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