Honduras - Interim Power Project

R E S T R I C T E D CIRCULATING COPY mD BE RETURNED TO REPORTS DESK R e p o r t N o. T.O.206a 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 AN INTERIM POWER PROJECT FOR HONDURAS May 12, 1959 Department of Technical Operations  CURRENCY EQUIVALENTS U.S. $1.00 - 2 Lempiras i Lempira - U.S. $0.50 1 million Lempiras - U.S. $500,000  APPRAISAL OF AN INTERIM POWER PROJECT FOR HONDURAS Table of Contents Pane SUNMARY i-i I. INTRODUCTION 1 II. THE BORROIJER 1 III. GE1\F-ATION AND DISTRIBUTION FACILITIES IN THE AREA TO BL SERVED BY THE PROJECT 2 Cost of Energy 2 IV. POWAER MARKET 2-4 Past Power Growth 2-3 Power Market Forecast 3-4 V. THE PROJECT 4-6 Present Status of the Project 5 Engineering and Supervision of the Construction 5 Estimated Cost of the Project 5 Schedules of Construction 5-6 Rate of Expenditures and Method of Financing 6 VI. FINANCIAL ASPECTS 6-10 Rates 6-7 Financial Position 7 Past Earnings 7-8 Estimated Future Earnings 8-10 Debt Service 10 Future Finarncial Position 10 VII. JUSTIFICATION OF THE PROJECT 10 VIII. CONCLUSIONS 11 List of Annexes 1. Power Operations of ENEE in 1958 2. Source and Use of Funds in the Interim Power Project and the Rio Lindo Project 3. Empresa Nacional de Energia Electrica - Power Department Actual and Estimated Income 1957-1965 4. Empresa Nacional de Energia Electrica Actual and Estimated Consolidated Balance Sheets 1957-1965 5. Empresa Nacional de Energia Electrica - Power Department Estimated Expenditures and Sources of Funds 1959-1965 6. Empresa FJacional de Energia Electrica - Power Department Actual and Estimated Balance Sheets 1957-1965 7. Empresa Nacional de Energia Electrica Actual and Estimated Consolidated Income 1957-1965 Map - Republic of Honduras  H O N D U R A S APPRAI'AL OF AN INTERIM POWER PROJECT FOR HONDURAS S'TfvORY i.. The Bank has been asked to consider a loan to cover the foreign exchange cost of an interim power project consisting of the installation of additional diesel capacity and the rehabilitation and expansion of dis- tribution facilities at Tegucigalpa. The project includes the cost of pre- liminary engineering and survey work for the Rio Lindo hydroelectric scheme which the Bank has indicated it would consider for financing in due course, subject to satisfactory improvement in the economic position of Honduras. The interim power project covered in this report is estimated to cost $1.78 million, of which $1.45 million would be in foreign currencies. iiL The Empresa Nacional de Energia Electrica (ENEE), which would be the bo.crower, is an autonomous organization created by the Government. At present; its operations are confined to Tegucigalpa. iLi. The Management and the technical staff of ENEE are adequate to carry on both the day-to-day activities of the company and the expansion work under the project, if supplemented by competent consultants. iv. The project is needed to meet the growing demand for power in the Tegucigalpa metropolitan area. Power has been in short supply in this area for many years. The forecast demand justifies the installation of the proposed facilities which are expected to be fully utilized shortly after the completion of the project. The rehabilitation of the distribution sys- tem will result in an appreciable reduction in distribution losses. V. The present financial position of ENEE is sound. The properties are carried on the books at realistic values. The capitalization is almost entirely in the form of equity. vi. The forecast of ENEEts future financial position appears satisfac- tory. It is expected that gross income from the power operations would increase about 4-1/2 times between 1958 and 1963, during the period when the current project would be completed. At no time during this period would the return on net fixed assets engaged in power operations be lower than 16.4%. The debt-service coverage would be at least 5.4 times up to 1963 and not less than 2.2 times after Rio Lindo comes into operation during that year. vii. Power rates in the past have been set high enough not only to cover costs fully but also to discourage any unnecessary use of electricity. It is the intention of ENEE to lower rates progressively as costs are re- duced as a result of the improvement of its facilities. However, the rates would be maintained at a level which would ensure that earnings after pro- vision for all operating expenses and realistic depreciation charges would result in an adequate return. A satisfactory rate covenant was agreed upon during negotiations.  - ii - v:iii. The estimates of the cost of the project are reasonable. The project is economically justified and suitable as a basis for a Bank loan in the amount equivalent to $1,450,000 for a period of 15 years including a grace period of three years on amortization payments.  APPRAISAL OF ANT INTEPIM POWER PRCJECT FCR HOlTDURAS I. Introduction 1,. The Government of Honduras has requested the Bank to assist in financing an interim power project consisting of the installation of ad- ditional diesel capacity and distribution facilities at Tegucigalpa, the capital of the country. The project would provide a much needed improve- ment in the distribution system of the capital city and supply additional generating capacity pending the completion of a comprehensive power devel- opment program for Honduras. The basis for such a program would be the Rio Lindo hydro-electric project which the Bank has indicated it would consider for financing in due course subject to satisfactory improvement in the economic position of Honduras. The Rio Lindo hydro project using Lake Yo:joa as a natural reservoir would involve an initial installation of 24,000 kwr with substantial transmission facilities which would serve an area with a population of 250,000 including Tegucigalpa in the central district, the Comayagua Valley, the area of San Pedro Sula in the north- west and the northern region up to Tela. The interim project for Teguci- galpa, including preconstruction engineering for Rio Lindo, is estimated to cost the equivalent of $1.78 million. The foreign currency cost would b- $1.45 million eauivalent. The Bank has been asked at this time to con- sid-r a loan for this amount. The Borrower would be the Empresa Nacional de Energia Electrica. II. The Borrower 2. The Empresa Nacional de Energia Electrica (ENEE) was formed in March 1957 by the Government as an autonomous organization for the purpose of the development and operation of generating and distribution facilities in the country. At present its operations are confined to Tegucigalpa. Its assets consist of the properties and rights formerly belonging to the Tegacigalpa Water and Electric Light Company which was also owned by the Government as a branch of the Ministry of Development and such other prop- erties and rights that the Government may assign to it. The ENEE has been responsible during the last two years for the operation of the Tegucigalpa water distribution system under a provision in its charter which expired on January 1, 1959. Since last January the Company has continued this service on an interim basis. The lack of permanence of this arrangement creates uncertainty regarding this phase of EEEE operations. A permanent settle- ment which would separate entirely the water supply operation from the power siervice is expected to be effected by the end of 1960. 3~. Management and the administration of ENEE are vested in a Board of five directors with the Minister of Development or his representative as President of the Board. The Board has broad powers and full independ- ence in the management of the Companyts affairs including the establishment of rates. The Board appoints a General Manager who holds office at the p:Leasure of that Board, and is responsible for all management and admin- istrative functions. The general organization of the Company as set forth in its charter is satisfactory for an undertaking of this kind and size. The management and the technical staff of ENEE should be able to carry on both the day-to-day activities of the Company and the expansion work under the project, if supplemented by competent consultants.  - 2 - III. Generation and Distribution Facilities in the Area to be Served by the Project 4. The ENEE is the only power company serving the Tegucigalpa met- ropolitan area (population 92,000). Its generating capacity is located at two power stations which are interconnected: (1) La Leona power plant in Tegucigalpa with an installed capacity of 4,900 kw (1,600 kw hydro and 3,300 kw diesel) which is currently being increased by the addition of a 1,000 kw diesel unit, and (2) the Rosario hydroeJectric power plant with a generating capacity of 1,200 kw located 21 km from the city. 5. The equipment at La Leona is of recent construction and in good operating ccndition; the equipment at the Rosario hydroelectric plant is very old and is estimated to have no more than five to ten years of useful life left. The transmission and distribution facilities are inadequate. The supply of power is delivered at 2,400 volts primary voltage and 220 volts s-condary voltage over an extended metropolitan area. No voltage regulatxcn is provided and line losses are high. Cost of Energy 6. The cost of producing and transmitting energy in 1958 in the Tegucigalpa metropolitan area was 2.13 U.S. cents per kwh. The cost of th.is energy delivered to the customer averaged 5.07 U.". cents per kwh. Details of the breakdown of costs are shown in Annex No.l. IV. Power Market Past Power Growth 7. Plant generation and peak load (including losses) together with load factor since 1949 are given in the following table: Tegucigalpa Metropolitan Area Annual Annual Annual Increase in Average Generated Load Generated-Energy Peak Load Energy in Factor Over Preceding in Thousand Year Year kw kwh % 19419 1,190 4,480 0.43 1950 1,260 4,770 0.43 6.2 1951 1,500 5,720 0.44 20.0 19'52 1,600 6,850 0.49 20.0 1953 1,900 8,400 0.50 23.0 1954 2,070 9,250 0.51 10.0 19'55 2,250 10,174 0.52 11.0 1956 2,750 12,500 0.52 23.0 19'57 3,200 14,500 0.52 16.0 19'58 3,800 17,100 0.52 18.0  The table shows that the peak load and annual energy generation have in- creased in the last 10 years 3.2 and 3.8 times respectively. The latter represents an average growth rate of about 13% per year. Even with this rapid increase in power consumption in the Tegucigalpa area, the consunp- tion level is one of the lowest in Latin America, and considerably lower than other areas with the same income level. 8. Principal factors which have restricted the consumption of elec- tric power in the Tegucigalpa area during the past few years have been the shortage of generating capacity, the inadequate distribution facilities and the high rates charged for electric power. The distribution system does not now reach many parts of the metropolitan area. The distribution loss- es are abnormally high and in certain areas, voltage drop is as high as 26%. The rc'idential rates were deliberately set very high to discourage consump- tic)n as long as sufficient capacity and adequate distribution were not avail- ab,Le. In 1955 the rate charged for the first fifty kwh per month was the equivalent of 22.5 US cents per kwh and 17.5 US cents per kwh for the next 100 kwh. By 1959 the rate for the first 100 kwh per month had been reduced to 9 US cents per kwh. (See paragraph 21 below). Industrial rates were laow. er,, but still high enough to heve caused a number of industrial undertaking. to install their own generating plants. On the other hand, the shortage of facilities has prevented a substantial number of residential and corrnercial applicants for power service from obtaining connections. Power Market Forecast 9. In 1955 the Government of Honduras retained consulting engineers to make a survey of the electric power market for the Central and Northwest areas of Honduras. The object of this investigation was to determine if the potential power demand would justify the construction of the Rio Lindo hydro- electric project. The information and load forecasts for the years through 1963 contained in the consultants' report supplemented by the latest data obt;ained from ENEE on power consumption in the Central District, have been used as the basis of the load forecast discussed below. The projection is based on th.e assumption that an abundant and reliable supply at reasonable rates would result from the completion of the current project and be an in- ducement to private investment in electrical equipment and appliances. The details of the forecast are as follows: Year Annual Average Load Net Generation Sales Distri- Peak load Factor Generation Increase in bution in kw in kwh-000 % kwh Losses% 1959 4,500 0.50 20,000 17 14,800 26 1960 5,500 0.48 23,500 17 19,300 18 1961 6.,400 0.48 27,800 19-> 2.5,000 10 1962 8,500 0.48 35,600 28& 32,000 10 1963 9,700 0.48 41,000 16 37,000 10 -Includes both the connection of captive loads and the connection of addi- tional residential and commercial customers as the distribution system is improved.  - 4 - 1(. In considering this high rate of growth it should be borne in mind that consumption by any standard in Honduras is among the lowest in the Western Hemisphere due in large measure to the shortage of power that has existed in the past. With the completion of the current project (a) for the first time an adequate power supply delivered at the correct voltage will be made available at lower rates than are now charged; (b) the number of customer connections will be substantially increased; (c) it should be possible to establish rates which, while covering all costs, would result in increased use of elec- tricity by residential and commercial customers, and make it attractive for industry to take public supply rather than generate power themselves. *L. For these reasons the forecast, which envisages that the load will double in the next five years, appears justifiable. V. The Project 12. The project consists of: The instal1otion at the La Leona station of two diesel electric generating units of 1,250 kw each at 0.8 power factor, 60 cycles per second. Thlis will bring the total capacity available for Tegucigalpa to 9,600 kw. B. The expansion and improvement of transmission and distribution facilities sufficient to cater for a demand of 10,000 kw, and designed to cater for a future expansion up to 30,000 low, consisting of: (1) The construction of three distribution substations of 3,750 kw each, 34.5/4.16 kv. (2) The construction of 7 kmi, 34.5 kv line, which will form part of a subtransmission ring circuit supply- ing the substations. (3) The installation of about 43 kmo of primary 4.16/2.4 kv circuits, about 72 km of 220/110 V. secondary circuits and about 5,000 kva of distribution trans- former capacity. (h) The provision of about 5,000 new service connections and associated meters. C. Further preliminary engineering and survey work for the Rio Lindo hydroelectric scheme.  -5- Present Status of the Project 1:3. A proliminary dosign of the project with general specifications and estimates of costs has been prepared for ENEE by consulting engineers (The Harza Engineering Company). No work has yet been started on the pro- ject and no orders for equipment have been placed. Engineering and Supervision of the Construction +- ENEE has agreed to make arrangements satisfactory to the Bark with consultants to prepare and review the necessary drawings and specifications for international competitive bidding. The consulting engineers would also suipply competent personnel to supervise the construction of the project. Estiriated Cost of the Project 1:5. The project is estimated to ccst the equivalent of $1.78 million, of which 11.45 million would be foreign currency. The foreign exchange and the local currency cost of the principal items included in the project are shown in the following table: Foreign Exchange Local Currency Total Cost Item Description cost in dollars cost in dollars in doliars- (f i g u r e s i n t h o u s a n d s) Diesel generating equipment 310 28 338 Substations 220 40 260 Distribution equipment and inaterials 540 200 740 Engineering and supervision of the project 80 - 80 Enagineering costs for the Rio Lindo Development 100 - 100 Contingencies 200 64 264 Total: 1,450 332 1_782 (:3quivalent cost in thousand Lempiras) (2,900) (664) (3,564) -Exclusive of interest during construction (see Annex 2). 16D. Contingencies were calculated on the basis of 10% of the cost of diesel generation equipment and 20%o of all other costs of equipment and materials whether purchased locally or abroad. The above estimates are realistic and these contingencies should be adequate for the construction of the project. Echedules of Construction 17. The execution of the project is scheduled over a period of three years from mid-1959 to mid-1962. This schedule appears feasible. The first generating unit is scheduled for installation in early 1960 and the second unit in mid-1960. The first stage of the distribution work which includes  - 6 - the substations, subtransmission circuit and some primary and secondary cir- cults, is scheduled to be completed by the end of 1960. 18. The second stage of the distribution work scheduled for completion through mid-1962 consists of the construction of primary and secondary cir- cuits and some 5,000 new customer connections. Rate of Expenditures and Method of Financing 19. It is proposed that the foreign expenditures be financed with a loan from th3 IBRD. The local currency requirements would be financed out of the intenial resources of the Borrower. (For details on sources of funds - see Annex 2). The rate of expenditures on the project are estimated as fol- low1Ts: 1959 1960 1961 196?- Tota-l (expenditures in thousands of U.S. dollars) Foreign currency expenditures 321 741 248 140 1,450 Local currency expenditures _72 132 81 47 _332 Total: 393 873 329 187 1,782 Equivalent in Lem- piras (thousands) 785 1,746 653 375 3,564 VI. Financial Aspects Rat es 20. ENEE has the power to set its own charges for electricity with- out reference to any other goverrment agency. The Minister of Development, however, is president of the Board. It has been the policy to set resi- dential and commercial rates at levels hibgh enough not' only to cover costs fully but also to discourage any unnecessary use of electricity by those consumers because of the shortage of capacity. Industrial rates have been kept at a much lower level but one that would still cover costs. Typical rates applicable at the present time are as follows: Rates in U.S. cents per Kwh 1. Residential and Commercial: up to 100 kwh per month 9.0 2. Residential and Commercial: over 600 kwh per month 7.5 3. Industrial: over 1,000 kwh per month 5.0  -7- 2:L. It is the intention of ENEE to lower rates progressivdy as costs are reduced as a result of the improvement of its facilities. The estimate of changes in average revenues from the sale of power are shown on the fi- nancial projections in Annex 3. ENE has agreed to maintain rates at a level which would ensure that earnings derived from the power operations, after provision for all operating expenses and adequate depreciation would result in sufficient surpluses to finance not less than 20% of ENEE's ex- pansion program through 1963 which would include the Rio Lindo hydroelectric proj ect. Financial Position 22. "he original balance sheet of ENEE's consolidated operation upon the Compan-:'s organization on March 20, 1957 as shown in Annex 4 indicates a reasonably sound financial position. An amount of Lempiras 4.00 million represents the historic cost of the power properties and installations of the &)ipresa de Agua y Luz de Tegucigalpa as they were transferred to the Er,pres3 Nacional de Energia Electrica (EN=E). By December 31, 1958 the gross f ixed assets used in power operations had increased by Lempiras 1.037 mill