El Salvador - Fifth Power Project

Report No.862 CONFIDENTIAL INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION PROJECT PERFORMANCE AUDIT on EL SALVADOR FIFTH POWER PROJECT (Credit 227-ES) September 10, 1975 Operations Evaluation Department  PROJECT PERFORMANCE AUDIT REPORT EL SALVADOR: FIFTH POWER PROJECT (Credit 227-ES) TABLE OF CONTENTS Page No. Summary i PROJECT PERFORMANCE AUDIT MEMORANDUM I. Background 1 II. Project Implementation 2 III. Financial Aspects 2 IV. Economic Justification 3 V. Bank's Performance 4 VI. Conclusion 4 Attachment: PROJECT COMPLETION REPORT Project Data 1 Project Description 2 Objective and Justification 2 Construction Schedule and Problems Encountered 3 Cost Estimates 3 Principal Contracts 4 Allocation of Credit Proceeds 5 Consultants 5 Organization and Management 5 Financing 5 Financial Ratios 7 Auditors 8 Useful Lessons Arising from the Project 8 Annexes 1. CEL - Actual vs. Forecasted Income Statement 2. CEL - Actual vs. Forecasted Balance Sheet 3. CEL - Actual vs. Forecasted Sources and Application of Funds Currency Equivalent (Colon) US$ 1 = 0 2.5  SUMMARY i. Credit 227-ES of $5.6 million to the Government of El Salvador and re- lent to Comision Ejecutiva Hidroelectrica del Rio Lempa (CEL) at 7k percent for a term of 20 years, was signed on January 13, 1971, became effective in October 1971 and was closed in January 1974. The purpose of the credit was to help finance the foreign exchange cost of a $7.0 million project expected to account for about 32 percent of CEL's 1970-1973 expansion program. The project consisted principally of: (i) the Soyapango gas turbine station with two 16.5 MW units; (ii) construction of a 115 kV single-circuit transmission line between San Rafael Cedros and San Miguel (see map). ii. The gas turbine, which accounted for 53 percent of expected and 55 per- cent of actual project cost, was completed on schedule but cost about 32 percent more than originally estimated. The main reason for the cost overrun was the weakness of the US dollar during the construction period which increased the price of the equipment purchased from Japanese suppliers, and a minor underestimation of civil works. The installation of the Soyapango gas turbine was necessary to meet the peak load and was the least cost and most flexible addition to CEL's system in spite of the cost overrun. iii. The new 115 kV transmission line, which accounted for 29 percent of ex- pected and 35 percent of actual project cost, was energized in May 1973 compared to early 1973 as originally envisaged, and cost 34 percent more than estimated at appraisal. The minor delay was due to workers' strikes in Italy (which produced the steel towers) and to delays in acquiring rights-of-way. The main reasons for the cost overrun were underestimation of land acquisition costs and higher labor expenses. The transmission line finally selected is probably still the least cost solution, in spite of the overrun. iv. CEL's financial performance was slightly better than estimated. Most financial indicators were stronger than forecasted. CEL's construction program during the 1970-73 period was 49 percent higher than projected, and the company financed 44 percent through internal cash generation (net of debt service) as compared to the 57 percent expected. Energy sales increased on the average by 10.6 percent per year as compared to the 9.5 percent forecasted at appraisal. Average revenue per unit sold was also slightly higher than projected because a 5 percent reduction in wholesale tariffs, as envisaged at appraisal, did not take place. The financial covenants were adhered to. v. The major objectives of this project have been met. The attention given by the Bank during construction - two supervision missions - was adequate. The Bank also seems to have influenced the Government in granting Compania Alum- brado Electrico de San Salvador (CAESS) a tariff increase which was needed to ensure adequate distribution expansion.  PROJECT PERFORMANCE AUDIT MEMORANDUM EL SALVADOR FIFTH POWER PROJECT (Credit 227-ES) This memorandum reports on an audit of achievements under the El Salva- dor Fifth Power Project, for whch Credit 227-ES of January 1971, of US$ 5.6 mil- lion was closed in January 1974. It is based on a review of the substance of the corresponding Project Completion Report (PCR) herewith attached as prepared by the Latin America and the Caribbean Regional Office, against other relevant reports and important material from Bank files (Appraisal Report, Credit and Project Agreements, Progress Reports, Supervision Reports, and correspondence between Bank and Borrower) and on discussions with Bank staff who had been involved with the project. I. Background 1.1 The Bank Group has been associated with the Comision Ejecutiva Hidroelec- trica del Rio Lempa (CEL) since 1949 and had made four separate loans amounting to US$ 24.7 million prior to granting this credit. CEL, an autonomous corporation created by Congress in 1945 and wholly government-owned, has provided practically all generating and transmission facilities in El Salvador since 1954 and has inter- connected all the distribution companies servicing the country. In 1961, CEL began a program of rural electrification to provide electricity to areas not served by private companies, and now supplies electricity to over 500 villages with a popula- tion of 75,000. However, about 95 percent of CEL's sales have been, over the past four years, on a wholesale basis; as a consequence, distribution has remained a marginal activity in operational terms. 1.2 In 1966, Harza Engineering Company International prepared a feasibility report on El Salvador Electric Power Development. A hydroelectric project at Cer- ron Grande together with future steam plant and/or geothermal plants were consid- ered to cover CEL's needs from 1971 and on7ards, but the sequence in which the plants were to be constructed was left open, pending completion of a geothermal study (financed by UNDP). The study showed promising results and indicated that sufficient geothermal resources existed in El Salvador to justify further investi- gation. Hence, CEL decided to take the calculated risk of eliminating the Cerron Grande hydroelectric project from consideration for the next stage of its power expansion in view of the time needed to construct it. However, of five holes drilled under a 1969 geothermal power survey only one was successful (near Ahua- chapan in the western part of the country). CEL then requested further UNDP assistance for a feasibility study for a first stage geothermal development in the western part of the country, with the possibility of a 30 MW unit entering service at the end of 1973. In the meantime, it was decided that the installation of two 16.5 MW gas turbines would be the least cost solution to ensure reliability of service until the additional major investment in the power sector was completed. 1.3 In January 1970, the Government of El Salvador requested the IDA credit to help finance the gas turbines and a transmission line. CEL was not particularly interested in coming to the Bank Group for financing at that stage since it expected to obtain suppliers' credits for the gas turbines on reasonably favorable terms and would then look to the Bank Group for the financing of the next major phase of its expansion program. However, the low level of IDA financing in Latin America at the time seemed to have been a special reason for proceeding with IDA lending in El Salvador, which at the time was one of the few Latin American countries that could establish a claim for IDA eligibility. Thus, the credit was made to - 2 - the Republic of El Salvador and the proceeds were relent to CEL at 71 percent interest for a term of 20 years, including a 2 year grace period. 1.4 The project was appraised in July 1970 and the credit was signed on January 13,1971, but it did not become effective until October 1971 - six months later than expected. The delay was due to new requirements adopted by the National Assembly of El Salvador at the time, whereby all documents had to be submitted in Spanish. 1.5 The project comprised the Soyapango gas turbine station, with two 16.5 MW units, and the construction of a 115 kV single-circuit transmission line between San Rafael Cedros and San Miguel (see map, and PCR, para. 16). Both facilities were to be commissioned in early 1973. The US$ 5.6 million IDA credit was to cover the foreign exchange cost of the project and the local component of US$ 1.36 million equivalent was to be financed through CEL's internal cash generation. The IDA credit agreement stipulated financial and institutional covenants which were all adhered to. II. Project Implementation 2.1 Despite the delay in making the credit effective, the execution of the project proceeded on schedule. The major contracts were awarded in the early part of 1971, and the good credit standing and cash position of CEL made it possible to deal quite comfortably with suppliers. The physical project was implemented as planned (PCR, para. 18) but with a cost overrun of 27.6 percent. The main reason for the cost overrun on the gas turbine was the price increase in terms of US dollars of the equipment purchased from Japanese suppliers, and underestimation of labor and civil works (PCR, paras. 19 and 27). IDA recommended limiting the power station building design to essentials. CEL, however, which was in a comfortable financial position, decided to go ahead with a design substantially different from that discussed during appraisal. The cost overrun on this item was about $100,000. The cost overrun on the transmission line was mainly due to underestimation of right-of-way and land acquisition costs, which were based on CEL's past experience and not on a land price survey (PCR, para. 27). III. Financial Aspects 3.1 The financial performance of CEL during 1970-73 was slightly better than estimated, mainly because a planned 5 percent reduction in wholesale tariffs did not take place (see below, and PCR, para. 27). The rate of return was always higher than projected except for 1973 when it fell somewhat but not below the 9 per- cent required in the credit agreement. Most other financial indicators were stronger than forecasted. CEL's actual construction program during the period was 49 percent higher than projected. Of this increase, the Soyapango gas turbine and the transmission line accounted for US$ 1.7 million and CEL's other works accounted for US$ 8.7 million. CEL financed 44 percent of its investment during this period by internal cash generation (net of debt service) as compared to 57 percent origin- ally envisaged (PCR, para. 24). 3.2 A 5 percent reduction in wholesale tariffs by 1971 was envisaged at the time of appraisal because it was found that at current tariff levels CEL would con- tinue to generate more funds than necessary for the normal financing of its expansion program. This reduction was to lower CAESS' (Compania Alumbrado Electrico de San - 3 - Salvador, a subsidiary of the Canadian International Power Company and CEL's largest customer) cost of purchased electricity and provide a substitute for its request to increase retail tariffs. CAESS had earlier requested a tariff in- crease- as the return on its net equity was less than 8 percent, but was refused the increase because the Government and CAESS did not agree upon the definition of taxes to be allowed in the rate base calculation. Prior to signing the credit, the Government and CAESS finally came to an agreement and CAESS was granted a retail tariff increase. Since, in addition, CEL's construction program during the 1970-73 period was higher than projected, the 5 percent reduction in whole- sale tariffs was not made (PCR, para. 25b). IV. Economic Justification 4.1 The installation of the Soyapango gas turbine was necessary to meet the peak load and was the least cost and most flexible addition to CEL's system in spite of the capital cost overrun (PCR, para. 17). 4.2 El Salvador has good hydropower sources and three projects on the Rio Lempa, together with a geothermal plant, were included in CEL's long term plans. At appraisal, only thermal plants were considered as the first step in CEL's development program (PCR, para. 17) since only gas and steam units could be com- pleted in time to meet the minimum standby requirements by the end of 1972. For the first step in the development program, the 33 MW gas turbine plant was the least cost choice and found well suited for the standby duty required. Because of a severe lack of rainfall in the 1972 rainy season which resulted in shortage of water in storage for the 1972-73 dry season (November-April), CEL had to in- stall an additional 25.6 MW gas turbine on short notice to meet the peak load and energy sales, which were slightly higher than the appraisal estimate for the 1970-73 period, as shown below. CEL never shed any load during this four-year period. Peak Load Energy Sales MW Growth (%) MW Growth (%) Act. Est. Act. Est. Act. Est. Act. Est. 1970 121 119 11.0 9.2 539 539 8.0 8.0 1971 133 130 9.9 9.2 598 588 10.9 9.1 1972 149 142 12.0 9.2 673 646 12.5 9.9 1973 162 158 8.7 11.3 746 717 10.8 11.0 Average Growth (%) 10.4 9.7 10.6 9.5 4.3 In retrospect, even the 66 MW steam alternative or the 66 MW combined steam and gas turbine alternative (PCR, para. 17) would not have been more econ- omical since CEL, from 1977 and onwards, is planning to generate all its electricity 1/ Except for CEL, all electricity companies in El Salvador are subject to a general regulatory law, which provides that tariff increases should be granted if any company's returnon its "patrimonio" (substantially equivalent to net equity) is consistently below 8 percent. CEL's charter gives it the authority, with approval of the Minister of Economy, to establish power rates to cover its costs and meet its obligations under agreements with its creditors. from its hydro and geothermal sources and the thermal units will only be needed for standby requirements. Gas turbines have lower capital cost than steam units, and with their quick and frequent starts and stops, they are universally employed for this kind of duty. 4.4 At appraisal, it was found that the least cost solution for meeting the country's transmission requirements assuming a 12 percent!! growth in demand, was the construction of a new 115 kV line from San Rafael Cedros to San Miguel for com- pletion by the end of 1972 and conversion of the existing 69 kV line to 115 kV by the end of 1977, which for discount rates up to 12 percent gave the lowest present worth. Two other alternatives were also considered (PCR, para. 17) of which conversion of the 69 kV line by 1972 and construction of a new 115 kV line by 1977 was the next best. Because of the cost overrun on the transmission work, which was mainly due to underestimation of land acquisition costs, the alternative finally selected gives only the lowest present worth for discount rates up to 8 percent, assuming that CEL will go ahead and convert the 69 kV line to 115 kV by the end of 1977.2/ Should CEL postpone the conversion of the 69 kV line till 1979, the chosen transmission program gives only the lowest present worth for discount rates up to 6 percent and gets less attractive the longer it is postponed. At 10 percent, which is considered the opportunity cost of capital in El Salvador, the conversion of the 69 kV line to 115 kV by 1972 and construction of a new 115 kV line by 1977 would, in retrospect, have been the least cost solution. However, at that discount rate, the cost difference between the two best alternatives is only US$ 64,000, so the chosen transmission program is probably still a worthwhile investment, especially since there might have been some cost overruns had the 69 kV line been converted, as the cost of labor also was slightly underestimated at appraisal. V. Bank's Performance 5.1 Two supervision missions took place during construction, in 1972 and 1973, but in connection with the subsequent power project of CEL financed by Bank Loan 889-ES. This was adequate and turned out to have been a flexible and economical way of dealing with a relatively simple project. 5.2 The Bank seems to have contributed positively toward the agreement finally reached between the Government and CAESS concerning tariff increases, by expressing its concern that CEL was depending on CAESS' continuing ability and willingness to expand, and by indicating that CEL's overall program could be materially affected by a continuing unresolved dispute between CAESS and the Government; particularly if the lack of a tariff increase would inhibit CAESS from financing adequate distribu- tion expansion. V. Conclusion 6.1 The major objectives of this project have been achieved. In spite of the cost overrun, the gas turbine was the most economical system addition that 1! At appraisal a 9.5 percent annual growth in sales was projected for financial calculations. For system planning a 12 percent annual growth was assumed. 2/ The costs assumed at the time of appraisal for operation and maintenance and conversion of the 69 kV line to 115 kV were used in the calculation. - 5 - could have been made. At this point in time, the transmission line finally selected seems to be less attractive than its alternative at the time of appraisal. However, the cost difference is marginal and the chosen transmission work is pro- bably still a worthwhile investment considering the highly likely increase in labor costs of the alternative solution. Transmission work was needed in the eastern part of the country to meet the load and ensure reliability on the system. CEL complied with all the covenants, and its financial performance was satisfactory during the 1970-1973 period. 6.2 The Bank Group contributed positively toward this project. Supervision missions to El Salvador were few but adequate. The Bank also seems to have in- fluenced the Government in granting CAESS a tariff increase which was needed to ensure adequate distribution expansion. Attachment  PROJECT COMPLETION REPORT EL SALVADOR CREDIT NO. 227-ES 1. Borrower: Republic of El Salvador 2. Beneficiarys Comision Ejecutiva Hidroelectrica del Rio Lempa (CEL) 3. Credit Amount: US$5.6 million 4. Date of Credit Agreementi January 13, 1971 5. Effective Date: October 22, 1977 6. Closing Date: Decomber 31, 1973 7. Period of Grace: 10 years 8. Terms: 50 years 9. Interest Rate: None 10. Chargess Service, 3/ of 1% p.q. 11. Amortization: 1/2 of 1% paid semi-annually beginning April 15, 1981 and ending October, 1990, and 1-1/2% paid semi-annually thereafter to October 15, 2020. 12. Relending Terms: The credit proceeds were relent to CEL at 7-1/4% for a term of 20 years including a 2-1/2 year grace period. Amortization will be made in 35 semi-annual level payments, starting on April 15, 1973. The Gbvernment irrevocably designated CEL its agent for the purpose of withdrawals of credit proceeds. 13. Fiscal Year: Calendar Year l. Exchange Rate: US$ j2 .5 (Colon) 15. Appraisal Report No. and Date: PU-55a; December 1, 1970 -2- 16. Project Description The project consists of: (a) The Soyapango cil-fired gas turbine plant (2-16.5 MW units), complete with transforpition, accessory electrical equipment, and power station building. (b) 115-kV, single circuit, transmission line (109 km), on steel towers with terminal points at San Rafael Cedros and San Miguel substations and including: (i) 11A6 kV substations at Tecoluca and Usulutan, and (ii) modifications to existing substations at Soyapango, San Rafael Cedros, and San Miguel. 17. Objective and Justification The gas turbine p]2nt was installed to provide adequate system reserve capacity during the period (1970-1973) when studies were being completed on the long-range expansion program which incorporated major generating facilities, currently under construction. The transmission line was intended to improve service to the eastern part of the country which was being supplied through a single-circuit line expected to be fully loaded by year-end 1972. The selection of the gas turbine plant was made on the basis of an optimization study by CEL's consultants, Harza Engineering Compary Ihternational,com- prising of 25 different expansion programs where the first stage, included the following types of thermal plants: - 33 MW steam, - 66 MW steam, - 33 MW gas turbine, - 66 MW combined (gas turbine/steam) cycle. The results of the analyses showed that the least-cost solution for the first stage was the 33 MW gas turbine plant. In the case of the transmission line, three schemes were compared: (a) raising voltage level of existing line from 69 kV to 15 kV by 1972, (b) (a), plus an additional 135-kV line to enter into operation by 1977, (c) new 115-kV line by year-end 1972 and conversion of the existing 69-kv line to cperate at 115 kV by 1977. The least-cost solution was the one described in (c). Had current fuel prices and other costs been used in the comparison, the chosen solution would not have been different because: - 3 - - in the case of the generating plant, the relative differences among the types of plants for the first stage would have remained practically constant and no other type could have been installed within the relatively short period of time available for installation; - the value of energy losses computed for the transmission line comparisons would have risen proportionally in each scheme compared; - additional costs for land acquisition and rights of way which were underestimated would have applied to all schemes compared. The objectives of the project were met. However, an additional 25.MW gas turbine unit was installed by CEL in early 1973 to further increase reserve capacity because growth in energy sales (GWh) averaged 11.h% instead of the expected 10%. 18. Construction Schedule and Problems Encountered Commercial operation for the first generating unit was originally scheduled for October, 1972 and for the second in January 1973. By the end of December 1972, the plant was operational. The initial schedule for completion of the transmission line was for early 1973 and it was energized in MAy of 1973. No major modifications were made in designs or construction schedules, and the minor lag in completing the line was due to delays in acquiring rights of way and to workers' strikes in Italy which produced delivery delays of the steel towers. Insurance An insurance policy was obtained to cover the equipment during shipment and including a six months period from the time of delivery until its installation. The policy was obtained from Moreno International Inc. on December 28, 1971. At the end of coverage period under this policy, the assets were incorporated into the general insurance policy that CEL maintains with Hanover Insurance Company in El Salvador. 19. Cost Estimates The Fifth Power Project cost about US$8.9 million, or 27.6% higher than estimated. The principal reasons of the overrun were: (a) a large proportion of the eqidpment was purchased frcm Japanese suppliers. The weakness of the US dollar during the construction period led to a 13.8% increase in the foreign currency component representing 36.9% of the overrun; (b) original calculations underestimated land acquisition, plant site preparation, and local labor costs which in total represented an increase of US$0.92 million, or 7.9% of the overrun; (c) the remainder is attributable to higher engineering and supervision costs. A table showing estimated and actual costs appears below: --illions of US$---------------------- -------Estimated--- -Actua - Foreien Local Total Foreign Local Total Difference Gas Turbine Plant 3.36 0.3? 3.68 4.17 0.70 4.87 1.19 Transmisnion line 1.3P o.64 2.02 1.67 1.41 3.0 1.06 Contingencies 0.39 0.23 0.62 - - - - Direct Cost 5.13 1.19 6.32 5.8h 2.11. 7.95 1.63 &gineering and Supervision 0.47 0.17 0.6h 0.50 0.43 0.93 0.29 Total 5.60 1.36 6.96 6.34 2.54 8.8F 1.92 20. Principal Contracts Wbrks Ccntractor Final Amount Pld (thousands of-US$ equiv.) Gas Turbine Plant Hitachi Ltd. (Japan) Transmission Line SVECA (Venezuela) 13400 Transformers .91mitomo (Japan) 233 Control Switchboards United Power and Control (Substations) Systems Inc. (USA) l0h Telemetering Equipment Moore Division of Facker Co. (USA) 70 Power Line Carrier Equipment General Electric (USA) 85 Circuit Breakers 23 kV ydtsui (Japan) 15 Circuit Breakers h6 kV Isodel Sprecher (Switzerland) 18 aigineering Har2,a Engieering Co. (USA) 550 -5- 21. Allocation of Credit Proceeds ------US$ Equivalent----- Category Original Final I. (a) Gas Turbine Plant 3,360,000 3,746,286 (b) Transmission Line 1,380,000 1,408,664 II. Engineering Services h60,000 4h5s050 III. Unallocated 00,_000_ - 5,6001000 5Z6001000 22. Consultants CEL retained Harza Engineering Company (USA) as its consultants for final design and supervision of the complete project. The performance of the consultant was satisfactory. 23. Organization and Management CEL, an autonomous corporation created in 1945 and wholly owned by the Government, executed the project diligently and quite efficiently. The institution proved its maturity when in August 1971, a new Executive Director was appointed from within CEL's staff and the transition was carried out smoothly. No other major changes have taken place in the organization since 1971. 24. Financing CEL's 1970-1973 construction program (see Annex 3 and sumvary table below) was 49% higher than expected at the time of appraisal due to: (a) the 04.L (US$1.7) milion cost overrun on the Fifth Power Project; (b) the addition of o third gas turbine unit at Soyapango costing %5.5 (US$2.2)million; and (c) accelerated installation of the Ahuachapan geothermal plant and the Cerron Grande hydroelectric station, costing 037.8 (US$15.1) million; and (d) 02.5 (US$1.0) milion less expenditures on miscellaneous capital items and other studies than anticipated. These additional requirements were financed by: (P) 05.6 (US$2.2) million more in net cash generation plus contributions than anticipated; (b) loans frcm IBRD and the Inter-American Development Bank for the Ahuachapan geothermal plant and the Cerrcn Grande hydroelectric station amounting collectively to A2.7 (US$5.1) million more then anticipated; and (c) 011.0 (uS$4.h) miLicn more in bonds and supplier credits than anticipated. DLe to the substantial increase in the construction program, net onternal. cash generation plus contributions azcunted to only 44% of requirem6ntt rather than 57% as anticipated. The following table proci.es su=a:y informatism cn GEL s sources and applications of funds for the ysrr: 970-1973. Summ Fands Statement, 1970-1973 (in thousands of Colones) Appraisal Sources of Fnds ACtUal Egtimate J)ifference Internal Cash Generation Operating income and depreciation 76,326 74,004 2,322 Debt Service 31,982 37427 (255) Net Internal Cash Generation 41,3s 36,477 867 Contributions 819 - 819 Borrowings IBRD 889-ES 5,363 - 5,363 IDA 227-ES 13,94171/ 1k,000 (53) Future Foreign Loans (IDB 352,SF-E's) 17,790 10,500 7,290 Suppliers' Credits 4,851 - 4.,851 Central Bank LP 85 3,500 3,500 - Bonds 6 123 - 6120 Total Borrowings 20oo 23.571 Total Sources 64-477 Applications of Fnds Construction Program Fifth Power ProjectVf 21,718 17,400 4,318 Soyapango Uas Turbine do. 3 5,500 5,500 Sixth Project Cerron Grande (units nos. 1 & 2) 32,975 ) Ahuachapan Geotheral Plant 4s800 19,000) 18,775 Studies - ) Other Capital Expenditures, Studies, & Geothermal Survey 14562 17.10 t2578) Total 79,s55 3,550 26,015 Change in Working Capital 14_29. 10.937 242 Cash 6,129 3,324 (19) non-Cash 8050 2t613 Total Applications of Finds 22& 6k4z77 2925- if Final disbursement of bredit proceeds occurred in January 15, 1974. 2/ Does not include 0482,000 which was spent in early 1974. -7- 25. Financial Ratios Annexes 1, 2 and 3 show the actual and appraisal financial statements for 1970-73. As shown in the following tables, which compare the actual and appraisal estimates for rate of return, debt-service coverage, and operating ratio CEL's financial performance was satisfactory. Rate of Return 1970 1971 1972 1973 Appraisal 10.9 9.9 11.1 11.3 Actual 11.6 13.0 12.2 11.0 Times Debt-Service Covered by Internal Cash Generation Appraisal 2.1 1.6 1.8 2.5 Actual 2.5 1.9 2.1 2.3 Operating Ratio Appraisal 39.7 41.7 1.5 Ui.0 Actual 3-.R3 1l.9 2.11 51.6 In 1970, 1971, and 1972, the actual rates of return surpassed the covenanted return (9.0%) and the forecasted returns because: (a) actual 1970 and 1971 construction expenditures amounted to only 03.526 (US$1.41lo) million and 05.129 (US$2.051) million, or 29% and 57% below forecast, with the consequence that the average rate base for 1970, 1971 and 197? was 3%, 4% and 1% below forecast; (b) the forecasted 5% rate reduction in 1971 did not materialize and, consequently, net operating income was 8% and 9% above forecast in 1971 and 1972; (c) delays in transferring the cost of planning studies (shown as deferred charges) to the rate base; and (d) delays in transferring completed projects to the rate base. The deferred charges amounted to P.3 (US$2.9) million in 1970 and JM.2 (US$3.3) million in 1971; and the completed projects carried in wDrk in progress amounted to J10.2 (US$4.1) million at the end of 1973. If deferred charges had'been carried as part of the rate base in 1970 and 1971, and if the completed projects had been carried as part of the rate base in 1973, the keturns for 1970, 1971, 1972 and 19. would have been, respectively, U.0%, 10.b%, 11.8% and 10.6%. Because the 5% reduction in rates did not occur, revenues were sufficient to cover ftel costs whicl were substantially higher (B8%) than anticipated for the years 1970-73. To prevent further deterioration of its rate of return, CHL raised its rates 3h% in July 1971. 26. Auditors In the Project Agreement (Section L.02), CEL agreed to have its accounts and financial statements audited by independent auditors acceptable to the Association. Under Salvadorean law, the Central Reserve Bank has the power to appoint auditors for government-owned businesses; and the government is not legally in a position to require the Central Reserve Bank to appoint a particular auditor. Because CEL's auditors were not famiiar with public utility concepts, IDA did not find them acceptable; but the Central Reserve Bank appeared reluctant to change auditors. Eventually, CEL engaged a second external auditor, Carlos Escalante, who is responsible to CEL's Board of Directors and acceptable to the Association. 27. Useful Lessons arising from the Project Cost Estimates The project was quite simple and consequently estimates of construction costs could have been more accurate. EqWipment costs which represented 73% of the project were estimated very accurately. However, the rather large under- estimation of civil works for the power station, land acquisition, and rights of way accounted for about 48% of the cost overrun. Had the borrower followed Bank recommendations in limiting power station building design to essentials, economies in its construction would have been derived and final costs would have stayed within original estimates for this item. Although costs for rights of way were based on recent actual costs for similar transmission lines in CEL's system and there were no indications they would vary substantially, such costs should be given comprehensive scrutiny based on land price surveys rather than on historical costs alone. Financial Projections Because a 5% rate reduction did not materialize and because the actual growth rate (11.4%) of G'Wh sales exceeded the forecast (10.0%) during the period 1970-73, actual net operating income (057.6, or US$23.0 million) exceeded by 4% the forecast (0$.4, or US$22.2 million) despite fuel costs substantially higher (83%) than expected. Without the offsetting effect of these three factors, net operating income would have fallen below the forecasts. Fuel expenditures for 1972 and 1973 were substantially higher than expected because the dry season (November 1972-April 1973) was abnormally severe. Consequently, thermal plants had to be operated at higher load factors. In 1970 and 1971, the higher than expected fuel expenditures are attributable to underestimation of thermal generation. Nevertheless, it should be pointed out that actual net operating income during the period was reasonably close to forecast figures. Latin America and the Caribbean Regional Office May, 1975 EL SALVADOR CREDIT NO. 227-E COMISION EJECUTIVA HIDROELECTRICA DEL RIO LEMPA IN()ME STATEMEMITs: ACTUAL VS. FORECAST Thousand Colones 1970 1971 1972 1973 Actual Forecast Difference Actual Forecast Difference Actual Forecast Difference Actual Forecast Difference Sales in OWh 539 539 - 598 588 10 673 646 27 746 717 26 Revenue in Ctvs/kwh 4.06 4.00 0.06 4.04 3.79 0.25 4.03 3.78 0.25 3.99 3.77 0.22 Sales Revenues 21,865 21,555 310 24,187 22,282 1,905 27,115 24,420 2,695 29,783 27,040 2,743 Miscellaneous Revenues _ _8 785_2_ Total operating Revenues Operating Costs Generation - Fuel 1,401 970 431 1,765 1,260 505 2,995 1,770 1,225 5,566 2,240 3,326 - Other 1,665 1,550 115 1,962 1,640 322 2,153 1,800 353 2,548 1,950 598 Transmission & Distribution 923 1,100 (177) 1,194 1,240 (46) 1,282 1,350 (68) 1,391 1,550 (159) ~ ~.e .7' , 6'c T ;P-. 77 - 2-, 2.. /?1.. 5eRrA, - Customer & Other Costs 42 10 2 49 165 (116) 51 138 (87) 63 170 (107) Depreciation 3.59 414 16) 4 176 4264 j§8) 4.478 4,290 182651014 102 Total Operating Costs 1037 95 (9 a--39 11L51 10t13 1,374 Net Operating Income 13,499 12,997 502 14,067 12,995 1,o69 15,610 14,287 1.323 14,428 15,151 (723) Other Income 1 70 4 86 170 (84) 297 170 127 1 464 270 Net Income Before Interest ,9 T3 051 4, 55 7 07 TET T B TETH ) Interest Charge 2,433 3,129 (696) 2,279 3,130 (851) 2,349 2,974 (625) 3,531 3,075 456 Iess Interest Charged to Construction 33 1 (19) 8 4 ?29 J43) 1 575 342 Interest Expense 2,9 2,508 150) -1,91 2,80 _T95-) 1 2,04 (191) 2, PIT 2,500 Net Income from Operations 11,824 10,469 1,355 12,212 10,368 1,844 14,049 12,408 1,641 12,278 12,921 (643) Miscellaneous Items 14 - 14 11 - 11 - - - - - Net Income -10149 1,3Tl1 12,201 )10,30 I1173- M 2T U 921 79) Operating Ratio 38.3 39.7 (1.4) 41.9 41.7 (0.2) 42.4 41.5 0.9 51.6 44.0 7.6  EL SALVADOR CREDIT NO. 227-ES COMSION EJECUTIVA HIDROELECTRICA DEL RIO LEMPA BALIANCE SHEETS: ACTUAL Vs. FORECAST Thousand Colones 1970 1971 1972 1973 Actual Forecast Difference Actual Forecast Difference Actual Forecast Difference Actual Forecast Difference Fixed Assets 156,539 164,721 (8,182) 164,449 165,851 (1,402) 165,508 166,851 (1,343) 179,131 187,168 (8,037) Less: Depreciation &0 @E~f 35 737 (82 914 4 1 64-1 12 T773 Work in Progress ) ) Total Fixed Assets M33 15,25 3_7 )I10 13,42 - -11 __T7989 _"73 151I07 __7W1 _199,502E47 -W Investments 300 100 200 300 100 200 300 100 200 300 100 200 Intangible Assets: Geothermal Survey 9) 4,146 28,7 4,946 InagbeAst:Other Studies 7,849_) 278 8,7414) 27 2,2 6,79),13 5,146 Total Intangible Assets 7, ) )7 6 F 7 = ) )5 -7rW- Current Assets: Cash 1.592 285 1,307 7,567 3.262 4,305 7,343 7,028 315 9,286 10,o44 (758) Accounts Receivable 3,457 3,200 257 3,979 3,500 479 4,697 3,800 897 5,303 4,100 1,203 Inventories 1,252 3,000 (1,748) 1,038 3,000 (1,962) 3,394 3,000 394 4,142 3,400 742 Other - - . - - - - - - - - - Total Current Assets 6,301 6,485 (184) 12,584 9,752 2,832 15,434 13,828 1,606 18,732 17,544 1,188 Total Assets 146,684 149,391 (2,707) 153,070 157,754 (4,684) 174,416 173,905 511 218,947 189,992 28,955 BILIT AND CAPITAL GoMe ME Grants 21,640 21,6L0 - 21,64o 21,640 - 21,917 01,6L0 277 22,183 21,640 543 Zon-Bturnabl 0otritationL 781 906 (12" 781 902 7' 2 L32 Anelatd ~1u fi78~26 76533 1.993 9,327 86.3011426 109,39 506 Total Wquty 107W W ..29U2 5,067I 45,547 1117274 I,230521 lwq-Term Borrowings IBD Ians: 22, 221, 263, 342-M 33.867 33,867 - 30,627 30,627 - 29,251 27,232 2, 019 30,998 23,677 7,321 Proposed Gov. loan fram IDA credit - - - - 4,875 (4,875) 12,088 13,050 (962) 14, 5 13,780 665 Future Foreign loans (IDB 352, Br-M) - - - - 700 (700) - 3,500 (3,500) 17,790 10,500 7,290 Central Bank loans 4,138 5,1438 (1,300) 2,918 2,918 - 398 398 - 377 377 - Suppliers' Credit 1,564 1,412 152 1,005 853 152 445 293 152 4,527 - 4,527 1969 and 1975 Guaranteed % Bonds 4,075 4,075 - 3.234 3,234 - 2,357 2,357 - 1,642 1,642 - 7.2% Guaranteed Bonds - 621 6 121 Total long-Term Borrowing 43, b414) -73,-207 ) 1757M (2,21) 75,700 -7) 25,924 Other long-Ters Liabilities 144 - 1414 5 5 5 9 402 - 402 Current Liabilities Account Payable 1,949 5,020 (3,072) 1,943 5,100 (3,157) 2,212 5,220 (3,008) 4,267 5,440 (1,173) Other Current Liabilities 1 - 1 1 - 1 - - - 4 - 4 Short-Term Bank Advances - 0000) - - __--- Total Current Liabilities , 20 ,571) 5,100 1577) 2(2-M 73 ) Tl ) Total Liabilities and Capital 146,684 149,391 (2,707) 153,070 157,754 (4,684) 174,416 173,905 511 218,947 189,992 28,955  94 x -e ' 1 1- .3 .. . .!11 1 4.I. -,, 1 j H a i 43 3- <3- «... 3«, går lii a e s i r  b1,Ab e eu HOrtL ' MEX iCOk EL SALVADOR COMISION EJECUTIVA HIDROELECTRICA ýGJT ALA HFl N D) U R A S OAV DEL RIO L E MPA (CEL) Approximate imits of service area for the distribution companies ¯N I C A R A G UA 1 b KV Existing or under constrUction 6Metapdn 15 KV Under project 69 KV 22 KV å Substations b Under construction C Undet project GUAJOYO Hy Existing power plants PLAT ZGPO1/10 Power plant under project Possibje future dermsites El Sinqul 1 Paso del Oso o o 20 3o 40 50 K ,, Ro lepo OChoatenrongc Chalchuapa -- Santa Ana El Licinoä CINCO DE NOVIE e "Y ~HYDRO PL ANT qoiqu Ahuochopan opco S akepew Coahpegt.t Quelzaitepeque ¯Ÿ QuetnitoeqieE/ Tigre & Ciudad Barrios Nelopa G SOYAINEPANOio rncsoGtr Sa Nelnoa GASTURBINE PLANT &San Francisco Gatera im Sosoot .. ... .. .. ... ..San Antonio bad /Co utepeque So Ra elCd s 0,1 SAN SALVADOR å So Saanta ecna Accijutlw, ~~~~~ ~ ~ ~~ L PCJTATEMAm/0Ula o iet aa Chapitqu Santrso )deiiia Rs PLANT San EmioMonterito TecolucaI El Triunfo oLa Libertad Zacotecoluca Lo Herrodura ZaaeouaSon Miguel c.c SLa UnmnO- - Jiquiisco El Deirio c 0 The boundarts hown on this map do nt mpit etnrsmnt or accePtance bv the ldt Bant and its affitates.