly Atitlan) would be Q28.7 million at the end of the forecast period. 5.31 INDE's debt/equity ratio would change from 15/85 in 1967 to 50/50 by the end of 1971, based on the assumptions in paragraph 5.26. During negotiations it was agreed that INDE will continue with a debt covenant similar to that under Loan 487-GU which stipulates a l.4 times coverage of maximum future debt service.  - 19 - 6. COTICLTUSIONS AND RECOtENDATIONS 6.01 The proposed Project is required to help INDE meet its commitments to serve a growing power demand in the Central Region and is justified. 6.02 The estimated cost of the Project is reasonable, the construction schedule is realistic and the arrangements for engineering and supervision of construction are satisfactory. The Project is considered to be tech- nically and economically sound. 6.03 The Project is suitable for a Bank loan of US$7 million equivalent for a term of 23 years including a grace period of about three years. During negotiations INDE agreed that: (i) Consultants and their terms of reference for services for the Atitlan Project will be subject to Bank approval (para- graphs h.08 and 4.09); (ii) It will continue to employ consultants acceptable to the Bank for engineering and supervision of construction of the steam plant (paragraph 4.14); (iii) It will continue to employ auditors acceptable to the Bank (paragraph 5.04); (iv) Until the end of 1969 tariffs will be so adjusted as to achieve a minimum rate of return of 10% on its net fixed assets in the Central System and there will be no reduction of tariffs in the outlying regions. A return of at least 9% on its entire average net fixed assets in operation should be achieved thereafter (paragraph 5.17); (v) It will not borrow, without the previous permission of the Bank, unless it can achieve a debt service coverage of at least 1.4 times its future maximum debt service requirements on existing and proposed debt (paragraph 5.31); and during negotiations assurances were also received from the Government that: (i) It will provide all necessary funds to enable INDE to cow'plete the Project (paragraph 5.20); (ii) No repayment of its contributions to INDE will be required and that no payments as dividends or interest on these contri- butions will be made without prior approval of the Bank (paragraph. 5.27). June 3, 1968  ANNEX I GUATEMALA: INDE-INSTITUTO NACIONAL DE ELECTRIFICACION HISTORICAL AND FORECAST MAXIMUM DEMANDS AND PLANT INSTALLATION PROGRAM-CENTRAL SYSTEM (MEGAWATTS) 1,000 -F-- -1--- 800 O 810 = == =r 600 =__ 40~~~~ ~~~~ ~ ~~~~~~~~ a ar = 20~~~~~~~~~~~~~~~~~~~~ 500 SM L M Cki~~~~~~~~~~~~~~~~~I < HISTORICAL > < FORECA~~~~~~ISTAL (R)8R - 31 400~~~~~~~~~~~~~~~~ Z Z 200 - - Z~~~~~~N- : c~~~ 0 co ~ 0_~~~~Z4L) INTALE w 0~~~~ Z > < w ~~~~~~AXIMUM DEMAND z ~ ~ I- U, 80 _~~~~~ 500 __ < ") 40~~~~~~F D _ 20 SEMI -LOGARITHMIC SCALE 15 I I I r. L 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 GE HISTORICAL 3w4 FORECAST (R) IBRD - 3613  GUATEJt 2!STITUTO NACIONAL DE ELECTRIFICACION Generation Forecast - Central System 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1. Syte Requiresents 1/ __ (a) mnd Mw 76 86 90 100 117 136 154 176 212 239 268 302 339 381 430 481 540 610 (b) Energy Gwh 352 393 4j20 ( 493) 556 626 734 829,} 977 1,095 1,225 1,373 1,538 1,722 1,929 2,160 2,420 2,710 2. Generating Calpab9iity 5?7Gut., .dt66 rFT5 iee1ar. as Turbines EEG Mw 21 21 21 21. 21 21 21 21 21 21 21 21 21 21 21 21 21 21 INDE Mw 12 12 12 24 297/ 24 24 24 24 24 24 24 24 24 24 24 24 24 (b) EEG Steam Mw 30 30 30 30 30 30 30 30 30 30 30 30 30 30 30 30 30 30 (c) GUACAALTE NO. 3 (INDE) Mw - - _ - - 31 31 31 31 31 31 31 31 31 31 31 31 31 (d) Exltins . Hydro EEG _YMw 13 13 1 1 1 1 1 1 1 1 1 1 1 1 1 1 i 1 Gwh 63 63 48 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 INDEY MY - 13 25 25, 45 85/ 85 85 85 85 85 85 85 85 85 85 85 85 Gwh - 28 70 11o 135 277 277 277 277 277 277 277 277 277 277 277 277 277 (e) Atitlan HydroW MW - - 9 _ - _ _ _ 92 92 138 184 276 276 322 368 368 368 (INDE) Gwh - - _ _ _ _ _ _ 96 234 272 550 1,050 1,144 1,144 1,144 1,144 1,144 3. OPerating_Plan (a)TLiHeseland Gas Turbines EEG Mv 20 20 21 20 21 12 9 12 20 24 24 16 - - - - - - Gih 45 41 41 65 82 49 6 52 110 90 150 80 - - - - - - INDE NW 13 12 13 24 29 12 7 17 8 21 15 8 - - 14 - - - Gwb 8 42 43 88 108 47 8 57 59 59 91 31 - - 73 - - - (b) EE Steam Mw 30 27 30 30 30 25 30 30 30 30 30 30 12 27 30 30 30 30 Gwh 235 227 228 225 225 163 210 210 200 200 200 200 56 124 200 200 200 200 (c) UACAIATE No. 3 MY - - - - - 30 31 31 31 31 31 31 30 30 31 31 31 31 (INDE-steami) Gvh - - - - - 87 230 230 230 230 230 230 150 170 230 230 230 230 (d) New Source/ Mw - - - - - - - - - _ _ _ _ _ 46 95 145 Gwh - - 304 564 854 (e) Atitlan Hydro MY - - - - - - - - 39 47 84 133 211 238 274 288 321 321 (INDE) Gwh - - - 96 234 272 550 1,050 1,1l4 1,144 1,144 1,144 1,144 (f) R siting ydro MH - 12 25 25 35 56 74 85 85 85 85 85 85 85 85 85 85 85 INDE (incl. Jurun) Gvh - 15 70 110 136 277 277 277 277 277 277 277 277 277 277 277 277 277 EEG MW 13 13 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 Gib 64 68 48 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 4. Reserves NW 0 3 (1) 1 9 56 38 16 72 hS 61 73 82 40 37 5/ 5/ 5/ 5. INLE Sales to EEG G0h 6 57 100 196 VWP240o 1.r 4394 1