Colombia - Guadalupe Hydroelectric Project

RETURN TO R E S T R I C T E D REPORTS DESK Report No. T.O. 203a WITHIN ONE WEEK 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 GUAPALUPE HYDROELECTRIC PROJECT OF THE EMPRESAS PUBLICAS DE MEDELLIN COLOMBIA May 12, 1959 Department of Technical Operations  CURRENCY EQUIVALENTS U.S. $1 - 7.5 Pesos 1 Peso - U.S. $0.133 1 Million Pesos - U.S. $133,000  APPRAISAL OF THE GUADALUPE HYDROELECTRIC PROJECT OF THE EMPRESAS PUBLICAS DE NMELELLIN COLOMBIA Page No. SUMARY i - ii I. INTRODUCTION II. THE BORROWIER 1 Organization and Management 1 Ability to Carry Out Project 2 Facilities of EPMts Power Department 2 III. THE PC,JER MARKET 2 Area Served 2 Past Growth 3 Conditions Occurring During the Past Two Years 3 Forecast of Growth 4 I:V. LONG RAGE POI-ER PROGRAM 5 V. THE PROJECT 6 Description of the Project 6 Sedimentation in Troneras Reservoir 7 Design and Supervision of Construction 7 Present Status of Work on the Project 8 Schedule of Construction 8 Estimated Cost 8 Economic Justification 9 VI. TARIFFS 10 VII. FINANCIAL ASPECTS 10 Present Financial Position of the Power Department 11 Recent Earnings Record 13 Program of Future Expansion 14 Financial Forecasts 15 VIII. CONCLUSIONS 17  LIST OF ANNEXES 1. Peak Loads and Capabilities at Medellin 2. Annual Energy Requirements at Medellin 3. Description of the Guadalupe Scheme 4. Description of Expansion Program of EPM's Telephone, Water Supply and Sewage Departments 5. Condensed Income Statements 1955 to September 30, 1958 for the Telephone, Water Supply and Sewage Departments 6. Condensed Balance Sheets December 31, 1956, 1957 and September 30, 1958 7. Condensed Balance Sheets - December 31, 1955, 1956, 1957 and 1958 for the Power Department 8. Condensed Income Statements 1953-58 for the Power Department 9. Forecast of Income Statements 1959-64 for the Power Department LO. Forecast of Cash Flow 1959-64 for the Power Department 1L1. Pro-forma Balance Sheets 1959-64 for the Power Department :L2. Calculation of Generating Cost MAPS A. Electric System of the Empreaa de Energia de Medellin B. Layout of Guadalupe Scheme  SUMMARY i. The Bank has been asked to consider a loan to cover the foreign exchange cost of the Guadalupe hydroelectric scheme in the neighborhood of the city of NMedellin, Colombia. The project would have a capacity of 96 MW and its total cost would be about $20 million of which $12 million would be in foreign currencies. This total cost is equivalent to $200 per kilowatt. This cost is low and compares favorably with the invest- ment cost of a thermal plant. ii. Empresas Publicas de Medellin (EPM), which would be the borrower, is an autonomous public entity independent from the municipality of the city of Medellin and from the Government. EPM has four departments deal- ing with power supply, telephone, water supply and sewage. Each depart- ment is administered independently and maintains separate accounts. The project would be built and operated by the Power Department. The local esxpenditures would be financed by retained earnings and by short-term 'Loans. iii. The project would comprise the diversion of two small rivers into the Guadalupe river, the construction of an earthfill dam, the development of 96 W in two different power stations, transmission facilities and the expansion of the Medellin distribution system. Lv. EPMts management is competent and its staff, which already includes good engineers is in the process of being strengthened. Several consulting firms have participated in the design of the various structures and arrange- ments are being made to ensure proper coordination and supervision of con- struction. In addition, EPM has retained the services of an expert of international reputation who has investigated the sedimentation problem in -bhe Guadalupe river and its tributaries. This expert has made recommenda- tions to alleviate this problem and EPM has undertaken to carry them out. v. The economic justification of the project is well established. The present capability of EPM's facilities is already fully utilized and EPM will have to ration power until the start of operation of the project. Thereafter, this enlarged capability will be absorbed within one or two years. Therefore, EPM is in the process of completing the studies and designs of another hydroelectric project on the Nare river and will take all steps necessary to start its construction as soon as possible. vi. The present financial position of EPM's four departments is sound. The Bank has received assurances that the assets of the Power Department would not be used by the other departments and that all departments would continue to be maintained in a sound financial position. vii. An increase in the rates of EPMts Power Department was authorized on July 1, 1958, which will result in an increase of the average revenue per kwh of 32%, or from 3.4 centavos to 4.47 centavos per kwh. This re- flects relatively low average rates. A further rate increase of about 5 or 6%. per year during the next six years has been assumed by EPM. EPM has agreed  - ii - to tace all necessary steps not less often than once every two years to obtain such adjustments in the rates charged for the services of each of its four departnents as will cover all operating expenses including realistic depreciation charges and assure a reasonable return on the total investment. EPM has further agreed that power rates should be set at such a level which wovld permit at least 30% of new investment in power facili- ties to be financed from retained earnings. viii. The financial prospects of the Power Department during the next six years (1959-64) appear to be good. During this period the return on net fixed assets would probably average about 8% and cash receipts from operations would cover debt service about 1.9 times as an average. ix. The estimates of the cost of the project are reasonable. The project is sound and suitable as a basis for a Bank loan in the amount equivalent to $12 million for a term of 25 years including a period of grace of four years on amortization payments.  I. INTRODUC TION 1. The Empresas Publicas de Medellin (EPYI) has asked the Bank to con- sider a loan to finance the foreign exchange cost of a power expansion program. This program consists of the development of 96 S4W of hydro- electric power on the Guadalupe river, 70 km of transmission lines and the expansion of the distribution system in the city of Redellin. The total cost is estimated to be the equivalent of $19.3 million of which 4%12 million wouli be in foreign exchange. 2. iedellin first approached the Bank in 1954 for assistance in iinancing its electric power program. At that time the power undertaking was owned by and operated as part of the municipality. The Bank recom- mended that the power undertaking be established as an organization having an independent financial and administrative status before further con- sideration could be given to the loan application. Permissive legislation to this end was enacted by the Central Government and on August 6, 1955 t;he municipality established an independent agency known as the Empresas Mublicas de Medellin to operate the municipal power, telephone, water ard sewage undertakings under a common management. EF14's charter was approved by the Governor of the Department of Antioquia on November 25, 1955, and became effective January 1, 1956. LRter in 1956 a technical mission was sent to appraise the expansion program. However, before the mission's report could be considered the Bank decided to defer further lending in Colombia until the economic situation of the country had improved. Since t'hen EPi4 has attempted to carry out its power expansion program but has been hampered by the limited funds at its disposal. II. THE BORROWER ,. 4EP not only owns and operates the electrical power supply, but also a telephone system, water supply and sewage. It is therefore divided into four departments which are administered independently of each other. Ihe cost of services within EPVi common to the four departments is appor- tioned among them and this results in about 55% of such costs being charged to the Power Department. Orpanization and Management 4. EPMts four departments, although operated separately, are administer- ed by one general manager who is responsible to a board of directors. The Board of Directors consists of seven members, appointed for a period of two years. Three of the members are appointed by the municipal- ity and the remaining four represent banks, industries and commerce. 6. The general manager is the chief executive officer of FE1I4. He is appointed by the Board for a term of one year. This is too short for continuity and the possibility of lengthening the period of office is being explored. However, the present general manager has been retained in office since May 1954 and has recently been reappointed for another year.  - 2 - 7. Each of the four operating departments has a supervisor who deals with the day-to-day problems of his department. Managerial decisions of importance are, however, referred to the general manager. 8. Planning, engineering, finance and administration are under the direct supervision of the general manager or of one of his assistants. Ability to Carry out Project 9., The present general manager is competent with experience in the operation of public utility enterprises. His staff includes several well qualified engineers. As the general manager and his principal engineers are overworked, EPM is taking measures to strengthen its staff. 10( On the basis of its past performance it can be assumed that EPM would be capable of carrying out the present project with the assistance oj: qualified consulting firms. Facilities of EPM's Power Department 11. At present the Power Department owns ana operates four hydro plants with a total capacity of 136.5 NW: Rio Grande (75 MW), Guadalupe I (o10 Hi), Guadalupe II (10 MW) and Piedras Blancas (11.5 MW). The trans- mission system totals about 150 miles of 120 KV circuits. III. THE POWER IARKET Area Served 12. The power system serves one of the major population centers in Colombia. The service area comprises the modern and rapidly growing city of Medellin, and a number of smaller municipalities adjacent to the Rio Grande and Rio Guadalupe plants (see Map A attached). Between 1938 and 1556 the population of the city of I4edellin increased from 170,000 to 420,000, or at an average annual rate of 5.5%. This report assumes a ccntinued increase of the population of the city and suburbs but at a slower annual rate of growth of about 3%. EPM also plans to connect, in the future, a few other small towns and villages. Accordingly, the popula- tion of the service area, which was 600,000 in 1956 and 710,000 in 1958, should reach one million in 1964 and 1.2 million in 1968. 13. The Medellin area is relatively advanced industrially and has important textile mills. However, for the past several years, the power supply deficiency has interfered with the industrial growth. Existing industries hesitate to increase their consumption and it has been common practice to have standby diesels. The two most important textile mills have recently constructed their own power plants, totalling 30 SW.  -3- Past Growth 14. EPM has good power statistics covering the past 30 years showing number of consumers, peak loads, production and consumption for different classes of consumers. The record for the past ten years is illustrated on the charts presented in Annexes 1 and 2. The abnormal conoitions which have occurred since 1956 make it advisable to consider the period 1948-56 separately. Growth of the Peak Load and Consumption During the Period 1948-56 Average Annual Rate 1948 1956 of Growth Peak load (in iMI) 42.7 117.1 13.5% Consumption (in million kwh) Residential 142.1 367.9 12.5% Incustrial