RETURN TO REPORTS DESK WI ONE WEEKdocuments.worldbank.org/curated/pt/608911468176353948/pdf/multi0page.pdf · and CADAFE the Macagua-Guri complex and the EHV Project on an interconnected

RE5TRICTED

Report No. TO-572a

RETURN TOREPORTS DESK

WI ILNONE WEEK

rL.:. a s prepared for use within the Bank and its affiliated organizations.They do not accept responsibility for its accuracy or completeness. The report maynot be published nor may it be quoted as representing their views.

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

INTERNATIONAL DEVELOPMENT ASSOCIATION

APPRAISAL OF EXTRA HIGH VOLTAGE TRANSMISSION PROJECT

C. V. G. ELECTRIFICACION DEL CARONI, C. A.

VENEZUELA

December 29, 1966

Projects Department

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CURRENCY EQUIVALENTS

Us $1. 00 = Bolivares (Bs) 4. 50Bs 1.00 = US $0. 22Bs 1 million US $222, 222

WEIGHTS AND MEASURES EQUIVALENTS

1 kilometer (km) 0. 622 statute mile1 metric ton 2204. 6 pounds

VENEZUELA

APPRAISAL OF EXTRA HIGH VOLTAGE TRANSMISSION PROJECT

C.V.G. ELECTRIFICACION DEL CARONI, C.A.

TABLE OF CONTENTS

Page No.

SUMMARY

I. INTRODUCTION 1

II. THE BORROWER 2

III. POWER MARKET 3The Guayana Market 3The CADAFE System 5La Electricidad Market 5Proposed Pool Arrangements 6Total Power Sales by EDELCA 1969-1973 7

IV. CONSTRUCTION PROGRAMS 1966-1975 8Guri Project 9The Proposed EHV Project 10Construction of Guri Units 4-9 10Second EHV Transmission Line 10Other Transmission Lines 10

V. THE PROJECT 11Technical and Economic Aspects 11Status of Procurement 12Project Cost Estimate 12Engineering Arrangements 13Construction Schedule 13

VI. FINANCIAL ASPECTS 14Past Operations and Earnings 14Construction Expenditures 16Financing Plan mid-1966 - 1975 16Tariffs 18Estimated Future Financial Performance 19Accounts and Audits 22Financial Covenants 22

VII. CONCLUSIONS 22

ANNEXES

MAP

This report is based upon information obtained from comprehensive studie.smade by EDELCA and its consultants; a continuous exchange of views withEDELCA, including visits to the Bank by EDELCA staff; and upon a finalappraisal in Venezuela by F.H. Howell in October 1966.

LIST OF ANNEXES

ANNEX 1 - Background and Status of Frequency Conversion

ANNEX 2 - Estimated Maximum Demand, Energy Sales, and Revenues

ANNEX 3 - EHV Project Cost Estimates and Construction Expenditures

ANNEX 4 - Actual and Estimated Income Statements, 1964-1975

ANNEX 5 - Estimated Sources and Applications of Funds, 1966-1975

ANNEX 6 - Condensed Actual and Estimated Balance Sheets, 1964-1975

MAP

VENEZUELA

APPRAISAL OF EXTRA HIGH VOLTAGE TRANSMISSION PROJECT

C.V.G. ELECTRIFICACION DEL CARONI, C.A.

SUYMARY

i. C.V.G, Electrificacion del Caroni CoA. (EDELCA) has requested a Bar:!:loan of US$15.0 million equivalent to assist in financing the foreign exchangecosts of a new 570 kam Extra High Voltage (EHV) transmission line from EDELCA'sGuri Hydroelectric Plant, now under construction, to Caracas. The totalestimated cost of the Project is US$23.4 million equivalent. The Bank madeits first loan 353-VE to EDELCA in September 1963 for US$85 million equivalentto finance the foreign exchange costs of the Guri Plant, initial power pro-duction from which is now scheduled for July 1968. The EHV facilities willbe required to transmit Guri power to the market not later than the beginnix.gof 1970.

ii. The EHV system has been soundly designed and engineered. Procure-ment is well advanced and all major contracts are expected to be signed notlater than January 31, 1967. EDELCA has followed international biddingpractices in accordance with Bank policy, and all proposed contract awardshave been reviewed by the Bank.

iii. EDELCA continues to be capably managed by executives known to theBank, assisted by a competent staff. Projected operating results are satis-factory, and EDELCA should have no difficulty in achieving the financialperformance targets established in Loan 353-VE.

iv. The Caracas market is very important to the economic utilizationof Guri power, and the Government undertook, in connection with Loan 353-VE,to arrange for the conversion of La Electricidad de Caracas' 50 cycle systemto 60 cycles, the national frequency standard, by the time Guri would be irnoperation. Due to extended afninistrative procedures and technical con-siderations precedent to unde.b::taking the work of conversion, it cannot becompleted by 1968 when CGuri slhould be in operation. However, all necessarylegal and financial measures have now been taken and the work of conversionis scheduled for completion by June 1970. During 1968-1969, La ElectricidaAwill purchase increasirkg amounts of 60 cycle power as the changeover from50 to 60 cycle operation proceeds. The proposed EHV system will constitutean important step in assuring La Electricidad that it can rely upon EDELCAfor a power supply of adequate capacity with a high degree of security.

v. Of the total cost of the Project, 64 percent will be financed bythe proposed Bank loan, and 36 percent by EDELCA's internal cash generationand planned national budget contributions.

vi. The Project is suitable for a Bank loan of US$15.0 million equi-valent for a term of 20 years including a grace period of three and one-ha2fyears.

VENEZUELA

APPRAISAL OF EXTRA HIGH VOLTAGE TRANSMISSION PROJECT

CeV.G. ELECTRIFICACION DEL CARONI CeA.

I* INTRODUCTION

1. In September 1963, the Bank made its first Loan for power develop-ment in Venezuela (353-VE) of US$85 million equivalent to a newly-createdcompany, C0V,Go Electrificacion del Caroni C.Ao (EDELCA), for the constructio..of the Guri Hydroelectric Plant. The Plant, which should commence commercialoperation in early 19691/ with an initial capacity of 525 MW installed inthree units, is designed for an ultimate capacity of 1750 MW in ten units.One of the principal customers for Guri power will be the privately-ownedC.A. La Electricidad de Caracas (La Electricidad) whlich serves the capitalcity of Caracas and certain nearby communities. The other principal custo.-rwill be C.A. de Administracion y Fomento Electrico (CADAFE), which operatesgovernment-owned systems throughout the country. The Bank made its secondpower loan in Venezuela to CADAFE (391-VE, September 1964, US$14 millionequivalent) to finance the construction of a 230-kv transmission line tointegrate several isolated systems, which will constitute an important partof the market for Guri power (see map). W4hen Loan 353-VE was made, it wascontemplated that EDELCA would be required to construct extra-high-voltagetransmission facilities (EHV) by about the end of 1968, extending from theGuri Project to the Caracas area, to deliver power to La Electricidad, and tcCADAFE's central zone. The Government of Venezuela has now requested the Banrto assist in financing the foreign exchange costs of these proposed EHVfacilities, planned for completion and initial operation in coordination wit'the Guri Project. The estimated cost of the EHV facilities is equivalent toabout US$23.4 million, including interest and other charges during constructionof which the foreign exchange component would be approximately US$16.9 millicn-

2. The EHV Project would consist of a 570 km single-circuit bundle-conductor steel-tower 400-kv transmission line from the Guri Plant to Caracas.three 400-lkv substations, including an intermediate switching station; andengineering and inspection services.

3. Design and planning of the proposed 400-kv Project has been carriedout by EDELCA, assisted throughout by consulting engineers. (Engineeringarrangements are discussed in paragraphs 30, 31, and 35, and in Annex 1.)EDELCA is currently operating the 375 MW run-of-river Macagua HydroelectrocPlant and associated transmission facilities, and constructing the GuriHydroelectric Plant. EDELCA will construct, own, and operate the EHV Pro-ectwhich, together with the Macagua and Guri Plants will form a coordinatedbulk-supply system. EDELCA would be the borrower of the proposed niew Bankloan.

1/ Initial power generation by unit 1 is scheduled for July 1968, with Uist'i92 and 3 coming into operation by the end of 1968.

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4. This report is based upon information obtained from comprehensivestudies made by EDELCA and its consultants; a continuous exchange of viewswith EDELCA, including visits to the Bank by EDELCA staff; and upon a finalappraisal in Venezuela by F.H. Howell in October 1966.

II THE BORROWER

5. EDELCA is a subsidiary of Corporacion Venezolana de Guayana (CVG),an autonomous agency responsible for developing the Guayana region near the

confluence of the Orinoco and Caroni Rivers. CVG is operating a large steel-works, Planta Siderurgica del Orinoco (SIDOR); constructing, with ReynoldsInternational (USA) an aluminum smelting facility for initial operaticn in1967; and also developing the major new city of Ciudad Guayana wlhich present1yhas a population of some 70,000. CVG is in addition investigating and pro-moting possibilities for additional development of this general area, includilgexpansion of the steel and aluminum operations, land reclamation, reforestaticr.,pulp and paper operations, etc.

6. EDELCA was created in August 1963 by CVG to take over CVG's electric

power activities. The Charter and By-Laws were drafted in close consultationwith the Bank and provide a sound basis for its operations. In particular,

the Charter (Article 20) requires that EDELCA's President shall at all timesbe a person of proven experience and executive capacity, competent to direct

the operations of the Company. A breach of this Article constitutes an act

of default under Loan Agreement 353-VE, and EDELCA agreed in a supplementalletter to consult with the Bank whenever a change in the position of Presiderntis contemplated. The current President has been in charge of EDELCA since itscreation, and has also directed all the affairs of CVG, since its creation in1960, and is well known to the Bank. He is supported by EDELCA's staff whicnis successfully operating the Macagua Plant, and assisted by consultants super-vising construction of the Guri Plant. With training programs now underwayand planned, EDELCA staff should be capable of administering the constructionof the ERV Project, and later of operating all the power facilities, inaddition to providing the coordination necessary to operate with La Electricidaciand CADAFE the Macagua-Guri complex and the EHV Project on an interconnected

pool basis.

7. Because the Caracas market is very important to the economic uti ii-zation of EDIALCA's 60 cycle generating plants, the Government and La Electri-cidad have agreed to cor.vert the latter's system from 50 to 60 cycle operatic-.which is necessary before EDELCA can sell power to La Electricidad. (seeparagraphs 17 - 19, and Annex 1. CADAFE's systems are all operated at 60cycles.) CVG will act as the Government's fiscal agent for the conversion.CVG will not only disburse the funds the Government has appropriated to defraycertain costs of the conversion, but will also be responsible for auditingthe cost of this work. Suitable staff with appropriate background are nowdischarging this responsibility.

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III. PWER MARKET

8. EDELCAts market will consist of three components, as shown on themap.

(i) the Guayana region;

(ii) the Central and Eastern Zones of CADAFE, served by majorgas-fired steam-electric plants, and smaller isolateddiesel and gas-turbine installations (these Zones will beintegrated in mid-1967 by CADAFE's double-circuit 230-kvtransmission line, financed by Loan 391-VE); and

(iii) the system of La Electricidad which serves the capitalcity of Caracas, and certain smaller contiguous communities,from modern, gas-fired steam plants located on theCaribbean Coast.

The potential market for Guri power was reviewed in depth in the course ofthe investigations carried out 1 n 1962 and 1963 by the Bank prior to makingthe loan for the Guri Project.lr At that time it was concluded that immediateconstruction of Guri would be justified only if EDELCA's market area includedCaracas. Incorporation of Caracas in the Guri market necessitated the inter-connection and integrated operation of the electric power facilities ofEDELCA, CADAFE, and La Electricidad. It was appreciated that achievement ofthis objective would be difficult, since it involved not only the close co-operation of the public and private sectors, but the conversion of LaElectricidad's system from 50 cycle to 60 cycle operation. The currentsituation with respect to the three market components and the prospects forthe future are presented in the paragraphs immediately following. As isdiscussed in Section IV, "Construction Programs" initial generation of power'at Guri will be delayed about one year beyond the estimates made when con-struction was started, i.eo from June 1967 until July 1968. This delay hasrequired certain changes in planning for generating facilities by La Electri-cidad and CADAFE.

9. With the completion of Guri, and the proposed EHV facilities, thesystems of EDELCA, CADAFE, and La Electricidad will be planned and operatedas a coordinated mixed hydro-thermal power pool. This was visualized whenthe Guri Loan was made, and should be achieved by mid-1970. This is severalyears later than originally estimated, due to delays in completing CADAFE's230-kv transmission line; slower progress than scheduled in the constructionof Guri; and underestimates of the time required for the Government and LaElectricidad to reach agreement on frequency conversion.

The Guayana Market

10. The Guayana load is principally industrial, and is served fromEDELCA's 375 I"lW Macagua Plant. The major consumer is CVG's steelworks, ST-CDR,

1/ See Report TO-373b, September 4, 1963.

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which has a maximum demand of 220 MW, from nine 200 metric ton iron-ore-reducing electric furnaces, open-hearth furnaces, and associated finishingfacilities. CVG has plans to expand the fabricating and finishing faciliticspnow principally devoted to production of tubes and wire, to produce plateand structural shapes. The planned expansion will increase the power demand,in several steps, to about 275 MW by 1973-1974.

11. CVG and Reynolds International (USA), through a jointly owned sub-sidiary Aluminio Caroni S.A. (ALCASA) are completing an aluminum reductionfacility near SIDOR. The first pot-line with 10,000 metric ton annual ingotcapacity will begin operation in 1967, with an initial demand of 25 14W. Anexpansion to 20,000 metric tons and 50 M-W is contemplated for 1968. CVG iscurrently negotiating with Japanese interests to further expand production to40,000 metric tons and 100 14W in the early 1970's.

12. Another major industrial customer in the Guayana is Orinoco MiningCompany, a wholly-owned subsidiary of United States Steel Company, which hasa very large iron ore mining operation inland, a ship-loading facility at theport of Ciudad Guayana, and a captive ore-carrying railroad connecting themine and port. This company is planning a new iron-ore reducing facility nearthe port and expansion of its port activities, which will increase its powerdemand from the current 5 Wiw to 15 MW in 1970. Furthermore, power requiremenlt;sat the iron-ore mine, now supplied by a 3 IMW diesel power plant, could be moreeconomically served by EDELCA. In addition to Orinoco Mining, Bethlehem Steeloperates a mine in the region, and Philips Petroleum has a transhipmentfacility in the port of Ciudad Guayana to load sea-going tankers with crudeoil from fields in eastern Venezuela.

13. As part of its regional development activities, CVG is investi-gating the possibility of producing sponge iron, and kraft pulp and paper fromilocally grown timber. The increased pace of activity in the Guayana, to whiCcthe construction of the Guri Plant has contributed significantly, has promoteea large increase in small commercial and service establishments. Tlhe populatIcis now, as noted, some 70,000, compared with 2,000 in 1950, and is expected toreach 250,000 by 1975. Continued emphasis on development of the Guayana byCVG will undoubtedly bring about a continuous increase in population and livirxgstandards and consequent increase in the use of electric power.

14. The present forecast of aggregate demand in the Guayana is sub-stantially the same as that made by the Bank in 1963, with the exception thatthe ALCASA development has been delayed about 18 months. The forecast isreasonable, based upon current knowledge of development plans and conservativeestimates of power requirements. The Guayana market is of decided financialimportance to EDELCA since it should produce 45 percent of all operatingrevenues during the 10 years 1966-1975.

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The CADAFE System

15. CADAFE operates a number of systems throughout Venezuela, including.two (Eastern and Central) which are located within EDELCA's market area.lThe Eastern Zone includes a number of communities served by small isolated,inefficient powerplants, while the Central Zone includes the industrial centcisof Valencia and MNiaracay and is supplied principally by three major steamelectric plants with a capacity of 200 MW. CADAFE's Central Zone also servesthe water supply system of Caracas, which is being expanded with the assistarlc.of Bank Loan 444-VE of US$21.3 million equivalent made in April 1966, toInstituto Nacional de Obras Sanitarias (INOS). CADAFE's Central Zone more orless surrounds the service area of La Electricidad.

16. The principal objective for the construction of the 230-kv Macagua-Caracas transmission line has been to integrate CADAFE's Eastern and CentraJZones with each other, and with EDELCA's N4acagua Plant. Some of CADAFE'ssmaller high-cost plants can be retired, and lower-cost hydroelectric energypurchased from EDELCA's Macagua Plant to supply these markets. CADAFE willnot have completed the new 230-kv transmission system until mid-1967, aboutone-and-one-half years later than estimated when Loan 391-VE was made for thieproject. Thus, sales of Macagua power to CADAFE by EDELCA did not take placein 1965, as expected when the Guri Loan was made. CADAFE has installed 25 TWin two "paclcage" type gas-turbine units in the Central Zone in 1966, to pro-vide generating reserves in view of the delays in the 230-kv system, and hasrecently contracted for six additional gas turbine units, with an aggregatecapacity of 84 MW, of which 42 MW are scheduled to be installed in the Gurimarket area by March 1967. CADAFE considers that the gas-turbine capacityis required to serve growing loads in the Central Zone (including INOS), andto provide system reserves in view of the delay in completing the 230-kvfacilities, and the delay in Guri (see paragraphs 22 - 24). Because thegas-turbines represent an expensive mode of generation, CADAFE will use themprinarily for supplying short-duration peaking power, and purchase hydro-electric energy from EDELCA in nearly the same amounts originally visualized.In any event, CADAFE's long range planning visualizes relocating these unitsin communities outside the Guri market area after completion of the proposedEHV ProJect. CADAFE and EDELCA are currently negotiating an interim polweragreement to provide a basis for sales before Guri Plant is completed in lP)'.These interim arrangements will be superseded by the long-term agreementdiscussed in paragraph 19.

La Electricidad Market

17. Because of the long-range significance of the Caracas power marketto the economic utilization of the energy resources of the Caroni River, theBank has in the past already taken the position that it was essential forarrangements to be started as soon as possible to convert La Electricidad's50 cycle system to 60 cycle operation, to permit interconnection with EDELCA

1/ See TO-44Oa, August 11, 1964, for a general description of CADAFE'soperations.

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and purchase of Guri power. In fact, agreement to this concept was animportant condition of the Guri Loan. The Bank received assurances from theGovernment that measures would be taken to unify the frequency of powersystems throughout the country, and the Council of Ministers established aCommission for Changing Frequency to carry out studies of frequency unifi-cation, so that interconnection at 60 cycles could be accomplished by the tiiTeGuri came into operation, i.e. by the end of 1967, as then expected. Theproblem has proven difficult, and the studies protracted; moreover, thequestion of voluntary cooperation by the privately-owned La Electricidad withgovernment-owned systems has been delicate and negotiations have been time-consuming. La Electricidad signed a contract with the Government in March1966, providing for conversion and purchase of power from EDELCA, but it isunlikely that actual physical conversion of La Electricidad's system will bestarted before mid-1967. The estimated completion of conversion is July 1,1970. During the period of changeover, La Electricidad will rely increasinclyupon EDELCA to provide 6 0-cycle power and reserves in case of emergencies.The status of the frequency-changeover is discussed in detail in Annex 1.

18. La Electricidad's load has been increasing at an average compoundrate of about 7-1/2 to 8 percent per annum in recent years (1957-1965).While it is reasonable to expect this rate of growth to continue throughoutthe next decade, the sales of power by EDELCA will be related to both LaElectricidad's own load, and its own system generating capacity. La Electri-cidad has recently installed a new 66 MW gas-fired steam unit, and has con-tracted for an aircraft-engine peaking unit of 50-60 14W, which will be in-stalled in mid-1968. La Electricidad has invested in these facilities notonly because it has always maintained reserves in accordance with quitesevere reliability-of-supply criteria, but also because it is unwilling torely solely upon CADAFE's 230-kv Macagua-Caracas line to transmit power fromEDELCA's Macagua Plant, and later from Guri. La Electricidad's managementhas continued to insist that additional transmission facilities of highreliability must be constructed from Guri to Caracas before it will be will ng

to enter into firm power sales agreements with EDELCA. Because of the in-stallation of the additional generating facilities on La Electricidad'ssystem, and the delays in initiating the frequency conversion, EDELCA's salesto La Electricidad in the near future will be limited principally to provid-ing reserves while the conversion is underway (when La Electricidad will bein effect operating two separated systems).

Proposed Pool Arrangements

19. Longer-range sales will be in accordance with the provisions ofthe proposed interconnection and sales agreement drafted by InternationalMiddle West Service Company (Middle West), who were retained by EDELCA, LaElectricidad, and CADAFE for this purpose. 'See Annex 1.) The terms of theproposed agreement have been generally agreed upon by La Electricidad andEDELCA, and CADAFE. It is expected that the agreement will be signed by thethree parties by mid-1967. The agreement provides, inter alia, for:

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(i) centralized planning of generating additions and majorinter-system transmission lines by a Planning Committeerepresenting the three systems;

(ii) the continued development of Guri as the fundamentalsource of further generating capacity beyond that in-stalled at the time the agreement is signed;

(iii) the coordination, through a joint Operating Committee,of the operation of the facilities of all three systemsto achieve maximum economies consistent with reasonablestandards of service reliability, maintenance require-ments, etc;

(iv) a central load-dispatching office to supervise dailyoperation, under the direction of the Cperating Committee;and

(v) establishment of tariffs for different classes of powerand energy sales and interchanges.

Total Power Sales by EDELCA 1969-1973

20. In summary, projected sales to EDELCA's three market areas are shownin the table on the next page for the period after the proposed EHV Projectis in service, and the Guri Plant begins commercial operation. EDELCA'sestimated sales of firm power to La Electricidad and CADAFE are based uponthe Middle West studies, which have been accepted by all parties. The energrassociated with the firm power represents 5,300 hours use of demand annually.About 25 percent of all sales will be sales of economy (or fuel replacement)energy during off-peak hours. This will be priced below fuel costs alone onboth La Electricidad and CADAFE, and they can be expected therefore to takefull advantage of its availability. This estimate of about 29 billion kwhsales over the five-year period is about 11 percent lower than the Bank's1962-1963 estimate. The effect on revenues during the period is discussed

in Section VI, "Financial Aspects". More detailed estimates of firm powerand economy energy sales, and revenues therefrom, are presented in Annex 2.

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Estimated EDELCA SalesPower - W

1969k/ 1970 1971 1972 1973

La Electricidad 50 61 49 93 93CADAFE 195 287 355 403 460Guayana 340 350 387 447 452

TOTAL 585 698 791 943 1,005

Energy - Million of kwhFirm

La Electricidad - 58 258 489 489CADAFE 1,025 1,508 1,866 2,118 2,418Guayana 1,854 1,909 2,094 2,548 2,575

2,879 3,475 4,218 5,155 5,482Economy

La El.ectricidad 535 1,122 1,219 1,253 1,342CADAFE 690 338 376 383 224

1,225 1,460 1,595 1,636 1,566

TOTAL 4,104 4,935 5,813 6,791 7,048

IV. CONSTRUCTION PROGRAMS 1966-1975

21. The construction activities of EDELCA during the ten-year periodreviewed in this report would consist of the following five programs, someof which will be carried on simultaneously:

(i) completion by 1969 of the original Guri Project (includingUnits 1, 2, and 3) which is being financed by Loan 353-VE;

(ii) construction during 1967-1969 of the EHV TransmissionProject, for which a second Bank loan is now proposed,(see Section V, "The Project");

(iii) installation at Guri of an additional six generating units(4-9) during 1969-1975;

(iv) construction of a second EHV transmission line, during1971-1973, to parallel the proposed EHV Project, fromGuri to Caracas; and

1/ Estimated 1966-1968 sales, shown in Annex 2 and taken into account in th-ieforecasts of financial performance, are relatively small, and are notrelated to the proposed EHV Project.

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(v) construction of certain other transmission lines (230-kv,115-kv and 33-kv) to serve the growing industries in theGuayana, and Ciudad Guayana itself.

The total estimated cost of all these works during 1966-1975 is the equivaler-of about US$208 million, including interest during construction. This sum iscomposed of US$139 million equivalent in foreign exchange, and US$69 millionin local currency. Of these requirements, approximately US$51 million equi-valent is available from Loan 353-VE.

Guri Project

22. EDELCA has retained the services of Harza Eagineering Company (Harza)in connection with the design of Guri Project, and supervision of its con-struction. The general contract for the civil works was signed with Consl-cr.oGuri (managed by Kaiser Engineers & Constructors) in August 1963, and the ecn-tractor moved on-site and mobilized rapidly, and accomplished the initialdiversion of the Caroni River in March 1964. The work gradually began to fal).behind the schedule submitted by the contractor in his offer, which calledfor initial power generation by June 1967. Additional excavation has beenrequired, some of which Kaiser claims was difficult and more costly thanexpected. Kaiser has stated that these unexpected difficulties constituteda "change of conditions of the contract" and attempted to renegotiate theentire contract with EDELCA. Agreement in principle has been reached betweenEDELCA and Kaiser to pay for this part of the work at a price still to benegotiated. The pace of activities is increasing, and Kaiser has recentlymoved additional construction equipment on-site. However, it is clear thatthe job cannot be completed (unit 1 operation) as scheduled for June 1967.Kaiser has submitted a revised schedule of work, which calls for unit 1operation in July 1968.

23. All perman'ent equipment contracts have been awarded and manufactrrinh;is progressing satisfactorily. Certain equipment has already arrived at thejob-site, including the main powerhouse crane,'turbine embedded parts andrunners, main transformers, and switchgear. While the revised estimate ofunit 1 operation by mid-1968 seems reasonable at this time, for purposes ofprojecting EDELCA's sales and financial position only, it has been assumedGuri power will not be commercially available until January 1, 1969.

24. The original estimated cost of the Project -- which included onlythe first two generating units -- was the equivalent of US$137 million.Following the award of the civil works contract, and several major equipmenucontracts, the Bank agreed to enlarge the scope of the original Project toinclude the third generating unit. The present (October 1966) estimated costof the Project (including the third unit) is equivalent to US)145 mialion.As of July 1, 1966, funds required to complete the project are the equivalentof about US$86 million, of which US$52 million is in foreign exchange, andUS$34 million in local currency.

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The Proposed EHV Project

25. This Project is described in detail in Section V, "The Project".The total estimated cost is equivalent to US$23.4 million, of which US$16.9million is in foreign exchange and US$6.5 million in local currency.

Construction of Guri Units 4-9

26. Based upon recent load and capability forecasts for the inter-connected pool, the installation of units 4-8 at Guri is planned for 1969-1975(unit 9 would come into service in 1976). This program is essentially asvisualized at the time Loan 353-VE was made in 1963. The total estimatedcost of these works is equivalent to approximately US$72 million, of whichUS$51 million would be in foreign exchange, and US$21 million in local currency(About US$1.5 million equivalent would be spent in 19760)

Second EHV Transmission Line

27. A second EHV line is planned for operation in about 1974, when Gurishould have six units in service to be followed in 1975 by two more units.Guri's capability would then be 1050 ].M9 in 1974, and 1400 MW in 1975. Trans-mission requirements to Caracas will be about 550 MW in 1973 (firm power con-tract demand), about the combined maximum capability of EDELCA's first EHVline (the presently proposed Project) and CADAFE's 230-kv system. The secondEHV line will be required therefore in 1974, to assure continued dependabilityof supply to CADAFE and La Electricidad. The total estimated cost of thesecond line is the equivalent of about US$2165 million, of which about US$l6.4million would be in foreign exchange, and US$5.1 million in local currency.The construction of the second EHV circuit will require less investment thianthe first, because certain facilities are required initially for the firstline, which do not need to be duplicated in constructing the second line.Moreover, the initial 450 MVA transformer at El Tigre will be relocated atSanta Teresa and El Tigre will become only a switching station.1!

Other Transmission Lines

2a. In connection with the development of the Guayana region, EDELCAwill be required to construct additional 230-kv, 115-kv, and 33-kv transmissionfacilities. It is estimated that the total cost of this work during 1966-19(3will be the equivalent of approximately US$7 million, of which about US$4million will be in foreign exchange, and US$3 million in local currency. Ithas been assumed EDELCA will finance all these costs from its own resources,

1/ See Section V, "The Project", and Map.

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V. THE PROJECT

29. The proposed EHV transmission Project consists of the followingprincipal elements:

(i) a 570 km single-circuit steel-tower 400-kv transmission line,with two conductors per phase, from the Guri Plant to CADAFE's230-kv substation southeast of Caracas at Santa Teresa;

(ii) three 400-kv substations, including appropriate switchingfacilities, transformers, and control equipment adjacent to

(a) Guri Plant, with a 300 MVA autotransformer in thesubstation connecting the 400-kv and 230-kv systems.and a 255 MVA transformer connecting generator unit4 to the 400-kv system; and a 150 iVIA reactor;

(b) CADAFE's 230-kv El Tigre substation with an in-stalled capacity of 450 MVA, connecting CADAFE's230-kv system to the 400-kv system (this transformerwill later be moved to Santa Teresa when the second400-kv line is constructed); and

(c) CADAFE's Santa Teresa substation, with an initial in-stalled capacity of 450 MVA, connecting the CADAFE230-kv system to the 400-kv system; and a 150 MVAreactor;

(iii) Consulting engineering services in cannection with design andinspection; and training of EDELCA staff for 400-kv systemoperation.

System operating studies show that the EHV system should be in service notlater than the beginning of 1970, to augment the much lower transmissioncapacity of CADAFE's 230-kv sy-jtem. The EHV tra:!.mmission system wouldassure La Electricidad that Guri power will be available with an adequatedegree of reliability. Initiation of the EHV Project promptly is thereforeimportant to assure that La Electricidad will begin conversion to 60 cycleoperation as scheduled in mid-1967.

Techn^i.al and Economic Aspects

30. Both Middle West and Harza assisted EDELCA in studies to selectthe EHV system voltage, the best choice lying between 400-kv and 500-kvl/considering the distance and amounts of power involved. Economic studiesdemonstrated that for all realistic patterns of system development over a20-25 year period, the 400-kv class was to be preferred. EDELCA consultedexperts in Sweden, and in particular Gunnar Jancke and the firm Transelectv'cAB, who confirmed the desirability of 400-kv as the preferred voltage class,

1/ These are both generally accepted international standards.

- 12 -

and made recommendations concerning insulation levels for the facilitiesvisualized. (An ancillary, but very important advantage, of hOO-kv vs 500-kvis that there is a greater background of experience in the manufacture andoperation of 400-kv facilities.)

31. Following this basic work, the General Electric Co. (USA) carriedout detailed operating studies of the proposed line and interconnected systemconsidering both normal and abnormal conditions. Based upon the results ofthese studies, equipment ratings and characteristics were determined includingswitching criteria and control characteristics.

Status of Procurement

32. Specifications for the transmission line were prepared by EDELCA,and reviewed by Transelectric. Specifications for the substations were pre-pared by Harza, and reviewed by EDELCA and Transelectric. Following consul-tations with the Bank, EDELCA solicited bids for the line and substations onan international basis. Bids for the substations have been received andanalyzed and awards were made during November 1966. Bids for the line wereopened October 7, 1966, and the award was made during December 1966. Allprincipal electrical equipment, tower steel, conductors, insulators, andhardware will be imported, and erected by local labor, under the contractors'direction.

Project Cost Estimate

33. The total estimated cost, including interest and other charges onthe proposed Bank loan during the construction period, is equivalent to US$23.4million, of which US$15.0 million- is the amount proposed for Bank financing.

Condensed Cost Estimate(millionsT)

Local Currency Foreign Exch. TotalBs. US$ US$ Equiv.

Transmission Line 16.4 8.7 12.4Substations 8.3 5.2 7.0

24.7 13.9 19.4

Contingencies 2.3 o.6 1.1Ehgineering/Supervision/

Administration 2.3 005 1.029.3 15.0 21.5

Interest - 1.9 1.9

TOTAL 29.3 16^9 23.4

- 13 -

The cost estimate includes contingencies of about 6 percent on direct costs,which is considered adequate in view of the fact that bids for the principalitems of equipment have already been received. The 5 percent allowance forengineering, factory inspection, field supervision, and EDELCA's overheadsis ample. A more detailed estimate is presented in Annex 3.

34. Exclusive of estimated interest during construction, but includingcontingencies and supervision, etc., the average cost of the transmissionline is approximately US$39,000 equivalent per mile. The average cost ofthe three substations is about US$3.50 equivalent per installed kva ofcapacity, including reactors and spares. These average costs compare favor-ably with known costs of similar works executed under competent management.

Engineering Arrangements

35. EDELCA has been assisted by Harza in reviewing the offers receivedfor the line and substations. EDELCA staff will receive training by thesuppliers of the EHV facilities to enable them to participate in the fieldinspection, testing, and commissioning. EDELCA is, in addition, arrangingto obtain the services of two individual foreign engineers to reside inVenezuela and assist in the administration of the transmission line and sub-station contracts, and help organize and supervise field inspection offices,which will be staffed by experienced EDELCA personnel. EDELCA further willretain consulting engineering firms to carry out factory inspection priorto shipment of the equipment and materials. EDELCA has appointed an experi-enced engineer to take general administrative responsibility for executionof the Project. These arrangements are satisfactory.

Construction Schedule

36. The contracts for the supply and erection of the line and sub-station equipment will require completion within 25 months, with a provisionfor penalties for failure to comply. Approximately three months will berequired for testing and commissioning. Assuming down payments are made notlater than March 1, 1967, the EHV system should be in operation August 1969.However, for purposes of system planning, EDELCA has assumed the EHV systemwill be fully operational only at the end of 1969. This is prudent, andmeets the forecast requirements for transmitting Guri power to the Caracasarea.

- 14 -

VI. FINANCIAL ASPECTS

Past Operations and Earnings

37. As noted in paragraph 6, EDELCA was created in August 1963, sothat the first full year of operations was 1964. CVG transferred toEDELCA all its electric power operations and investments -- the principalasset being the Macagua hydroelectric plant constructed earlier by CVG --and in return received ownership of all EDELCA's capital shares. As ofJune 30, 1966, EDELCA's gross fixed assets were about Bs 490 million,including Ivacagua and the investment in Guri, which was about Bs 269million. Paid-in capital, earned surplus, and reserves were Bs 372million, and long-term debt (solely the drawings against Loan 353-VE)was Bs 153 million. CVG's equity investments in EDELCA for the con-struction of Guri have been made annually in cash, from CVG's ownallocations from the Government budget. The contribution for 1966was Bs 50 million. CVG's investments have always been timely, butbecause delays in the construction of Guri have resulted in constructionexpenditures lower than originally estimated, EDELCA presently has anapparently large amount of cash on hand. This will be required forcompletion of Guri during 1967-1968. (EDELCA also is presently holdingsome cash for CVG: this is not included in the condensed statementin paragraph 38. See paragraphs 40 and 52).

38. EDELCA's position as of June 30, 1966 is shown below incondensed form.

Condensed EDELCA Balance SheetJune 30, 1966(Bs millions)

ASSETSFixed AssetsPlant in Service 220.3Depreciation Reserve 21.1

199.2Work in Progress 269.2

TOTAL NET FIXED ASSETS 468.4Current Assets

Cash 51.7Other Current Assets 5.3

57.0Other Assets and Deferred Charges 12.7

538.1LIABILITIES

CapitalPaid-in 348.1Earned Surplus and Reserves 23.9

372.0Long-Term Debt (Loan 353-VE) 153.4Current Liabilities 5.7Other Liabilities 7.0

538.1

- 15 -

39. In the analysis of EDELCA's operations made in conLnection withLoan 353-VE in 1963, it was assumed that substantial power sales wouldbe made to CADAFE, beginning in 1965. Due to delays in completion ofCADAFE's 230-kv system, EDELCA's sales to CADAFE will not begin untilmid-1967. Also, energy sales to CVG's steelworks (SIDOR) in the Guayanahave not developed as rapidly during 1964-1965 as had been expected, dueprincipally to difficulties in achieving scheduled production at SIDOThIEDELCA's operating expenses have proven to be somewhat higher thanoriginally estimated, particularly at the Macagua plant. The combinedeffect of lower revenues and higher expenses has reduced operatingincome (before interest charges) for 1964-1965 from Bs35 million forecast,to Bs17 million, as shown below.

Condensed EDELCA Income Statements1964 and 1965 Combined

(Bs Ilillions)

Bank Forecast Actual

Sales - Millions kwh 3456 2179

Operating Revenues 51.0 35.7

Operating ExpensesOperation & Maintenance 4h0 5.1Depreciation 9.7 9.0General Expenses 2.4 4.2

16.1

Operating Income 34.9 1704

These results would-be a cause foi concem -in a company engaged in full-scale operations. EDELCA, however, is in Qnly the early stages of itsdevelopment, and substantial revenues (in terms of investment requirements)were not expected to be achieved until Guri was completed. Thus, it wasnot anticipated that EDELCA would be able to contribute significantly,from operations, to construction. Moreover, progress has not beenaffected by the failure of sales to develop as initially forecast, becauseCVG has had adequate cash resources to compensate for the shortfall. Inconnection with Loan 353-VE, when it was expected Guri would be completedJune 1967, EDELCA undertook to maintain tariffs at levels sufficient tofinance 15 percent of Guri construction expenditures from internal cashgeneration. The Bankls original forecasts indicated that for the periodJune 1963 to June 1966 about 9 percent of the construction expenditureson Guri would be financed by EDELCA, whlereas actual internal cashgeneration has financed about 7-1/2 percent. This small difference shouldbe more than made up by the time Guri is completed (see paragraph 46).In any event, this measure of past performance is not particularlysignificant, because Guri has been delayed 13 months, and the rate ofconstruction expenditures has been slower than anticipated.

- 16 -

40. Condensed Income Statements for 1964 and 1965, and condensedBalance Sheets for the same years are shown in Annexes 4 and 6, res-pectively. An adjustment in the year 1966 and later estimated BalanceSheets has been made to eliminate the accounts carried by EDELCArelating to the Government's contributions to the cost of convertingLa Electricidad's system to 60 cycle operation. In the past, thesefunds, in effect, "flowed through" EDELCA and are not properly relatedto EDELCA's own electric power operations.

Construction Expenditures

41. The programs described in Sections IV and V will require atotal investment in construction activities equivalent to approximatelyUS$208 million in the period from mid-1966 until the end of 1975.

CONSTRUCTION EXPENDITURESJuly 1966 -- December 1975

(Millions of Bs & USs)

First Full Equiv.Year Operation Bs US$ US$

Guri Dam and Units 1-3 1969 150.5 52.2 85.6

EHV Project 1970 29.3 16.9 23.4

Guri Units 4-9 1971-6 95.2 49.4 70.5

Second EHV Line 1974 22.9 16.4 21.5

Other Transmission 1966-76 12.4 4.4 7.2

Bs310.3 $139.3(l) $208.2

(1) Includes interest of US$19.5 million financedfrom present and assumed future foreignfinancings.

Financing Plan Mid-1966-1975

42. The financing plan for the period from July 1, 1966 untilDecember 1975 is based upon the following principal assumptions:

(i) Sales would develop as forecast (See Annex 2) at thetariffs discussed in paragraphs 43 and 4h.

(ii) The Government, through CVG, would continue tocontribute to the cost of the constructionprograms.

- 17 -

(iii) A new Bank loan of US$15.0 million equivalentwould be made in time to permrt drawings in early1967. Terms of 20 years, including three and one-half years grace, and an interest rate of 6 percent havebeen assumed.

(iv) The foreign exchange costs of the completion ofGuri units 4-8, (assuming unit 9 will be financedby EDELCA) and the second EHV line would befinanced by two additional foreign loans. Theamounts required would be about the equivalent ofUS$19 million in 1969, and US$38 million in 1971.Terms of 25 years, including three and four yearsgrace respectively, and 6 percent interest havebeen assumed.

(v) EDELCA would maintain a satisfactory current cashposition.

(vi) At an appropriate time, EDELCA would begin to paydividends to CVG. It is assumed this will bepossible beginning in 1971, at which time CVG'sinvest&ent in EDELCA will have reached theequivalent of nearly US$140 million.

EDELCA's depreciation policy is conservative and sound. Depreciationrates for various classes of plant are set forth in a supplementalletter given the Bank in connection with Loan 353-VE.

- 18 -

Financial Plan(July 1966 - December 1975)

(Bs Millions)

Bs Per Cent

SOURCESGross Internal Cash Generation 718.9

Debt Service (1) (370.3)Dividends to CVG (115.0) (485,3)

Net Internal Cash Generation 233.6 27.1

Decrease in cash-on-hand 2.1 0.2

Foreign Borrowings(1) 529.3 61.2

CVG Contributions 99.2 11.5

Bs 86h42 100.0%

APPLICATIONS 2Construction Programs(2) 847.9 98.1Increase in Other Current Assets - Net 16.3 1.9

Bs 864.2 100.0%

(1) Includes interest charged to constructionfinanced by foreign borrowings.

(2) Excludes interest charged to construction

Tariffs.,

43. As discussed in Section II 'Power Market", EDELCA expects toenter into a pool agreement with CADAFE and La Electricidad, which willprovide for firm power sales and economy energy (fuel replacement)interchanges. Although final agreement on tariffs has not yet beenreached, negotiations have proceeded to the point where agreement doesexist concerning the range of tariffs. For purposes of forecastingoperating results, the lower figures in the agreed ranges have beentaken. These in equivalent US Dollars are as follows:

(i) For sales to CADAFE -- US$24 per kw-year, with 5,300hours use of demand, for firm power (contract) sales;US 1.1 mills per kwh of economy (fuel replacement) energy.

(ii) For sales to La Electricidad -- US$28 per kw-year, with5,300 hours use of demand, for firm power (contract)sales; US 1.1 mills per kwh of economy (fuel replacement)energy.

- 19 -

The firm power tariffs are related to the estimated costs to CADAFE arndLa Electricidad of providing power by alternate means, i.e., by gas-.fired steam plants, and peaking units. The economy energy tariff isrelated to the cost of fuel. The difference of US$4 per kw-year betweenLa Electricidad and CADAFE reflects the fact that CADAFE will be buyingEDELCA power at Macagua, and will transmit a portion of EDELCA's salesto La Electricidad over its 230-.kv system.

44. Tariffs for sales in the Guayana region have been estimated onthe basis of existing arrangements with the CVG steelworks (SIDOR), thecontract with ALCASA, and average tariffs for other customers. Thepreponderance of sales in the Guayana will be to SIDOR and ALCASA, atknown tariffs of US 3.2 mills per kwh, and US 2.2 mills per kwh,respectively. The tariff assumed for all other sales in the Guayana isUS 8.9 mills, which is consistent with present average tariffs for suchsales.

45e EDELCA's ability to achieve the projected operating revenuesdepends primarily upon conversion of La Electricidadts system. Thisshould be accomplished by mid-1970 as noted. Estimated future revenuesfrom sales to La Electricidad and CADAFE are realistic, since they arebased on assumed tariffs lower than those likely to be actually contracted.Both La Electricidad and CADAFE can be expected to buy all the economyenergy they can use, since it will be priced about 20 percent below theirown fuel costs alone.

Estimated Future Financial Performance

46. In connection with Loan 353-VE, EDELCA undertook, inter alia,to achieve two principal performance targets:

(i) To finance. 15 percent of the investment in Gurifrom net internal cash generation; and

(ii) To achieve by 1973, and to maintain thereafter,a rate of return on total net fixed assets inoperation of not less than 8 percent.

The revised total estimated cost of Guri is equivalent to Bs654e8 millions,including interest charged to construction. (Of this estimated total,Bs 269.2 million equivalent had been spent up to June 30, 1966, includingdrawings on Loan 353-VE). On the basis of both the latest project costesuimates and sales/revenue forecasts considered realistic and attainable,it is reasonable to expect the self-contribution target to be achieved.

- 20 -

EDELCA Contribution to Guri Project (1963-1969)(UTnits 1-3)Bs Millions

Total Estimated Project Cost(') 654.8

Operating Income 115.8Depreciation Charges 31.5 147.3

Debt Service lo1.4less interest charged to construction Bo.8 - 20.6

Mlet Internal Cash Generation 126.7

(1) Includes interest charged to construction

Contribution from internal cash generation 126.7/654h8 = 19.3 percent

47. The forecasts indicate that an 8 percent return on net plantin service will be achieved by 1973, and maintained thereafter. Theseestimated results are essentially the same as those forecast duringthe Bank's initial appraisal of EDELCA for the Guri Loan in 1963, andare satisfactory. EDELCA's contributions from operations to the con-struction programs other than the Guri project (units 1-3) during1970-1975 will be proportionately much higher than during the periodof operations prior to completion of Guri. This is, of course, to beexpected in view of the fact that total construction expendit-res willbe lower in the future and the revenues much higher as sales to CADhFEand La Electricidad increase.

EDELCA Contribution to Future Construction(1970-1975, After Guri 1-3 Completion)

Bs Millions

Total Estimated Construction Expenditures(') 408.7

Operating Income 483.6Depreciation Charges 116.9 605.5

Debt Service 282.9less interest charged to construction 21.2 261~7

Net Internal Cash Generation 343,8

(1) Includes interest charged to construction

Contribution from internal cash generation = 343.8/403.7 = 84.1 percent.

- 21 -

48. Loan Agreement 353-VE does not require EDELCA to maintain anyparticular debt/equity ratio. During the period covered by the pro-jections, a ratio of about 45/55 is reached in the early 1970's, basedon the assumptions concerning future foreign borrowings in the estimatedfinancial plan. This ratio, the highest reached during the period ofthe projections is acceptable.

49. Loan Agreement 353-VE provides for an objective debt-servicecoverage test which EDELCA must meet before incurring additional long-term debt without the Bank's agreement. The test is stated in termsof historic revenues vs maximum future debt service requirements,which must be covered 1.4 times. On the basis of the assumptionsunderlying the proposed financial plan, EDELCA must seek the Bank'sagreement to all the borrowings assumed. Annual debt service coverageby gross internal cash generation, taken year-by-year, is about 1.7 timesbefore Guri comes into operation and increases thereafter during 1970-1975to about 2.5 times, The sole exception to this satisfactory performanceoccurs in the year 1968, when principal repayments begin on Loan 353-VE,a year before completion of Guri. In that year, indicated debt servicecoverage is only 0.8 times which indicates the original estimate ofGuri's completion, upon which the repayment schedule of Loan 353-VEis based, was over-optimistic. The estimated cash-on-hand at the beginningof 1968 is about equal to the debt service payable in cash during 1968,so that the low coverage of 0.8 times from operations is not ofparticular concern, nor does it reflect inadequate financial management.

50. Under the financial plan, CVG will invest about a furtherBs7O million in EDELCA during 1967-1968, to enable EDELCA to carry outthe proposed construction programs. Because EDELCA had large cashreserves in mid-1966, the Congress did not appropriate any funds forEDELCA during its recent session. CVG has agreed to make, from itsown resources, an equity contribution of BslO million to EDELCA during1967. The Congress is expected to appropriate not less than Bs7O millionto CVG for contribution to EDELCA in 1968. 1/ Thus, CVG's investmentduring 1967 will in effect anticipate receipt of a small portion ofthe 1968 appropriation. The Bank's 1963 appraisal of EDELCA assumeddividends would be paid to CVG in nominal amounts, beginning in 1969. 2/In the present projections, it has been assumed that dividends wili not bepaid before 1971. CVG's investment in EDELCA will then have reached aboutthe equivalent of US$140 million. (CVG's initial investment in poweroperations was made in 1956, when construction of Macagua was started.)The total dividends assumed paid during 1971-1975 represent an averageannual return to CVG on its investment in EDELCA of about 3 percent.

1/ On August 15, 1963, the Congress passed a law (Gaceta Oficial No. 27220)budgeting Bs258 million for the five years 1964-1968 for Guri andassociated transmission facilities. Bs174.5 million has already beenreceived by CVG, so that the 1968 appropriation should be Bs83.5 million.

2/ The Agreement of Loan 353-VE prevents EDELCA from paying any dividendsin cash before 1968.

- 22 -

Accounts and Audits

51. EDELCA is maintaining separate corporate accounts, in a form com-parable to those prescribed by the U.S. Federal Power Commission. Both theaccounting and control functions are capably managed, and information pro-cessed quickly: for example, results for the first six months' operationsof 1966 were available in formal form July 15, 1966. Because CVG and EDELCAare state-owned, their accounts are audited by the Government's Controlariade la Nacion. EDELCA also retains independent auditors (Price Waterhouse) ircompliance with an agreement reached in connection with Loan 353-VE. The Bankis receiving regular, timely reports from EDELCA and the independent auditors.

52. Certain funds appropriated by the Government to CVG to defray thecosts of converting La Klectricidad's system to 60 cycle operation have beencarried on EDELCA's books, and in its cash accounts. The advisability ofseparating these funds and accounts from EDELCA has been discussed withmanagement during the course of this appraisal. Inasmuch as these accountshave no relation to EDELCAss electric power operations, and because CVG issupervising the expenditure of the funds and is responsible to the Governmentfor accounting for expenses, they have been transferred from EDELCA to CVG.

Financial Covenants

53. During negotiations it was agreed that the three basic financialcovenants incorporated in Loan Agreement 353-VE will be included in the pro-posed loan in the following form:

(i) Section 5.13 -- EDELCA will not pay any dividends in cash toCVG before 1971.

(ii) Section 5.14 -- EDELCA will maintain tariffs at an averagelevel to produce a reasonable rate of return on total netfixed assets in operation. This is defined as 8 percent in1973 and later years.

(iii) Section 5.16 -- EDELCA will not incur additional debt unlessthe debt service coverage test of 1 4 times is met.

54. Annexes 4, 5, and 6 present estimated Income Statements, Sourcesand Applications of Funds, and condensed Balance Sheets, respectively.

VII. CONCLUSIONS

55. The proposed EHV Transmission Project has been soundly planned ardengineered. EDELCA staff are capable of executing the EHV Project, with theassistance of consultants, as planned. The cost estimate is realistic inview of the prices already offered for the principal equipment and materialsThe contract documents will require completion of all work within 25 months,Initial operation should begin in mid-1969, although it has been assumed irthis appraisal that full commercial operation will not begin until January1970 (paragraphs 29 through 36).

- 23 -

56. The completion of the Guxi Project (Loan 353-VE) by the revisedschedule submitted by the general contractor (Kaiser) -- July 1968 forinitial power generation -- seems reasonable. Both Kaiser and EDELCA'sconsultants, Harza, believe this can be achieved. Progress is being graduallyaccelerated. The revised estimated cost of the Project (units 1-3) includingsubstantial contingency allowances, is not appreciably higher than thatoriginally made in connection with 353-WE in 1963 (paragraphs 22 through 24)o

57. Past operating results have not been as good as anticipated. How-ever, this is not of concern since EDELCA will not achieve full-scale operationuntil 1969. Moreover, because CVG has had adequate cash resources, EDELCA'sconstruction program has not been affected (paragraph 39).

58. Projected operating results are satisfactory. EDELCA shoild be ableto contribute from operations to the investment in the Guri Project somewhatmore than had been visualized in the original appraisal (paragraph 46). TheLeshould be no difficulty in achieving the rate-of-return of 8 percent requi-c-din 1973, and thereafter. An adequate cash position can be maintained, whileproviding for necessary increases in other working capital requirementsoEDELCA should be able to begin paying dividends to CVG in 1971(paragraphs 47 and 50).

59. The EHV Project would provide a suitable basis for a second loanto EDELCA of US$15.0 million, with a term of 20 years, including a graceperiod of three and one-half years.

December 29, 1966

ANNEIVX 1Page 1

BACKGROUND AND STATUS OF FREQUENCY CONVERSION

1. The question of frequency unification had been studied at varioustimes, but it was only in 1963, with the decision taken by the national Govern-ment to create a Commission for Changing Frequency, that concrete steps weretaken to develop a solution. The Commission is composed of the chief execu-tives of EDELCA, CADAFE, and La Electricidad, and detailed studies and planninigwere carried out by staff members of these organizations. The Commissionretained consultants, International Middle West Service Company, USA (MiddleWest) to carry out short and long-range planning and operating studies for thesupply of power in the Guri market area. These studies, begun in late 1963,are now completed, and cover the following aspects of the problem:

(i) ways and means of interconnecting the three systems;

(ii) the most economic long-range pattern of expandinggeneration;

(iii) the optimum system for transmitting Guri power to theCaracas load center, including voltage class and outlinedesign;

(iv) draft interconnection and power sales agreements, andrecommendations as to prices for various classes of powerand energy;

(v) recommended system operating procedures, and draft manualsof operations.

This assignment will be completed in early 1967 when Middle West is requiredto recommend prices for power sales and energy interchanges, which have alrcarbeen agreed upon within narrow ranges by the three systems. Agreement hasalso been reached among the parties that, taking into account existing andcommitted generating facilities, the major expansion in generating facilitieoover the next decade will be completion of Guri to 1750 Mlw.

2. The Government, through the Ministry of Development, publishedResolution No. 3633 of October 18, 1965, informing the public that the costsof conversion to 60 cycle operation of any consumer's apparatus purchasedafter July 1, 1966 would not be borne by the Government0 On April 16, 1963,CVG had been authorized by the Council of Ministers to represent the Goven-ment in its dealings with La Electricidad for the conversion of the latter'ssystem, and to act as the Government's fiscal agent in disbursing and account-ing for the funds required to effect conversion. CVG negotiated a contractwith La Electricidad in this connection which was approved by the Council ofMinisters on March 23, 1965 and signed by La Electricidad March 3, 1966. The

ANNEX IPage 2

principal provisions of the contract are:

(i) the costs of converting all apparatus and equipmentof La Electricidad's customers will be borne by thenational Government;

(ii) La Electricidad will bear the costs of converting itsown generating facilities;

(iii) the physical work involved will be carried out byLa Electricidad under supervision and audit of CVG;

(iv) La Electricidad will not initiate work on the conversionuntil assured that the Government will make available fundssufficient to carry the work to conclusion; and

(v) La Electricidad is obligated to purchase from EDELCA, overa period of not more than 20 years, power, at a price tobe determined, in such amount that the total purchases willequal the costs incurred by the Government in connectionwith the frequency conversion. The total value of thepower purchased will include interest at 5-1/2 percentper annum on the "unamortized" balance of the Government'scosts. These purchases will represent only a part ofEDELCA's total sales to La Electricidad.

3. La Electricidad has formed a new subsidiary, Cambio deFrecuencia C.A. (CAFRECA) to carry out the conversion work, and tomaintain separate accounts of the costs involved. CVG has retainedthe services of Bechtel Corporation (Bechtel) to prepare, in cooperationwith CAFRECA, detailed plans, work schedules, manuals for convertingcustomers' apparatus, etc. and to render general advisory service duringthe conversion. CAFRECA now has a staff of about 100 employees including25 engineers, and is taking a census of customers' apparatus.Supervisory staff will reach about 500 during conversion, in addition tothe several thousand electricians, mechanics, etc. required. Severalof the key staff of CAFRECA supervised the conversion from 50 to 60cycles of the CADAFE Central Zone system, which was completed in1962. CAFRECA's work is proceeding well and it is reasonableto expect that the initial steps for conversion will be taken in mid-1967 as planned, particularly in view of the financial arrangementsdiscussed below. CAFRECA is already purchasing portable substationsrequired.

4. Following the establishment of the principle of conversion,and during the studies and negotiations with La Electricidad, theGovernment appropriated a total of Bs 40 million for defrayingpart of its share of the conversion costs (i.e. the part related tocustomers' facilities). The present estimated cost of this work(exclusive of the expenses for the account of La Electricidad) is

ANE 1Page 3

about Bs 125 million0-/ The Congress recently authorized-/ CVG to obtainguarantees or credits, national or foreign, up to Bs 100 million to assurethe availability of funds sufficient (with the Bs 40 million alreadyappropriated and held by CVG) to complete the converSion of La Electricidad'lsystem. CVG is arranging for a Letter of Credit of Bs 100 million in favorof La Electricidad with a New York bank. Thus there are reasonable assurancenthat all financial impediments to converting the system of La Electricidadhave been removed.

1/ This has increased from the Bs 90 million estimated in 1962 by virtue ofthe expansion of facilities which has taken place since then.

2/ In a law published in the Gaceta Oficial No. 28,125 of September 2, 1966>

December 29, 1966

VENEZUELA

EDELCA

ESTIMATED r:AXIMUN DEMAND AND ENERGY SALES

1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 19751/

MAXIMUM DEMAND (FIRM POWER SALES) - MW

La Electricidad de Caracas - _ 50 50 50 61 h9 93 93 163 242CADAFE - 55 195 287 355 403 h60 482 515Sub-total 3/ - - 100 100 245 34d h404 496 553 645 757Guayana Area

CVG Steelworks (SIDOR) 220 220 220 220 240 2hO 272 272 272 274 292ALCASA - - 25 25 50 5o 5o 100 100 100 200Other Industrial and Local 14 20 30 ho 50 60 65 75 80 90 95TOTAL DEMAND 234 240 375 385 585 698 791 943 1,005 1,109 1,344

ENERGY SALES - MILLION IWH

La Electricidad de CaracasFirm Energy

- 58 258 489 489 857 1,272Economy Energy _ 535 1,122 14179 15723 1.3h2 1 h0 12653- - - ~~~~ ~~~~ ~~~133 5 35 - 1.15 '1927 1,724 1.531 2972.605CADAFE

Firm Energy - - 1,025 1,508 1,866 2,118 2,418 2,533 2,707Economy Energy - 690 338 376 383 224 438 612- - 350 567 1,715 1,d46 2,242 2,501 2,6E42 2,971 3,319Guayana Area

CVG Steelworks (SIDOR) 1,084 1,084 1,08h 1,084 1,183 1,183 1,341 1,341 1,324 1,351 1,439ALCASA - - 200 200 400 400 400 800 800 800 1,600Other Industrial and Local 76 109 163 217 271 326 353 2407 2434 2489 5161,160 1,193 1,447 1,501 1,o574 1.909 2.0954 2,5483 2.575 2,6h44 3.555TCTAL SALES 1,160 1,193 1,797 2,201 4,104 4,935 5,813 6,791 7,048 7,808 9,479

EDELCA INSTALLED CAPACITY - MW 375 375 375 900 900 900 1,075 1,250 1,250 1,425 1,775

1/ It is assumed the CADAFE 230-kv line goes into service July 1967, and Guri commercial operation begins January 1969.2/ It is assumed conversion of La Electricidad's system will be completed July 1970. Sales prior to that date are notfirm, but are related to 60 cycle reserve requirements, and economy energy.3/ The sub-total represents requirements of transmission from Guri/Macagua to La Electricidad/CADAFE. The EHV Projectis assumed to go into service for the first full year in 1970, when firm sales to La Electricidad begin.

December 23, 1966

VENEZUELA

EDEICA

REVENU`ES FROM SALES - MILLIONS OF BOLIVARES

1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975La ElectricidadFirm Power - - - - - 1.3 6.1 11.7 11.7 20.5 30.4Economy Energy _ _ _ 1.3 5.4 5.5 6.0 6.2 6.6 6.6 6.62/ - - _ 1.3 5.4 6.b 12.1 17.9 18.3 27.1 37.-CADAFEFiri Power - - 21.0 30.9 38.3 43.5 49.6 52.0 55.6Economy Energy - - 3.4 1.7 1.9 1.9 1.1 2.2 3.0_ - - 3.5 5.7 24.4 32.6 I40.2 45.4 50.7 54.2 58.6Guavana AreaCVG Steelworke (SIDnR) 15.5 15.5 15.5 15.5 16.9 16.9 19.1 19.1 19.1 19.2 20.5AICASA - - 2.0 2.0 4.o 4.0 4.o 8.o 8.0 8.0 16.0Other Industrial and Local 3.5 4.4 6.5 8.7 10.8 13.0 14.1 16.3 17.4 19.6 20.619.0 19.9 24.0 26.2 31.7 33.9 37.2 43.4 44.5 46.8 57.1

TOTAL REVENUES 19.0 19.9 27.5 33.2 61.5 73.3 89.5 106.7 113.5 128.1 152.7

1/ Firm power sales at Bs 126 per kw-year, with 5,256 hours use of demand, beginning 1970 with 11 MW.Economy energy sales at 0.5 centimos per kwh, related to fuel replacement coat.During 1968-1969, before firm power sales begin, energy is masumed to be sold at not less than 1.0 centi3o per kwh.Firm power sales at Bs 108 per kw-year, with 5,256 hours use of demand, beginning 1969 with 195 mw.Economy energy sales at 0.5 centimos per kwh, related to fuel replacement coat.During 1967-1968, before firm power sales begin, energy ia assumed to be sold at not less than 1.0 centimo per kwh.3/ Sales in Guayana Area at following average tariffs per kwh,

(a) CGV Steelworks (PSO) 1.43 centimos(b) AICASA 1.0 centimo, fixed by contract(c) Other Industrial and Local 4.0 centimos

Decemlb8r 23, 1966

ANNEX 3Page 1

VENEZUELA

EDELCA

EHV PROJECr COST ESTI4ATE

Equiv. Us$Bs US$ 1000

1000 1000 TotalTRANSMISSION LINE

Land Acquisition & Clearing 500 -1Materials & Equipment

Towers 250 1,700 1,756Wire 1,400 4,750 5,061Hardware & Insulators 900 1,600 1,800

Erection 13,350 650 3,617

DIRECT COST 16,1400 8,700 12,345

Contingencies 1,600 450 806

Supervision & Inspection 1,400 300 611

19,400 9,450 13,762

SUBSTATIONSEquipment

Switchgear & Transformers 5,100 5,100 6,233Communications & Control 150 100 133

Erection & Civil Works 3,000 - 667

DIRECT COST 8,250 5,200 7,033

Contingencies 850 150 339Supervision & Inspection 750 200 366

9,850 5,550 7,738

INTEREST & Other Charges DuringConstruction Periodl/ - 1,900 1,900

TOTAL ESTIMATED COST 29,250 16,900 23,400

1/ Not included in proposed loan

December 22, 1966

ANNEX 3Page 2

VENEZUELA

EDELCA

ESTIMATED PROJECT CONSTRUCTION EXPENDITURES

Equivalent Bs 1000

1967 1968 1969 Total

FOREIGN EXCHANGETransmission Line 29,800 8,500 4,200 42,500Substations 15,000 7,500 2,500 25,000

44,800 16,000 6,700 67,500

LOCAL CURRENCYTransmission Line 5,800 9,700 3,900 19,400Substations 4,900 3,000 2000 9,900

10,700 12,700 5,900 29,300

TOTAL - CONSTRUCTION 55,500 28,700 12,600 96,800

INTERESri 1/ 1,500 3,200 3,900 8,600

TOTAL EXPENDITURES 57,000 31,900 16,500 105,400

1/ Not included in proposed loan.

December 22, 1966

VE2!EZ'JFLA

EDELCA

ESTIL'ZEL 1i:CCME GTAMTE'ETSBolivares - Millions

(ACTUAL)1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975

Energy Sales - Millions kwh 1,019 1,160 1,193 1,797 2,201 4,104 4,935 5,813 6,791 7,048 7,808 9,479

Average Realization - Centimos 1.6 1.6 1.7 1.5 1.5 1.5 1.5 1.5 1.6 1.6 1.6 1.6

Operating Revenues 16.7 19.0 19.9 27.5 33.2 61.5 73.3 89.5 106.7 113.5 128.1 152.7

Operating Expensesoperation and Maintenance 2.3 2.8 2.8 2.8 2.9 4.1 5.9 6.3 6.7 6.7 7.5 8.3Depreciation 4.5 4.5 4.5 4.5 4.7 8.8 16.1 17.3 18.7 18.7 22.0 24.1General Expenses 2.1 2.1 2.1 2.1 2.1 2.3 2.6 2.7 2.8 2.8 2.9 3.1

8.9 9.4 9.4 9.4 9.7 15.2 24.6 26.3 28.2 28.2 32.4 35.5

Operating Mhcame 7.8 9.6 10.5 18.1 23.5 46.3 48.7 63.2 78.5 85.3 95.7 117.2

Interest 4.6 5.6 8.0 13.5 24.1 25.0 25.7 27.8 28.7 30.7 33.0 33.1Interest Charged to Construction 4.6 5.6 8.0 13.5 24.1 25.0 2.0 4.7 1.8 4.7 8.0 -Interest Expense - - - - - - 23.7 23.1 26.9 26.0 25.0 33.1

Net Incace 7.8 9.6 10.5 18.1 23.5 46.3 25.0 40.1 51.6 59.3 70.7 84.1

Average Net Plant in Service 208.3 203.5 199.0 194.0 193.2 516.9 886.5 952.8 999.0 1,016.1 1,058.8 1,151.5

Rate of Return 3.7% 4.7% 5.3% 9.3% 12.1% 9.0% 5.5% 6.6% 7.9% 8.4% 9.0% 10.2%

December 23, 1966

VENEZUEL;;

EDELCA

ESTIMATED SOURCES AND A-PLICATIOIIS OF FUNDS

Bolivares - ilillions

(1/2 year)1966 1967 1968 1969 1970 1971 1972 3973 1974 -975

SOUR'.ES

InternalODerating Income 5.3 18.1 23.5 46.3 48.7 63.2 78.5 85.3 95.7 117.2Depreciation 2.2 4.5 4.7 S.8 16.1 17.3 18.7 18.7 22.0 24.1

7.5 22.6 28.2 _ 5S1 64.8 80.5 97.2 104.0 117.7 141.3

Loan 353-VE 31.0 84.2 74.3 39.6 - - - - -Proposed Bank Loan - -4.- - -Future Foreign Loans - - - 12.6 41.2 37.9 32.7 63.9 44.4 -

31.0 129.0 90.3 58.9 41.2 37.9 32.7 63.9 44.4 -CVG Investments 29.2 10.0 60.o - - - - - - -

60.2 139.0 150.3 58.9 41.2 37.9 32.7 63.9 44.4 -

TOTAL SOURCES 67.7 161.6 178.5 114.0 106.0 118.4 129.9 167.9 162.1 141.3

APPLICATiONS

ConstructionGuri Project (1-3) 49.3 137.5 103.7 37.7 - - - -Guri Units 4-9 - - - 25.4 52.6 38.2 8.9 68.3 74.6 38.2Proposed EHV Project - 55.5 28.7 12.6 - - - - - -Future (2nd) EliV Line - - - - - 19.1 32.6 32.9 - -Other Transmission 2.7 3.4 1.4 2.5 4.2 1.2 1.9 0.9 7.2 6.7

52,0 196.4 133.8 78.2 56.8 58.5 43.4 102.1 81.8 44.9Debt Service

InterestLoan 353-VE 4.2 12.0 20.9 20.3 19.7 19.1 18.4 17.7 17.0 16.2Proposed EHV Project Loan - 1.5 3.2 3.9 4.0 4.0 3.8 3.7 3.5 3.3Future Financings - - - 0.8 2.0 4.7 6.5 9.3 12.5 13.6

4.2 13.5 24.1 25.0 25.7 27.8 28.7 30.7 33.0 33.1Amortization

Loan 353-VE - - 10.0 10.6 11.2 11.8 12.5 13.2 13.9 14.7Pronosed ENV Project Loan _ - - _ 1.1 2.5 2.7 2.8 3.0 3.2Future Financings - - - - 1.7 1.28 19 5.9

- - 10.0 10. 2.6.9 17. 1. 2TOTAL DEBT SERVICE 4.2 13.5 34.1 35.6 38.0 42.1 45.6 48.5 51.8 56.9

TOTAL APPLICATIONS 56.2 209.9 167.9 113.8 94.8 100.6 89.0 150.6 133.6 101.8

Increase in Cash - Gross 11.5 (48.3) 10.6 0.2 11.2 17.8 40.9 17.3 28.5 39.5Increase in Receivables - 0.9 0.7 3.5 1.4 2.0 2.2 0.8 1.8 3.0Dividends to CVG - - - - - 10.0 15.0 25.0 30.0 35.0

Increase in Cash - Net 11.5 (49.2) 9.9 (3.3) 9.8 5.8 23.7 (8.5) (3.3) 1.5

Cash-on-Hand Beginning Period 51.7 63.2 14.0 23.9 20.6 30.4 36.2 59.9 51.4 48.1

Cash-On-Hand End Period 63.2 14.0 23.9 20.6 30.4 36.2 59.9 51.4 48.1 49.6

Debt Service Coverage ByGross Internal Cash Generation 1.8 1.7 0.8 1.5 1.7 1.9 2.1 2.1 2.3 2.5

December 23, '966

VENEZUELA

EDELCA

C0NDENSED ESTIHATED BALANCE SHEETS - DECEMBER 31Bolivares - Millims

ACTUAL1964 196S 1966 1967 1968 1969 1970 1971 1972 1973 1974 j975ASSETS

Gross Plant in Service 220.5 219.8 220.3 220.3 226.4 881.2 990.5 1,047.2 1,118.8 1,118.8 1,245.0 1,350.2Depreciation Reserve 14.5 18.8 23.3 27.8 32.5 41.3 57.4 74.7 93.4 112.1 134.1 158.2Net Plant in Service 206.0 201.0 197.0 192.5 193.9 839.9 933.1 972.5 1,025.4 1,006.7 1,110.9 1,192.0Work in Progress 146.9 236.2 325.4 535.3 687.1 135.5 85.0 91.5 65.1 171.9 135.5 75.2

Total Net Fixed Assets 352.9 437.2 522.4 727.8 881.0 975.4 1,018.1 1,064.0 1,090.5 1,178.6 1,246.4 1,267.2Current Assets

Cash 23.2 63.3 63.2 14.0 23.9 20.6 30.4 36.2 59.9 51.4 48.1 49.6Accounts Receivable 2.1 2.3 2.3 3.2 3.9 7.4 8.8 10.8 13.0 13.8 15.6 18.6Other Current Assets 2.0 5.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.027.3 70.6 68.5 20.2 30.8 31.0 42.2 50.0 75.9 68.2 66.7 71.2

Other Assets and DeferredCharges - Net 11.1 4.3 5.7 5.7 5.7 5.7 5.7 5.7 5.7 5.7 5.7 5.7

TOTAL ASSETS 391.3 512.1 596.6 753.7 917.5 1.012.1 1.066,0 1.119.7 1.172.1 1.252.5 1.318.8 1.344.1LIABILITIES

CVG InvestmentsCapital 296.8 348.1 377.3 387.3 447.3 447.3 447.3 447.3 447.3 447.3 447.3 447.3Surplus 9.8 19.9 29.2 47.3 70.8 117.1 142.1 172.2 208.8 243.1 283.8 332.9Total Equity 306.6 368,0 406.5 434.6 518.1 564.4 S89.4 619.5 656.1 690.4 731.1 780.2

Lons-Ter'. DebtLoan 353-VE 79.1 131.2 184.4 268.6 322.9 351.3 339.5 327.1 313.9 300.0 285.4 269.9Proposed Loan - - - 44.8 60.8 67.5 65.3 61.4 58.5 55.6 52.4 49.0Future Financings - - - - 12.6 53.8 91.7 121.0 183.0 225.4 215.5

79.1 131.2 184.4 313.4 383.7 431.4 458.6 480.2 493.4 538.6 563.2 534.4Current LiabilitiesCurrent Maturities of

Long-Term Debt - - - - 10.0 10.6 12.3 14.3 16.9 17.8 18.8 23.8Other Current Liabilities 5.6 12.9 5.7 5.7 5.7 5.7 5.7 5.7 5.7 5.7 5.7 5.75.6 12.9 5.7 5.7 15.7 16.3 18.0 20.0 22.6 23.5 24.5 29.5 ITOTAL LIABIIITIES 391.3 512.1 596.6 753.7 917.5 1.012.1 1,066.o 1.119.7 1,172.1 1,252.5 1.318.8 1,344.1 10

Debt/Equity Ratio 21/79 26/74 31/69 42/58 43/57 44/56 44/56 44/56 44/56 45/55 44/56 42/58

December 23, 1966

VENEZUELA

PROPOSED EHV TRANSMISSION SYSTEMIN GURI MARKET AREA

Lo GuloC .. ... .o

VaIepc o'4 SIA TERESA -_ rtX'

96~ ~ ~ ~~~~%AAA- o,.+ ' 3 VZIE/ s BRAO °

CA DAFE'S CERA ZONE ,

AND LA ELECTRIC/DAD \ X 9ts t M ' " G oC CADAFE'S CEN --T 9 %CADA C'ACAOAF

EASTERN ZONE° 2YOKVIINE

0~~ 50 40 60 0 00

fPROP'O5:ED9,G / NA REIONREDCMHV P'R6JEC6 -_

TRANSMISSION LINES\,

230 KV (..der construction) 8 o< fiiMACAGUA

EHV > ~ _A

0 2 40 60 80O 100 M= - . ', ,' , . G U Ri

G UA YANIA LREG N

DECEMBER 1966 IDBD-1859R