LOqAAJ6' XZ-HC

FILELJurC I Report No. PU-42a

This report was preparedfor use within the Bankand its affiliated organizations. Public Disclosure Authorized Theydo not acceptresponsibility for its accuracyor completeness.The report may, not be publish-ednor mayit be quotedas representingtheir views.

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION Public Disclosure Authorized

APPRAISAL OF

FOURTH POWER PROJECT

EMPRESA NACIONAL DE ENERGIA ELECTRICA

HONDURAS Public Disclosure Authorized

May 28, 1970 Public Disclosure Authorized

Public Utilities Projects Department CURRENCYEQ1TIVAIENTS

Currency Unit - Lempira (L) Li * 100 centavos Li - 1US$0.50 Li, 000,000 US$500,000 1 centavo * 0.5 USp US$1 U US#1 2 centavos

UNITS AND MEASURES

kW kilowatt MW Megawatt - 1,000 kW k'Wh a Kilowatt hour G'di Gigawatt hour - 1,000,000 kih kV - kilo volt kVA 5 kilo volt-ampere MVA = Megavolt-ampere

a - 3.28 fet km 0.621 mi ia2 - 0.386 Jq xi

FISCAL YEAR

ENEE's Fiscal Year Ends December 31 ABBREVIATIONSAND ACRONYMS

ENEE - EmpresaNacional de Energia Electrica

US AID - United States Agencyfor International Development

CABEI - CentralAmerican Bank for Economic Integration HONDURAS

EMPRESA NACIONALDE ENERGIAELECTRICA

APPRAISALOF FOURTHPOWTR PROJECT

TABLEOF CONTENTS

Page No.

SUMMIARYAID CONCLUSIONS

1. INTRODUCTION 1

2. THE POWER SECTOR 2

General 2 ENEE's Market 3 La Ceiba and Aguan Valley 4 Tela and Sula Valley 5 Municipalities 5 Industrial Power Plants 5 Future HydroelectricDevelopment 5

3. THE PROJECT 7

Five-YearProgram 7 Project Description 7 Estimated Cost 8 Engineering and Construction 9 Procurement and Disbursement 9

4. JUSTIFICATION 11

Forecast of Sales and Dbmand 11 Justificationof the TransmissionExtensions 11

5. ENPRESA NACIONAL DE ENERGIA ELECMRICA 12

Organization and Management 12 Tariffs 13 Capital Structureand FinancialPosition 13 Auditors 15 Earnings Record 15

6. FUTURE FINANCES 16

Proposed Financing Plan 16 Future Earnings 18 Future FinancialPosition 18

7. AGREEIENTSREACHED DURING NEGOTIATIONS 20

This report was prepared by Messrs. Hui Huang, Carel de Beaufort and Everardo W4essels. LiST CF AIlTIEXZS

1. Installed Capacity of Power Plants (Interconnected System) Z.t.stm$ated Oosts of Proposed Transnission Extension Project 3. Energy Sales - Actual and Forecast

4. Energy Sales, Energy Generation, MYaximumDemand and Firm Capability (Interconnected System) 5. Actual and Forecast Balance Sheets 1965-l974 6. Long-TermDebt as of December31, 1969

7. Actualand Forecast Income Statements 1965-1974

8. ForecastSources and Applications of Funds 1970-1974 9. Actual and ForecastFinancial Ratios 1965-1974

10. Incremental Financial Rate of Return

MAP HONDURAS

EMPRESAMACIONAT, DE ENERGIAELECTRICA

APPRAISALOF FOURTHPOWER PROJECT

SUMMARYAND CONCLUSIONS i. This report covers the appraisal of the Fourth Power Project for which the Empresa Nacional de Energia Electrica (ENEE)of Honduras has requestedBank Group assistance totaling US$11.0 million. ii. The Bank Group has provided major financialassistance in Honduran power developmentthrough three loans and one credit, totaling US$21.75 million, for three ENEE power projects. The first two projects have been successfullycompleted; the third project is under construction with satisfactoryprogress and is expected to commenceoperation by the end of 1970. iii. ENEE is a fully government-ownedcorporation responsible for the developmentand operation of power facilitiesin Honduras. The Bank Group's assistancehas enabled ENEE to establishan interconnectedsystem and to increase the energy productionalmost six times during the last six years. The total installedcapacity of the interconnectedsystem - predominantlyhydro - and severalisolated diesel plants, is 60 MW which represents73% of the country's total capacity availablefor public power supply. ENEE's managementhas shown marked improvementsince the re- organizationin 1969. However, its engineeringstaff stillneeds strengthening. iv. The interconnectedsystem presently encompassesonly the narrow strip from the capital city of Tegucigalpato the Caribbeanport of Puerto Cortes. Under the Project ENEE proposes to extend the system:

(a) to serve the importanttowns of Tela and La Ceiba on the northern coast which are now suppliedby two fruit companieswith inadequatediesel in- stallations(the concessionof one company has expired),

(b) to supply the Aguan Valley which is being develop- ed, and

(c) to supply the southern zone presently servedby E\EE's isolated diesel plants. v. The Project is a part of ENEE's five-year (1970-1974)ex- pansion program calling for a total investmentof US$54 million. It would consistmainly of: (a) 138 kV and 69 kV transmissionlines and substations,(b) subtransmissionlines and substations,and (c) a gas turbineplant. The Project would also provide funds to cover communi- cations and maintenanceequipment, training, and studiesof future hydro- electric projects and tariffs. The total cost of the Project is estimatedat US$14.8million with US$11.0 million in foreigncurrency, which wouildbe financedby the Bank Group. - ii - vi. The design and supervisionof constructionof the principal items of the Project would be carried out by consultingengineers. Pro- curement would follow the Bank's guidelines. The Project is expected to be completedby the end of 1973. vii. Honduras is the least economicallydeveloped country in Central America. It is also lagging behind in the electric power field despite ENEE's achievementsin recent years. The Project would lay a sound foundation for further development. Extension of the transmission lines would replace the inefficientdiesel installationsby the more economical power of the interconnectedsystem and would also help open up new areas for economic development. viii. ENEEts financial conditionand earnings are satisfactoryand are expected to remain so. ix. The Project would form a suitablebasis for a Bank loan of US$5.5 million equivalentwith a term of 20 years including 4 years of grace, and for an IDA credit of the same amount. As in the case of the Rio Undo Project (Loan 541-HO/Credit116-HO) the loan and the credit would be made to the Republic of Honduras which would relend the proceeds to ENEE on the terms of the Bank loan. HONDUPLAS

ETMPESANACION.L DE ENERGIAELECTRICA

APPRAISALOF FOURTHPOWER PROJECT

1. INTRODUCTION

1.01 This report appraises the Fourth Power Project for which Bank Group assistance totaling US$11.0 million equivalent oas been requested by the Empresa lNacionalde Energia Electrica (ENEE), the Government-oinedauthority which is responsiblefor the development and operationof power facilitiesin Honduras. A Bank loan of US$5.5 million equivalent and an IDA credit of the same amount are proposed. The Borrower would be the Governmentof Honduras,which would relend the proceeds to ENEE to cover the foreign exchange costs of the Project, the total cost of which is US$14.8 million.

1.02 The Project would extend ENEE's main interconnectedsystem to important areas in the north and the south, replacingdiesel engines, and would permit, sooner than would otherwise occur, full utilization of the power to be produced by the Rio Lindo hydroelectricscheme under construction(being financed by the Bank Group) and other future projects.

1.03 The Bank Group has helped finance three power projects in Honduras, providing major financial support for power developmentin addition to loans from US AID and the Central American Bank for Economic Integration (CABEI), and enabling ENEE to increase its investment in plant during the last ten years more than twelve-fold. In 1959, Loan 226-HO for US$1.h5 million was made to ENEE for a project to provide a 2.5 MWdiesel generating plant at the capital city of Tegucigalpa and to improve the city's distribution system. The following year, Loan 261-HO for US$8.8 million was made to ENEE for constructionof the 28.5 MW Canaveralhydro station (the first stage of Lake Yojoa-Rio Lindo Develop- ment) and associated transmissionfacilities. Both projects have been successfullycompleted. In 1968, Loan 541-HO for US$7.5 million and Credit 116-HO for US$4.o million were extended to the Government,mainly to assist ENEE in the constructionof the 40 MWRio Lindo hydro station as the second stage of the Lake Yojoa-Rio Lindo Development. Construction progress of this project is satisfactory,and the first generatingunit is expected to be commissionedby the end of 1970. l.o4 This report is based on a feasibilityreport prepared by ENEE's consultants,R.W. Beck & Associates,and on the findings of an appraisal mission composed of Messrs. Hui Huang, Carel de Beaufort and A. Bouhaoualawhich visited Honduras in February 1970. 2. THE POWERSECTOR

General

2.01 A mountainouscountry with an area of some 112,000 km2, of which only about one-sixth is arable, Honduras is the second largest of the five Central American countriesand ranks third in population. Its populationof about 2.5 million is growing rapidly at a rate of over 3% per year. In recent years, Honduras has experienceda reasonabledegree of politicalstability and has achieved satisfactoryeconomic progress. The annual rate of growth of the gross domesticproduct (GDP) has averaged 6% in real terms. With the per capita gross national product (GNP) estimatedat only about US$260 the country is still the poorest among the Central American countries.

2.02 Agricultureaccounts for about 40% of the GDP. Bananashave long been the leading export,but coffee and lumber have gradually assumed importance. Recently there has been a rapid expansionin manu- facturing,especially in the area of San Pedro Sula, the principal city in the north. The manufacturingsector now contributesabout 15% of GDP. Several large industrialprojects have been proposed for imple- mentation in the near future, the most importantbeing a large pulp and paper project near La Ceiba to exploit the abundant forest resources in the Aguan Valley. The InternationalFinance Corporationis partici- pating in the pilot project and is expected to participatein the full project.

2.03 Since ENEE embarked on the Canaveralhydro project in 1962, Honduras has made great stridesin power developmentwith an almost six- fold increase in electricityproduction during the last six years.l/ Further progress will be realizedwhen the Rio Lindo hydro stationcom- mences operationby the end of 1970. As of now, however, the per capita annual electricitygeneration is only 104 kWh and less than 20% of the total population is estimated to have electrical service.

2.04 Public electrical service in Honduras is provided by ENEE, private companies,and municipalities. As shown below, the present installedcapacity totals 82 MW and the total energy generationin 1968 is estimatedat 225 GWh (excludingcaptive industrialplants - see paragraph 2.17). Present InstalledCapacity Generationin 1968 ENEE 6o vw 194 GWh Private companies 20 YI 29 GWh lunicipalities 2 14W 2 GWh

Total 82 MW 225 GWh

1/ In 1964 energy sales increased94% over 1963 due to the coming into operation of Canaveral, the acquisition of the San Pedro Sula system and a tariff reduction. -3-

ENEEIs Market

2.05 ENEE is the principal supplier of power. Its main system (the interconnectedsystem) serves the most populous and important zone including the capital, Tegucigalpa,the new industrial center of San Pedro Sula in the north, and Puerto Cortes on the Caribbeancoast (see rriap).It also supplies the country'stwo major industries-- the silver mines at Pochito and the cement factory at Bijao. Under the proposed Project ENEE would extend the interconnectedsystem to the north and the south to encompass new power markets.

2.06 The interconnectedsystem presently consists of 229 km of 138 kV transmissionlines and 50 km of 69 kV lines connectingseven hydro and diesel power plants with a total installed capacity of about 54 MW.The 28.5 MWCanaveral hydro station is the major source of power. The 40 MW Rio Lindo station and a 15 MWgas turbine at San Pedro Sula are under construction and expected to be commissioned by the end of 1970. Details are shown in Annex 1. In addition, ENEE operates 14 isolated plants totaling 6.2 MW. The largest is the 2.2 MW diesel plant at San Lorenzo which was recently installed to meet the increasing power demand of the southern zone.

2.07 Tegucigalpa,the political and commercialcenter, is served with a long transmissionline coming from the Canaveralstation and does not have an adequate local back-up power source to cope with any interruptionof the line. Under the proposed Project, a gas turbine would be installedat Tegucigalpa to ensure reliable supply.

2.08 San Pedro Sula has had an extremely rapid economic growth in recent years and has become the most important industrial center of Honduras. Puerto Cortes is the largest seaport in the country, and its developmenthas been financed by a recent Bank loan. Power to these im- portant areas is presently suppliedwith a single 138 kV line from Canaveral to San Pedro Sula and a single 69 kV line from San Pedro Sula to Puerto Cortes. To provide economicalmeans of deliveringreliable power to these areas, ENEE proposes to construct, under the proposed Project, another 138 kV line from the Rio UIndo station to San Pedro Sula viaEl Progreso and Bufalo, and another 69 kV line from San Pedro Sula to Puerto Cortes.

2.09 Outside of the interconnectedsystem ENEE serves 13 other towns including the newly industrialized town of San Lorenzo in the south and the largest southern town of Choluteca by means of isolated diesel plants. Under the proposed Project, the interconnectedsystem would be extended with a 69 kV line to these towns. The southern zone is a potentiallyrich region whose rapid developmentthe Government has been promoting in recent years. A large cotton ginnery at San Lorenzo and a silver mine on the route of the proposed line have been in operation for a number of years with inefficientpower installations;they would be served by ENEE. Several industrialprojects are planned. The merits of improved port facilitiesin the area are being investigatedby a Bank financed feasibilitystudy. 2.10 E12EEplans to supply important areas which do not yet have electric service, either by installing diesel units which are no longer needed in the interconnected system or, if the distances are not too great, by linking these areas to the main system with 34.5 kV subtrans- mission lines (in some cases to be operated at 13.8 kV initially). Under the proposed Project the latter method would be used to supply the Tamara Valley near Tegucigalpa, the Comayagua Valley, and La Masica near La Ceiba. Santa Barbara, the center of a large rural population presently served by ENEE with an isolated diesel plant, would also be connected to the inter- connected system.

La Ceiba and Aguan Valley

2.11 Of the ten private companies supplying power to the public, the most important are the two fruit companies - the Standard Fruit Company and the United Fruit Company through its subsidiary, the Tela Railroad Company. The former supplies La Ceiba, the largest town on the north coast and the third largest town of Honduras, with a diesel plant of 5.5 I4. Inadequatefacilities and high costs have inhibited the increaseduse of electricity. With Standard's utility franchise at La Ceiba having expired, EIEE plans to purchase the power properties from the company and, as part of the proposed Project, to extend the interconnected system with a 138 kV line to serve this city. A new highway is being constructedfrom San Pedro Sula to Tela and La Ceiba. New pineappleplantations have been established near La Ceiba, and an international airport as well as the large pulp and paper mill mentioned in paragraph 2.02 is proposed to be built nearby. These various projects will stimulate economic activity in this area.

2.12 The Standard Fruit Company also operatesirrigation pumps driven by diesel units at its banana plantations at Isleta (total about 3,000 hp) and Coyoles (total about 8,000 hp) in the Aguan Valley. For the most part these units are old and inefficient and the operating cost is high. ENEE would be prepared to extend a 69 kV line as part of the Project from La Ceiba to the valley if the company converts its pumps to electric drive. However, ENEE willonly construct this extension if it is financially and economically justified.

2.13 Through the National Agrarian Institute, the Honduran Government recently launched a land reform program to develop the lower Aguan Valley. Included in this large-scale program are new settlements and the establish- ment of packing and processing plants for agricultural products. An Inter-American Development Bank loan of US$7.5 million is helping to finance the undertaking, in which many public agencies including ENEE are partici- pating. Thus, in addition to electrifying the irrigation pumps, the extension of ENEE's transmission system to the valley would meet the power requirements of this important agricultural development program and thereby contribute to its implementation. -5-

Tela and Sula Valley

2.14 The Tela Railroad Company owns two diesel plants in the north coast area - one at La Lima with a capacity of 7.4 MW and the other at Tela with a capacity of 2.6 MW. Each of these plants provides energy to the company'semployees and industrialestablishments as well as to the respectivemunicipalities. As part of the Rio Lindo project, ENEE has under constructiona 69 kV line from San Pedro Sula to La Lima and El Progreso. The city of Tela is the second largest town on the north coast and the third most important port of Honduras. The proposed Project would extend a 138 kV line from El Progreso to Tela, thereby enabling ENIEEto serve both La Lima and Tela directly and also the company's facili- ties in these municipalities on a wholesale basis.

2.15 The company also operates a number of diesel-drivenirrigation pumps in the Sula Valley with a total capacity of about 22,000 hp. If the company converts these pumps to electric drive, ENEE would supply power to them wholesale, provided a satisfactorycontract can be concluded.

Minicipalities

2.16 Some twenty municipalitiesprovide public electrical service by operating diesel or hydro units of small capacity. These units are inadequate and the power costs are high. Whenever the interconnected system reaches these municipalities,ENEE will take over their electrical services completely and increased consumptioncan be expected because of a more adequatepowersupply and lower rates.

Industrial Power Plants

2.17 A few industries in Honduras have their own power facilities. The total capacity of these facilities is estimated at 23 IW. Their energy generation in 1968 is estimated at 35 GWh, whichl together with the estimated output of 225 Gdh for public electricalservice brings the country's output for 1968 to 260 GWh. The most importantof the industrial power facilities are the diesel plants owned by the silver mines at Mochito (5.6 MW) and the cement factory at Bijao (2 Nd). As noted heretofore, these two industries receive their primary power supply from ENEE and maintain their power plants as standby.

Future Hydroelectric Development

2.18 Honduras is rich in hydro power resources. Potential sites on the Humuya River are particularly attractive because of favorable technical features and proximity to the power market. Motor-Columbus of Switzerland is carrying out feasibility studies for projects on the river financed under the loan/credit for the Rio Lindo project. From their preliminary findings, it appears feasible to build a high dam (about 220 m) at El Cajon creating - 6 - a very large reservoir which could produce a considerable amount of power (of the order of 400 1W) and effectively control the floods in the Sula Valley. The cost of energy would be low and it might be economic to export part of the output to neighboring countries, particularly to Nicaragua, which otherwise would have to resort to more expensive thermal power generationin the future. However, since such a large multi-purpose project requires intensive studies of various technical and economic aspects,which take time, it may be preferable to first undertake a smaler hydro projecto.n the Ulua River which has been explored previously. ENEE has agreed to continue employing consultantsacceptable to the Bank and the Associationfor studies on the two rivers. The decision on the priority of developmentwould be ma d e only after sufficient information on both projects has been gathered.

2.19 Because neither the El Cajon project nor the Ulua River project can be expected to be completedby the end of 1974 when additionalgenerating capacity would be required (see Annex 4), ENEE would have to construct an interim thermal plant. On the other hand, there is the possibility of Nicaragua supplying ENEE's needs during this interim period as an initial phase of interconnection between the two countries. In any event, this matter would be resolved by EwEE and the Bank before the middle of 1971 in order to allow sufficient time for the construction of the thermal plant, if the supply from Nicaragua cannot be arranged. 3. THE PROJECT

Five-Year Program

3.01 The proposed Fourth Power Project, which is essentiallythe ex- tension of the transmissionfacitities, is a part of ENEE's five-year developmentprogram for the period 1970-197a. The program calls for a total investment of about US$5 million and would consistof the following works in addition to the Project:

Under Construction

(a) Rio Lindo project;

(b) Gas turbine at San Pedro Sula;

(c) Second 34.5 kV line to the I4ochitomines.

Future Works

(a) Interim thermal project to be started in 1971 (at La Ceiba - two 30 MW units) for initial operation by 1974 (paragraph2.19);

(b) Major hydro project to be started in 1974 for initialoperation by 1977 (paragraph2.18);

(c) Improvementand expansionof existing distribution systems;

(d) Supply to additional towns;

(e) Feasibilitystudies of future power projects.

3.02 The Drogram is adequate to meet the needs, but the generating projects in (a) and (b) above are subject to review and revision after the completionof the feasibilitystudies of future hydro power projects (paragraph2.18).

Project Description

3.03 The proposed Bank/IDA transmissionextension Project would comprise the following:

(a) 138 kV transmissionlines from Rio Lindo station to Bufalo (near San Pedro Sula) via El Progreso and from El Progreso to La Ceiba via Tela, total- ing 227 km; 69 kV lines from San Pedro Sula to Puerto Cortes, from La Ceiba to the Aguan Valley, and from Tegucigalpato the southern zone, totaling 331 kmn;138 kV and 69 kV substationswith a total capacity of 103 MVA; - 8 -

(b) 34.5/13.8kV subtransmissionlines totaling184 km; and 34.5/13.8kV substationswith a total capacityof 20 MVA;

(c) One 15 MW gas turbineat Tegucigalpa(paragraph 2.07);

(d) Communicationsand maintenanceequipment;

(e) Training; and (f) Consultingservices for feasibilitystudies of futurehydro power projects and for a tariff study (paragraphs2.18 and 5.o8).

3.04 The voltagesadopted are the most suitablefor the distances involvedand the amountsof powerto be transmitted.All lineswill have single-circuitstructures. The 138 kV and 69 kV lineswill be on steel towers,while the 34.5/13.8kV lineswill be on woodenpoles. 3.05 The communicationsequipment would consistof a carriertele- phonesystem installed on the 138 kV lines,similar to that in use on the existing138 kV lines. It is requiredfor centralizeddispatching. The maintenanceequipment is requiredfor work on the transmissionand distri- butionsystems.

3.o6 ENEE'sengineering staff needs to be strengthenedby employing some more experiencedand competentengineers (paragraph 5.05). Sinceno such personsof Hondurannationality are knowntobe availableat the presenttime, ENEE has agreedto engage4 or 5 experiencedand competent expatriates,on three-yearcontracts, to assistthe existingstaff in carryingout the Projectand at the same time to give additionaltraining to the ENEEstaff. ENEE has also agreedto send selectedengineers and technicians from its present staff to foreign power companies for on-the- job training. The foreigncurrency funds required for thesepurposes wouldbe met by the proposedloan/credit. EstimatedCost

3.07 The Projectis estimatedto cost US$14.8million with a foreign currencycomponent of US$11.0 million. Ihe estimatesof the costof the transmission linesand substations and the gas turbine are based on recent experiencewith similarworks in Hondurasand otherCentral American countries.A contingency allowance of approximately 12% (8% to coverin- creases in quantities and 4% to coverprice escalation)of the estimated costs of the lines and substations has been included which should be adequate. Details of the cost estimates are shown in Annex 2. The following is a summary: - 9 -

Estimated Cost of the Project

Lempiras (millions) US$ (millions) Foreign Local Total Foreign Local Total a. Transmission Lines and Substations 12.72 4.70 17.42 6.36 2.35 8.71 b. SubtransmissionLines and Substations 1.42 1.17 2.59 0.71 0.58 1.29 c. Gas Turbine Plant 2.82 0.05 2.87 1.41 0.03 1.44 d. Communicationsand MaintenanceEquipment 0.60 - o.60 0.30 - 0.30 e. Training 0.40 0.10 0.50 0.20 0.05 0.25 f. FeasibilityStudies of Future Hydro Power Projects and Tariff Study 0.80 0.40 1.20 0.40 0.20 0.60 g. Engineeringand Supervision 1.48 0.52 2.00 0.74 0.26 1.00 h. Contingencies 1.76 o.66 2.42 0.88 0.33 1.21

Total 22.00 7.60 29.60 11.00 3.80 14.80

Engineeringand Construction

3.08 Constructionof works under the Project would be done by contrac- tors. Engineeringdesign and supervisionof constructionfor the 138 kV and 69 kV lines and substationsas well as procurementof communications and maintenance equipmentwould be carried out by consultantsacceptable to the Bank and the Association. Motor-Columbus would continue with its existing assignment on the HnumuyaRiver feasibilitystudies and would also carry out the studies on the Ulua River. During negotiationsENEE confirmedthat it will continue to employ qualified consultants,acceptable to the Bank and Association, to do the above work. ENEE's own staff would design and supervise the constructionof the subtransmissionlines and substations,with which it has previous experience. Preparationof specificationsand tenderingfor the gas turbine plant also would be handled by the Empresa based on its recent experiencewith such an installation.

3.09 The Project is expected to be completedby the end of 1973.

Procurementand Disbursement

3.10 Procurementof equipment and selectionof contractorswould follow the Bank Group's internationalbidding procedures. Except for the engagement of the consultantsand individuals (paragraphs3.06, 3.08 and 5.08) contracts are not expected to be awarded before the signing of the loan/credit. - 10 -

3.11 Disbursements from the loan/credit accounts would be made for the CIF cost of imported equipment and materials and for the foreign cur- rency cost of contractors'erection work, consultants' services, and train- ing. Disbursementsare expected to be completedby mid-1974. In the event the Project costs less than estimated, any savings from the loan/credit should be canceled. - 11 -

4. JUSTIFICATICN

Forecast of Sales and Demand

4.01 The forecast of energy sales through 1980 in ENEE's market is shown in Annex 3. ENEE's forecastswhich have been remarkablyaccurate in the past are based on an analysis of historicaltrends and on forecast economic and population growth in the different areas served by ENEE. Sales to large existing customers were projected on the basis of load estimates furnished by these customers. New major industrial, agricultural and mining loads were included only for well advanced projects; the pulp and paper project mentioned in paragraphs 2.02 and 2.11 is not among these and was not included in the forecast.

4.02 The average growth of energy sales in the areas presently served by ENEE's interconnected system is forecast at 15%, considerably below the 24% observed during 1965-1969, because of the expected slower industrial growth in these areas. However, including the forecast sales for areas to be added to the interconnectedsystem, total sales are expected to increase at an average annual rate of 21% through1974. Maximum demand in the interconnectedsystem which was 44.5 MWJin 1969 is expected to increase to 121 MW by 1974 (Annex 4). These forecastswhich have been reviewed by ENEE's consultantsare satisfactory.

Justificationof the TransmissionExtensions

4.03 The principal componentof the Project is the proposed extension of transmissionlines to important northern and southern towns and to the Aguan Valley, in line withl the Government's policy of economic diversifica- tion by developing these potentially rich areas. The important towns of Tela and La Ceiba in the north and San Lorenzo and Choluteca in the south are presently served by isolated diesel generating units which are inadequate to meet their expected growth in demand. The proposed transmission line extensions to these towns would ensure reliable service at lower cost, as small inefficient diesel units would be replaced by the more efficient hydro and thermal plants of ENEE's interconnected system. The economy would also benefit from the substitution of the small diesel units used to drive irrigation pumps in the Aguan and Sula Valleys.

4.04 ENEE's consultants have examined alternative methods of supplying the areas to be included in the interconnected system and have concluded that the proposed transmission extension is the most economical way of supplyingpower to these areas. Isolated units could continue to be used to supply these areas, but this would result in a higher cost operation of the country's power sector.

4.05 T7he incremental financial rate of return (see Annex 10) on the investmentneeded for the north coast interconnectionfrom El Progreso to the Aguan Valley is about 10%. The incremental financial rate of return on the investment needed for the southern zone interconnection is about 14%. These incremental financial rates of return are based on conservativesales forecasts and the actual returns could be higher. - 12 -

5. EMPRESANACIONAL DE ENPiGIA ELECTRICA

Organization and Management

5.01 The Empresa Nacional de Energia Electri-ca (ENEE) was established in 1957 by law as an autonomous authority wholly owned by the Government and responsible for developing and operating power facilities in Honduras. It is a reasonably well-managed utility.

5.02 ENEE is governed by a Board of Directors composed of five members: the Minister of Communications and Public Works, as Chairman; the Minister of National Resources; and representatives of the National Economic Planning Council, the Development Department of the National Development Bank, and the National Chamber of Commerce and Industry. The two Ministers are appointed ex-officio. The term of office of the other three representatives is three years and they are eligible for reappointment.

5.03 A General Manager, appointed by the Board, is responsible for all managerial and admlnistrative functions. The ENEE Law stipulates that the appointmentof the GeneralMqanager shall be reservedto persons with technicaland administrativeability, experience and academic qualificationsin the power sector. The presentGeneral Manager, a civil engineer,is a capableexecutive. He was appointedin October1965. Under the previousloans and creditENEE agreedto carryout its functions under the directionof a qualifiedand experiencedGeneral Manager mutually satisfactory to ENEEand the Bank Group. This provision was confirmed during negotiations and incorporated in the loan and credit agreements.

5.04 When the financingof the Rio Lindoproject was under considera- tion, the Bank found ENEE'sorganization weak and its operatingprocedures too cumbersometo cope with its heavy expansionprogram and, consequently, suggested that ENEEengage a managementfirm to help improveits management and organization.In 1968 ENEE retainedthe servicesof R.W. Beck & Associatesto make a studyof ENEE'sorganization and operatingprocedures and to recommendany neededimprovements. After the Beck reportwas submittedand reviewedby ENEE and the Bank in 1969,work on the reorganiza- tion commencedwith Beck'sassistance and is stillin progress. As part of their assignment,the Beck firm formulatedthe By-lawsdelineating the Generallvianager's authority and specific duties in order to facilitate day-to-dayoperations. The Boardrecently adopted these By-laws, essentiallyas recommendedby the Consultants.ENEE's management is alreadyshowing a markedimprovement, especially with regardto decision- makingon operationalmatters. - 13 -

5.05 ENEE's engineering staff has always been weak resulting in lack of sound development planning and causing frequent delays of construction work. A competent expatriate engineer with considerable experience was recently engaged as a Technical Adviser to the General Manager to deal with planning and engineering matters. ENEEhas also recruited a number of young Honduran engineering graduates, but they lack experience. The engineering staff still needs strengthening and training (paragraph 3.06).

Tariffs

5.o6 The ENEELaw gives the Empresa the authority to establish power tariffs; however, it does not stipulate the basis for determining the tariffs. In the agreements for the previous loans and credit, a minimum rate of return of 10% on fixed assets was specified. Thi-s provision is continued in the new agreements. In recent years ENEE's rate of return has been well above this level.

5.07 ENEE's tariffs have remained practically unchanged since 1964t. The overall average revenue per kILXlsold is now about 7.2 centavos (US¢3.6). It is the highest in Central America but necessary at the present time because of the need to generate cash for expansion (paragraph 6.07). After the completion of the Project, some reduction in the tariffs might be justified. The tariffs for the isolated systems are generally 30-50% higher than those of the interconnected system.

5.08 In order to attract irrigation pumping loads of the fruit companies (paragraph 5 2.12 and 2.15) it is necessary for ENEE to formulate appropriate off-peak tariffs for this purpose. The general structure of its tariffs should also be reviewied. Because ENEE does not have a qualified commercial engineer to handle tariff matters, it has agreed to engage consultants to carry out a tariff study and submit their recommendations for review by the Bank and Association. The required foreign currency funds would be provided under the proposed loan and credit.

Capital Structure and Financial Position

5.09 ENEE's financial position is sound. Since 1963 when it suffered from a shortage of working capital, its liquidity has been satisfactory and its equity has been increasing at a rapid rate. Due to the reinvest- ment of earnings, the debt/equity ratio shows a strong improvement from 68/32 in 1965 to 52/48 in 1969.

5.10 The followring table contains a summary of the preliminary balance sheet at December 31, 1969, as shown in Annex 5. - 14 -

ASSETS Lempiras US$ (millions) Utility Plant - Gross 77.2 38.6 Less: AccumulatedDepreciation 13.8 6.9

Utility Plant - Net 63.4 31.7

Current Assets 9.2 4.6 Deferred Debits 1.0 0.5

Total Assets 73.6 36.8

LIABILITIESAND EQUITY

Capital and Surplus 33.5 16.8 Long-term Debt, Excluding Current Maturities 35.1 17.5 Current Liabilities 5.0 2.5

Total Liabilities and Equity 73.6 36.8

5.11 Except for the negligiblepart identifiedin footnote 1 to Annex 5, the utility plant has been stated at cost. This is acceptablein view of the fact that 90% of the assets were acquired during the last ten years, which in Honduras was a period with a fairly stable level of prices. -

5.12 Straight-linedepreciation is charged on each group of assets at percentagesbased on their useful lives. The resultingrate of deprecia- tion on average utility plant in operation during 1969 was 3.4% wlhichis satisfactory.

5.13 lWorkingcapital is at a high level of L4.2 million (US$2.1million) with a current ratio of 1.83:1. At Ll.9 million (US$1 million) cash balances are also at a fairly high level, which is prudent in view of the sizable payments to be made in 1970 for construction,including the additionalcost of the Rio Lindo project largely due to the revaluation of the German mark, the general contractorbeing a German firm. The current assets include accounts receivablefrom customersin the amount of L3.2 million (US$1.6million) or 22% of the operatingrevenues for 1969 which is somewhat high, but not a major problem. During recent years this percentagehas remained almost constant in spite of ENEE's efforts to reduce the amount of arrears. W4hilethe arrears of various departments of the Government were reduced, other groups of consumers, especially hospitals, fell behind in their payments. To some extent the problem was complicated by errors made in the billing department. ENEE is taking adequate action to remedy this situation.

5.14 The deferred debits of L1.0 million (Us$0.5 million) consist mainly of the cost of preinvestment studies. These costs will be transferred to the plant account when the projects are carried out.

1 In calculating the rate of return, the gross value of the assets is determined "in accordance with methods of valuation or revaluation acceptableto the Bank". At present the book value is accepted for this purpose. - 15 -

5.15 At the end of 1969, US$12.2 million or 66% of the disbursed and outstanding long-term debt consisted of financial assistance given by the Bank Group. Details of the Group's loans and credits are given in paragraph 1.03; their original amounts total US$21.8 million. Most of the remainder of the debt consisted of a 3½%US AID loan for L5.6 million (US$2.8 million) made in 1961 and maturing in 1987, to help finance the Canaveral Hydroelectric project, and of local 7% and 73-4 ten-year bonds with an outstanding amount of L6 million (US$3 million). These bonds were placed by the Central Bank of Honduras which guarantees their debt service.

Auditors

5.16 The financial statements of ENEE are audited by Price Waterhouse and Co., Guatemala, wlich is satisfactory. ENEE has agreed that its accounts will continue to be audited by a firm of accountants acceptable to the Bank, and that the accountant's report will be transmitted to the Bank within four months after the end of each financial year.

Earnings Record

5.17 Financial ratios for the 1965-1969 period are given in Annex 9. Since 1964, when during the latter part of that year, hydroelectric energy became available from the Canaveral plant, ENEE's rate of return has shown a steady increase. The minimum rate of 10% agreed upon with the Bank in 1968, has been earned in every year since 1966. During the period, sales of energy grew at the high average rate of 24% but net income did even better with an average annual rate of increase of 34%. Net income for the five-yearperiod totaling U9.1 million (US$9.5million) was used to help finance a 70% increase in gross plant during the period. Operatingexpenses were held at a moderate level. - 16 -

6. FUTUREFINANCES

Proposed Financing Plan

6.01 During the five-year period 1970 through 1974, net internal cash generationis expected to finance 38.7% of the constructionand acquisition program-plusadditions to working capital. This is satisfactorvespeuially in view of the fact that during tnis period the investmentin p±antow l increase by about 140%. Governmentcontributions will cover 0.8% of the requirements and borrowings 60.5%. The following table gives a summary of the financing plan:

Financing Plan for 1970 through 1974

Requirement of Funds Lempiras US$ Percentages (millions) (millions) Constructionand AcquisitionProgram (excludinginterest):

Completionof the Rio Lindo Project 26.1 1.3.0 23.6 Proposed Transmission Extension Project 29.6 14.8 26.7 Interim Thermal Plant 20.3 10.2 18.3 Future Hydro Project (InitialCost) 5.2 2.6 4.7 DistributionImprovement and Expansion 17.5 8.8 15.8 Other Construction 6.2 3.1 5.6 Acquisition of lNewSystems 1.2 o.6 1.1 FeasibilityStudies 1.4 0.7 1.3

107.5 53.8 97.1

Working Capital Additions (net) 3.2 1.6 2.9

Total Requirements 110.7 5.4 100.0

These requirements would be financed in the following manner:

Sources of Funds Lempiras US$ Percentages (millions) (millions)

Internal Cash Generation 82.2 41.1 74.3 Less: Debt Service 39.4 19.7 35.6

Net Internal Cash Generation 42.8 21.4 38.7

GovernmentContributions 0.9 0.5 0.8 Borrowings 67.0 33.5 6o.5

Total Sources 110.7 ~ 5.4 100.0 - 17 -

A more detailed forecast of sourcesand anplicationsof funds coveringthe period 1970-1974 is given in Annex 8.

6.02 The borrowings would consist of: Le Viras US$ Miions Existing Financing

Undisbir sed balance IBRD Loan 541-HO and IDA Credit 116-HO 14.8 7.4 Bonds (Rio Lindo Project) 3.1 1.6 CABEI loan (gas turbine) 3.2 1.6 CABEI loan (distribution) 3.0 1.5

Sub-total 24.1 12.1

Proposed_Loan/Credit 22.0 11.0 FutureFinancing

Interim thermal plant 15.3 7.6 Hydroelectricproject (initial disbursements) 3.6 1.8 Local bonds 2.0 1.0

Sub-total 20.9 10.4

Total Borrowings 67.0 33.

6.03 The proposed loan and credit would be made to the Governmentwhich has agreed to relend the proceeds bo ENEE for a term of 20 years including4 years of grace, at the interest rate of the Bank loan, under a SubsidiaryLoan Agreement satisfactoryto the Bank and IDA.

6.04 Arrangementshave not yet been made for the future loans which will be required to finance the interim thermal plant and the hydroelectric project. After the completionof the feasibilitystudies it is likely that ENEE will ask the Bank to finance these works.

6.05 The future local financingestiriated at L2 million (US$1million) would be required in 1972. On the basis of past experienceit is assumed that ENEE will obtain the necessary amount by issuingten-year bonds which would be guaranteed and placed locally by the Central Bank of Honduras. During the negotiations ENEE agreed to use its best efforts to place bonds as and when required, or to arrange for alternative financing acceptable to the Bank and the Association. In 1972 ENEE might also have to draw down its cash and bank balances and obtain a small overdraftwhich would be re- paid within two years. Such a temporaryoverdraft would be acceptable. - 18 -

6.o6 As under previousloan and creditagreements the Governmenthas undertakento make arrangements,satisfactory to the Bank and Association, to provide, in case of any inadequacyof funds, the amounts needed to carry out the Project.

Future Earnings

6.07 During the 1970-1974period ENEE's rate of return is expected to range between 11% and 13.9%, well above the minimum rate of 10% agreed with the Bank. During negotiations, ENEE agreed to continue to earn at least 10% per year on its average net fixed assets in operation. The tariff study referred to in paragraph 5.08 is expected to recommend revisions in some of the tariffs. In view of the need for cash generation above the return of 10% during the construction period of the Project, ENEE has also agreed that it will not adjust its interconnectedsystem tariffs 1/ during this period without the agreementof the Bank and the Association.

6.o8 The annualrate of increaseof operatingrevenues is expectedto be about 17.5% and of operating costs about 15%. Considerablefluctuations are expectedfrom year to year in the operatingcosts due to changing fuel consumption. During 1970 fuel expense will be high until the Rio Lindo project comes into operation. Fuel expense should be low in 1971 and 1972 because Rio Lindohydro energy will replacethermal generation. Projected increasesin wages rangebetween 2% and 3% per year, based on existing wage contractsand past increasesin wages.

6.09 Net incomeis expectedto increasefrom L5.7 million(US$2.85 million) in 1969 to L12.8 million (US$6.4 million)in 1974. Totalnet in- come for the five-year period is estimated at L46 million (US$23 million). Sincethe financingplan is basedon the reinvestmentof all net income, ENEE agreedduring the negotiationsto retain,until the Projectis completed, all its earningsfrom powerfor investmentin its powerfacilities. 6.10 Interestcoverage will be satisfactoryat between2.8 timesand 3.2 times. The averagedebt servicecoverage for the periodwill be 2.1 times;the low for the periodwill be reachedin 1972 with a coverageof 1.9 timeswhich is stillsatisfactory.

6.11 Forecastincome statements are includedin Annex7 and a summary of pertinentfinancial ratios is givenin Annex9. FutureFinancial Position

6.12 The balancesheet projections for 1970-1974given in Annex5 reflecta continuingsound financial position. The additionsto ENEE's plantwill be coveredfor 49%by additionsto eqiityand for 51% by a net increasein the long-termdebt. During1970, the Debt/Equityratio is

1/ The interconnectedsystem provides 93% of the revenues. - 19 - expected to rise from 52/48 to 58/42 because of large disbursementsto be made under Loan 5h1-HO and Credit 116-HO for the Rio Lindo project. Thereafter,the ratio will graduallydecline to 52/48 in 1974.

6.13 ENEE agreed during negotiationsthat it will seek the consent of the Bank and the Associationbefore incurringdebt if the sum of its net operatingincome and depreciationis less than 1.4 times the maximum debt service in any future year. - 20 -

7. AGREEMENTSREACHED DURING NEGOTIATIONS

7.01 During negotiations,agreement was reached on the following principal points:

a) ENEE wi1ll not proceed with the construction of the La Ceiba- Aguan Valley transmission line and other facilities required to supply irrigation loads before submitting satisfactory evidence that they are economically justified (paragraphs 2.12 and 2.15);

b) ENEEwill continue to employ consultantssatisfactory to the Bank and Associationto carry out feasibility studies of future hydroelectricprojects (paragraph2.18);

c) ENEE will engage experiencedand competentengineers to assist its staff and to train its personnel and will send engineers for training abroad (paragraph 3.06);

d) ENEE will engage consultants, acceptable to the Bank and Association, to make a tariff study and will submit their recommendationsfor review (paragraph5.08);

e) ENEE will use its best efforts to place bonds as and when required, or to arrange alternative financing acceptable to the Bank and Association (paragraph 6.05);

f) ENEE will not adjust its interconnected system tariffs during the constructionperiod of the Project without the agreementof the Bank and Association (paragraph6.07); and

g) ENEE will retain, until the Project is completed,all its earnings from power for reinvestmentin its power facilities (paragraph6.09).

May 28, 1970 AIP-EX 1

HONDURAS

E-TRESA NACIONALDE ENFERGIAELECTRICA

Interconnected System

Installed Capacity of Power Plants

Installed Peaking Capacity. Capability

Existing

Canaveralhydro plant 28,500 kW 30,000 kW

La Leona hydro plant (Tegucigalpa) 1,600 tt 1,600 "

La Leona diesel plant (Tegucigalpa) 6,540 " 5,200 "

Santa Fe diesel plant (Tegucigalpa) 10,000 " 11,000 "

Rosariohydro plant at San Juanito 1,3401! 1,340

Diesel plant at San Pedro Sula 4,759 " 3,500 "

Diesel plant at Puerto Cortes _1,000 " 1,000 "

Sub-total 53,739 I 53,6140

Reduction at the end of 1970 3,940 " 3,940 "

Net sub-total 49,799 " 49,700 " or 50 MW 50 MW

Under Construction

Rio Lindo hydro station 40 M 46 MW

Gas turbine at San Pedro Sula 15 i 17 "

Sub-total 55 i 63 "

Total InterconnectedSystem 105 MS 113 MS (by the end of 1970)

1/ Operationwill cease by the end of 1970 due to diversionof water for city water supply.

2/ To be retired by the end of 1970. ANN1EX2

HONDURAS

EMPRESA NACIONAL DE gNERGIA ELECTRICA

Estimated Costs of the Proposed Transmission Extension Project

Foreign Local Foreign L ocal Cirrency Currenc Total Currency Currency Total (thousands of Lempiras)

1. Transmission Lines

a. 138 kV Rio Lindo - El Progreso, 50 km 819 310 1,129 b. 138 kV E1 Progreso - Bufal, 32 km 524 198 722 c. 138 kV F1 Progreso - Tela, 60 km 983 370 1,353 d. 138 kV Tela - La Ceiba, 85 km 1.391 526 1.917

Subtotal - 138 kV, 227 km 3,717 1,404 5,121

e. 69 kV La Puerta a/s - North Sula s/s, 12 km 193 82 275 f. 69 kV North Sula 5/s-Puerto Cortes, 48 krm 551 273 824 g. 69 kV La Ceiba - Junction, 75 klo 361 426 1,287 Ii.69 kV Junction - Isleta (double-circuit),7 km 136 55 191 i. 69 kV Junction - Coyoles, 50 Ian 574 285 859 j. G9 kV Santa Fe s/s-Southwest Tegucigalpa s/s, 7 km 113 48 161 k. 69 kV Souttwest Tegucigalpa s/s-San Lorenzo, 100 km 1,147 568 1,715 1. 69 kV San Lorerizo-Choluteca,32 km 367 182 549

Siubtotal - 69 kV, 331 km 3,942 1,919 5,861

2. Transmission Substations

a. aio Lindo S/s Extension 280 55 335 b. 7 Progreso S/s 879 244 1,123 c. La Puerta S/s Extension 461 15C 617 d. North Sula S/s 385 107 492 e. Puerto Cortes s/s Extension 335 98 433 f. Tela s/s 375 112 7 g. La Ceiba s/s 700 193 893 h. Isleta S/s 213 63 276 i. Coycles S/s 174 43 217 j. Santa Fe sls Extension 349 53 402 k. Southwest Tegucigalpa s/s 383 108 491 1. San Lorenzo 5/s 390 109 "199 Ml.Choluteca S/s 137 172

Subtotal - Tiarianissior.s/l 5,061 1,376 ,!37

3. Subtransmissior.Lines

3. 34.5/13.8 kV La Ceiba-E'asica,35 kmT 133 182 315 b. 34.5 kV Canaveral-SantaBarbara, 28 km 263 231 494 31345/13.8kV Comayagua-Lamani, 36 km 107 145 252 3.34.5/13., }.VTejucinlpa-Tanara, 25 km 79 109 1°° .'3 Nr"IIsleta Aren, 25 km 13, 170 30C f. 13.~3 4-V ov a .rea, 35 hr 190 230 420

8-th;.ml - Svlbransawiasion: Lines, 1814 km, 9r2 1,2.67 1,1>9

4. Subtranosissio4no3ibsntions and Trannsorirers

-nr-l /e 'I45 nson 52 36 88 hb.Santa 3arbara S/s 66 25 91 c. Transfsr.aers for Mlasica, etc. 13 2 2C z. Transformers for La Paz, etc. 36 4 40 e. Transforfnersfor Tamara Valley 36 4 40 f. Transfortaersfor Isleta Area 79 9 '88 . Transforviors for ~oYOlesArea 225 25 250 Subto-al - Subtransmission s/s 512 105 I17

5. Gas Turbtne Plant 2,818 514 2,872

6. Con,rmunicationsEquipment 200 0 2CC

7. ;:airnt3n.nceEquLpmen t 1400 0 ItO

3. Train-n_ 140C 100 500

,. Feasibiliw Sty zilee on Future HydrO Projects and Tariff Study CDo 400 1,286

10. XIWTnoorinj and Sulpnor';Lsioa 1,4P0 520 2,00r

11. Con'l,ngencies 1,760, 655 2,42 3

TOTAL 22j00 7.600 29.600 ANNEX 3

7dDNDURAS

DTESIRCANACIONA DE ENEw33A YLECTRICA

Energy Os.e - ActaLl sod Fore-ast

(thoue..ds of kdb)

------Atoot ------t -ro- - - -r-o------a-t------

1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980

INTERCONNECTED 5YEM1

Eli.ttig Loada

1. Togoolgalpo 30,606 33,826 41,199 50,175 58,805 645763 75,851 86,079 98,970 112,826 128,622 1.9,343 162,784 182,318 200,196 226,658 249,324 2 Son Pedr, Sole 16,622 23,17h 32,366 42,505 52,792 67,129 76,577 91,902 106,512 122,376 139,380 158,732 177,608 196,950 218,615 240,480 264,530 . puerto Corte- 3,962 4,416 5,999 5,476 6,315 7,217 8,292 9,415 10,553 11,667 12,903 14,169 15,546 16,941 18,465 Mochito Mi-e, 12,086 19,290 21,852 24,486 29,118 35,724 46,475 46,475 54,925 54,925 54,925 54,925 55,925 55,925 54,925 54,925 54,925 5. bJi-o Ce-ent Plant 7,945 12,684 15,176 13,753 17,653 19,807 27,000 27,200 27,000 27,200 27,001 27,00 27,000 27,000 27,010 27 000 27,00C 6. lGRyog.. & Slgcate,eq, 42 403 650 1,211 1,571 1,669 1 643 2,103L 2,258 2,583 2,751 2,992 3,258 3,5 3,856 5,183 7. El Pro.greno - ,52 1,619 3,817 2,035 2,29' 2,552 2,767 3,295 3,236 3,521 3,809 8. Tla Ril-rood Prop-rtio at L.a Li 19,387 20,000 20,590 21,160 21,740 22,320 22,857 23,300 23,770 24,240 Y Mi-e31-ejaneo Sales 87 160 158 561 3,520 1,137 197 180 180 18 1180 13 1850 1850 180

S%btotol - Efitlng Lode 6,29 88,996 ,5 136,135 165,936 193,931 235,719 282,665 319.730 321a61A 386,600 424,870 463,479 50h,644 546,562 597,331 646,656

New L-bd lodr- Proposed Pro-e,t

o. Choloteco 4,993 5,892 6,895 7,997 9,197 10,485 11,584 13,270 11. L-obr.o. 7,905 8,410 8,957 9,653 10,396 11,211 12,070 15,966 12. NSrn 297 940 1,100 1,276 1,467 1,672 1,889 2,116 17. Mo a 2,300 3,000 03000 3,000 7,170 3,200 3,300 3,500 14, raeiioe s alSo 120 140 160 180 200 _ 220 240 260

Subtotal- Sooth Zone o5-5 IT381 7 31 27 7Y7683 2876 8 29,347 32,D12

15. Stocdrd F-ilt Propoctie. 2,700 2,85C 3,000 3,150 3,300 3,400 3,500 3,627 le Id Ceibo Munlcipality i3,4oC 16,000 18,800 21,600 24,200 26,000 29,500 32,306 17. L. Macto 450 505 540 580 620 667 700 7LO

Subtotal - La Ceibo 0000 L6,-50 19,350 22,340 25,330 28,120 30,860 33,701 36,650

18. stod. F. Propertieat Coyoles 1,179 1,232 1,320 1,506 1,596 1,594 1,628 19 Sten. F Irriagtion at Coyolea 24,200 24,640 25,080 25,520 25,960 26,507 27,720 2. Stoe."d2Fp rerteaot 1elera 629 660 7o4 753 792 936 780 -1 StOed. F. Irrgigtio at Ieleto 10,067 11,000 11,500 12, 00 12,400 12,500 13,OCO 2. Oloochito M.,clipallty 56, 628 714 813 926 1,057 1,2C8 23. 0ic R. -cecolopeet Projeot 1,295 1,372 1,525 1,600 1,676 1,829 1,981

Sbt0t0 l - Ag-aa Valley 38,c 309,9532 0,8542 42,089 43,250 44.,56 46,517

4. Telo 8ailroad Frop-rtie- at TIab 11,187 11,600 12,180 12,570 12,977 13,360 13,750 14,130 25 T,la M-ooipolito' 1,373 1,538 1,720 1,938 2,192 2,564 2,766 3,117

Subto7tl - Tob Irso 12,5T3 10,213 13 909 15,509 15,163 15,824 16,516 17,2L7

2 rb Lcad I-rgation Ic Silo Valley 16,000 32, 70 49,010 66,050 83,C09 83,00 3,000 93,500 .Satta Sarb-r 355 560 590 650 690 757 095 937 .9. T-.ra Vofloy 1,530 1,60C 1,66C 1,73D 1,820 1,900 1,990 2,101 2,220 2,3LO 0o9-yO8u Volley 56C 630 66o 3700 75 783 820 860 900

6 Subtotal - Nrw Lode 1,530 2,180 ,523 12334 147,991 172,05 196,195 203,382 210,735 iiL

Total - Oet-oooe Systcs 69,209 R8,5 114,045 136,135 16o,936 193,931 237,718 285,195 321,917 416,237 520,532 372,961 635,535 700,838 709 9!I, 878,265 856,042

1. Ch0]1t-co 37D6 1,187 1,456 2,336 2,521 2,915 3,597 L,196 2 Sln L-ar-o 309 895 2,041 2,100 2,517 2,9LC N80.ooe 61 286 354 431 465 558 670 LMdsoellanrous labes io Sooth Zone 75 55 100

obtoto.l - Sooth ZOoa 306 906 1,248 27039 3,681 4,993 5,55 667 906

5. Sota 3at aoa 269 286 310 335 377 605 430 4555 80 S Other 1solated Oystema 1,047 1,193 1,889 2,090 2,556 3,081 7,270 3,745 4,320 L,995 5,555 6,310 7,363 8,110 9,163 13,415 11,5r0

Total - Isolated Syt-es 1.625 2,385 3.457 45463 6,518 8,508 3,235 10,850 12,706 ,895 5,555 6,310 7 ;06 I,110 0,160 10,615 11,87D 6 G80ANCTOTAL - ENEEo 68,863 91,3811 010.92 150.968 171,555 202,409 256,992 295,052 34,L61 .21,132 , 9579,101 682,593 708,9583759,101 916,680 877,912

AVERAGE ANNUGALDROWTR RATES 9017 17598 1965-1969 1970-197, 1975-1980 INTE33CONNECTED SYSTEM

E'lbtieg Loads Only 23.6 r 1L.8 i 8.9 With Neo Loade Added 21,3 1 9.2

ISOLATE0 SYdTSMS 39.2 7 -5.e9 i

ENE3 - TOTAL 24.2 3 2C.65'

Apr2l 1 HONDURAS

EMPRESA NACTONAL DE ENERGIA ELECTRICA

INTERCONNECTED SYSTEM

Energy Sales, Energy Generation, Maximum Demand and Firm Capability

-----…------…ACTUAL------FORECAST…------…------

Average Average Average Increase Tncrease Tncrease 1979 1980 1975-1980 1964 1965 1966 1967 1968 1969 1965-1969 1970 1971 1972 1973 1974 1970-19.74 1975 1976 1977 1978

416 511 21.3% 573 636 701 750 808 866 9.2% Energy Sales GWh 67.3 89.0 114.0 136.1 164.9 193.9 23.6% 238 284 322 657 728 796 855 922 990 9.2% Energy Generation GWh 79.3 103.1 132.0 154.0 192.0 226.0 23.4% 275 328 370 479 585 21.0%

13.2 12.6 - 12.8 12.6 11.9 12.3 12.4 12.5 - System Losses % 15.1 13.7 13.6 11.6 14.1 14.2 - 13.5 13.4 13.0

98.0 121 22.1% 136 150 165 177 190 204 9.1% Maximum Demand MW 15.4 20.0 24.1 30.0 37.6 44.5 23.7% 54.0 64.5 73.5

- 55.1 55., 55.1 55.1 55.4 55.45 Annual Load Factor % 58.8 58.8 62.5 58.6 58.3 58.0 - 58.0 58.0 57.5 55.8 55.2 180 180 210 250 240 240 - Installed Capacity ! MW 55 55 55 54 55 54 - 105 105 120 120 150 -

130 160 - 190 190 223 256 256 256 - Peaking Capability MW 53 43 43 43 54 54 - 113 113 130

- 160 160 190 223 223 223 - Firm Capability MW 28 28 28 28 39 39 - 90 90 107 107 130 24 10 25 46 33 19 - Surplus (Deficiency) MW 12.6 8.o 3.9 (2.0) 1.4 (5-5) - 36 25.5 33.5 9 9 -

Addition of Capacity/ Hydro Hydro Peaking Capability MW Canaveral Diesels Gas Turbh. Gas Turb. Thermal Thermal 30/33 28.5/30 10/11 15/17 15/17 30/30 30/30 30/33 Rio Lindo 40/46

1/ Reduction of 4 MW in 1970 due to shut-down of two hydro plants and one diesel plant. April 1970 I!? TONDIJRAS

E1QRESA NAITOIIAL DE ENEGIA ELECTRICA (ENEE)

Actual and Forecast Balance Sheets

(exuressed in thousands of Lempiras)

------Actual ------Forecast…------As of December 31, 1965 1955 1957 1968 1969 1970 1971 1972 1973 1974 (preliminary)

ASSETS

Utility Plant at cost 1/ 47,447 50,552 54,546 56,113 60,683 104,049 115,766 144,616 154,051 26Q,271 Construction work in progress - - - 5,441 15,546 _ 3,000 1,560 9o060 29,9140

Utility Plant - Gross LL7,447 50,S62 51,545 S1,554 77,229 104,049 118,766 146,176 163,111 185,811 Less: Accumulated depreciation S,455 8,347 5,959 11,590 13,784 15,983 18,48 22,094 26,358 30,874

Utility Plant - Net 40,992 42,315 44,687 59,864 53,445 88,066 10oo328 124,082 136,753 154,93

Current assets: Cash and banks 571 1,792 897 1,836 1,92a 1,620 1,080 1,017 1,S52 1,{12 Accounts receivable 1,230 1,533 2,370 3,069 3,468 4,038 4,710 5,348 6,530 7,676 Mateiials and supplies 1,471 2,118 3,201 2,982 3,535 3,600 3,800 4,o0O 4,300 4,550 Pregaid expenses 98 109 115 128 306 320 340 370 400 440

Total Current Assets 3,370 5,652 6,583 8,015 9,235 9,578 9,930 10,785 12,582 14T378

Deferred and other debits: Preinvestment studies 85 275 1,217 1,518 988 1,088 1,388 1,788 2,188 2,388

TOTAL ASSETS 44,447 48,2142 52487 59397 73,668 98,732 11.636 166 171703

LIABILITIES AND EQUITY

Caoital and surplus 13 648 17,907 21,797 27,021 33 488 4c.o07 48,143 57 197 67,648 80,441 Long-term debt 9 28106 27,107 29,067 3 59,o3 78,695 86,112 Less: Current portion 906 1,010 1,307 1,805 1,856 2,182 4,295 4,438 5,083 4.667

28,093 27,096 25,800 27,261 39,139 93,033L9770 99,338 73.612 81.LL5

Current liabilities: Current sortion of long-term debt 905 1,010 1,307 1,806 1,85S 2,182 4,295 4,438 5,083 4,667 Notes and accounts savable 862 1,234 2,426 2,046 1,697 1,870 2,060 2,270 2,500 2,750 Accrued expenses 419 380 474 500 S41 710 780 860 950 1,050 Customers' deposits 519 615 683 763 847 930 1,020 1,120 1,230 1,350 Overdraft - l,000 500 2,706 3,239 4,890 5,115 5,041 5,592 8.155 9,688 1

TOTAL LIABILITIES AND EQUITY 44,447 48,24259,39 52,487 7 73.558 98 71 11-s 6'6 al3 ,'5 1

Debt/Equity Ratio S8/32 61/39 55/45 52/48 52/48 59F/42 55/45 56/44 95/146 52/48

1/ Excent for: (a) original electrical system for the Tegucigalga area acquired in 1957 which is included at its assigned value o' L3.4 million; and (b) original electrical svstem for the San Pedro Sula ares acquired in 1963 which is included at its original cost less the unamortized balance of the excess of such cost over the gurchase or:ce. harch 2, 1970 ANNE-.

HONDURAS

EMPRESANACIONAL DE ENERGIAELECTRICA (ENEE)

Long-Term Debt as of December 31, 1969

(expressed in thousands of Lempiras)

Final Interest Outstanding Balance Creditor Maturity % Currency December 31, 1969

Republic of Honduras/IBRD

226-HO 1974 6 Various 1,388 261-HO 1985 6 Various 14,739 541-HO 64 4,4_5 Total IBRD 20,572

Republicof Honduras/IDA

116-HO 2018 64 Various 2,520

AID, Loan 137 1987 3½ US$ 5,012

Bonds, Guaranteedby Central Bank of Honduras

CanaveralProject 1975 7 Lempiras 2,947 Rio Lindo Project 1981 7½t Lempiras 2,000 Total Bonds 4,947

CentralBank of Honduras,Acquisition of Cholutecasystem 1975 7 Lempiras 131

CABEI; Loan 182 1977 6 US$ 1,676

Tela Railroad,Acquisition of Puerto CortesSystem 1970 6 Lempiras 6

FinancingPending, Rio Lindo Project

541-HO/116-HO Various 1,273 Bonds Lempiras 858 2,131 TOTAL 36,995

March 2, 1970 HONDURAS

EMPRESANACIONAL DE ENERGIA ELECTRICA (ENEE)

Actual and Forecast Income Statements

(Exoressed in thousands of Lemniras)

------Actual------Forecast------Fiscal Year Ending December 31, 1955 1965 1967 1968 1969 1970 1971 1972 1973 1974 ?reliminary

Sales increase in percent 32.7 28.5 19.7 22.0 18.o 22.0 19.4 13.4 25.9 22.6 Sales (Gwh) 91.4 117.5 140.J 171.5 202.4 247.0 295.0 334.6 421.1 516.1 Average revenue per KWh (centavos) 7.6 7.5 7.5 7.4 7.2 6.8 6.7 6.7 6.6 6.3 OPERATING REVENUES 6,983 8,852 10,595 12,650 14,561 16,859 19,820 22,533 27,727 32,757

OPERATING COSTS Operating expenses excl. fuel 2,367 2,925 3,852 4,060 4,805 5,200 5,622 6,132 7,293 8,833, Fuel 125 210 n.a. 703 643 2,177 225 250 966 1,759 Depreciation 1/ 1,272 1,384 1,493 1627 1,994 2,199 2,465 3.646 42664 4,516

Total Operating Costs 3,764 4,519 5,345 6,390 7442576 8312 10,028 12,525 15.10

NET INCOME FROM OPERATIONS 3,219 4,333 5,251 6,260 7,119 7,283 11,508 12,505 15,202 17,649 Miscellaneousrevenue and other income 174 166 170 266 173 159 173 199 223 245

NET INCOME BEFORE INTEREST 3,393 6,499 5,421 6,526 7,292 7,442 11,684 12,704 15,425 17,894

Interest payable 1,687 1,651 1,594 1,606 2,153 2,653 3,795 4,420 5,199 5,571 Less: Interest Capitalized 7 4 6 77 567 790 247 770 225 470

1,,80 1,87 1,588 1,529 1,586 1,863 3,548 3,650 4,974 5,101

NET INCOME 1,713 2,852 3,833 4,997 5,706 5,579 8,136 9,056 10,451 12,793

Capital and surplus at beginning of year 11,75h 13,668 17,907 21,797 27,021 33,488 40,007 48,163 57,197 67,668 Contributions 70 1,400 23 208 750 940 - - - _ Transfer of properties 115 10 32 - - - - _ _ _ Credits (orcharges) (14) (3) 2 19 11 - - - - _

Capital and Surplus at end of year 13,648 7,907 21,797 27,021 33.488 60,007 48,143 67,668 L Times interest covered by net income before interest 2.0 2.7 3.4 4.1 3.4 2.8 3.1 2.9 3.0. 3.2 Return on net utility plant in operation (X) 8.3 10.8 12.5 16.2 ls.0 11.0 12.6 11.6 12.3 13.9

1/ In 1963 Plant Acquisition AdJustment Account was credited for L683,1,9 on account of the acquisition of the electric nlant in San Pedro Sula. This amount is being amortized by annual credits to income of about L65,000. In this statement these transfers have been deducted from denreciation.

May 1970 ANTEX 8

5ONDLIRAS

EMPRESANATIONAL DE ENERGIA ELECTRICA (ENEE)

Forecast Sources and Applications of Funds

(Expressed in thousands of Lempiras) Total 1970 1971 1972 1973 1974 1970-74

SOURCESOF FUNDS

Net income before interest 7,442 11,684 12,704 15,425 17,894 65,149 Deoreciation 2,199 2,465 3,646 4,264 4,51, 17,093

Internal cash generation 9,641 14,149 16,350 19,o89 22,410 82,239

Borrowings:

IBRD loan 541-HO/IDA credit 116-NO 10,761 4,000 - - - 14,7S1 "ronosed IBRD loC/IDA Credit - 2,60o 15,736 3,300 0oo 22,000 Bonds (Rio Lindo Project) 3,142 - - 3,142 CABEI loan (gas turbine) 3,148 - _ - - 3,1i4 CABEI loan (distribution) 3,000 - - - 3,00D Future loan (thermal plant) - - 1,170 5,625 8,460 15,255 Future loan (hydroelectric Project) - - - 3,540 3,p40 Future local bonds or loans - - 2,000 Overdraft 1000,- (500) (500)

Total Borrowings 20,051 6,600 05Th 12,000 ____4_

Contributi ons National Government for Rio Lindo Project 750 - - Other 190 - - - - -

Tctal Contributions 940 _ - - - 940

TOTAL SOURCES 30,632 20,749 36,220 28,114 34,410 150.125

APPLICATIONS OF FUNDS Construction and Acquisition Program (excluding interest) Pio Lindo Project 18,180 7,880 - - _ 26,D60 Gas turbine San Pedro Sula 2,700 - _ - 2,700 Transmission Ext. Project (IBRD) 500 3,000 21,100 4,500 500 29,600 Interim thermal project - - 1,560 7,500 11,230 2D,340 Puture hydro rroject - - - - 5,200 5,200 Mochito Mines transmission line 400 100 - - - 50O Distribution and normal expansion 3,650 2,690 3,030 3,810 4,350 17,530 Acquisation of new systems 100 300 300 250 250 1,200 Sunoly to additional towns 200 200 200 200 200 1,00 Feasibility studies 100 300 400 400 200 1,400 Headquarters building and miscellaneous items 300 300 450 450 450 1,950

Total Construction and Acquisition Program 2,130 l770 7,04 17,110 22,43;) 107,480

Interest 2,655 3,795 4,420 5,199 5,571 21,638 Amortisation 1,831 2,182 4,295 4,438 5,O83 17,829

Total Debt Service 4,484 5,977 8,315 9,637 10.654 39,467

Additions to Working Canital 324 542 528 1,032 98$ 3,392

TOTAL APPLTCATIONS 30935 21,28 3683 277.79 34,050 o0 9

Cash at beginning of year 1,926 1,620 1 o80 1,017 1,V2 2,92 Annual surplus (deficit) (306) (540) (63) 335 360 (214) Cash at end of year 1,620 1,080. 1,017 1,352 1,712 1,712

Times debt service covered by internal cash generation 2.2 2.4 1.9 2.0 2.1 2.1

May 1970 HONDURAS

EMPRESA NACIONAL DE ENERGIA ELECTRICA (ENEE)

Actual and Forecast Financial Ratios

(Amounts expressed in thousands of Lempiras)

------Actual------Forecast------1965 1966 1957 1968 1969 1970 1971 1972 1973 1974

Return on Net Plant Average net utility plant in operation 40,646 41,653 43,501 44,555 45,661 67,483 92,692 109,920 125,108 128,545 Net incomebefore interest 3,393 4,499 5,421 6,526 7,292 7,442 11,684 12,704 Percentagereturn 15,425 17,894 (%) 8.3 10.8 12.5 14.6 16.0 11.0 12.6 11.6 12.3 13.5 Interest ConFrage Times interest covered by net income beforeinterest 2.0 2.7 3.4 4.1 3.4 2.8 3.1 2.9 3.0 3.2 Debt Ti-mesdebt service covered by internal cash generation 1.3 2.3 2.7 2.8 2.4 2.h 2.4 1.9 2.C 2.1 Debt/Equity ratio 68/32 61/39 55/45 52/48 52/48 58/42 55/45 56/44 54/V6 52/48 4orking Capital Working capital at year-end 664 2,413 1,693 2,900 4,194 3,886 1,775 1,097 2,319~ 4,561 Current Ratio (to 1.0) 1.25 1.74 1.35 1.57 1.83 1.68 1.22 1.11 1.23 1.46 Depreciation As a percentage of average utility plant in operation 2.74 2.82 2.84 2.94 3.41 2.67 2.24 2.80 2.86 2.87

March 2, 1970

19o ANNEX10 Page 1 of 1

INCREMENTALFINANCIAL

RATE OF RETURN

1. The incremental financial rate of return on the additional investment needed to extend the interconnected system to the north coast and the southern zone is the discount rate which equalizesthe present value of the streams of benefits and costs associatedwith the project. The stream of benefits is the stream of incrementalrevenues generatedby the interconnectionover the physical life of the project. The stream of costs is the sum of the streams of incrementalcapital expendituresand of incrementaloperating costs which ENEE would have to incur as a result of the interconnection.

2. Incrementalrevenues are based on the present tariffs, except for irrigationloads, for which a low rate of about 3 centavos per kWh was assumed. Revenues are net of the revenueswhich could be derived from the isolated plants presentlyoperating in both areas, as these plants could still be used for some years.

3. Incrementalcapital expenditures are the differencebetween the cash expenditureson transmission,distribution and generationwhich ENEE will have to incur to expand its system (including the new areas) and the corresponding expenditures if these areas were not included in the system'sexpansion.

4. Incrementaloperating costs are the increase in the cash operatingexpenses of ENEE's interconnectedsystem as a result of the extensionof service to the new areas after deductingthe savings realized on the operationof theiz existingisolated p'nts.

May 5, 1970 HONDU RAS EMPRESA NACIONAL DE ENERGIA ELECTRICA INTERCONNECTED POWER SYSTEM (Only main facilities are shown.)

GULF OF HONDURAS

PUERTO CORTES tA~~~~~~~~~~~~~~~~~~~~'ASMASICA

EL PROGRESO

_l ,EMOELINO 9/0 o .0 40 60

'- /YO 1 LI O/

-4-lt1 CANAVERA LI00 O - SANTA IBARIA A 0. M AKE HYDRO PIOWER STATION g d . \ / /YOJOA - IIHYDROPOWER STATION - UNDER CONSTRUCTION SANTA *D DIESEL POWER STATION ROSA 0 \ T>>> \ 8;\ tG GAS TURBINE POWER STATION - UNDER CONSTRUCTION

X , \ E~~~~~~~~~~GUACAMI.YA * sSTYO 138 V TFIANSMISSION LINE

AT 69KV TRANSMISSION LINE 2SIGUATEPE\/ A ...... -.. - - 69KV-SANSMISNIOS O UELINE - UNDERC ONNTRUCTION

...... 34.5K, SU5TRANSMISSION LINE * POTENTIAL HYDRO POWER SITE: 0 G PROPOSEO GAS TURBINE POWER STATION - - *', , .

k \ 'S-r~ >' PROFO9ED.. > 'A SUBSTATION

LA ESPERAhZA°O L ,I'ROPOSED * 138-5 TRANSMISSION LINE PROPOSED 69KV TRANSMISSION LINE

, TAMARA\ t - PROPOSED 34.5/13,8KV SUBTRANSMISSION LINE 0 MARCALA b AMANI

P'IP

I~ NACAOME> ;I

M C 9ACHOLUTECA

MERIDO ~~~ArAiSTIC

PAE/97E PA

MARCH1970 IBRD 2913