Colombia - Yumbo Steam Plant Extension Project

RESTRICTE D R e p o r t N o. T.O 195 a This report was prepared for use within the Bank. In making it available to others, the Bank assumes no responsibility to them for the accuracy or completeness of the information contained herein. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT APPRAISAL OF THE EXTENSION OF THE YUMBO STEAM PLANT OF THE CENTRAL HIDROELECTRICA DEL RIO ANCHICAYA LTD. COLOMBIA December 3, 1958 Department of Technical Operations  CURRENCY EQUIVALENTS US$1 - 7.3 Pesos 1 Peso u US $0.137 1 million Pesos u US $137,000  COLOMBIA PPFRP ISQL OF THE . 7TFNfOT ET OF TIT YUI_PO STFAM PLANT of the CENTRAL HIDROELECTRICA DEL RIO ANCHIC-iYA LTD. CONTFNTS 2SeNo. Sumary i - ii I. INTRODUCTION 1 II. THE BCRRCWER 1 III. THE POWER MARKET 2 IV. THE PROJECT 4 V. DISTRIBUTION OF ENERGY IN CALI 6 VI. ORGANIZATION AND hANAGENENT 7 VII. FIMANCIPIL ASPECTS g VIII. CONCLUSIONS 12 ANNEXES Annex 1 - Distribution of Power Consumption in Cali in 1958 (estimated) Annex 2 - System Peak Load and Peaking Capability Annex 3 - System Sales and Generating Capability Annex 4 - Cost Estimate Annex 5 - Condensed and Rounded Balance Sheets as at December 31, 1955, 1956 and 1957 Annex 6 - Estimate of Earnings, Source and Application of Funds and Revenue Cover for Debt Service Annex 7 - Adjustedl Balance Sheet as at December 31, 1957 and Estimates of Balance Sheets as at December 31, 1959, 1961 and 1963 YAP - Layout System  SUMMARY The Government of Colombia requested the Bank in May 1958 to take ur) again consideration of a loan to the Central Hidroelectrica del Rio Anchicaya (CHIDRAL) of Cali for the financing of a second unit of 10,000 kw at its Yumbo steamplant, of which the Bank has made a preliminary study early in 1956. CIEDRAL, which is incorporated as a private company with the shares owned by a local development agency, the Departamento del Valle del Cauca and the Municipality of Cali, has obtained two previous loans from the Bank in 1950 and 1955, in the total amount of USt3 8,030,000. ii. The project as now presented consists primarily of (i) the addi- tion to the existing 10,000 kw steamplant at Yumbo of a second identical unit with the equipment supplied by the same manufacturers, (ii) the cor- responding expansion of the substations at Yurmbo and in Cali, (iii) the installation of a suction dredge for the remroval of deposits in the reser- voir of its Anchicaya hydroelectric plant, and (iv) completion of a 34.5 kv distribution ring and substations in Cali. The total foreign currency cost of these items is US$ 2.8 million. The distribution circuit will be carried out by the Empresas Municipales of Cali, which is the distributor in that city, and IS$ 550,000 of the loan woulcQ be re-lent to it for that purpose on terms similar to those of the Bank loan. The local currency cost (exclusive of the local cost of the aiistribution ring) would be rough- ly pesos 2.3 million. iii. The economic justification of the additional unit at Yumbo is well established. The area of Cali which CIfIDRAL serves is rapidly indus- trializing and growing in population. The additional capacity provided by the second unit will probably be absorbed within three years after its entering into service in 1959. The cost per kw installed and the cost of production of the additional unit, based on firm estimates, compare favor- ably with other projects of this type and size. The installation of the dredge at the reservoir of Anchicaya is required to preserve the plant's peaking capability. The completion of the cistribution circuit is neces- sary to ensure adequate distribution of the acdditional power from the second unit at Yumbo, and its inclusion in the loan is the most suitable method of' financing it. iV. The plans and specifications for the second unit at Yumbo and for the extension of the distribution facilities in Cali have been prepared by the Belgian firm SYNDIBEL. The firm has further been entrusted with the suLpervision of installation and testing of the unit, and will be given the same function for the distribution circuit. All the major equipment has been ordered for the second unit at Yumbo with suppliers' credits, but with only small payments made to date. v. The organization and staff of CHIDRAL is for the most part sound and its operations reasonably efficient. The manager has agreed to strength- en his staff as soon as possible through the addition of a deputy manager and/or a chief engineer, and a chief aispatching engineer, to cope with the fLture increase in the administrative and engineering problems of the com- pany. ContinuecL competence of management seems, therefore, assured. vi. The past growth of CHIORAL has been financed largely from capital contributions of its three shareholaers (i.e. the Government, the Lepartamento  ii- del Valle del Cauca and the Municipality of Cali), and the two Bank loans. Total capitalization at the end of 1957 was 91 million pesos of which this debt represented about 49/%. Very recently the majority ownership was trans- ferred from the Go-vernment to the Cauca Valley Corporation (CVC) the auton- omous local development agency. During the last few years CHIDRAL accumul- ated in addition a large medium and short-term debt of some 10 million pesos, incurred in part with government financing institutes and with banks, and in part with suppliers and contractors. This was the consequence, on the one hand, of: (i) the peso depreciations which nearly tripled the foreign debt service, (ii) continued increases in the operating costs due to in- flation, (iii) the ordering of the equipment for Yumbo 2 without assurance of its financing, and on the other hand (iv) delays in the additional capi- tal contributions from the shareholders, and (v) delays in the approval of tariff increases. vii. As CIILRAL is unable to carry this large short-term debt even with the proposed Bank loan and substantially increased tariffs, CVC as the majority shareholder has agreed to (i) assume 7.7 million pesos of this debt in return for additional shares, and (ii) extend to CHIDRAL 5.5 million pesos of new medium-term crecLit. In the financial projections it was furthermore assumed that (i) CHIDRAL would limit its expansion for the next three years essentially to completing the second unit at Yumbo; (ii) the cost of operation and maintenance woulcL continue to increase by certain per- centages each year due to inflation, and (iii) an increase of the average tariff rate would be granted of not less than 30/% not later than July 1, l'359. The proposed Loan Agreement provides as one of the conditions of effectiveness that a tariff increase satisfactory to the Bank has been authorized, and the Bank has informed the Government and CHIDRAL that it considers the above-mentioned increase to be the minimum. v-ii. Under these assumptions CHILRAL's net earnings together with the depreciation allowance, would produce enough cash during the next few years to meet the local currency cost of the proposed expansion at Yumbo, to pay off the remaining medium and short-term debt by 1960 and thereafter to pro- duce a modest surplus for investment. On the investm.ent calculated at its book cost (historic cost partly written up to reflect depreciations of the peso) the net earnings would represent a return of roughly 72g. ix. These financial results would be a substantial improvement over the past. They are still somewhat marginal, but they are based on the very conservative assumption of continued increases in the cost of labor and material without compensatory adjustments of the tariffs after July 1, 1959. x. A tariff covenant substantially to the same effect as that of the last loan to CHIDRAL is again included in the proposed Guarantee Agreement. In addition, the proposed Loan Agreement includes a debt limitation and a dividend limitation similar in scope to those of the previous Bank loans. xi. In conclusion, the project is technically and economically sound and, taking into account the measures to whicn the Government and CHIbRAL have agreed regarding its execution and financing, suitable for a Bank loan in the amount of US$p 2.8 million. The nature of the project would justify a term of 20 years, and the length of the construction period a grace period of about two years.  I. INTRODUCTION The Bank has so far made two loans to the Central Hidroelectrica del ho Anchicaya (CHIDRAL). The first for the equivalent of US$ 3,530,000 and signed on November 2, 1950, was to finance the foreign currency cost of its first plant, the Anchicaya hydroelectric plant with an initial capacity of 24,000 kw. The second was for the equivalent of US$ 4,500,000, signed in March 1955, to finance the foreign currency cost of an additional 20,000 kw unit at Anchicaya and the first unit of a new steamplant at Yumbo with a capacity of 10,000 kw. 2. In 1956 the Bank was requested to make a loan for the addition of a second identical unit of 10,000 kw at Yumbo and the related expansion of the main substations. A Bank mission reviewed the project at that time, but before submission of its report the Bank decided to suspend further lending until the economic and financial situation of the country had stabilized itself. Recently the Bank agreed to the request of the new government to consider the application again, and another Bank mission reviewed the project in June/July 1958. In the meantime CHIDRAL had pro- ceeded with the project as best it could with the limited funds at its disposal and placed the orders for the major equipment with supplierst credits. The proposed loan would be used in part to re-finance these orders. II. THE BORROWER 3. The Central Hidroelectrica del Rio Anchicaya (CHIDRAL) was in- corporated as a company in its present form in October 1950 for the pur- pcse of supplying power to the area of the Departamento del Valle del Cauca, beginning with its capital city of Cali. At that time 51% of its shares (total pesos 21 million) were held by the Instituto Electraguas (an agency of the national government), 237% by the Departamento del Valle and 26% by the municipality of Cali. In subsequent years the three share- holders made further contributions to the capital of CHIDRAL to finance its expansion, and by the end of 1957 share capital, including advance subscriptions, had reached pesos 37 million distributed as follows: Iristituto Electraguas 56%, Departamento del Valle 25% and the municipali- ty of Cali 19%. Very recently the shares of the Instituto were transferred tc) the Cauca Valley Corporation (CVC), the regional development agency created some three years ago. 4. The governing body of CHIDRAL is a board of directors, consist- ing of five members, appointed by the annual shareholders' meeting for one year. Three of the present directors represent CVC, one the Departa- mento del Valle and one the municipality of Cali. The principal executive of the company is the general manager. 5, CHIDRAL's capacity now totals 86,500 kw consisting of the Anchi- caya hydro plant recently expanded to 64,000 kw, small hydro and diesel p-Lants formerly belonging to the municipality, and the first stage of the Yuimbo steamplant. Practically all power generated by CHIRAL is sold to the Empresas Municipales of Cali who are sole distributors in the area of Cali and Yumbo.  6. Of the total investments of CHIDRAL, which anounted at the end of 1957 to pesos 111 million (at their book cost) roughly one-third came from the capital contributions of the shareholders, somewhat less than a hall from the Bank loans and the rest from other loans and miscellaneous sources. TII. THE POWER MARKET 7. CHIDRALs principal market is at present the municipality of Cali, whose Empresas IMunicipales are the sole aistributors in the area. Until July 1955, when the only sources of power of the municipality were the small hydro and diesel plants with a total capacity of 12,500 kw, the peak load and sales of the system were determined entirely by the available capacity, rather than by demand. From July 1955, when the first 24,000 k,w of Anchicaya entered into operation, until the end of 1957 the peak load jumped by some 6cf and kwh sales more than doubled, reflecting a large unsatisfied demand. The largest increase was in the industrial and com- mercial sectors, whose total consumption increased from 42 million kwh in 1955 to 101 million in 1957 and now represents roughly 6C0 of the sales. Annex 1 shows the use of power by principal classes of consumers. 8. Since the second half of 1957 the growth of load and sales has slowed down very considerably, because the backlog of demand has since been largely satisfied. In the forecasts shown in Annexes 2 and 3 a more modest growth of demand than 1955/57 has been assumed for the next few years, namely about 12% per year in sales in the Cali-Yumbo area and a somewhat smaller increase in the peak load. This is based on the assump- tions that: (i) a relatively srAllnuthr of industries still operating their own diesels would gradually be connected to the system, (ii) indus- trial and commercial consumption would increase at roughly 17o6 per year ana residential consumption at roughly 1(% per year. These forecasts assume that the political and economic situation would stabilize itself as promptly as now hoped for. 9. Annexes 2 and 3 show that under these assumptions the additional peaking capability provided by the proposed second unit at Yumbo is well justified and should be fully absorbed within two to three years after its entry into service in mid-1959. The load factor of the system thereafter should be roughly 56%. It could be said in retrospect that it might have been advisable to order this second unit of a larger size, covering the growth for another year or so, which would have reduced the overall capi- tal investment over the same perioo. and would have resulted in more efficient operation. 10. At present the system actually has a somewhat larger inherent reserve than shown in the tables, since several industries have maintained their diesel plants (total capacity some 6,0oo kw) as standby in case of failures at Anchicaya; it has been assumed, however, that these installa- tions will gradually be dismantled as CHILRAL's capacity increases and the industries become convinced of its cependability.  - 3 - 11. The forecasts of peaks and sales include supply of energy to (i) the Cia. Colombiana de Electricidad (one of the Colombian subsid- iaries of American and Foreign Power) serving principally the towns of Buga and Palmira to the north of Cali, and (ii) the Cia. Tulua, a private company serving the town of that name further north. Both companies are now interconnected with CHIDRAL by old 33 kv lines which, with some rehabilitation, can carry the envisaged loads. Both companies have their own small hydro and diesel plants, but are short of capacity for their rapidly industrializing areas. They have plans for acding new capacity, but their financing is stillfar from assured. Most of the planned addi- tions would, furthermore, be diesels which are relatively expensive to operate. 12. Because of this uncertainty about their own generating capabil- ity, and because power purchased from CHIDRAL would be cheaper than the fuel cost of their own diesels, both companies have asked CHIDRAL to suipply them as much energy as possible. CHIDRAL has agreed to do so without any contract, i.ee. ithout any commitments as to duration, amount, etc. Considering the needs of the two companies, it is likely that they will purchase substantial amounts even under these conditions. On the other hand, it is of interest to CHIvRAL to sell this energy as long as it has some excess generating capability, probably up to 1961. The only reason for it to sell less than envisaged would be for its own sales to gr'ow more rapidly than now anticipated. Despite the lack of contracts, it was, therefore, considered appropriate to include supply to the two companies in the forecasts. 13. Annexes 2 and 3 clearly show that the growth of the system after installation of the second unit at Yumbo will again reach first the peak- irig capability of the plant rather than its generating capability. How- ever, it should be kept in mind that the generating capability shown in the tables includes that of the dieeel pLant, which is very expensive to operate and should be used only in case of emergency; the economic generat- ing capability is, therefore, 65 million kwh smaller than shown in the tables. 114. The peaking capability of the system is being gradually reduced by continued silting in the Anchicaya reservoir. Contrary to the fore- cast of the consultants who designed the project, recent measurements show that since the start of operation in mid-1955 a substantial portion of the active storage has been lost. If silting were to continue at that rate the active storage would disappear within a few years, after which the plant would have to be operated as a run-of-river plant. An expert recently retained by CHIDRAL after consultation with the Bank, has con- firmed that the problem is serious. As measures to at least retard this silting he has recommended a combination of dredging in the reservoir and of building further upstream on the Anchicaya river and some of its tribu- taries a number of low debris-retaining barriers. CHIDPAL will proceed promptly with these measures. Together they will ada some 3-5% to the cost of generation of the system. The cost of the dredge, estimated at rDughly US$ 4OO,OOO, is included in the proposed loan. The costs of  its operation and of the debris barriers can be provided by the company's current revenues. IV. THE PROJECT 15. The existing plant at Yumbo, an industrial suburb of Cali, is of the "'semi-outdoor" type with one turbo-generator unit of a continuous capacity of 10,000 kw, a corresponding outdoor boiler of the convention- al type operating at 600 lbs/sq. inch and 8250F, and the standard auxiliaries. The fuel is coal from the existing mines in the area. The cooling water is obtained from the nearby Cauca river. A substation at the plant steps the voltage up to ll kv at which a line built in con- nection with the first unit carries the energy to the distribution sub- stations at Cali. The unit was put into operation in May 1958 and has since given satisfactory service. Design and supervision of construction of this first stage was entrusted to the Belgian firm SYNDIBEL, which performed this service satisfactorily. 16. The proposed addition of a second unit would be in all respects a duplicate of the first, ordered from the same French and Swiss manu- facturers. As the building, coal storage and handling plant, cooling waLter system and many auxiliaries were initially built for two units, the expansion is limited to the basic additional equipment at the plant and at the substations. SYNLIBEL was recently given an extension of their contract to provide design and supervision also for this second uniit. 1i7, The proposed loan will cover, in addition to the second unit at Yiunbo and the substation enlargement, four other items. The first is the cost of still unpaid engineering services and miscellaneous items of equipment for Anchicaya 4 ana Yumbo 1, amounting to US,p 150,000, which would have been eligible under the second loan but could not be paid because of insufficient funds in the loan account. The second is a pre- liminary study for the further expansion of the Yumbo plant, amounting to US. 100,000. The third is the cost of the above-mentioned dredge, esti- mated at roughly US$i 400,000, and the fourth is the expense for the com- p2e tion of the distribution ring in Cali (see detailed explanation in Chapter V), The following summarizes the foreign exchange cost of the various items to be covered by the Bank loan (given in more detail in Annex 4):  -5- US$ Equivalent Second unit at Yumbo 1,234,000 Enlargement of substations 227,000 Niscellaneous studies, services and items of equipment 250,000 Dredge and Auxiliary equipmlent 400,000 Completion of distribution ring of the Empresas Municipales de Cali 550,000 Contingencies 139,000 Total 2,800,000 18. The estimates of the foreign currency cost of the second unit at Yunbo are fairly firm, being based largely on contracts already placed with fixed prices, and on bills for services already performed. The esti- mates for the primary distribution were prepared by SYNLIBEL in 1955, based on detailed studies of the needs, and should, therefore, be quite co(mplete. They have been adjusted for the general price increases since that date. In view of the above, a contingency of US$ 139,000 for the entire loan can be considered adequate. 19. The local currency costs of pesos 2.3 million consist mostly of installation of the equipment, since the civil works were completed with the first unit. They are relatively small and their estimate not subject to much change. 20. The total cost of the additional unit, exclusive of the sub- station enlargements, would be roughly US$ 125 per kw installed, which is low for this type and size of plant, mostly because many facilities were already built with the first unit. 21. The orders for the major equipment for the second unit have been placed with the French and Swiss manufacturers of the equipment for the first unit, on the basis of price option which the manufacturers offered when they received the contracts for that unit. The awards of the orders for the first unit themselves were, however, based on wide international bidding. The contracts provide for medium term suppliersl credits but with the option, on the part of CHIDRAL, of accelerated pay- ments related to delivery in case of more favorable financing from other sources. 22. Present schedules provide for the major equipment, which is already manufactured but not delivered because of delay in the progress payments, to arrive at the plant early in 1959, and for the unit to go into operation early in 1960. 23. The coal supply to the Yumbo plant is not yet entirely depend- able. There is apparently no problem of reserves which can be mined economically, but the small indepencient producers are not fully equipped to maintain deliveries, sizes and qualities with the regularity required for a steamplant. CHIDRAL will, with the assistance of its consultants, complete as quickly as possible tests and studies now under way on the supply of the coal. Shortly thereafter it will award contracts with one  or two suppliers for the entire coal needs of the plant, covering a period of several years if a suitable basis can be devised for adjusting the price to increases in the cost of labor and materials. Alternatively, it will endeavor to place these contracts for a period of at least one year a-t fixed prices. V. DISTRIBUTION OF EIERGY IN CALI 24. All energy in the Cali-Yumbo area is distributed by Empresas Mumicipales of Cali, a semi-autonomous agency of the municipality, owning and operating in addition to the power distribution (but under entire separate financial accounts) the city's telephone system, water supply etc. Even before the start of operation of the Anchicaya plant the dis- tribution facilities had only been barely adequate. After the Bank made the first loan to CHIDRAL the Empresas undertook to expand their facilities. As a first step it retained the Belgian firm SYNDIBEL which in 1955 sub- initted a detailed project for an expansion in two stages, first up to 60,000 kw (the peak load anticipated in 1959/60) and second to 100,000 kw (the peak load expected in about 1963). The total cost of the two stages was estimated at that time at the equivalent of USt 2.2 million in foreign currencies and pesos 2.8 million in local currency. Subsequently Empresas s-tarted to carry out this expansion according to SYNDIBEL's plans, begin- ning with a 34.5 kv double circuit ring connecting the two 110 kv sub- stations at which CHIDRAL delivers the power, and with several 34h5 kv substations along this ring which will feed the 13.2 ks primary distribution lines. 21. The funds available to Empresas for this purpose have been far short of the needs. It purchases the energy at present from CHIDRAL at an average cost of 4.0 centavos and retails it at an average of 6.2 centavos. After expenses for operation and maintenance, this does not leave nearly enough to carry on the necessary expansion. Its net reven- ues from other sources are very limited and tied to other prop rams, and its capacity to borrow is very limited. It has recently obtained a suppliers' credit from German and Italian manufacturers for part of the transformers anu breakers for the 34.5 kv ring, totalling US> 460,000. The equipment for the rest of the ring still remains to be financed and ordered. 26, Completion of at least this ring is, however, essential if the additional power available from Yumbo 2 is to be properly distributed. Already now the voltage in some of the areas more remote from the exist- ing distribution lines drops by as much as 2Wa during the peak load, which is a serious hanaicap to the several larger consumers in those areas. The completion of the ring should, therefore, definitely go for- ward at the same time as installation of Yumbo 2. 27. This completion depends, however, entirely on its financing. The cost of the remainder of the imported equipment has been estimated at US$550,ooo installation of which would require only a relatively small amount of local currency. As the Empresas cannot borrow or other- wise finance a sum of such magnitude from any other source, it is  - 7 - proposed to include it in the loan to CHIRA4L and for the latter to re- lend it to the Empresas. The related local currency and the subsequent ser-vice of the loan could be provided by the Empresas from its own resources. 28c The relending of the abo-ve amount from CHIDRAL to the Empresas will be under the same terms as the proposed Bank loan to CGIIDRAL and all obligations to be entered into by CHIDRAL vis a vis the bank regard- iIng efficiency in planning and execution, operation etc., would also be extended to the Empresas. For the detailed plans, specifications, com- parison of the bids and supervision of the work, the Empresas has agreed to retain again SYNDIBEL, which was in charge of preparing the original program. Furthermore, CHITRAL will have specific rights to review and approve purchases and execution of the works by Empresas. Finally the Municipality and the Empresas will jointly make available all 'Local and foreign currency funds above the US$ 550,000 to complete the distribution ring. The above arrangements will be spelled out in detail in a subsid- iary loan agreement between CHIDRAL and Empresas, the approval of which by the Bank is one of the conditions for the loan to become effective. VI. ORGANIZATION AND IKANAGE7Y NT 29. The present organization and staff has been developed gradually during the eight years of service of its first general manager. This organization is on the whole suitable and the staff competent. The operating and maintenance personnel, although young, is well qualified, as most of it has been assisting in the installation of the equipment and has since stayed with the company. The administrative tasks and the technical complexity of the system have now increased to a point, however, where this staff requires strengthening at the top, through the addition of a deputy general manager and/or chief engineer, and a chief dispatcher of the system. 30. The first general manager resigned on the occasion of the transfer of the majority ownership to CVC and the consequent changes in the board of directors. His successor is a successful businessman who served from 1951-54 as deputy-general manager of CGIIDRAL and thus seems well qualified for the position, As he will be able to devote only a part of his time to CHIDRAL, he is particularly aware of the need for keeping the present qualified operating staff and for filling the above-mentioned senior positions in the company. He has received the necessary authority from the board anca intends to make the appointments shortly. These various steps and measures combined give reasonable assurance of competent future management.  - 8 - VII. FINANCIAL ASPECTS A. Past Financial Results 31. The net operating revenues and profits of CHIDRAL have so far been low. Net revenues in 1956 and 1957, the first full years of operation, were Pesos 3.2 million and 3.8 million, giving returns of 6O0% and 4.9% ;/ on the investment ("investment" meaning here the fixed assets at book cost, less depreciation) and net profits have averaged about 6.5% of the share capital. The above return and profits are after an allowance for depreciation on the fixed assets at their book cost. 32. The expansion of CHIDRAL has in the past been financed in the first instance from capital contributions of its three shareholders and to a smaller extent from loans (see Annex 5 for Balance Sheets 1955-57). The share capital was distributed at the end of 1957 as follows: Instituto Electraguas 56%, Departmento del Valle 25% and the YMunicipality of Cali 19%. The only long- term debts were the two Bank loans of a total of US$ 8,030,000, less amortiza_ ticin to date, amounting to Pesos 44 million, or roughly 490 of total capitali- zation. The recent depreciations of the peso have had the effect of increasing the peso equivalent of this debt (carried at December 1957 at Pesos 6.2 to the dollar) and fixed assets have been written up accordingly. 33. During the last few years CHIDRAL has accumulated in addition to the long-term loans a total of some Pesos 10 million in medium and short- term debt, incurred in part with financing institutes of the national govern- ment and with banks, and in part with contractors and suppliers. Furthermore, current liabilities doubled in 1957, rising from Pesos 3 million to 6 million. This accumulation of short-term debt was caused on the one hand b.y the in- crease in the commitments due to: (i) the depreciations of the peso which neeLrly tripled the service of the foreign debt; (ii) the construction and ordering of equipment for Yumbo 2 on a cash basis because financing could not be secured; and (iii) the continued inflationary increase in the cost of operation. On the other hand there were long delays in obtaining new funds, especially in securing additional capital contributions from the stockholders and an increase in the tariffs. 34. The tariffs of public utilities in Colombia are subject to approval by the Ministerio de Fomento. There are, however, no comprehensive tariff regulations, and the practices of the public utilities vary considerably. The tariffs of CHIDRAL, which consist of an energy charge only, and average Pe,os 0.04 per kwh, have not been revised for over two years, although in- vestments and operating costs have substantially increased during that period. 1/ The drop in percentage is due to the writing-up of investment to reflect the revaluation of IBRD debt.  - 9 - 35. The last Loan Agreement provides that CHIDRAL may not incur debt, other than debt maturing in one year or less, except with the Bankts consent, if its debt is or would become more than its equity. In 1957, mainly as a result of revaluation (following the depreciation of the peso) of debt duse to IBRD, the debt exceeded equity. Despite this CHIDRA.L incurred additional debt in order to proceed with its expansion program, but it kept the Bank informed. The Bank took no action because the situation had developed largely for reasons beycnd CHIDRAL's control, the excess of debt over equity was small and the Bank was at that time about to enter into preliminary dis- cussions with CHIDRAL regarding further lending, which were bound to cover its financial situation. 36. The above-mentioned medium and short-term debts and liabilities reached a point where CHIDRAL could no longer carry them even with a substan- tial increase in tariffs and with the proposed Bank loan. CVC, as the largest shareholder, has recognized this and has agreed to take over some Pesos 7.7 million of CHIDRAL's debt, in return receiving additional shares. Furthermore, it has agreed to extend to CHIDRAL Pesos 5.5 million of new medium-term credit repayable after not more than 30 months, and carrying an interest rate of 6%. This amount is in the form of a loan and not capital, because CVC, which has other development projects, does not want to sink more capital in CHIDRAL than it has to, and because the projections show tihat CHIDRAL should be able to repay the loan. 37. A statement of estimated earnings, source and application of funds, and revenue cover for debt service for the years 1958-63 is given in Annex 6. Thie statement is based on CHIDRAL's estimates, modified where necessary. 38. It has been assumed that: i) the kwh sales would increase as indicated by the forecast shown in Annex 2; ii) the present average price per kwh would be increased by 301V effective on July 1, 1959, but that there would be no further increases thereafter (in order to be on the conservative side). The proposed Loan Agreement provides as one of the conditions of effectiveness that a tariff increase satisfactory to the Bank be authorized, and the Bank has informed the Government and CHIDRAL that it considers the above-mentioned increase to be the minimum. iii) the operation and maintenance requirements in fuel, labor etc. would continue to grow in relation to sales as indicated by past experience. On top of this, increases due to continued rises in price levels have been assumed after 1958 at 10% per year in the cost of labor and materials, and 7% per year in the cost of the ocal for Yumbo;  - 10 - iv) all outstanding debts of principal and interest of CHIDRAL to the Instituto Electraguas and Fondo de Establizacion, amounting to roughly Pesos 7.7 million, would be taken over by CVC in return for additional shares; / v) CVC would extend to CHIDRAL credits up to Pesos 5.5 million for servicing remaining debt and for meeting current obligations for investment, operation and maintenance to the extent that these items are not covered by current income; the loan would be repaid in 1960; 2/ vi) the financing of the foreign currency cost of Yumbo 2 and the other items shown in the cost estimate would be provided by a Bank loan in the amount of tUS$ 2,800,000 with a rate of interest of 5-3/4% and 20-year term including a period of grace of two yrears (assumptions made for the purpose of presentation only); J vii) the investments until 1962 would be limited to the installation of Yumnbo 2 and measures to reduce sedimentation in the Anchicaya reservoir. 39. The financial position of CHIDRAL during the next five years under these assumptions can be summarized as follows: i) CHIDRAL would be able to repay the remaining short-term debt and CVC loan by 1960 and thereafter to produce a modest cash surplus for investment in further expansion. ii) The return on CHIDRAL's total investment ("investment" meaning here the fixed assets at book cost, i.e. the historic costs partly written up to reflect depreciations of the peso, less the provision for depreciation, plus an allowance for working capital) would range from 3% in 1958 to between 6% and 7% in 1963. j/ The Instituto debt of about Pesos 2.2 million has already been assumed by CVC. 2/ Present estimates suggest that, because of agreements with creditors whereby CHIDRAL may postpone payments until after the Bank loan be- comes effective, some Pesos 3.3 million only might be drawn. / IJUS$ 550,000 would be relent to Empresas, which would provide CHIDRAL with funds to meet the debt service due to the Bank on that amount. The drawing of the US$ 550,000 and the debt service applicable to it have not been shown in Annex 6. The debt service would be less than Pesos 360,000, so that even if Empresas defaulted, the effect on CHIDRAL's finances would not be serious.  iii) The net profit would rise from Pesos 0.3 million in 1958 to average about Pesos 4.6 million in the three years 1961 to 1963. This would represent a return on share capital of under 1% in 1958 rising to about 10% in 1961/63. iv) Net operating revenues before depreciation would not cover debt service until 1959; thereafter it would rise to 1.6 or 1.7 times. v) The ratio of long-term debt to equity would drop to 43/58 by 1963 (see Annex 7). 40. The above financial results for the next few years would be a sub- stantial improvement over the past. They are still somewhat marginal but, as pointed out before, the forecasts are on the conservative side because they are based on the assumption of continued increases in the cost of labor and material without compensatory adjustments of the tariffs. 41. In order to improve further on this financial situation in the long run,, it is essential that: (i) CHIDRAL embark on future expansions only if sound financing is assured; and (ii) CHIDRAL's tariffs be put permanently on an equitable basis and be adjusted promptly for all increases in its costs. 42. As regards the first point, the proposed Loan Agreement to CHIDRAL again includes a debt limitation similar to that included in the agreement of the last Bank loan (i.e. that the borrower may not incur debt, other than debt maturing in one year or less, except with the Bank's consent if its debt is or would become more than its equity). Under this provision CHIDRAL, according to the projections, would have to ask for Bank approval if it wanted to start new projects which would involve borrowings during the period of construction of the Bank project and the Bank would thus be able to exercise some control over such borrowings. In addition, the Loan Agreement contains the same limitations as the last agreement regarding payment of dividends and undertaking of major developments other than the Bank project during the latter's construction, and regarding payment of dividends thereafter. 43. As regards the second point mentioned in paragraph 42, the proposed Guarantee Agreement again contains a tariff covenant to the effect that the Government shall grant to CHIDRAL (and Empresas Municipales de Cali) tariffs that will provide revenues sufficient to cover operating expenses, maintenance, depreciation and interest, to meet repayments of long-term debt to the extent that they shall exceed the depreciation provision, and to leave a reasonable surplus for new investment. 44. Finally, as in the case of the previous loan, the Bank would not require any lien or charge on assets, but would include the negative pledge clause.  - 12 - VIII. CoCLTESIONS 45. The project is technically and economically sound and, taking into account the measures to which the Government and CHIDRAL have agreed- reglarding its execution and financing, suitable for a Bank loan in the amount of tS$ 2.8 million. The nature of the project would justify a term of 20 years, and the Length of the construction period a grace period of about two years.  Atmex 1 DISTRIE5TION OF PFrER COiL.7JPTIPON IN CAL! IM 1958 (estimated) Residential 32% Industrial 46% Corunercial 13% Gcvermment buiildings 1% TMholesale to oth.er powTer coanpanies 4% iThnicipality Public lighting 3% 100%  Annex 2 SYS MI PEAK LOAD MJD TEAKIM CA-ABILITY (thousands of Kh) Start of Ooeration 1954 1955 1956 1957 1958 1959 1960 1961 IWST ILLED CA'ACTIY Small Hydro Plants 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 Diesels 10.5 10.5 10.5 10.5 10.5 10.5 10.5 10.5 Anchicaya Hydroplant Units 1 and 2 June '55 24.0 24.0 24.0 24.0 24.0 24.0 24.0 Units 3 and 4 July 157 40.0 40.0 40.0 40.0 40.0 Yumbo Steaw-zlant Unit 1 June '58 10.0 10.0 10.0 10.0 Unit 2 July '59 10.0 10.0 10.0 TOTAL 12.5 36.5 36.5 76.5 86.5 96.5 96.5 96.5 PEAKING CAPABILITY (WITH L.'^RGEST UNIT UNDER FE7AIR) 10.0 2245 24.5 56.5 66.5 76.5 76.5 76.5 DEAK LOAD 1/ 12e5 2 /329 / 35 2/ 45 21 50 57 65 75 / Including load of Cia. Col. and Cia.Tulua I/ Actual figures  Annexi SILo S~m~ M1,, T AnT i-Y'7M IIM AVPTT(G A PARTT,TTY (in million kwh) 1956 1957 L958 1959 1960 1961 SATL E To: Cali-Yumbo 162.6 195.5 223.0 250.0 282.0 330.0 To: Cia. Col. de El. and Cia. T'Iulua 3.0 15.0 28.0 32.0 Total 162.6 195.5 226.0 265.0 310.0 362.0 O. uses and losses 7.1 7.2 8.0 8.0 9.0 9.0 TOTAL C(MRAT/kJTN RE1UIRTD AT '9LANT`3 169.7 1/ 202.7 234.0 273.0 319.0 371.0 GEMRATING CAV XBILITY Small Hydro Plants 10.0 10.0 10.0 10.0 Diesels 65.0 65.0 65.0 65.0 Yumbo 36.o 144.0 144,0 144.0 Anchicaya - Average year 220.0 240.0 250.0 250.0 - Dry year (driest of available 12-year record) 172.0 194.0 200.0 200.0 TOTAL CAPABILITY FOR AVACAGE YEAR 331.0 459.0 469.0 469.0 TOT4L CAPABILITY FOR DRY YEAR 289.0 413.0 419.0 419.0 (Compare with "Generation Required" as above) (234.0 273.0 319.0 371.0) See soccial coments in text  Annex 4 COST ESTIMATE Foreign Local Total Currency Currency (1 US$ = 7.3 Pesos) US '; Equiv. Pesos Pesos L'esign and Supervision 123,000 - 898,000 Boiler, Generator and Accessories for Yumbo 2 925,000 100,000 6,852,000 Enlargement of Substation Yumbo 125,000 - 913,000 Enlargement of Substation Cali 88,000 - 6422,000 Freight and Insurance 150,000 170,000 1,265,000 Erection and Testing 50,000 920,000 1,285,000 Miscellaneous Expenditures for Anchicaya 4 and Yumbo 1 150,000 - 1,095,000 Studies for Yumbo 3 100,000 - 730,000 Dredge and Auxiliary Equipment 400,000 - 2,920,000 Primary Distribution in Cali 550,ocol/ - 2/ 4,015,000 0Overhead - 910,000 910,000 Contingencies 139,000 200,000 1,215,000 Total 2,800,000 2,300,000 22,740,000 1/ To be re-lent to Empresas Municipales of Cali 2/ Local currency costs to be met by Empresas IMIunicipales  Aunex, 5 CENTRAL HIDROELECTRICA DEL RIO -OCEICAYA LTDA. Condensed and Rounded Balance Sheets as at December 31. 1955, 1956 and 1957 (expressed in Yjillions of Pesos except where otherwise stated7 12L5 -1956 1957 A S S E T S Electrical installation in operation 49.0 49.1 59.9 Other fixed assets 1.3 7.1 23.8 Work in progress 1.6 8,2 18.6 Advances to suppliers and Equipnent in transit 1.9 1.7 .7 Inventories .5 1.1 1.1 Current Assets .5 1.3 1.3 Deferred Charges - 3-7 68.5 109.1 LI A B I L I T I E S Capital 33.2 33.2 36.3 Advances on account of Capital, etc. .3 3.3 1.0 Surplus 1.1 2.8 5.5 Depreciation ard other reserves .9 3.5 5.8 Long and Medium term debt 17.8 18.4 48.5 Short term debt .4 4.2 5.8 Current liabilities 1.1 3.1 6.2 5L,a 68.5 109.1 Ratio of Long and Mediun term debt to Equity 3Lz66 32/68 5__47  AH 6 CEITT7L HT ",rI^.. C:, D" -IO --CHIC.YA LTUDA. Estimate of Earnings, Source and hoplication of Funds and Revenue Cover for Debt tervice (exoressed in Billions of Pesos excent i,here otherwise stated) Years ending December 31: 1959 1959 1960 1961 1962 1963 I. 3nergy bales Yillions of kwh sold 226 265 310 362 302 362 Average orice ner kwh in centavos 4'.0 4.6 5.2 5.2 5.2 5.2 II. 7evenue Account Revenue from sales of newoer 9.1 12.2 16.1 23.9 13. 2I3.9 Oneration, maintenance and administration 3.0 5.0 6.0 7.4 7.9 8.4 0coreciation 2.9 3.4 3.6 3.6 3.6 3.6 Net operating revenue 3.2 3.8 6.5 7.3 7.3 6.8 Interest 2.9 2._ 3.1 3.0 2.9 2.7 less charged to construction 0.4 2.9 2.4 3.1 3.0 2.9 2.7 Net profit 0.3 1.4 3.4 4.9 LI.4 4 .1 tII. source of Funds ;,et oneratin revenue 3.2 3.9 t. 5 7.9 7.3 6.9 add back Jlenreciation 2.9 3.4 3.6 3.6 3.6 36 6.1 7.2 10.1 11.4 10.9 10.4 Few c$.)ital subscribed by .7.J,. 7.7 Lo?ns: II'2D - existing 1.9 - pro-aosed 13.1 3.3 B mco Cafetero C.5 3.7.2. 3.3 19.4 20(-3 13.4 11.4 10.9 10.4 IV. Am-rlication of Funds Const.ruction (exclusive of ca' it alized interest): Bank -roject 1.5 12-4 3.3 oeasurec to reduce qedi5entation 0.3 0.6 1.0 1.0 Com-letion Yumbo I 1.5 3.3 1-3.0 4.3 1.0 Debt Service: I3RD existing loans - interest ..4 24 2.2 2.1 2.0 1.9 - amortisation 1.9 2.7 2.9 2.9 3.0 3.1 IRPD pro3osed loan - interest 0.2 0.9 0.9 0.9 0.9 - amortization 0.5 0.5 o.6 Other - interest 0,5 0.2 0.1 - amortization 1.6 0.4 3.3 Instituto and Fondo debt 5.3 B.anco Cafetero 0.5 11.7 6.4 9.2 6.4 6.4 o.4 15.0 19.4 13.5 7.4 6.4 6.4 V. .'vailable Funds *1uralus for year 4.4 0.9 (0.1) 4.0 4.5 l+.O kvailable at beginning of year (4.9) (0.4) 0.5 0.4 4.4 8.9 Available at end of year (0.4) 0.5 0.4 4.4 9.9 12.9 VI. Revenue Cover for Debt Service rjet crsh revenue 6.1 7.2 10.1 11.4 10.9 10.4 Debt service 6.4 1/ 6.5 9.2 6.4 6.4 6.4 Number of times debt service covered - 1.1 1.1 1.9 1.7 1.6 / excluding Instituto and Fondo orincinal  CENTRAL HIDROELICTRICA DEL RIO ANCHICAYA LTDA. Adjusted Balance Sheet 1 as at December 31, 1957 and Estimates of Balance Sheets as at December 31, 1959, 1961 and 1963 (expressed in hMillions of Pesos except where othern.ise stated) 1957 1959 1961 1963 ASSETS Fixed Assets 111.0 127.7 133.0 133.0 Net Current Assets (352) 2.6 6,5 15.0 107.8 130.3 139.5 148.0 LIABILITIES Capital 37.3 45.0 45.0 45.0 Reserves and surplus 6.o 7.7 15.9 24.4 ~433 52.7 -60.9 69.4 Debt - I3D 52.3 62.6 59.7 52.5 - Other 6.8 3.3 - - Provision for 5.4 11.7 18,9 26.1 dlepreciation 107.8 _____ 139 5 ____O Ratio of Long and Iledium term debt to '...quity 58/42 55/45 50/51 43/58 The 1957 Balance Sheet has been adjusted to the rate of exchange of Pesos 7.3 to the dollar, the rate used in the Dro,ections; certain contingent items have been eliminated; and the reserves have been adjusted slightly.  LOM ,EA r . VIJES CE : LA CUMBRE COLOMBIA \ iAL/l C ENTRA L DE ANCHICAYA LTDA. EXISTING PLANTS AND TRANSMISSION LINES CANELRI TRANSMISSION LINES . A L L N TYDRO PLANT * M STEAM PLANT *LAIV RAILROADS ANCHICAYA LTD- , ROADS DEPARTMENT BOUNDARY .................... JA MU ND I/l Coribbeon Sea ,zy 3'g1ta 2 :,( PUE TEJ ADA SEPTEMBER 1958 IBRD-508