Document of

The World Bank

FOR OMFCAL USE ONLY

RePort No. 5211-PAN

STAFF APPRAISAL REPORT

PANAMA

SEVENTH POWER PROJECT

February 19, 1985

Projects DepartmentLatin America and the Caribbean Regional Office

This doument has a restricted disribution and may be used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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Currency Equivalents

Currency Unit Balboa (B)US$1.00 B 1.00 = 100 cts.

Units and Measures

m meterkm kilometermile - 1.609 kmkm2 100 ha (hectares)kW kilowattMW = megawatt = 1,000 kWkWh 5 kilowatt hourGWh = gigawatt hour = 1 million kIWhkV kilovoltkVA kilovolt amperekVAr kilovolt ampere reactiveMVA = megavolt ampere = 1,000 kV'.

Tcal teracalory - I x 109 kilocaloriesbbl = barrel = 42 gallonsCOS cubic meter per secondmCM = million cubic meters

Glossary of Abbreviations

CONADE = Comision Nacional de EnergiaFortuna = Edwin Fabrega (Fortuna) Hydroelectric PlantIDB = Inter-American Development BankICE = Instituto Costarricense de ElectricidadIRHE = Instituto de Recursos Hidraulicos y ElectrificacionUNDP = United Nations Development ProgrammeUSAID = US Agency for International DevelopmentOLADE = Organizacion Latinoamericana de Energia

Panamanian Fiscal Year = Calendar Year

FoR OMCUAL USE ONLYPANAM

INSTITUTO DE RECURSOS HIDRAULICOS Y ELECTRIFICACION - IRHE

SEVENTH POWER PROJECT

Table of Contents

Page No.

PROJECT SUMMARY . . . . . . . . . . . . . . . . . . 1

1. TEE POWER SECTOR . . . . . . . . . . . . . . . . . . . . 3

Energy Resources . . . . . . . . . . . . . . . . . . . . 3Energy Demand and Supply . . . . . . . . . . . . . . . . 4Energy Planning . . . . . . . . . . . . . . . . . . a . . 4Bank Participation in the Power Sector . . . . . . . . 5Power Sector Organization and Regulation . . . . . . . . 6Power Tariffs . . . . . . . . . . . . . . . . . . . . . . 7Existing Facilities . . . . . . . . . . . . . . . . . . . 7Electricity Consumption and Access to Service . . . . . . 8Rural Electrification . . . . . . . . . . . . . . . . . . 8Power Sector Development and Constraints . . . . . . . . 9

2. TRFE BORROWER . . . . . . . . . . . . . . . . . . . . . 10

Background . . . .. . . . . . . . . . . . . . . . . . 10

Organization and Administration . . . . . . . . . . . . . 10Staff . . . . . . . . . . . . . . . . . . . . . . . .* . 10Training . . . . . . . . . . . . . . . . . . . . . . . . 11Accounting and Rate Base . . . . . . . . . . . . . . . . 11Auditing . . . . . . . . . . . . . . . . . . . . . . . . 12Billing and Collection . . . . . . . . . . . . . . . . . 12Accounts Receivable . . . . . . . . . . . . . . . . . . . 12Performance Indicators and Reporting . . . . . . . . . . 13Insurance . . . . . . . . . . . . . . . . . . . . . . . . 13

3. THE MARET . . . . . . . . . . . . . . . . . . . . . . . 14

Historical Market. .. . . . . . . . . . . . . . . . . 14Energy Losses . . . . . . . . . . . . . . . . . . . . . . 14The Forecast. . . . . . . . . . . . . . . . . . . . . 15The Energy and Capacity Balances . . . . . . . . . 15

This report is based on the findings of an appraisal mission, comprised ofMessrs. L. E. Luzuriaga (Power Engineer) and J. L. Vietti (FinancialAnalyst), which visited Panama during February-March 1984. Messrs. J.Wilberg, R. Klockner (Financial Analysts) and B. Dahlborg (TrainingSpecialist) contributed to the preparation of this report.

I This document has a restricted distribution and may be used by recipients only in the performance of1their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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Page No-

4. THE PROGRAM AND THE PROJECT . . -. . . . . . . . . . 16

IRBE's Development Program . . . . . . . . . . . . 16Project Origin, Preparation and Justification . . . . . . 18Project Objectives and Description . . . . . . . . . . . 19Project Cost and Financing . . . . . . .. ... .. . . 19Project Implementation . . . . . . *.. . 21.Procurement and Disbursement . . ... . . . . . . . . 22Disbursement Schedule . . . . . . . . . . . . . . .... 23Environment * . .. . . . . . .. ... . . . . . . . . . . 23Project Risks . . . . . . . . . . . . . . . . . . . . . . 24Project File . . . . . . . . . . . . . . . . . . . . . . 24

5* FINANCES . . . . . . . . . . . . 25

Summary . . . . . . .. . . . . . . . . . . . . . . 25Past Performance and Present Position . . . . . . . . . . 25Financial Structure .26Investment and Financing Plan . . . . . . . . . . . . . . 26Future Finances . . . . . . . . . . . . . . . . . . . . . 28

6. ECONOMIC ANALYSIS . . . . . . . . . . . . . . . . . . . . 29

Least-Cost Solution ................... . . . . . . . ... 29Return on Investment . . . . . . . . . . . . . . . . . . 29

7. AGREEMENTS REACHED AND RECOHMENDATION . . . . . . . . . . 31

During Negotiations . . . . . . . . . . . . . . . . . . . 31Recommendation . . . . . . . . . . . . . . . . . . . . . 31

Annex 1.1 Bank Participation in the Power Sector . 32Annex 1.2 Electricity Rates as of January 1, 1985 . 33Annex 1.3 Distribution of Electricity Consumption . 34Annex 1.4 Existing and Future Power Projects . . . . . 35Annex 1.5 Estimated Hydroelectric Potential . . . . . . 36Annex 2.1 IRHE's Organization Chart . . . . . . . . . 37Annex 2.2 Main Performance Indicators . . . . . . . . . 38Annex 3.1 Actual and Forecast Sales and Gross . . . . .

Generation - GWh 39Annex 3.2 Energy Balance for IRHE's System - GWh 40Annex 3.3 Capacity Balance for IRHE's System - MW . 41Annex 3.4 Firn Energy Forecast . . . . . . . . . . . . 42Annex 3.5 Demand Forecast . . . . . . . . . . . . . . . 43

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Page No.

Annex 4.1 Investment Program for Period 1984-1989 . . . 44Annex 4.2 Project Cost Estimate . . . . . . . . . . . . 45Annex 4.3 Proposed Execution Schedule . . . . . . . . . 46Annex 4.4 Loan Disbursement Schedule . . . . . . . . . 47Annex 4.5 Economic Comparison of Power Generation

Alternatives Considered by IRHEfor the Period 1984-1998 . . . . . . . . . . 48

Annex 4.6 Contents of Project File . . . . . . . . . . 51Annex 5.1 Financial Indicators . . . . . . . . . . . . 53Annex 5.2 Actual and Forecast Income Statement (1982-1989) 54Annex 5.3 Estimated and Forecast Sources and Application of

Funds (1982-1989) . . .. . . . . . . . . . 55Annex 5.4 Actual and Forecast Balance Sheet (1982-1989) 56Annex 5.5 Loans Disbursement Statement . . . . . . . . 57Annex 5.6 Forecast Interest Charges to 1984-1989 . . . 58Annex 5.7 Forecast Debt Amortization Statement 1984-1989 59Annex 5.8 Schedule of Existing and Proposed Debt . . . 60Annex 6.1 Internal Rate of Return for IRHE's Investment

Program . . . . . . . . . . . . . . . . . . 6

KAP IBRD No. 18293

PANAMA

INSTITUTO DE RECURSOS HIDRAULICOS Y ELECTRIFICACION - IRHE

SEVENTH POWER PROJECT

PROJECT SUMMARY

Borrower: Instituto de Recursos Hidraulicos y Electrificacion - IRHE

Guarantor: Republic of Panama

Amount: US$51.0 million

Terms: 15 years, including 3 years grace, at the standard variableinterest rate.

Project The project would help to further develop the power sector inDescription: Panama through (i) raising the height of the existing dam of

the Fortuna Project to increase the project's generatingcapacity by 247 GWh per year (average hydrology); (ii)complete feasibility studies for two medium-size hydroelectricprojects for future construction to meet demand growth; and(iii) an asset revaluation study.

Estimated Cost: Local Foreign Total- -- US Million

Raising the Fortuna dam 19.5 33.2 52.7Feasibility studies of twonew hydro-projects 1.9 2.9 4.8

Sub-total base cost 21.4 36.1 57.5Physical contingencies 3.2 5.4 8.6Price contingencies 3.5 9.5 13.0Total project cost 28.1 51.0 79.1Interest during construction - 8.5 8.5Total financing required 28.1 59.5 87.6

Financing Plan: Local Foreign Total

US Million

Bank loan 51.0 51.0IRHE 28.1 8.5 36.6Total financing 28.1 59.5 87.6

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--------- US Million-

Estimated Bank FY 1986 1987 1988 1989 1990 1991Disoursements:

Annual 3.7 8.8 11.6 14.5 10.4 2 0Cumulative 3.7 12.5 24.1 38.6 49.0 51.0

Rate of Return; 18 percent

Risks: The project would involve no unusual risks.

MAP: IBRD 18293

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PANAMA

INSTITUTO DE RECURSOS HIDRAULICOS Y ELECTRIFICACION - IRHE

SEVENTH POWER PROJECT

1. THE POWER SECTOR

Energy Resources

1.01 The main source of indigenous commercial energy identified so farin Panama is hydro energy. The Instituto de Recursos Hidraulicos yElectrificacion (IRHE), with the assistance of foreign consultants and thefinancing of the United Nations Development Programme (UNDP) and the SwedishGovernment, has prepared pre-feasibility and feasibility studies for 13projects with a potential of 1,880 MW and an average generation of 10,800 GWhper year (see Annex 1.5). Other studies also prepared by IRE at inventorylevel with local surveys for each river based on gross linear potential orsurface runoff potential, show additional hydro energy resources on the orderof 4,700 MW and 27,000 GWh per year. Some of the larger projects such as theones of the Changuinola, Teribe, Veraguas and Tabasara bassins are located inthe west of Panama, remote from the energy consumption centers, and requirelarge investments in transmission facilities. For this reason, and in orderto facilitate a staggered power development more in line with its fiuancialpossibilities, IRHE has decided to carry out feasibility studies for mediumsize hydroelectric projects (para. 4.09), located closer to the main consump-tion centers, before deciding on which project to develop next, and has post-poned the execution of final design of the Changuinola project (300 NW),originally planned to be financed by the Inter-American Development Bank(TDB).

1.02 Panama's geothermal resources would permit the installation ofabout 400 MW according to the results of preliminary investigations preparedby Corporacion Miners de Cerro Colorado (CODEMIN), a government-owned miningcompany, and by IRHEE, from 1971 to present, with UNDP and the OrganizacionLatinoamericana de Energia (OLADE) financing. The geothermal sites arelocated in the areas of Anton, Calobre, Colorado and the Baru Volcano. Undera project financed by IDB, and with the participation of OLADE as executingagency, IRRE has contracted consultants to execute a geothermal potentialsurvey across the country, and the pre-feasibility study of the Baru andCerro Colorado sites, where power plants of around 110 MW could be installed;the studies would be completed in 1987.

1.03 Investigations to determine the existence of petroleum deposits andcoal resources have not advanced; preliminary information available at themoment shows no indication of existence of such resources.

1.04 With USAID financing, IRHE has prepared feasibility studies for 40mini-hydro plants with capacities of 5 kW to 1,000 kW, and has installed four

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plants of this kind (total 600 kW). IRHE's experience is that mini-hydrosare not attractive in Panama because of their relatively high investmentcost; however, sometimes they are the only feasible alternative to supplyelectricity to small isolated communities. IRHE is also conducting studiesand experiments to utilize other renewable sources of energy such as biomass,biogas, solar energy and firewood, although these sources are not expected tocontribute significantly to the country's energy supply in the foreseeablefuture.

Energy Demand and Supply

1.05 Panama continues to depend heavily on imported petroleum to meetits energy requirements. In 1982, 11.75 million barrels of petroleum wereimported at a cost of US$373.4 million, or about 20% of all Panama's importsthat year. In 1983 about 13.5 million barrels of petroleum were imported,accounting for 72Z of Panama's total primary energy supply, up from 60% in1981; this increase was caused mainly by the additional electric energygenerated by oil-fired thermal power plants, required to meet energy demandgrowth and to compensate for the decreased output of hydroelectric powerplants during the drought of 1982 and 1983. This dependence has been reducedsignificantly since the start in 1984 of operation of the Fortuna (EdwinFabrega) Hydroelectric Plant, the capacity of which would be augmented by theproposed project. Petroleum is refined locally at Las Minas refinery whichhas a capacity of 100,000 bbl per day. Currently, about half of the importedpetroleum is re-exported, mainly as diesel and fuel oil.

1.06 The following table shows the gross energy consumption by sourcesfor the period 1979-1983:

Gross Primary Energy Consumption by Sources (Tcal)

Source 1979 Z 1981 Z 1982 Z 1983 Z

Petroleum Products 7, 687 48 6,727 47 6,882 46 6,987 44Petroleum for

Electric Generation 3,084 20 1,922 13 3,180 21 4.468 28Hydroelectricity a/ 800 5 1,432 10 1,048 7 844 5Wood Products 3,167 20 3,186 22 2,686 18 2,666 17Bagasse 1,183 7 1,100 8 1,218 8 981 6

Total 15,921 100 14,367 100 15,014 100 15,946 100

at 1.0 Tcal - 1.163 GWh

Energy Planning

1.07 Comision Nacional de Energia (CONADE), created in 1980 as anadvising body to the President of the Republic, is in charge of investigatinganrd planning all matters related to energy supply and consumption in Panama.It is headed by IRHE's Director General and operates with personnel of IRHE's

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Planning Directorate. CONADE's Executive Board is chaired by the Minister ofPlanning and Economic Policy and includes its Director, its Technical Secre-tary and delegates representing the President of the Republic, the Ministerof Commerce and Industry and the Association of Panamanian Engineers. UnderLoan 1954-PAN, CONADE, with the assistance of consultants, is finalizing anEnergy Development National Plan which covers (a) planning and organizationof the energy sector; (b) energy auditing and conservation; (c) cost analysisof energy conservation and substitution; and (d) establishment of a nationalenergy information center.

Bank Participation in the Power Sector

1.08 Since 1962 the Bank has made six loans to IRHE totalling US$204.4million (Annex 1.1). The first four loans have helped to finance hydro-electric and thermal expansion (533 MW) and associated transmission, and thefifth and sixth loans finance subtransmission and distribution projectsacross the country. Bank participation has contributed to the improvement ofsector organization and planning and has facilitated the inflow of foreigncommercial and bilateral financing to the sector. Bank lending has assistedIRHE and the Government in their efforts to implement tariff policies aimedat maintaining electricity prices in line with long-run marginal costs and atproviding appropriate generation of funds to meet the sector investmentrequirements. The continued Bank presence in the sector would be crucial to(i) help finance IRHE's expansion program, which is an essential element ofthe Government development strategy of reducing dependence on imported oil,through direct loans and by assisting IRRE in arranging the necessaryco-financing from commercial and/or official sources; (ii) ensure that thedevelopment of this program is based on sound economic criteria and wellintegrated into the country's overall energy policy; (iii)continue tostrengthen IRRE institutionally and financially; and (iv) ensure that thelevel and structure of IRHE's tariffs remain in line with economic costs andprovide for an adequate level of self-financing.

1.09 As detailed in the corresponding Project Completion and tuditreports, the first three Power Projects financed under Loans 322-PAN (1962),661-PAN (1970) and 948-PAN (1973) were successfully completed although withsome delays and cost overruns. In the execution of the Fourth Power Project,partly financed under Loan 1470-PAN, the construction of the Fortuna Hydro-electric Plant encountered unexpected poor geological conditions whichresulted in a delay of 16 months and a cost overrun of 93% 1/, which theBank and IDB helped to finance, through supplemental loans. The Fifth PowerProject was completed as scheduled, although with a cost overrun of about 50%due to the expansion of the scope of the project and higher than estimatedlocal costs, and the execution of the Sixth Power Project is advancingsatisfactorily.

1.10 The proposed US$51.0 million loan would be the seventh to IRHE, andwould help to finance the construction of the second stage of the Fortuna

1/ As compared to the original cost estimate and original scope of work.The Fortuna Project started commercial operation in 1984.

(Edwin Fabrega) Project, raising of the dam, to increase its generatingcapacity, the execution of feasibility studies of new hydroelectric projectsfor future construction and an asset evaluation study.

Power Sector Organization and Regulation

1.11 IRHE, an autonomous Government agency created in 1961, is the soleentity responsible for public service electricity supply in Panama, exceptfor the supply of the Canal and adjacent areas (para. 1.13). IRHE acquiredthe Compania Panamena de Fuerza y Luz (FyL) in 1972, the Empresas Electricasde Chiriqui in 1973, the Hidroelectrica de El Valle in 1976, and two smallpower utilities in 1978: La Chorrera, formerly a privately owned company inWest Panama Province (about 3 MW), and Bocas del Toro, a municipal company(less than 1 NW).

1.12 IRHE's Board of Directors is in charge of power sector policies(para. 2.02). There is no separate regulatory body for the sector.Electricity tariffs have to be approved by the Cabinet on the recommendationof IRHE's Board and the Economic Cabinet 2/. IRHE's annual budget issubject to approval by the Economic Cabinet.

1.13 Electric service to the Canal facilities and adjacent areas isprovided by the Panama Canal Commission which has an installed capacity of210 MW (Annex 1.4). The systems of the Canal Commission and IRHE areinterconnected and exchange of power and energy is determined for economicdispatch and technical reasons on a day-to-day basis and is efficientlycarried out, although there Is no formal power exchange contract. In 1983IRHE purchased 23 GWh from the Commission. Most of the residential serviceto the Ancon and Cristobal areas inside the former Canal Zone is now providedby IRHE at standard tariffs.

1.14 IRHE and the Instituto Costarricense de Electricidad (ICE), signedearly in 1982 a system interconnection agreement setting forth the basis forenergy exchange and pricing, and for the progrAmming and financing of therelated facilities. The interconnection is financed by the Bank (Loan 1778-PAN) and by IDB and would benefit both countries, permitting the exchange ofup to 150 MW in emergency and secondary hydroelectric energy to replacethermal generation in Panama. The completion of this project, originallyscheduled for 1984, has now a delay of one year due to difficulties of bothinstitutions in securing the complementary financing required for the pur-chase of equipment.

2/ The 'Gabinete Economico created by executive Decree of November 25, 1983is chaired by the Minister of the Presidency of the Republic, andincludes the Minister of Planning and Economic Policy, the Minister ofFinance and Treasury, the Minister of Commerce atad Industry, theController General of the Republic, the General Manager of the NationalBank of Panama and the General Manager of the "Caja de Ahorros(Government's savings bank).

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Power Tariffs

1.15 Government legislation enacted in 1958 allows IRHE to earn anannual rate of return of 8.75% on a rate base equal to average net revaluedassets in operation plus a working capital allowance of three monthsrevenues. A covenant under Loan 2313-PAN establishes that IRHE's tariffswill be set to allow 8.75% as a rate of return, starting in 1980. Actualfigures were 8Z in 1980, 9.2% in 1981, 7.4% in 1982 and 5.2Z in 1983; thereasons for the shortfall in 1982 and 1983 are given in para. 5.02. Fixedassets, including major works under construction, will continue to be revalu-ed yearly in accordance with a method satisfactory to the Bank 3/ (para.2.09).

1.16 IRHE's tariff structure is based on the principle of marginal cost-ing, and reflects the cost of the investments on incremental supply facili-ties and the incremental cost of operation and maintenance required to pro-vide incremental energy. They were designed by IRHE with the assistance ofthe consultant, SOFRELEC of France, under provisions of Loan 1470-PAN, andinclude fuel surcharge. In 1984 the average tariff was 11.14¢/kWh, plus afuel surcharge of 1.67d/kWh. The substitution of thermal generation byhydroelectricity, now in progress with the start of generation from theFortuna Project (Stage I), has substantially reduced the fuel surcharge.From 1985 on, tariff (including fuel surcharge) has been projected to grow at7.2% average (current terms) per year until 1989. The tariffs would remainabout equal to the long-run marginal cost estimated by IRHE (para. 6.02),calculated for an expansion program that considers the postponement of theChanguinola project (para. 4.03). Their application would permit IRHE togenerate enough cash to cover its debt service, and to finance 66% of the newinvestments in the period 1984-89 (para. 5.08).

1.17 IRHE applies a unified tariff structure to all its customersthroughout the country (Annex 1.2). It has been designed to discourageexcessive electricity use by residential consumers with higher consumption,as shown in Annex 1.3 wlhich also contains information on the distribution ofelectricity consumption in Panama for the month of December 1984. Theexisting covenants under Loan 2313-PAN linking IRHE's tariffs to long-runmarginal cost have been maintained under the proposed loan (para. 7.02).

Existing Facilities

1.18 IRHE's total installed capacity by December 1984 was 824 MW ofwhich 67X was lhydroelectric capacity. The following table summarizes theexisting capacity and 1984 generation in Panama by type of installation andownership (see Annexes 1.4 and 3.2 for details):

3/ The methodology agreed with the Bank provides for revaluation of assets(including major works during construction) according to specifiedindices for international inflation (Handy-Whitman indices) and localinflation (composite index of IRHE's labor and materials costs).

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Installed Capacity and 1984 Generation in Panama

Panama Self- TotalIRHE Canal Producers Country

Installed Capacity (12/31/84)Hydro (MW) 552 94 0 646Thermal (MW) 272 116 6L 449Total (MW) 824 210 6] 1,095

Hydro (Z) 67 45 0 59Thermal (Z) 23 55 100 41Total (2) 100 100 100 100

Generation (1984)Hydro (GWh) 1,552 116 0 1,668Thermal (GWh) 712 428 160 1,300Total (GWh) 2,264 544 160 2,968

Hydro (Z) 69 21 0 56Thermal (Z) 31 79 100 44Total (x) 100 100 100 100

1.19 By the end of 1984 the transmission system consisted of about 850km of 220 kV and 115 kV lines interconnecting the regional systems and themain power plants to the grid. The same year distribution systems totalledabout 5,200 km of 34.5 kV and lower voltage lines. Total capacity in trans-formers was about 1,200 MVA at 220 kV and 115 kV, and 1,010 MVA at 34.5 kVand lower voltages.

Electricity Consumption and Access to Service

1.20 Per capita coasumption of electricity in Panama was 687 kWh in1977, 753 kWh in 1979, 801 kWh in 1981 and 940 kWh in 1984 41. In 1984, 81%of the urban population and 42% of the rural population, or 59% of the totalpopulation, had access to electricity. IRHE's goal is to increase thosefigures to 85%, 45% and 62% respectively by 1986. This reflects the Govern-ment's awareness of the need to provide adequate public services to supportthe service oriented economy of the country.

Rural Electrification

1.21 IRHE has started the execution of a five year rural electrificationprogram, the first stage of which would be completed by 1987 at an estimatedcost of US$26.0 million, of which IDB is financing US$16.8 million. Thisstage covers 1,400 km of 34.5 kV lines and would serve 13,500 new ruralconsumers.

4/ Per capita electricity consumption and access to electricity in 1981 forsome South American countries are respectively: Argentina 1,444 kWh and80%; Brazil 1,167 kWh and 57%; Colombia 872 kWh and 63%; Ecuador 438 kWhand 43%; Peru 619 kWh and 40% and Uruguay 1,205 kWh and 91% (Source:IBRD, Power Sector Data Sheets for 1981).

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Power Sector Development and Constraints

1.22 The main objectives of IRHE's expansion program are:

(a) to meet electricity demand at least cost;

(b) to integrate the small isolated systems into the regional systems;

(c) to interconnect the regional systems through a high-voltagenational grid; and

(d) to develop the country's hydro and geothermal resources to meet theincrease in demand and to substitute high cost thermal generation.

1.23 IRHE's technical staff has acquired considerable experience in thedesign, construction and supervision of power projects, some of which, lfkethe Fortuna hydro project, have presented difficult technical and financialproblems. Such experience has been complemented with formal training in andoutside the country and on the job training provided by consultants. As aresult IRRE's staff is technically prepared to meet most of the futureproject requirements. However, consultants' services will still be requiredfor the design of large power plants, complex transmission systems andsubstations and other highly specialized technical projects. The Bank'spresence in the power sector has contributed to the encouragement and supportof IRHE's staff training in particular and institution building in general.

1.24 IRHE has successfully overcome the short-term financial constraintsrelated to the cost overrun of the Fortuna project (para. 1.09). No majorfinancial constraints are anticipated at present, provided that IRHEcontinues to charge adequate tariffs for electric service and meet the ratesof return discussed in para. 5.11.

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2. THE BORROWER

Background

2.01 The proposed borrower, IRHE, is an autonomous agency of thePanamanian Government, created in 1961 for the purpose of planning,constructing and operating, under exclusive basis, all power generationrequired by the country. Since IRHE's creation, the Government has purchasedthe assets of other private utilities vesting them in IRHE. Today theinstitution is the sole utility providing electrical energy to the entirecountry, with the exception of the area served by the Panama Canal Commission(para. 1.13).

Organization and Administration

2.02 IRHE is reputed to have the best organization and staff amongpublic institutions in Panama. IRHE is directed by a seven member Boardof Directors and a Director General. The Chairman is the Minister ofPlanning and Economic Policy; other members are the Ministers of Agricultureand of Commerce and Industry, and the representatives of the Association ofIndustrialists, of the Banking Association, of the Society of Engineers andArchitects, and of IRHE's Labor Union. This Board composition has generallyproven to be satisfactory. IRHE's annual operating and investment budgetmust be approved by the Government's Economic Cabinet (para. 1.12)-

2.03 Administration is entrusted to the Director General, the DeputyDirector General and the General Executive Director. The first two areappointed by the President of the Republic, and the General ExecutiveDirector by the Director General-

2.04 IRHE's current organization (Annex 2.1) was modified in 1983 toinclude five Directorates (Administration, Finances and Computer Services,Planning, Operations, and Engineering and Construction). The basicorganization was implemented in 1978 as a result of an organizational andtraining program executed by IRHE with the assistance of the consultantGilbert and Associates (USA), with Bank financing (Loan 1470-PAN). Themodification introduced in 1983 is adequate for today's operation.

2.05 Bank financed organizational studies, training and consultant'sservices, especially under the Fourth and Fifth Power Projects, havepermitted IRRE to achieve important institutional improvements such as:organizational structure, staff training at all levels, implementation ofcomputer fac'l1ttes for billing, accounting, technical applications andfinancial projections; implementation of financial and load forecastingmodels; purchasing procedures and management of wiarehouses; and coverage ofrisk insurance policies.

Staff

2.06 IRHE's relatively favorable compensation policies combined with aplentiful supply of manpower in Panama has enabled IRHE to hire and retain

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personnel in the numbers required. Total staff in December 1984 was 5,610,71% of whom administer and operate the power system across the country; theremaining are involved in engineering and construction of new projects and ingeneral support. Of all staff, 19% are classified as managers and supervis-ors, 34% as administrative workers, and 47% as technical workers. Theeducational background of the staff is relatively good (60% have completedsecondary education and about 400 have a university degree, 275 of whom areengineers). With substantial support under a number of Bank-assisted pro-jects, IRHE has developed its own staff training programs both in-house andoverseas so that IRHE now has a good core of qualified managers and profes-sionals at the higher levels, as well as trained skilled workers at the lowerlevels.

2.07 The rapid expaasion of IRHE's operations to cover the entirecountry caused a fast growth of its staff, leading to a high incidence ofpersonnel costs in power rates and productivity indicators lower than theaverage for similar utilities 5/. Under Loan 2313-PAN, IRHE agreed to limitstaff growth to conform to estiblished indicator levels, and management laterdecided to (a) freeze hiring and fill necessary positions through internaltransfers; and (b) decrease IRHE's construction force by not replacing con-struction workers leaving the company. In addition, IRKE's management alsodecided to update and refine IRHE's personnel policies and procedures, aimingat improving the company's efficiency, with an emphasis given to middle-levelmanagement performance and overall training needs.

Training

2.08 IRE's training programs (para. 2.06) are generally of good qualitybut require periodic review to meet evolving training needs in view of IRHE'srapid growth. The elements of a training policy exist, but a coherent policyand a systematic approach consistently applied to all staff are needed.Training activities are spread over five different departments, requiringefficient coordination. IRHE's overall efficiency could be substantially andeconomically improved through training, requiring, at this stage, more of aninternal institutional reappraisal (for which IRHE will need some assistance)than immediate investment in training facilities. For this purpose, IRHE,with the assistance of consultants financed with funds from the Sixth PowerProject, is analyzing the required reforms of its personnel and trainingpolicies and organization, and planning the expansion of training activitiesfor the next three years.

Accounting and Rate Base

2.09 IRHE has substantially improved its accounting procedures in thelast few years. As a result, monthly financial statements are now issuedwithin 30 days of their respective closing dates. IRlE's fixed assets havebeen revalued yearly since 1976 by a suitably qualified local independent

51 In 1984, one of the productivity indicators, the number of customersserved per employee, vas 48 in Panama, as compared to 75 and 95 for thepower sectors of Costa Rica and Ecuador respectively.

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consultant under a methodology agreed with the Bank (para. 1.15). However,in view of the lapsed time and in view of the necessity of having a correctvaluation of net fixed assets in operation based on replacement costs as anadequate rate base, during negotiations IRHE agreed to designate adequatelyqualified staff within its organization to study the current (replacementcost) value of its assets in operation (para. 7.01(a)); if during implementa-tion technical assistance is needed to set up such a group, an amount up toUS$100,000 for foreign exchange components would be made available from theproceeds of the proposed loan within the category assigned to consultants.Once such group carries out the first comprehensive study on the currentvalue of the fixed assets in operation, views will be exchanged with the Bankon the advisability of revising its assets valuation and its assets revalua-tion methodology.

Auditing

2.10 Since IRHE is a Government autonomous agency, its accounts areaudited annually by the office of the Controller General of the Republic.IRHE's annual external audit, required under previous Bank loans, has beenperformed satisfactorily by Arthur Anderson and Co. since 1975. Under theterms of the proposed loan, IRHE will continue to engage qualified externalauditors to audit its accounts yearly and to send to the Bank audited finan-cial statements, including the Auditor's recommendations, within four monthsof the end of each fiscal year.

Billing and Collection

2.11 Within the context of the Fourth Power Project (Loan 1470-PAN),IRHE, with the assistance of Gilbert and Associates (USA), established amodern data processing system for customer billing and accounting. Monthlybills are distributed by carriers and by mail, and within 20 days of receiptconsumers should pay their bills at IRHE's offices or banks located through-out the country.

Accounts Receivable

2.12 Electricity bills are paid regularly by private consumers and bythe Central Government and most decentralized agencies. However,Municipalities and autonomous public agencies have been paying only afterlong delays, and the Central Government has not been able to retain funds fordirect payment to IRME because these agencies are beyond its budgetary and/orlegal control. By the end of 1984, the accounts receivable from the publicsector amounted to:

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-~~- - -- US$ MillionnEntities Total Current Arrears

Central Government 0.4 0.4 0Decentralized a/ 0.4 0.4 0Municipalities 9.8 0.2 9.6Autonomous b/ 13.4 2.3 11.1Total 24.0 3.3 20.7

a/ Non-revenue earning agencies.b/ Revenue earning agencies, although some of them receive budgetary

allocations.

With the intervention of the Central Government, however, the payment ofarrears by the public sector was resolved satisfactorily in January 1985, as(a) the autonomous agencies reached agreement with IRHE for settlement ofUS$8 million of these arrears, payment of the remaining US$3 million over twoyears, with the Government assuming any remaining balance at the end of thetwo years, and timely payment of current bills; (b) the Central Governmentassumed the payment in five years of the entire arrears from the Municipali-ties; and (c) to minimize further problems with payments from the Municipali-ties, starting in January 1985, the total cost of electricity for streetlighting will be included in the tariff for the remaining consumers.

Performance Indicators and Reporting

2.1.3 During negotiations, IRHE agreed to comply with and to inform theBank quarterly on the performance indicators showa in Annex 2.2 which definetargets for continuing to improve its operating efficiency. IRHE also agreedto inform the Bank whenever noncompliances with such targets are expected tooccur, and to prepare and send to the Bank periodic progress reports and suchother reports as the Bank may reasonably request, including a project comple-tion report.

Insurance

2.14 IRHE carries acceptable insurance against risks arising from civilliability, motor vehicle claims, fire, lightning, explosion, flood, accidentclaims, and income loss due to equipment failure for specified plants, ware-houses and buildings. As a result of a rationalization of its practices,IRHE now contracts its insurance policies with three companies through abroker.

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3. THE MARKET

Historical Market

3.01 TRHE's service area extends throughout the country and includesrural areas and isolated villages. As provided in the Torrijos-Carter CanalTreaty signed in 1977, IRHE is gradually assuming the service to residentialcustomers of the former Canal Zone. However, electricity supply for theCanal operations and its military installations will continue to be providedby the Canal Commission. At present, IRHE serves 59% of Panama's population,equivalent to 1.2 million inhabitants. In the period 1970-80, in the areasnow served by IRHE, electricity consumption grew at an annual average of 8.8%which declined to a slower pace in the period 1977-84 (i.e. 6.4% in 1977-84and 5.5% in 1980-84) as a result of generation restrictions in 1977 and 1978,a public campaign since 1979 directed by the Government to save electricenergy and lately the economic recession.

Energy Losses

3.02 Energy losses at IRHE's system have grown from 12% (referred togross generation) in 1978 to a peak of 17% in 1982 because of distributionsystem overload and theft of electricity, which IRHE is addressing throughthe renovation and enlarging of the distribution network, with the Bank'sfinancial assistance (Loans 1778-PAN and 2313-PAN). In 1983, when a numberof renewed facilities were placed in operation in the central and westernprovinces, system losses were reduced to 15.3%, but increased again to 17.7%in 1984, in part because of the increase of transmission losses caused by theconnection to the system of the Fortuna Project, located at a relatively longdistance (about 400 km) from Panama City, the main consumption center. Assuggested in a study prepared under the Joint UNDP/World Bank Energy SectorManagement Program 6/, the construction of a new transmission system wouldbe economically justified by the reduction of energy losses. However, IRHEis not planning to implement it at present because of current financial con-straints faced by IRHE itself and by the country. Other recommendationspresented in the study, like the installation of capacitors and the improve-ment of auxiliary installations in the Bahia-Las Minas power plant are beingcarried out by IRHE. Within the context of the Sixth Power Project, IRHE,with the assistance of consultants, is performing a system loss reductionstudy which would help to achieve further reductions through transformer loadmanagement, reactive power compensation, feeder design optimization, monitor-ing and control of energy theft, etc. As part of the study, IRHE is install-ing feeder and substation recording instruments to be used as input forcomputerized optimization system programs, also financed by the Bank, underthe Fifth Power Project.

6/ Panama: Power System Loss Reduction Study, Report No. 004/83, June 1983.

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The Forecast

3.03 IRHE has improved its load forecast models with the assistance ofconsultants financed by the Bank. The most suited model for Panama'sconditions is one that considers both econometric and macroeconomic inputsrelated to historical and projected data for consumption and economic growth.Energy sales for the period 1983-90 are expected to grow at an average rateof 6.0% per annum, a rate lower than the 6.75% forecast for the same periodduring the appraisal of the Sixth Power Project (Loan 2313-PAN). Theforecast considers the relatively low growth of sales in recent years, andthe inclusion of new bulk sales expected during the period to Petroterminalesand Chiriquiland Company, at present large customers of IRHE who decided topurchase the balance of their electricity needs from IRHE's system ratherthan to continue with their own power generation. Statistical data andforecast of energy sales in Panama by consumption categories are shown indetail in Annex 3.1 and summarized in the following table, which shows thechanges in patterns of electricity consumption expected in the future.

Electricity Consumption in Panama

1977 1984 1990Type of User GWh X GWh GWh

Residential 403 34 522 29 688 25Commercial 397 33 573 32 821 29Industrial 128 11 227 12 365 13Public Lighting 23 2 37 2 57 2Government a! 196 17 328 18 566 20Other b/ 35 3 128 7 300 11

Total 1,182 100 1,815 100 2,797 100

a/ Includes municipalities and public companies and services such asPort Authority, International Airport, Water Treatment Plants, etc.

b/ Includes bulk sales and IRHE's own consumption.

3.04 The number of IRHE's consumers grew from 210,000 in 1978 to 269,000in 1984, and IRHE expects to serve 307,000 consumers in 1988.

The Energy and Capacity Balances

3.05 The forecast energy and capacity balances are shown in Annexes 3.2and 3.3, and graphically in Annexes 3.4 and 3.5. The generation dispatch ofIRHE's powver plants (Annex 3.2) shows that thermal generation from existingplants will be greatly reduced after the inclusion in the system of theFortuna Project. Generation dispatch was forecast by IRHE using a mathemat-cal load dispatch model, on a month by month basis; the model takes intoconsideration the probability of occurrence of dry, average and wet hydrolog-ical conditions.

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4. THE PROGRAM AND THE PROJECT

IREE's Development Program

4.01 Up to 1976 Panama relied almost exclusively on thermal generationto supply electric energy, thus depending heavily on fuel imports. As aconsequence of the oil crisis of the seventies, the Government and IRHEembarked on an ambitious program of construction of hydroelectric projects;after commissioning of the 150 MW Bayano power plant in 1976 and the 90 MW LaEstrella-Los Valles power plants in 1979, IRHE considerably reduced itsthermal generation from 94% in 1975 to 48% in 1982 7/, and will be reducedto 3% in 1985 when the first stage of the Fortuna Project will be fullyoperational.

4.02 IRHE's generation expansion program for the country aims towardsthree important goals: (i) the installation of least cost capacity to supplydemand growth; (ii) the substitution of hydro for thermal generation; and(iii) the improvement of system reliability to secure a loss of load prob-ability of two days per year as a maximum. The generation expansion programis based on a Master Plan prepared in 1976 by IRRE with the assistance ofconsultants, periodically updated by IRHE's Planning Directorate. In its1984 version, which covers the period 1984-2003, the system expansion studycompared a total of eight alternative plans, combining in variousarrangements and timing the following projects:

(a) Fortuna II, raising of the dam in 1987, 1988 or 1989

(b) Bayano unit No. 3 hydro (75 MW)

(c) Changuinola I hydro project (300 MW)

(d) Teribe I hydroelectric project (237 MW)

(e) Esti-Barrigon hydro plants (120 MW)

(f) Baru geothermal plant (110 MW)

(g) Colon coal fired steam power plant (150 NW)

(h) Colon oil fired steam power plant (75 MW)

(i) Gas turbine power plant (50 MW)

(j) New transmission grid at 230 kV or 500 kV

4.03 As a result of economic comparisons made for the various alterna-tive expansion schemes, IREE adopted a firm expansion program which coversthe period 1984-1990, a tentative construction program for the period 1991-92

7/ In 1983, an exceptionally dry year, IRHE's thermal generation increasedto 61% of its total generation.

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and a reference construction program for the period 1993-2003. The firmconstruction program, which includes the raising of the Fortuna dam, isessentially the same program agreed with the Bank under the Loan Agreementfor the Sixth Power Project (Credit 2313-PAN). However, there are somesubstantial changes in IRHE's expansion plan after 1991. In view of thedifficulties that the Government and IRHE would face in financing largeprojects, IRHE decided to postpone the execution of the Changuinola projectand replace it with smaller power plants, easier to finance; the resultingtentative construction program, however, would be confirmed only in 1986when the results of additional feasibility studies on medium sizehydroelectric projects and the size and cost of geothermal resources areknown (para. 4.09). TRHE's expansion program is the following:

Project Capacity MW For operation in

(a) Firm construction program:

Interconnection with Costa Ricaat 220 kV - December 1985

Fortuna II: raising of the dam - December 1988Bayano hydro, unit No. 3 75 January 1990

(b) Tentative construction program:

Esti-Barrigon hydroelectric plants 120 1990David-Panama 500 kV transmissionline (operated at 230 kV) - 1991

(c) Reference construction program:

Colon coal fired steam plant 150 1993Changuinola I hydro project 300 1996David-Panama transmission line,upgrading to 500 kV - 1996

Teribe I hydroelectric project 237 2000Tabasara hydroelectric project 220 2002

4.04 In addition, the program includes the expansion and improvement ofthe subtransmission and distribution systems, and the execution of the firststage of the rural electrification program, financed by IDB, covering 1,400km of primary voltage transmission lines (34.5 kV) to serve 12,500 new ruralconsumers. Section 4.05 of the Loan Agreement for Credit 2313-PAN, dealingwith IRHE's expansion program has been updated and included in the LoanAgreement for the proposed project (para. 7.02).

4.05 The cost of the 1984-1989 slice of the above construction program(6 years) in current prices, excluding interest during construction, isestimated at US$725.0 million, of which 42% would be local costs and 58%foreign costs (para. 5.07 and Annex 4.1). It includes the full investment ofIRHE's firm construction program, and the initial investments required forthe tentative construction program. This investment program has been usedfor the financial forecast of the period (para. 5.07).

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Project Origin, Preparation and Justification

4.06 Technical and economic studies made in 1976 for the Fortunahydroelectric project by IRHE with the assistance of the consultant C. T.Main (USA), recommended that the rock-fill dam for the project be built intwo stages: Stage I, a 60 a high dam, with an operating level of 1,010 mabove sea level, forming a reservoir with a useful storage capacity of 8.4MCM, and Stage II, raising the dam by 40 m to operating level 1,050 m,enlarging the storage capacity to 158.4 MCM. Stage I, financed by the Bankunder Loan 1470-PAN (Fourth Power Project) was completed in February 1983,and now IRHE is planning the execution of Stage II for completion by the endof 1988. A project updating study prepared by IRHE in March 1984, presents adetailed technical and economic analysis, justifying the execution of StageII. The generation attributed to the Fortuna hydroelectric project,calculated for combined operation with the storage provided by IRHE's Bayanohydroelectric project, is the following:

Total Generation in GWh per Year

Fortuna I Fortuna I and II

Firm Energy (dry year condition) 846 1,390

Average Energy (average hydrology) 1,242 1,489

4.07 Safety of the lower dam under maximum flood conditions demandsraising its height as soon as possible, as the reservoir-spillway for Stage Ihas been designed for a flood of 2,325 CMS only (probabiliy of occurance: 1in 55 years), a calculated risk which wiLl disappear when the spillway forStage II is constructed, providing a reservoir-spillway capacity for themaximum probable flood of 5,300 CMS, which is considered a safe design inaccordance with international engineering practice. As an alternative, IRHEcould increase the safety of the lower dam by enlarging the capacity of thespillway to acceptable limits, with an investment estimated at 10 million USDollars, an unattractive proposition not being considered by IRHE, as thisinvestment would not bring any return in terms of additional energygeneration.

4.08 The execution of the Fortuna II project is a part of the leastcost solution to supply electric energy to Panama, and is included in IRHE'sfirm construction program. In order to further justify the execution of theproject and optimize its year of operation, IRHE made a detailed economicanalysis for the supply of electric energy in the period 1987-1991, prior tothe operation of other projects. The following alternatives were considered:(a) operation of Fortuna II in 1987; (b) operation of Fortuna II in 1988j (c)operation of Fortuna II in 1989; (d) operation of an equivalent 75 MW oilfired steam power plant in 1989. The existing Bahia-Las Minas thermal powerplant would provide the energy balance for all the alternatives considered.The alternative plans were compared assuming that international oil pricesprevailing in 1983 (crude oil at US$29 per barrel f.o.b.) would remain con-stant during the period of analysis in real terms (17 years). A discount

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rate of 12% was used to determine the present value of the capitalinvestments and operating costs related to each alternative. Sensitivityanalyses were made for fuel prices (prices 15% lower and 10% higher) and fordiscount rates of 10% and 14%. The results of the analyses show that themost costly alternative would be to install an equivalent 75 MW thermalplant, and that the least cost would be to operate the Stage II of theFortuna dam at the earliest possible date, now estimated by IRHE to beDecember 1988. Details of the economic analysis are shown in Annex 4.5, andthe study is available in the Project File.

Project Objectives and Description

4.09 The proposed Seventh Power Project would include the execution ofStage II of the Fortuna hydroelectric project, raising the height of the damto elevation 1,050 m, which will increase the availability of hydroelectricenergy in Panama by an amount equivalent to the output of a 75 MW thermalplant. The project is part of IRHE's least cost expansion program and wouldmeet projected energy demand growth uatil 1991, when a new power plant wouldbe required. The project would also include (i) the execution of feasibilitystudies for medium size hydroelectric projects, the results of which will beused by IRHE to make decisions on the future generation expansion programbased on the knowledge of a larger number of alternative projects, and (ii)the asset revaluation study (para. 2.09).

4.10 The propGsed project would include the following:

(a) Raising of the rock-fill dam at the Fortuna hydroelectric projectfrom operating level 1,010 m above sea level to operating level1,050 m. Preparatory works such as clearing of organic materialsto foundation level, access roads, clearing of borrow pits, conrstruction of camps, etc. were done while executing the first stageof the dam.

(b) Execution of field investigation for ten medium size hydroelectricprojects (Phase I), pre-feasibility studies for three (Phase II)and feasibility studies for two (Phase III), selected from a listof approximately 28 projects located near Panama City, the mainpower consumption center in the country.

(c) Execution of a study on the current value of IRHE's assets inoperation.

Project Cost and Financing

4.11 Project cost estimates for raising the Fortuna dam are based ondetailed final designs made by the IRHE with the assistance of the consult-ant, C.T.Main (USA), in 1983, and actual cost data updated in January 1984,available from the execution of the first stage of the Fortuna dam. Costestimates for the execution of feasibility studies, also prepared by IRHE,are based on a proposed scope of services and detailed man-month estimates(paras. 4.15 and 4.16), using rates now being paid by IRHE for similar worksplus the cost of field activities such as drilling, travel, supplies, etc.

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Cost estimates do not include duties or taxes, of which IRHE is exempt.Detailed project costs are shown in Annex 4.2, and are summarized below.

Project Cost Estimate(In Million US$)

Local Foreign TotalCost Cost Cost

1. Part A: Raising the Fortuna Dam

Diversion works 1.5 3.3 4.8Dam construction 10.5 21.8 32.3Spillway construction 2.9 6.7 9.6Auxiliary works 0.6 0.9 1.5Engineering & Administration 4.0 0.5 4.5

Sub-total 19.5 33.2 52.7

2. Part B: Studies for Medium SizeHydroelectric Projects

Phases I, II and III 1.9 2.9 4.8

3. Total Base Cost (Jan. 1984 prices) 21.4 36.1 57.5

4. Contingencies

Physical contingencies 3.2 5.4 8.6

Price contingencies 3.5 9.5 13.0

5. Total Project Cost 28.1 51.0 79.1

6. Interest During Construction - 8.5 8.5

7. Total Financial Requirements 28.1 59.5 87.6

4.12 Base costs are expressed in January 1984 prices. Physical continr-gencies were calculated at 15% of base cost. Price contingencies were added,assuming the following inflation rates:

1984 1985 1986 1987 1988 1989

Local Cost (%) 1.1 1.5 4.0 4.0 5.0 5.0Foreign Cost (X) (2.8) 5.0 7.5 8.0 8.0 8.0

4.13 The project would be financed by the proposed loan (US$51.0million) and by IRHE from Its own funds (US$28.1 million plus US$8.5 millionto cover interest during construction).

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The financing arrangement and disbursement per calendar year issummarized below:

Project Sources of Financing(US$ Million)

1986 1987 1988 1989 1990 Total

Source

1. Bank LoanRaising of the damasid consulting services 7.5 7.3 12.2 14.2 6.2 47.4

Feasibility studies 0.4 2.4 0.8 - - 3.6Sub-total 7.9 9.7 13.0 14.2 6.2 51.0

2. IRHE's own funds:Raising of the dam 4.1 3.8 6.4 7.4 4.0 25.7Feasibility Studies 0.4 1.6 0.4 - - 2.4Interest during construction 0.9 1.3 2.2 4.1 - 8.5Sub-total 5.4 6.7 9.0 11.5 4.0 36.6

3. Total Sources 13.3 16.4 22.0 25.7 10.2 87.6

4.14 The proposed US$51.0 million Bank loan would finance 64% (US$46.7million) 8/ of the total cost of the dam, and 100% of the foreign costs forall consuTting services related to the project for the supervision of the damconstruction, the execution of the feasibility studies and the asset revalua-tion study (para. 2.09). The loan would be made with a 15-year maturity,including a 3-year grace period, with interest at the Bank's standard vari-able rate. For financial forecast purposes, an interest rate of 9.29% perannum was assumed.

Project Implementation

4.15 As in previous Bank financed projects, IRHE would be responsiblefor the implementation of the project. The design and bidding documents forFortuna II (raising of the dam) were executed by IRIE with the assistance ofthe consultant, C. T. Main, who also assisted IRHE in the design and conr-struction supervision for the entire Fortuna hydroelectric project since itsstart in 1974. The designs have been reviewed and found acceptable by anindependent Board of Consultants consisting of internationally known experts

8/ Equivalent to the total estimated foreign cost of the dam construction.However, the Bank loar. would finance the estimated foreign exchange costas a fixed percentage of the dam construction costs (64%), independentlyof contractual local and foreign costs. (Experience has shown that inPanama the concept of local and foreign components of a contract does notfollow a trend, in view of the equivalence and free convertibility of thelocal currency (Balboa) with the US Dollar).

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appointed by IRHE. Construction work would be done by a single civil workscontractor. In view of the experience gained by their engineers in thesupervision of Fortuna I, supervision of construction would be done by IRHEwith assistance from foreign consultants as required (approximately 24 man-months), including periodic revievs by the same Board of Consultants mention-ed above.

4.16 The execution of the studies for the medium size hydroelectric pro-jects would be carried out by IRHE's Planning Directorate, by a group of 15local engineers, assisted by a foreign consulting company to be contractedfor all three phases of the study (field investigations, pre-feasibility andfeasibility studies). The project would require 240 man-months local and 86man-months foreign engineers and other professionals. The asset revaluationstudy would be carried out mainly by LRHE's staff, assisted by about 10 man-months of consulting services.

Procurement and Disbursement

4.17 A single civil works contract for the construction of the dam rais-ing would be established, through international competitive bidding initiatedin 1984, in accordance with Bank guidelines.

4.18 The consulting services required for the execution of feasibilitystudies of the medium size hydroelectric projects would be contracted inaccordance with Bank Group Guidelines for Hiring of Consultants. Consultingservices required for the supervision of the dam construction, including damsafety, would be provided, at the request of TRHE, by the same professionalswho now serve on the Board of Consultants (para. 4.15) and by individualexperts to be contracted in accordance with Bank guidelines.

4.19 The following table summarizes procurement arrangements for theproject:

Procurement Method TotalICB Other Cost

'US$ Million -- -

Contract

1. Civil works contract for 66.7 - 66.7construction of the dam (46.7) - (46.7)

2. Consulting Services:- Engineering and Administration - 6.4 6.4for Fortuna II (0.7) (0.7)

- Feasibility studies for medium - 6.0 6.0size hydro projects (3.6) (3.6)

3. Total 66.7 12.4 79.1(46.6) (4.4) (51.0)

Note: Figures in parenthesis are the respective amounts financed by the Bank.

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4.20 Disbursements from the loan account would be fully documented andwould be made for 64% of the total cost of the dam construction, includingcontingencies, with a limit of US$46.7 million, and for lOOX of foreignexpenditures for consultant services related to the supervision of the damconstruction, the execution of feasibility studies and the asset revaluation(para. 2.09), with a limit of US$4.3 million.

Disbursement Schedule

4.21 The disbursement schedule shown in Annex 4.4 is based on a detailedconstruction and implementation program prepared by IRHE, which takes intoaccount recent experience acquired during the construction of the first stageof the Fortuna dam. In this project, a total of 47 months elapsed from thetime of bid invitation (March 1979) to completion of works (February 1983).The project execution schedule summarized in Annex 4.3 considers that bidinvitation process for both the civil works contract and hiring of consul-tants started in July 1984, and that dam construction would be finalized inDecember 1988 (36 months total construction time), which is reasonable whenconsidering that access roads, camps, auxiliary facilities, etc. were alreadyconstructed in the first stage of the Fortuna dam. The feasibility studiesfor medium size hydroelectric projects would be completed in September 1987.It was assumed that there would be a delay of six months between the comple-tion of the various stages of a contract and the disbursement of funds, andthat a period of twelve months would elapse between the time of completion ofa contract and its final liquidation. The disbursement schedule is similarto typical Bank wide profiles for the hydroelectric power subsector, exceptthat the period of disbursement was shortened by one and a half years to fiveyears, to take into account the advanced status of preparation of the pro-Ject, the relatively simple task of construction, and the constructionschedule proposed by IRHE. Disbursements would take place between January1986 and December 1990, and the loan closing date would be December 31, 1990

Environment

4.22 IRHE's Department of River Basins Protection, in charge of themanagement of river basins of existing and future hydroelectric projects, hasperformed numerous studies related to the effects of the construction of theFortuna project, Stages I and II, on human population and the ecologv of thearea (See list of related studies in Annex 4.6). The studies conclude thatif specific precautions are taken, the project will have little or no nega-tive effects on the environment. The Fortuna dam has a cachment area of15,500 ha of tropical rain forest, the reservoir will cover an area of 100 hain the first stage, (Fortuna I) and 1,000 ha in the second stage (FortunaII). In order to provide the necessary protection to the forest in the areaand keep siltation at present low levels, by Decree of 26 September, 1976,the Government declared as national forestry reserve an area of 19,000 haaround the dam, and restricted use area of an additional 18,000 ha, all underthe control of forestry guards and ecologists hired by IRHE.

4.23 Preliminary studies made by IRHE in 1976 estimated tha. about 120families living in the area would have to be relocated; in the executionof Stage I of the project, however, only 27 families were affected by the

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construction of access roads to the project and camp facilities, but norelocation was necessary. The execution of Stage II will not affectanybody. In order to help the population of the area, IRHE, by itself orwith the collaboration of other government agencies, has establishedcommunity development programs aimed at improving education, living condi-tions and agricultural production methods, through the construction ofschools, water supply and sanitary systems, roads, housing improvements,health, agricultural and education programs, etc. In addition, IRHE has madestudies and has surveillance on the possibility of propagation of the riverblindness disease caused by the black fly; as of this date, there are nosigns that this disease exists in Panama. The area flooded by the firststage of the reservoir has been cleared of trees to avoid the formation ofnoxious gases and acidity. During normal reservoir operation, IRHE willsupervise and control any aquatic growth on the lake surface and the sameprecautions will be taken by IRHE in the execution of the second stage of thedam.

4.24 In view of all studies made and precautions taken by IRHE, it isreasonable to state that the construction of the dam, and in general, of theFortuna project, will have no negative impact on human life or on theenvironment of the region.

Project Risks

4.25 The execution of the first stage of the Fortuna hydroelectricproject suffered set-backs due to initial starting delays and to unexpectedadverse geological conditiors, both in the underground powerhouse and in thefoundations of the dam. As a consequence, the project was completed in 1984,with important cost overruns and a delay of 16 months witl. respect to theoriginal schedule shown in the S.AR for the Fourth Power Project (Loan 1470-PAN). In order to solve the technical problems, IRHE performed additionalgeological studies, including deep drilling, and now the geology of theproject area is well defined and no construction problems are expected duringthe execution of the dam raising. Project design and bidding documents arecompleted, and IRHE has on site the faciliLies to coordinate, administer andsupervise the project, including an ergineering group composed of about 15engineers and supporting staff. Therefore, no major project risks would beinvolved and it would be reasonable to expect IRHE to complete the projectwithin budget and schedule.

Project File

4.16 Reference is made to Annex 4.6 for the conternts of the projectfile.

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5. FINANCES

Summary

5.01 From 1977 to 1981, IRHE sustained an improving trend in itsfinancial performance, and after a less prosperous 1982 and 1983 its presentfinancial situation is satisfactory. The difficulties which arose in late1982 as a consequence of the cost increase of the Fortuna project wereovercome by agreements on a supplementary financing package with variousagencies including the Bank, IDB and commercial banks as well as bilateralGovernment aid agreements with Italy and Venezuela. IRHE's 1984-89investment program, including its construction program, interest duringconstruction, requirements for working capital and other applications,amounts to US$965.8 million. The net internal cash generation would financeUS$640.1 million, or 66% of the total requirements, and the remaining 34%would be covered by loans.

Past Performance and Present Position

5.02 TR E's financial performance deteriorated substantially during theperiod 1974-76, mainly due to low tariff levels and insufficient Governmentcapital contributions. In 1977, in connection with the Fourth Power Project(Loan 1470-PAN), IRHE and the Government agreed with the Bank on a programfor financial recovery and improvement including a covenant to obtain a rateof return of 8.75% on revalued assets (para. 1.15). This program was recon-firmed in 1979 and 1983 in connection with the Fifth and Sixth Power Projects(Loans 1778 and 2313-PAN). IRHE and the Government have been in compliancewith the main undertakings of such programs; IRHE's actual rates of returnconsistently increased from 6.9% in 1977 to 9.2% in 1981 due to an adequatetariff policy, which kept pace with inflation and fuel prices. However, thereturn in 1982 and 1983 fell to 7.4% and 5.2% due to two unusually dry sea-sons which demanded higher thermal generation than forecast; the additionalfuel cost was not entirely recouped because, for Government social considera-tions, IRHE could not apply the full fuel surcharge.

5.03 In 1982 IREE faced serious financial difficulties due to the costoverrun of the Fortuna project (para. 1.09) in the order of US$240 million(inicluding interest during construction); at first IRHE applied for financialaid froa the Venezuelan-Mexican Investment Fund created in the San JoseAgreement of April 1980, but this scheme failed when the two countries them-selves faced financial difficulties. With the Bank's assistance, IRHE suc-cessfully arranged another financial scheme to fund the project, whichincluded supplemental financing from the Bank and IDB, and new financing fromItalian cooperation agencies, commercial bai.ks and a small amount from theVenezuelan-Mexican Investment Fund.

5.04 To partially offset the gaps resulting from the lack of long termfinancing for domestic components of its investment program and to avoidfurther delays in the construction schedule of the Fortuna project, in1980-82 IRHE resorted to excessive short and medium term financing, which wasavailable in Panama, exceeding the limit covenanted under Bank loans.However, IRiE has made efforts to reduce such high level of short term debt

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(from US$58.3 million in 1981 to US$48.6 million in 1983) and has adopted astrategy for reducing its short term debt position to a more manageablelevel.

Financial Structure

5.05 As of December 31, 1983, IRHE financial structure was the following(Annex 5.4):

US$ Million %Equity

Capital 132.5 10Retained Earnings 229.9 18Revaluation Reserve 273.5 21

635.9 49Long Term Debt 433.1 34Short Term Debt 48.6 4Current Liabilities 100.3 8Other Liabilities 63.5 5

Total 1,281.4 100

5.06 As of December 31, 1983, TRHE's principal creditor was the Bank;the debt balance under its first five loans amounted to US$112 million (26%of total long term debt); the second largest creditor is IDB with US$93.3million (22%) followed by Mitsubishi, US$60 million (14%), Libra Bank, US$40million (9%), the Government (by transfer of a loan from Dillon ReadOverseas) US$37.2 million (9%) and suppliers and commercial banks.

Investment and Financing Plan

5.07 IRHE's 1984-89 financing requirements, including its constructionprogram (para. 4.05 and Annex 4.1), interest during construction, require-ments for working capital and other applications, amounts to US$965.8 million(Annex 5.3). The construction program, excluding interest during construc-tion, amounts to US$725.1 million or 75% of total applications, of whichUS$79.1 million or 8% corresponds to the proposed Seventh Power Project. Theongoing works comprise: conclusion of construction of the Fortuna project,partially financed by Loan 1470-PAN, and other ongoing works such as thePower V and VI Projects, partially financed by Loans 1778/2313-PAN and aRural Electrification Project partially financed by IDB. In addition to theproposed project other future construction includes transmission, substationand distribution facilities, and the initial investments for the Esti-Barrigon hydro project and the Changuinola project, the operation of whichhas been postponed until 1996. The interest during construction for theperiod is estimated at US$115.7 million or 12% of total financing require-ments. The increase in working capital requiremeats amounts to US$125.0million or 13%, of which US$48.2 million represents repayment of short termloans. The investment program and financing plan are shown in detail inAnnex 5.3 and are summarized on the next page.

- 27 -

Proposed Investment Program and Financing Plan for 1984-89

US$ Million zRequirements of Funds:

Construction ProgramOngoing 151.7 16Proposed VII Project 79.1 8Other Future 494.3 51

Subtotal 725.1 75Interest during Construction 115.7 12

Total 840.8 87Increase in Working Capital 76.8 8Amortization of Short Term Loans 48.2 5TOTAL REQUIREMENTS 965.8 100

=

Sources of Funds:

Gross Internal Generation 1,215.5 126Less: Debt Service 575.4 60Net Internal Generation 640.1 66Borrowings

Existing 145.3 15Proposed IBRD Loan 51.0 5Future 127.8 14

Subtotal 324.1 34Other Sources 1.6 -TOTAL SOURCES 965.8 1oo

- ~ :

5.08 Assuming the projected tariff levels are achieved, IRHE would beable to generate a high 66% of its total financial 1984-89 requirements; theremaining 34% would be covered by loans amounting to US$324.1 million. Ofthis figure US$145.3 million would come from undisbursed proceeds of existingloans including Loan 2313-PAN. The Power VII Project would require theproposed loan of US$51.0 million. Finally, other future loans amounting toUS$127.8 million would be required for the rest of the 1984-89 program. IRHEis considering the following sources: (a) US$3.4 million from suppliers; (b)US$112.1 million from International Financing Institutions; and (c) US$12.3million from the Venezuelan Investment Fund (already negotiated).

5.09 IRHE's proposed financing plan for 1984-89 is reasonable. In viewof its sound financial position, the Government support and the interestshown by lenders in projects upheld by both the Bank and IDB, it is expectedthat IRHE obtain the estimated suppliers and commercial bank financing.

- 28 -

Future Finances

5.10 Financial projections 9/ presented in Annexes 5.2 to 5.4 are basedon (a) updated assumptions for inflation; (b) energy sales forecast of May1984 and an energy balance considering the commissioning of the last unit ofthe Fortuna hydroelectric power plant in October 1984; and (c) a tariffpolicy decided by the Government for 1984 and 1985, and tariffs projected toattain a rate of return of 8.75% in 1987 and thereafter, computed on a ratebase calculated using fully revalued fixed assets in operation and 1/4 oftotal annual sales as a proxy of a working capital allocation.

5.11 Under these assumptions, RLHE would obtain an average rate ofreturn of 8.6% for the years 1984, 1985 and 1986 (9.7% in 1984, 8.1% in 1985and 1986). From 1987 onward the covenanted rate of 8.75% would be reached.The level of the rate of return may need to be reviewed once the revaluationof IRHE's fixed assets in operation is completed in 1987 (para. 2 07).

5.12 IRHE's financial situation is expected to further improve duringthe forecast period (Annex 5.1). The debt service coverage on an annualbasis is not expected to fall below the 1.4 covenanted in Loan 2313-PAN; andthe debt/equity ratios (50/50 in 1983) are forecast to remain at safe levelsduring the period (20/80 in 1989) despite the borrowings required for con-struction of ongoing and future projects. The self-financing ratio shows anincreasing trend averaging 66% for the period 1984-89; the projected improve-ment of the operating and working ratios reflect the significant change ofthe operating cost structure due to the Fortuna hydropower generation. Thecurrent ratio of 61% in 1983 decreases to 55% in 1985, but increases againafterward, attaining a comfortable 90% in 1989.

5.13 The following package of financial covenants, which were agreedupon by IRHE under the Fortuna and the Fifth and Sixth Power Project loans,have been repeated in the proposed loan: (a) adequacy of accounting practicesand annual revaluation of fixed assets; (b) auditing by independent auditorsacceptable to the Bank; (c) liens limitations; (d) short term debt limita-tion; (e) long term debt and debt service coverage limitations; (f) price ofbulk sales; (g) accounts receivable targets; and (h) annual rate of return.

91 Actual financial data for 1984 were not yet available at the time ofprinting this report (Februarv 1985), therefore financial projectionswere not updated to reflect the results for 1984 and the new energysales forecast: overall results, however, are not expected to varysignificantly, nor to have unfavorable effects on the project.

- 29 -

6. ECONOMIC ANALYSIS

Least-Cost Solution

6.01 A least cost analysis prepared by IRHE for various alternativeschemes to meet the projected electric energy demand growth in Panama in theperiod 1988-1991 (para. 4.08 and Annex 4.5) single out the Fortuna II Projectas the best alternative available at this time. The execution of the pro-ject, in addition to providing the required energy to meet energy growth atleast cost, would bring other benefits which have not been evaluated ineconomic terms: (1) increase of the firm energy (dry year condition) forIRHE's entire generating system (para. 4.06), and (ii) securing the physicalsafety of the existing Fortuna Dam for maximum flood conditions (para. 4.07).

Return on Investment

6.02 Since the proposed project is an integral part of TRH 's least costexpansion program, the internal financial rate of return for the overallinvestment program was calculated for a slice of time covering the period1984-1992. An economic evaluation of the project by itself was not done asit is difficult to allocate among the power system components the incrementalcosts and benefits associated with the project. The rate of return was com-puted as the discount rate equalizing the present value of tne stream ofcosts and benefits associated with the expansion program. The cost stream,expressed in 1984 constant prices, comprises the capital investment of thedevelopment program and the incremental operations and maintenance costsrelated to the incremental energy sales. Fuel savings due to thermal genera-tion substitution realized with the operation of the Fortuna I Project werenot considered, as the investment for this project was done before the periodof analysis. As a proxy for benefits, the revenues derived from incrementalsales were used, assuming the same tariffs used for financial projections,which, when expressed in constant currency, imply tariff reductions, i.e.from USUI2.4/kWh in 1984 to USU10.1/kWh in 1989. Average long run marginalcosts for the present expansion program for the period 1983-1992 are estimat-ed by IRHE to be USU12.1/kWh for peak loads and USi6.1/kWh for off-peak loads(expressed in 1984 constant prices). No attempt was made to reflect furthereconomic benefits to society and the economy of the country, such as consumersurplus, maintaining or improving quality of service to consumers, availabil-ity of energy for new industries, Increasing the firm energy of IRHE's entirehydroelectric system (para. 4.06), and increasing the security of the firststage of the dam for the Fortuna Project (para. 4.07). The true economicrate of return would be higher if these benefits were taken into account.

6.03 Using only tariff revenue as benefit proxy, the internal rate ofreturn is 19% (Annex 6.1), which compares favorably with the opportunity costof capital in Panama, estimated to be 12%. A sensitivity analysis was madeto estimate the impact of major uncertainties affecting the economic compari-son for the following cases:

(a) Should the capital investment and operation and maintenance costsbe 20% higher than estimated, the rate of return would be reducedto 15%.

- 30 -

(b) Should benefits be decreased by 2OZ because of lower energy salesor lower tariffs, the rate or return would be decreased to 14%.

(c) Should capital and operation and maintenance costs be 20% higherand benefits be 20% lower, the rate of return would be decreased to12%.

- 31 -

7. AGREENENTS REACHED AND RECOMMENDATION

During Negotiations

7.01 Agreements were reached that:

(a) IRHE would study the current value (replacement cost) of its fixedassets in operation as a complement of the annual asset revaluationcarried out by the company. Once the first comprehensive study hasbeen completed, views would be exchanged with the Bank on theadvisability of revising its assets valuation, its asset revalua-tion methodology and tariffs to meet its rate of return require-ments (para. 2.09);

(b) the remaining two thirds of the public lighting energy consumptionbilled to municipalities, be included in the tariffs for the restof the consumers (para. 2.12);

7.02 The following main provisions of Loan Agreement 2313-PAN would berepeated:

Ca) execution of the project;

(b) management and operation of the Borrower and revisedexpansion program (paras. 4.03 and 4.04);

(e) financial covenants (paras. 1.17 and 5.13);

'd) changes in legislation affecting IRHE (para. 1.12).

7.03 Section 3.02(c) of the Guarantee Agreement limiting to no more than60 days the outstanding electricity bills from the Government agencies andpublic institutions would be repeated (para. 2.12).

Recommendation

7.04 As above assurances were agreed upon during negotiations, theproposed project is suitable for a Bank loan of US$51.0 million equivalent,to be made to IRHE wlth the guarantee of the Government of Panama. The loanwould have a repayment period of 15 years, including 3 years of grace.

February 19, 1985

- 32 -

ANNEX 1.1PANAMA

INSTITUTO DE RECURSOS RIDRAULICOS Y ELECTRIFICACION (IRHE)

SEVENTH POWER PROJECT

Bank Participation in the Power Sector

Loan and Year Purpose Amount (US$ million)

322-PAN, 1962 Loan to IRHE for the(First Power Project) financing of a Rural

Electrification Program 4.0

661-PAN, 1970 Loan to IRHE to finance(Second Power Project) the Bayano hydroelectric

project (150 MW), expansionof Las Minas steam plant(40 MW), related transmis-sion, small diesel plantsfor rural areas and distri-bution systems 42.0

948-PAN, 1973 Loan to IRHE to finance the(Third Power Project) San Francisco diesel plant

(25 MW), new transmissionlines and substations, aload dispatch center, expan-sion of the distributionsystems, training and insti-tutional improvement 30.0

1470-PAN, 1977 First Tranche: Loan to IRHE to(Fourth Power Project) finance the Fortuna hydro-

electric project (300 MW) andrelated transmission lines andsubstations, training andinstitutional improvements 42.0

Second Tranche: Additional loanto IRHE to finance part of theadditional costs related to theFortuna hydroelectric project 31.3

1778-PAN, 1980 Loan to IRHE to rehabilitate and(Fifth Power Project) expand the distribution systems

across the country 23.0

2313-PAN, 1983 Loan to IRHE to complete the(Sixth Power Project) rehabilitation and expansion of

the distribution systems in thecountry, initiated under theSixth Power Project 32.1

Total 204.4

June 18, 1984

- 33 -

ANNEX 1.2PANAXA

INSTITUTO DE RECURSOS HIDRAULICOS Y ELECTRIFICACION (IRHE)

sEvEnTH POWEt PROJECT

Electricity Rates as of January 1. 1985(in Balboa.)

1. Residentiel Customers (Tariff 11-F)

First 10 kWh B 1.80 minimum chargeNext 40 kWh 414.5 per kWhNext X kUh 4 11.0 per kWhNext 300 kWh 4 10.6 per kWhNext 600 kWh ¢ 11 9 per kWhExcess over 1000 kWh 4 15.5 per kWh

2. Agro-industrial Customers with Contract Demaondunder 3C kV and monthly consumption lover then10.000 (Tariff 16)

First 50 kWh B 7.00 minImau chargeNext 950 kWh i 11.5 per WWhNexc 9,000 kWh i 11.0 per kWh

3. General Use Customere with 5 kW Load or less (Tariff 21)

First 10 kWh B 1.80 minima chargeNext 90 kWh 4 14.6 per kWhNext 125 kWh 4 12.1 per kWhExcess over 225 kWh 4 11.3 per kWh

A. General Ume Customers with 6 to 29 kW Contract Demand (Tariff 26)

Flrut 15 hours of billing demand a* 4 24.0 per kWhNext 30 hours of billing demand 4 14.5 per kWhNext 55 hours of billing demand 4 10.4 per kWhExcess over 100 hours of billing demand 4 10.2 per kWh

Minimum charge: B 3.60 per kW demand but no less than B 21.60 per month.

5. Industrial (30 to 299 kW) and Commercial (over 30 kW) Customers withContract demand (Tariff 31)

Demand charge B 5.20 per kW of demand biFirst 25 hours of billing demand 4 11.4 per kWhNlext 375 hours of billing demand ¢ 8 6 per kIhExcess over 400 hours of billing demand 4 7.9 per kWh

Minimum charge: demand charge. but not less than B 156.00 per month.

6. Industrial Customers with More then 300 kW Contract Deand (Tariff 36)

Demand charge B 4.90 per kV of demand b/Energy charge 4 6.9 per kWh

7. Street Lighting (Tariff 65) c/

Mercury lamps 400 W B 10.01 per month125 W 4.43 per month

Fluorescent and 115 W 4.30 per monthincandescent lamps 25 W 1.80 per month

High-pressure sodium 1,000 W 23.97 per monthlamps 100 w 5.09 per month

Charge per pole installed especially for publtc lighting: B 3.45 permonth.

Note: All seven categories above are subject to a fuel eurcharge clause,to allow for recovery of fuel price increases, equal to di.06per kWh in the month of Decenber 1984.

n/ Billing demand is defIned as the maximum demand over the last 4-manthperiod including the month of billing, or as the contracted demand.

b/ Naximum demand Is the maximum demand registered over the last 4 months,including the month of billing, or the contract demand for demands notmeasured.

c/ This tariff is applied to street lighting on private properties. FrosJanuary 1985, public street lighting in included in the general tariffto all consu-ers, end not any longer to the Municipalities.

February 11, 1985

- 34 -

AMNNX 1.3

PANAKA

INSTITUTO DE RECURSOS HIDRAULICOS Y El.CTRIFICACION (IRIIL)

SEVENTH POWER PROJECT

Distribution of Electricity Consumption(Month of December 1984)

Number of Consumers Consumption Revenue Average PriceType of Consumer Number 2 KWh S z(000) S t/kWh a/

Residential0-50 kWh 61,075 22.7 1.122 0.7 182.4 0.9 16.2651-200 117,179 43.7 13,375 8.6 1,726.7 8.9 12.9120L-400 35,982 13.4 9.785 6.3 1,201.6 6.2 12.28401-1,000 16,334 6.1 9,560 6.2 1,213.2 6.3 12.69

Excess 6156 2 3 11041 7.2 1,614.7 8.4 14.62Sub-Total 236,726 88.2 44,883 29.0 5,938.6 30.7 13.23

CoaercialT-21 20,1I5 7.5 9,959 6.4 1,316.6 6.8 13.22T-26 4,049 1.5 11,892 7.7 1,547.1 8.1 13.01T-31 1,460 0.5 26,491 17.1 3,210.7 16.6 12.12Sub-Total 25,624 9.5 48,342 31.2 6,074.4 31.5 12.56

IndustrialT-16 116 0.1 155 0.1 2.4 - 12.71T-21 349 0.1 135 0.1 18.5 0.1 13.69T-26 132 0.1 388 0.2 53.5 0.3 13.79T-31 325 0.1 8,215 5.3 1,056.4 5.5 12.86T-36 44 10 482 6.8 1 134.2 5.9 10.82Sub-Total 966 5 L9 375 1-23.S 11.8 115*J67

GovernmentT-21 4,316 1.6 7,017 4 5 930.4 4.8 13.26T-26 478 0.2 7,812 5.0 1,014.8 5.3 12.99T-31 190 0.1 13 579 8.8 1 706.9 8.8 12.57Sub-Total -- 4 ,9 B 4 28. 408 1T.3

Public Lihting - - 3,150 2.0 239.4 1.2 7.60

Block Sales 4 - 10,900 7.0 1,131.4 5.9 10.38

TOTAL 268,304 100.0 155,058 100.0 19,300.9 100.0 12.44

a/ Includes the fuel surcharge equal to d1.06 per kWh in the month of December (Averagefor the entire 1984 vas 41.67 per kWh).

February 11, 1985

- 35 -

ANNEX 1 4

PANAMA

INSTITUTO DE RZCURSOS HIDRAULJCOS Y ELECTRIFICACIDN (15R5)

SEVENTH POWER PROJECT

Existing and Future Poer Projects(Am of January 1984)

TotalInmtalled Effective Average AnnualCapacity Capacity Generation

Names of Project Type Year NW Kw a* CUh Comments

1. Existing Project.

a. IRH!Las Ninas Steam b/ 1969/74 3 x 40.0 134.0 942 Good condition

Stem b'/ 1964 1 x 22.0

San Francisco Steam 1955 1 x 11.0 47.0 246 33 KW to beDiesel 1964 1 x 12.0 retired by 1989Diesel h/ 1976 4 x 7.0

Diesel Provinces Diesel 1961/75 23 units (43.0) 35.0 200 Good condition

Cas Turbines Panama Gas Turb. 1982 2 x 18 36.0 95 Good condition

Teguada Hydro 1967 2 x 3.5 7.0 35 Good condition

Bayeno Hydra 1976 2 x 75 150.0 606 Good condition

Estrella Hydro 1978 2 x 21.5 90.0 509 Good conditionLos Vslles Hydro 1979 2 x 23.5

Mini-hydros Hydra 1980/82 2 plnts (0.6) 0.6 2 Isolated systems

Fortuna I Hydro 1984 3 x 100 300.0 1,242

Chiriqui 3ydros hydro 5 unite (4.6) 4.0 21 Good condition

Sub-total IRE 824.2 803.6 3,898

b. Comision del Cansl b/Kiroflores Steam 2 units (55.5) 55.5

Diesel 3 units (40.0) 40.0

Mount Hope Diesel 1 x 20 20.0

Medden Hydro 3 x 24 25.0

Cetun Hydro 6 units (22.5) 21.5

Sub-total ComisionCannl 210.0 162.0 _

Self-ProducersCbiriqui Land, Sugar Diesel end Several unitsMille, various osners Steam 60.5 30.0 78

c. Total Existing 794.7 695.6 3,4

2. Future Projects (1985-1990)

Fortune II Hydro 1989 - - 2.o Seventh PoserProject

Nayeno 3 Hydro 1990 1 x 75 75.0 28

Sub-total FutureProjects (1985-1990) 375.0 375.0 1,526

*/ Plant capacity considered for load-ispetcb purposesb/ Operated on Bunker C fuel.

February 8, 1985

- 36 -

emi 1.5

ZISTITUTO OK MI33AM.ZCS K 315CT311ZC*tIWK CZ=)

KatlSted Uydre.lectrie Potwenal

Spe ad Studles me" CteCity Avere Ceneretle Proe]ct costlIver sa Prject StriJes bye YO_7r USMAN1 (19)

I_ vmottE C Prfssblty (Pr)

or _swbIIJ! (7) 5ta

Cheedel CberoiS~ t r t33l1i 19611 390 1.|140 2 1591aCnguislefl FF rr hc±n 19" 306 1.760 2,U7Cbmaganela III PF ImzInai 197 102 645 2.976C5Uu.1eSs IV Pr tmILs 1979 146 R21 2.106Ckmj1neaS V PTr rI.Ni 1979 i8 126 2.,20

TUrtle Tsrl b6 rr tZINn. 197 237 1. 51 2.304Tanlb 1X Pr r3KZIIei 1979 70 437 2.421Tlibe Xrr PF rIIIN±l 1979 1Z6 no 2.060Talbre rV Pr ZUWU.1E 1979 39 3M 3.239Tonlb V Pr SiXJEi. t979 79 454 2.432

SosIC F S WSbo_inmn±n 1960 24 13 3.70JTabseere Tab_aro F t uAtr.o 1W62 220 1. 67 3.372Chiriqol Lett Pr Iin/SVeco 19S4 75 336 2.3aa

Soue-ttal 1.60 10.631

2- troject at tevenor Le (e )with Locel Studles for Each Riwr

Cs4riviacs 13 projects t 913 133 59 ..Criamolm . projects I DM 1963 136 773 nclov 6 peroject. I t 19S3 as 499 n.-

ojeco S project. 1 mm; 1903 145 24 *.e.'=Tew 5 projects I I1963 113 642 n.Chiriqul Viejo S projects I DM 193 230 1.90 n9-

S1o" 3 prject. I Im 1963 31 176 .-.Codr del Norte project I tUI 1963 i4 191 U.S.Fomeeca 3 projnct I lw 1963 153 S71 n.e.San Feltx I project t t23 1963 22 130 S.M.cowr 6 projects I It 19 3 204 1.162 * a.Cdvleora 2 projct. I I= 1593 3 27 U.S.Oees 17 projectc L I 1993 6 36 .eS.

s Vtilla 4 projt.s I D 1933 a 45 a.e.Seats SeS 17 project., I Tll 1963 347 1.973 U.S.Ge4e g a proje-ts I Z 19S3 92 24 U.S.Noedi 4 projet. I mm 1963 24 136 a.m.

S'eur-total 1.62 10,354

3. Project. at 7uester, Level Basedan Gross Linea Potential

La Cloria, I t DM 19S3 .ll 2.0 4 n-Celeto Q.&. t tK 1963 14 75 a.eKaearre a.&. t TUs 19S3 10 232 n.-Cos a.a. I t U1 19S3 196 1.114 n-Ceo SCcLe n.-. I 1963 1S 100 Loaladle nS. I Tout 1983 25 146 a.m.Leerto .a. I T 193 S 28 a.m.Cstnnclllo Se.. I - mt 1963 62 354 a-.eCred. a.m. I DM 19U3 52 297 *.a.Piedras .&.- t t3DM 19Q3 45 252 n.e.aSend * S. t t1 1963 3 20 * s..*P U.e. I t219 1983 454 2.67 n ..TOes n.&. I low 19U3 D9 341 a.m.Olivita n.. I t9E 1983 24 136 n.e.Frite n.*. I tOM 1953 10 SS a..-

Anton .ae. I DME 1913 146 9 n.a.Chase n.a. I t 3OCK 19U3 45 257 n.e.CmIndto n.e. I t RHZ 1963 10 57 n.S.Cebre n.a. - t 1983 30 173 n.e.

S- >-totel 1,501 8.697

4 Pro.Ject at Inntorr Lev de Cram Surf e ff Po tte

See Pedro U.a. I t235 1983 196 1.116 n-.Coee n.S. I t Dt8 1953 71 403 n.e.Plyom Cre" .&. I - 1953 73 422 n.e.Paco . t It. 1973 24 :35 n.e.CMIES .. I -1 1953 60 456 n.e.Acted. U.S. I INN3 193 *9 281 n.*.Chbecsq.e U-S. I 2E 19S3 246 1.401 n.e.Tares n. . I DMK 1963 171 1.079 n.e.DelOs n... I t 19H3 278 1 586 n-..

aes U.S. I rimt 183 11 65 *.eSombe U... I I3 1983 130 73.8 n.eJeque n.m. I I-R1 1939 51 290 n-.

Sub-total 1N0 7 972

5. TOTAL 6.562 37.85e

Tebrery 7. 1965

(4~n 3W W'I t4WN$~WOjiw~ *

AS*~~~p'~I r 46w

Iw.A00MOOVADV-: -

E r Ir { r 4Ur-E r :Yr E r

e . S rX S E0 <W Etl **AX' w w3 m [e q~~~~~uc"A&

DDW

r ~~3ri

3|4ll1FK:I')P I11 I rI I 1 I;16 ' 11 I 1~

PANAMA

INSTITUTO DE RXCURSOS IlIDRAULICOS Y ELECTRIFICACION (IRHE)

SEVENTH POWER PROJECT

Main Performance Indicators

- Actual ---------- ------------------ Forecast -----------------

1977 1978 1982 1983 1984 1985 1986 1987 1988 1989

1. Market IndicatorsNumber of Customers (1,000) 194 210 254 261 269 278 288 297 307 317Total Sales (GWh) d/ 1,240 1,251 1,673 1,853 1,815 1,942 2,078 2,328 2,487 2,637Average EffectLve Capacity (W) n.a. a.a. 531 509 804 804 804 748 748 748Maximum Demand ((W) n.a. n.a. 336 370 384 401 420 470 502 532

2. Efficiency IndicatorsTotal Number of Employees a/ 3,737 4,081 5,415 5,360 5,610 5,636 5,745 5,860 5,977 6,096Customers/Total Employees 52 51 47 49 48 49 50 51 51 52tWh Sold/Total Employees 332 307 309 346 324 345 362 397 416 433XWh Sold/Customer 6.4 6.0 6.6 7.1 6.7 7.0 7.2 7.8 8.1 8.3Losses % b/ 12.1 11.9 17.0 15.3 17.7 16.0 14.3 14 1 14.1 14.1

3. Financial IndicatorsDebt/Equity Ratio 47/53 48/52 44/56 50/50 44/56 38/ 62 33/67 28/73 23/77 20/80Debt Servlce Coverage Ratio 1.10 1.19 1.3 1.0 1.5 1.5 1,5 1.8 2.0 2.0(as per 2313-PAN)

Accounts Receivable (days) 89 89 83 85 80 70 60 60 60 60Self-financing Ratio (%) 5 8 26 25 53 67 72 83 81 64Rate of Return (X) 6.9 7.9 7.38 5.21 9.68 8.1 8.L 8.75 8.95 8.75Average USf/kUh c/ 6.94 7.48 11.5 12.4 12.8 11.1 12.8 13.8 13.9 14.6

a/ Includes permanent and temporary employees, but not the hydrology observers, employed as of K)December 31 of each year.

b/ Losses as compared to gross energy generation.c/ Includes fuel adjustment clause.d/ Includes tthe isolated systems.

February 14, 1985

- 39 -

ANNEX 3.1

PANAMA

INSTITUTO DE RECURSOS HIDRAULICOS Y ELECTRIFICACION (IH3)

SEVENTI POWER PROJECT

Actual and Forecast Sales and Gross Generation - CGh f/

1982 a/ 1983 a/ 1984 aI 1985 1986 1987 1988 1989 1990

Sales to Customers

Residential 499.0 5Z7.9 522.2 539.5 566.6 594.9 624.6 655.8 688.0Comercial 532.0 567.9 572.7 600.8 639.7 681.0 724.8 771.5 820.8Industrial 218.8 218.0 227.4 244.6 265.0 287.2 311 1 337.0 365.0covermnent b/ 311.3 337.2 327.5 315.8 408.1 443.0 480.8 521.9 566.1Street Lightlng 34.7 36.8 37.1 40.1 43.0 46.1 49.4 52.8 56.6

Sub-total 1,595.0 1,688.6 L.,686.9 1,800.8 1,922.4 2,052.2 2,190.7 2,339.0 2,496.5

Block Sales

ICE (Costa Rica) 3.1 3.1 1.9 3.1 3.1 3.1 3.1 3.1 3.1Chiriqui Land Company 16.1 16.5 17.0 21.6 34.9 47.2 65.4 65.4 65.4Inpregilo c/ 25.9 26.1 8.7 - - - - - -Petroterninales dt 18.6 103.5 86.6 91.3 91.3 195.0 195.0 195.0 195.0Canal Commission 3.8 0.1 1.5 12.0 12.0 12.0 12.0 12.0 12.0

Sub-total 67.5 149.3 115.7 128.0 141.3 257.3 275.5 275.5 275.5

T*HE's Use e/ 10.3 13.8 12.4 13.5 14.2 18.8 20.3 22.6 24.8

Total Salem 1,672.8 1 852.7 1,815.0 1,942.3 2,077.9 2,328.3 2,486.5 2,637.1 2.796.8

Plant Use 57.5 45.2 48 8 26.0 31.5 27.5 34.3 41.5 41 0

System Losses 355.7 342.5 400.2 374.9 352.0 386.7 413.8 439.7 465.8

Required Gross Generation 2,088.0 2,238.3 2,264.0 2,343.2 2,461.4 2,742.5 2,934.6 3,118 3 3,303.6

In Percentage of GrossGenerstion (Z) 17.0 15.3 17.7 16.0 14.3 14.1 14.1 14.1 14.1

Actual data.Includes municipalLties and public companies and services such as Port Authority, laternational AirportWater Treatment Plants, etc.Sales to the contractor Inpregilo for use in the construction activitLes of the Fortune projectIncludes sales to Petrotermiaales for the Caldera oil pumping station, in operation since 1983, andfor the Charco Azul station planned for operation in 1987.For accounting purposes. IRIIE's energy use is shown as sales. Does not include plant use.Includes Isolated systems.

bruary 8, 1985

- 40 -

A1IX 3.2

PANAMA,

INSflTUTO DC RECURSOS HIDLRAILXCOS Y ZLECTRIFICACION (IRI)

SEVENTh POWER PRWJCT

Energy Balance for IREfs. System - Glih Jh

A. Energy Balance 1982 a/ 1983 a/ 198* A/ 1985 1986 1987 1988 1989 1990 1991 1992 1

1. Required Cross Ceneration 2.080 2,230 2,266 Z,335 2,453 2,735 2.927 3.109 3,294 3.490 3,698 3.

2. Available Generation

Z.1 Therual

Bhaia Las Minas el 901 863 943 934 924 915 906 897 8e8 879 870 lISan Francisco 73 146 246 246 246 178 bt 178 146 b/ 146 146 146

Avenida Sur 0 0 28 - b/ _ - - - - - -

Diesel Central Provinces a 73 71 71 71 71 71 71 71 71 71 71Diesel West Panama 6 20 34 34 34 34 314 34 34 34 34Diesel Chiriq.u 16 67 95 95 95 95 95 95 95 95 95

Gas Turblnea 2 195 1! 95 95 95 95 95 95 95 95 95Other Future Thermal Il _ __ __ ,fll

Sub-Total Thermal 1006 1.364 1.51 1,475 1,465 1.388 1,379 1.338 1,329 1,320 1.311 2.-

2.2 Hydro (Average Hydrology) f/

Yeguada 33 24 35 35 35 35 35 35 35 35 3SChiriqut Bydro 13 16 21 21 21 21 21 Zl 21 21 21 21Bayano 593 -22 606 606 605 606 606 606 606 d/ 606 606Estrella Los Valles 435 404 509 509 509 509 509 509 509 509 509 _

Fortun, I and II - - 690 1.242 1.242 1.242 1,212 1,489 e/ 1.489 1.489 1.489 1 _

Other Future Hvdro hi _ _ - - - - - - 209 h/ 617 617 _

Sub-Total Hydrology (Average) - - 1,861 .413 _ ,413 2.413 2,413 2.660 2,869 3,277 3.277 3,..

Sub-Total Hydrology (Firm) S/ 1,074 866 1,741 1,741 1,741 1.741 1.741 2,306 2.515 2.776 2.776 2.---

2.3 Total Available Generation

Awerage - - 3.373 3,8S8 3.S78 3.801 3,792 3,998 4*,98 4,597 4.588 S__-

Frm 2.080 2.230 3.253 3.216 3.206 3.129 3.120 3,644 3,844 4,096 4.087 5._--

3. Firm ReserveReserve tn C'h - - - 881 753 394 193 535 550 606 389 1.,11

Rtserve In: of Gross Generation - - - 38 31 14 7 17 17 17 11 lt

B. Generation DIspatch k/

Thermal Generatton 1,006 1,364 712 72 !°5 322 514 449 425 213 421 641Hydro-Generatton L.074 866 1,552 2,63 ,258 2413 2413 2,66 2,869 3,277 3,277 3277

Total Dispacch 2,080 2,230 2,262 2,335 23.1C 927 3,490 3,698 3,,..

al Actual datab/ Retirement of old equipmentc/ Output decreases yearl due to aging of quipaent (Z2 per year)d/ Installation of a naw S5W unit at Baysan for peaking purposes only- So additional generation is involved.e/ Raise of the Fortzum danEl Hydro energy for average hydrological year (abour S out of 10 years)ji Hydro energy determined for the combined operatior. of all hvdro plants in a dry year (about I out of 10 years)h/ Possibly the Esti-3arrigon hydrcelectrIc project (feasibility stueies completed)11 Colon coal fired steam 1lant rated 150 'f..

Does noc include isolated systemsk/ Calculated by iaH£ ustng a mathematical load daspatch aidel, on a =ontb by neev h basas; the codel takes Into consideration the probbillties

of occurrence of dry, average and wet hydrclogical conditions.1/ In 1983 the 3as turbine. were sed as base load plants to compenaate for the lou hydro-generation. From 1984 onwards they will operate as

emergency or peaktig units.

February 7, 198 5

ANNEX 3. 3

PANAN

1NST71hM DE RECUIRSOS EIDRAIULICOS Y ELECSTIFICACION (INNE)

smrTR POWER PROJECT

Capacity Balance for IE 's System - NW a/

1982 f/ 1983 fi 1984 ft 1985 1986 1987 1988 1989 1990 1991 1992 1993

twa et leqBLremants

Rsquired Gross GeneratLoan (wb) 2.080 2.230 2.264 2.335 2,453 2.735 2,927 3.109 3.294 3.490 3,698 3,918Required Net Generation (Cuh) c/ 2,022 2.185 2.214 2.309 2,421 2,707 2,893 3.067 3,253 3,440 3.648 3,866Load Factor a 68.7 67.4 65.8 65.8 65.8 65.8 65.8 65.8 65.8 66 66 66Naximum Demand (HW) (Net) 336 370 384 401 420 470 502 532 564 595 631 669

iLvailable Capacity

-hermalBabia Las Mimea 135 135 135 135 135 135 135 135 135 135 135 135Sa Francisco 47 47 47 47 47 3 6 b/ 36 2 . bJ 24 24 24 24Avenida Sur 5 5 5 - - - - - - - - -DiLeel Central Province 12 12 12 12 12 12 12 L1 12 12 12 12Diesel Wet Pean-a 6 6 6 6 6 6 6 6 6 6 6 6Diesel Chiriqut 17 17 17 17 17 17 17 17 17 17 17 17Cas turbines - 36 36 36 36 36 36 36 36 36 36 36Other Future Thermal d/ - - - - - - - - - - - 1 50Sub-total Thermal 222 258 258 253 253 242 242 230 230 230 230 380

- ydroYeguada 7 7 7 7 7 7 7 7 7 7 7 7Chiriqu ilydro 4 4 4 4 4 4 4 4 4 4 4 4Bajano 150 150 150 150 L50 150 150 150 225 225 225 225Estrella-Lo Valle9 90 90 90 90 90 90 90 90 90 90 90Fortua I and It - - 255 Z3, 255 255 255 300 300 300 300 300Other Future Hydro e/ - - - - - - - 80 120 120 120Sub-rotal Hydro (avergse) 251 25L 506 506 506 506 506 551 706 746 746 746

Sub-total Hydro (firs) Al 177 177 254 254 254 254 254 498 590 645 645 632

- otal Available CapacltyAverage 473 509 764 759 759 748 748 781 936 976 976 1.126Firm 399 435 512 507 507 496 496 728 820 875 875 1,012

as Demand 336 370 384 401 420 470 502 532 564 595 631 669

- ir- ReserveReserve in NW 63 65 128 106 87 26 (6)hi 19 6 2 56 280 244 343Reserve In Z of taxium Demand 19 17 33 26 21 6 (1) 37 45 47 39 51

-fes not Lnclud solated systems.-etirement of A d equipment.;os generation Less plant use.

eosuibly a coal fired plant.osesibly the Esti-Darrigon hydroelectric project.

'6ctdal data.-etermined for the combined operation of all hydro-plants connected to IRHE's system In a dry year (one out of every ten years).if 1988 would be a dry ear. IRIIE would not be able to meet the maximum demand with power generated from Its own system; however, thebaleance could be covered by importiog power from neighboring systems (Costa Rica and the Canal Zone).

nary 11, 1985

PANAMIRHE40EVENI POWER PROJECT

RFm Eerw Frncast

ENJRY-GWH

4A3000_ _

000

26000 t___ _- . . I

0 - -Ii

1963 1964 1965 1966 1967 1968 1969 1990 199 192 1993WEm

Waru 8,*-2M18

February 89 1985

PANAMAIRHE-SEWNiN POWER PROJECT

Demand Forcait

9m~~~~~~~~~~~~~~~~~~~*

800 ,___ __.

700

5m~~~~~~~i

_ __0_ _ _ _ _ _ __M_ _ _

400- -

200

1983 1984 1906 1906 1i97 198 1909 1990 1991 1992 1993

VWAVid r*-2W313

February 8, 1985

_ 44 -

ANNU 4.1

FANANAL

INSTlIVTO DZ IUICSS HIDR4ULICOS Y EIZCTRIFICACZOa (IBM)

saUN POWER ROJEC

Irnnstwt Progrm for Period 19361989(US$ Nillion - Current Prce"s)

1983 ./ - 19 o- - 1985 - -- 1986 - -- 1987 - -- 198S - -- 1989 - -- 1984-1989 Period--LC FC LC FC LC Fc LC rc LC rc LC rc LC PC Total

1. Ongoing Works

IV Power Project (Fortune I) 628.4 b/ 18.9 26.5 10.2 - - - - - - - - - 29.1 26.5 55.6V Power Project (Discrib.) 51.0 0.4 0.4 - - - - - - - - - - 0.4 0.4 0.8VI Power ProJect (Distrib.) 1.7 *.8 3.9 16.4 19.6 2.2 5.9 - - - - - - 23.4 29.4 52.oRural Electrification 3.8 1.6 1.9 10.7 5.1 4.3 4.2 - - - - - - 16.4 1l.2 Z7 6Other Varks:

Tranc. &ad Subotationo - 0.6 1.' - - - - - - - - 0.6 1.1 1.7Distributon - 1.8 0.5 - - - - - - _ - - _ 1.8 0.5 2.3CGneral Plant - 3.5 - - - - - - - - - - - 3.5 - 3.5other (Includes studies) - 1.7 1.3 - - - - - - - - - - 1.7 1.3 3.0InterconnectLou with

Costa Rice 3.8 0.9 1.5 0.8 1.0 - _ - - 1.7 2.5 6.2

Total Ongoing Works - 34.0 37.1 38.1 25.7 6.5 10.1 - - - - - - 78.6 72.9 151.5

2. ruture Works

Other Works:Proposed Vll Power Project:

Raising of the D_ (Fortun 11) Si - - - - - 4.1 7.5 3.3 7.3 6.4 12.2 11.4 20.4 25.7 67.4 73.1Studies Nadinu Site Ilydra

Projects - - - - - 0.4 0.4 1.6 2.4 0.4 0.8 - - 2.4 3.6 6.0Subtotal Proposed VI1 Project - -5 79 5 -97 Ti -13.0 114 z.4 ZO.1 3fl1 79.1

Byano Ecxpanion (Third Unit) - - 0.2 0.7 2.8 8.8 3.0 9.5 12.5ZEtt-Serrigon Hydro Proj-:t:

Engineering Studiesand Acces Roads - - - 0.5 0.6 -- - - - - - 0.5 0.6 1.1

Power Plant Construction - - - - - 5.8 8.9 9.6 18.7 15.0 28.3 29.6 51.0 60.2 106.9 167.1Transmission to Panama (230 IC) - - - - - 0.5 4.8 1.0 10.2 2.3 23.8 2.8 28.7 6.6 67 5 74.1

Substation - - - - - - - 0.4 0.2 0.3 1.7 0.8 7.9 1.5 9.8 11.3Coal Fired Power Plant - - - - - - - 0.6 1.1 0.5 0.9 9.5 2Z.6 10.6 24.6 35.2Calderas-Docas 115 XV Line - 0.4 - 1.3 1.6 Z.2 2.6 2.4 3.2 1.3 2.1 - - 7.6 9.5 17.1Changnunola Hydro 3.3 - - - - - - 6.2 9.1 ' 2 14.9 4.1 10.6 14.5 34.6 49.1

Trans. aind Substation - - - - - 0.1 0.4 0.5 1.4 0.7 1.3 0.9 1.9 2.2 5.0 7.2Distribution - - - 1.1 0.7 7.2 4.9 8.1 5.4 8.9 6.0 9.8 6.6 35.1 23.6 58.7General Plant - - - 4.9 - 4.6 - 4.5 - 4.8 - 4.6 - Z3 4 - 23.4Other (Include studies) - _ - 6.3 0.8 7.7 0.9 6.1 1.1 6.6 1.2 5.5 1.6 32.2 5.4 37.6

Total Future Works - 0.4 - 14.1 3.7 32.6 30.4 42.8 60.1 53.6 93.9 82.0 159.9 225.5 368.0 573.5

3. Total InvestmntCurrent Prices - 34.4 37.1 2.2 29.4 39.1 40.5 62.8 60.1 53.6 93.9 82.0 159.9 304.1 420.9 725.0

4. fnvesteent in 1984Constant rrices - 32.7 36.4 49.0 27.3 34.8 35.4 35.6 48.1 41.8 68.8 59.6 107.9 254.5 323.9 578.6

*7 Actual figures (local and foreign cost).bi A.cctulted invesmcnt to 1983.'e 1989 figure Include disbursements to he ado tn 1990.

Februsry 8. 1985

- 45 -

ANNEX 4.2

PANAMA

INSTITUTO DE RECURSOS HIDRAULICOS Y ELECTRIFICACION (IRHE)

SEVENTH POWER PROJECT

Project Cost Estimate

--- Cost in USS x 1,000Local Foreign Total

Part A: Raising of the FortunaDam (Fortuna II)

Diversion Works:E=cavation 263 726 989Concrete 403 610 1,013Reinforcing steel 118 2 50 368Gates 685 1,700 2,385Other works 21 31 52Sub-total 1,490 3,317 4,807

Dam Construction:Excavation 4,230 10,506 14,736Rock-fEll 3,060 6,439 9.409Reinforcing steel 515 1,555 2,070Concrete 1.860 2,379 4,239Other works 844 923 1 767Sub-total 10,T509 21,802 32,311

Spillway Construction:Excavation 1,040 3,734 4,774Concrete 1,436 1,848 3,284Reinforcing steel 122 368 490Other works 291 779 1,070Sub-total 2,889 6,729 9,618

Auxiliary Works:Access roads 370 781 1,151Related services 212 82 294Sub-total 582 863 1,445

Engineering and Administration 4,010 500 4.5L0Total Base Cost (January 1984) 19,480 33,211 52,691Physical Contingencies (15X) 2,922 4,982 7,904Price Contingency (to December 1988) a/ 3?300 9,223 12,523Total Cost Part A 25,702 47,416 73,118

Part 3: Studies for Medium SiaeHydroelectric projects

Phase I: Field Investigation(10 projects) 270 180 450

Phase II: Pre-feasibility Studies(3 projects) 700 1,210 1,910

Phase III: Feasibility Studies(2 projects) 941 1,486 2,427

Total Base Cost (January 1984) 1,911 2,876 4,787Physical Contingency (15%) 287 431 718Price Contingency (to November 1987) a/ 200 277 477Total Cost Part B 2,398 3,584 5,982

Total Project Cost 28,100 51,000 79,100

a/ Assumed indices for price escalation in percent:

1984 1985 1986 1987 1988 1989Local Cost 1.1 1.5 4.0 4.0 5.0 5.0Foreign Cost -2.8 5.0 7.5 8.0 8.0 8.0

February 8, 1985

- 46 -

ANNEX 4.3

PANAMA

INSTITUTO DE RECURSOS HIDRAULICOS Y ELECTRIFICACION (IRHE)

SEVENTH POWER PROJECT

Proposed Execution Schedule

Start Completion

Part A: Raising of the Fortuna Dam(Fortuna II): One Contractor

Engineering Design 1/82 2/85Bid Invitation 7/84 7/85Bid Evaluation 7/85 8/85Contract Award 9/85 1/86Mobilization 2/86 4/86Dam Construction 5/86 12/88Reservoir Fill-up 12/88 6/89

Part B: Studies for Medium SizeHydroelectric projects: One Consultant

Terms of Reference Consultant 1/84 1/85Bid Invitation 2/85 3/85Bid Evaluation 4/85 5/85Contract Award 6/85 8/85Phase I: Field Investigation 6/84 12/85Phase II: Pre-feasibility Studies 10/85 8/86Phase III: Feasibility Studies 9/86 9/87

February 8, 1985

- 47 -

ANNEX 4.4

PANAMA

INSTITUTO DE RECURSOS HIDRAULICOS Y ELECTRIFICACION (IRHE)

SEVENTH POWER PROJECT

Loan Disbursement Schedule(In USS Million)

IBRD Fiscal Year Semester's Accumulated Disbursementand Semester Disbursement Amount Percentage

FY 86June 30, 1986 3.7 3.7 7

FY 87December 31, 1986 4.2 7.9 15June 30, 1987 4.6 12.5 25

FY 88December 31, 1987 5.1 17.6 35June 30, 1988 6.5 24.1 47

FY89December 31, 1988 6.5 30.6 60June 30, 1989 8.0 38.6 76

FY90December 31, 1989 6.2 44.8 88June 30, 1990 4.2 49.0 96

FY91December 31, 1990 2.0 51.0 100

AsUlMptlonsLoan Signing: June 1985Effective Date: August 1985Closing Date: December 1990

February 12, 1985

- 48 -ANNEX 4.5Page 1 of 3

PANAMA

INSTITUTO DE RECURSOS HIDRAULICOS Y ELECTRIFICACION (IRHE)

SEVENTH POWER PROJECT

Economic Comparison of Power GenerationAlternatives Considered by IREE for the

Period 1984-1988

The following is a summary of an economic analysis made by IRHE fo.four alternative plans to meet demand of the National Interconnected Systemin the period 1984-98.

1. SUMMARY OF ALTERNATIVES CONSIDERED

Capacity and Investment Month ofAverage Generation (1983 US$ Mill.) Operation

Alternative Al

Fortuna 1 300 MW; 1,176 GWh bI June-Oct. 84Fortuna II - , 244 GWh 57.6 Dec. 1989Bayano Unit No. 3 75 MW; - 11.9 Dec. 1990New Hydro-Project a/ 300 KW; 1,605 GWb 524.3 Dec. 1992Oil Fired Steam Plant 50 MW; 350 GWh 50.0 Dec. 1997Gas Turbines 50 NW; 131 GWh 15.0 Dec. 1998

Alternative B1

Fortuna I 300 I1W; 1,176 GWh b/ June-Oct. 84Oil Fired Steam Plant 75 MW; 494 GWh 75.0 Dec. 1989Bayano Unit No. 3 75 MW; - 11.9 Dec. 1990New Hydro-Project a/ 300 MW; 1,605 GWh 524.3 Dec. 1992Gas Turbines 50 MW; 131 GWh 15.0 Dec. 1998

Alternatives A2 and A3

Same as Alternative Al, except for variations in month of operation forFortuna II:

Month of Operation

Alternative A2, Fortuna II Dec. 1988Alternative A3, Fortuna II Dec. 1987

a/ Possible the Esti-Barrigan hydro-project. In this study data for theChanguinola project was used.

b/ Since Fortuna I is a common project to all alternatives, its investmentwas not included in the analysis.

- 49 -ANNEX 4.5Page 2 of 3

Alternative BI represents the substitution of the Fortuna II project by athermal power plant of equivalent capacity; given the time constraint toconstruct any other hydroelectric project this would be the only alterna-tive available to IRHE if the energy market growth is to be met with adequatereserve margins to assure good service.

2. FUEL COSTS, 0 & M COSTS AND PLANT LIFE

The following table presents thermal efficiency, fuel costs and 0 & Mcosts considered for existing and new power plants:

0 & M CostsType of Efficiency Fuel Price a/ Fixed VariableFuel kWh/gal US$/bbl US$/kW US$/MWh

Bahia-Las Minas Bunker C 11.95 27.00 31.20 0.10San Francisco

No. 3 Plant Bunker C 9.70 27.00 78.00 5.50San Francisco

Diesel Plant Bunker C 15.70 27.00 27.80 2.00Small Diesels Diesel 11.90 34.00 24.60 28.10Gas Turbines Diesel 10.30 34.00 4.00 0.90Steam Power Plants Bunker C 12.10 27.00 31.20 0.10

a/ CIF price based on international FOB prices for petroleum of US$29.00/bbl1 remaining constant in real terms during the period ofanalysis.

The following plant life was assumed for the generation projects:

Hydro-electric projects 50 yearsSteam power plants 30 yearsGas turbines 20 years

3. ECONOMIC COMPARISON OF ALTERNATIVES

Present value for the four alternatives, at various discount rates:

Present Value - US$ MillionDiscount Rate

10% 12% 14%Alternative

Al: Fortuna II in 1989 537.2 476.5 424.1A2: Fortuna II in 1988 525.3 466.6 415.9A3: Fortuna II in 1987 514.7 457.8 408 7B1: Steam Plant in 1989 600.7 528.3 466.6

- 50 -ANNEX 4.5Page 3 of 3

Under the assumed conditions, the least cost solution is to construct theFortuna II project as early as possible (earliest possible year is 1987).

Fuel Cost Variations

A sensitivity analysis was made for fuel price, considering variations aboveand below the prices for the base cost (at 12% discount rates):

Present Value - US$ MillionAlternative Fuel Price Variations

-15% -10% Base +10%

Al: Fortuna II in 1989 447.8 457.4 476.5 495.6A2: Fortuna II in 1988 440.1 448.9 466.6 484.2A3: Fortuna II in 1987 433.3 441.5 457.8 474.1B1: Steam Plant in 1989 492.9 504.7 528.3 551.9

Fuel price has little influence in the relative position of the alternatives,and the basic conclusion on the least cost solution does not change.

Effect of Cost Over-Run on Delays in the Fortuna 1L Project

Present Value - US$ MillionFortuna II Project (12% Discount Rate)

- Case A3-a: No delays, butcost over-run of 100% 486.3

- Case A3-b: No delays, butcost over-run of 200% 515.5

- Case Al-a: Delay of 2 yearsto 1989, cost over-run of 200% 529.9

Since the present value of the first two cases is lower than Alternative B1(PV - 528.3 US$ million), it is concluded that even if the Fortuna II projectcosts three times as much as estimated, it cannot economically be substitutedby a steam power plant of equivalent capacity. However, if in addition to200% cost overrun the project is delayed by two years, the alternative of asteam power plant is more economical.

4. SELECTED ALTERNATIVE

Under strictly economic considerations, the construction of the FortunaII project (raising of the existing dam) as early as possible represents theleast cost solution to meet IRHE's power demand growth up to 1990, the yearwhen additional capacity would be required. In addition, for technicalreasons, the construction of Fortuna II is imperative, as described in thetext (para. 4.07).

May 25, 1984

- 51 -

ANNEx 4.6Page 1 of 2

PANAMA

INSTITUTO DE RECURSOS HIDRAULICOS Y ELECTRIFICACION (IRHE)

SEVENTH POWER PROJECT

Contents of Project File

1. Estudio del Proyecto Fortuna - Etapa II.Informe Bdsico IRHE, Marzo 1984.

2. Plan Maestro de Generacion. Informe Ejecutivo.TRRR, Enero 1983.

3. Boletfn de EstadIstica Electrica 1982.IRPE, Noviembre 1983.

4. The Fortuna Project Reservoir Level.K. E. Sorensen, Octubre 1978.

5. Estado Actual de las Investigaciones Geotermicas en Panama.Dr. V. Luque, Panama, Abril 1979.

6. A Study of the Economic Costs of Electricity Power Outages in Panama.Mark Gellerson (for lR3E), March 1982.

7. Anazlisis sobre el Coeficiente de Elasticidad del Consumo Especiflco deEnergia Electrica. IRHE, Abril 1982.

8. El Consumo Energetico de la Industria Manufacturera en el Per!odo1970-1980.Ing. Denis Corro, tRuE. PanmAa 1983.

9. Informe Final: Seleccion y Estudio de Factibilidad de CuarentaMicrocentrales Hidroelectricas. Convenio TIRE - AID.IRHE, Julio 1983.

10. Prefeasibility Study for a Coal-Fired Power Plant.Japan Consulting Institute (for IRHE). December 1983

11. Evaluacion Ambiental y Efectos del Proyecto Hidroelctrico Fortuna.Laboratorio Conmemorativo Gorgas (for IRHE). Marzo 1977

12. Estudio sobre la Biolcig!a y Ecologia del Estuario del Rfo Chiriqui yPedregal. Univereidad de Panama (for IRHE) 1980. (3 Vol-umenes)

13. Informe sobre las Actividades del IRHE en el Proyecto Fortuna conRelacion a los Problemas Ambientales y Ecologia Humana.IRHE, Diciembre 1980.

- 52 -

ANNEX 4.6Page 2 of 2

14. Diagn6stico sobre el Problema de la Colonizacifn del Area de Palo Seca ysu Influencia en la Reserva Forestal de Fortuna.IRHE, Octubre 1983.

15. Plan Gualaca: Analisis Cualitativo de los Objectivos, Metas, Logros y siImpacto sobre la Poblacift Beneficiada. Proyecto Fortuna.IRHE, Octubre 1983.

16. Consideraciones Tecnico - Ecoldgicas para la Tala y Limpieza delProyecto Fortuna.IRHE, Julio 1982.

17. Area de Manejo Especial. Proyecto Fortuna.IRHE, 1980.

18. Informe Preliminar: Proteccion de la Reserva de Fortuna.IRHE, Agosto 1982.

19. Plan de Manejo del Pollgono de Protecci6n de Fortuna.IRHE, Julio 1982.

20. Informe sobre el Control de Simulidos en el Area de Fortuna.Laboratorio Conmemorativo Gorgas. Junio 1981.

21. Ecosistema Acuatico del Lago Bayano: Un Embalse Tropical.IRHE, 1983.

22. Estados Financieros Auditados - IRHE.Diciembre 1983.

23. Proyecciones Financieras.IRHE. 10 de Abril de 1984.

24. Detalle de Antiguedad de las Cuentas por Cobrar al 31 de Diciembre de1983. IRHE.

25. Presupuesto Consolidado 1984.IRHE.

26. Informe del Estudio Tarifario Basado en Costos Marginales.IRHE and Sofrelec. 1982.

27. Selected Working Papers.

July 2, 1984

- 53 -

ANNEX 5.1

PANANA

SEVENTH POWER PROJECT

INSTITUTO DE RECIRSOS I4IDRAULICOS Y ELECTRIFICACION (fRHE)

FINANCIAL INDICATORS

Actual f------------1983 1984 1985 1986 1987 !988 1989

Rate Base (US$ millions?Averace Net Fixed Assets 666.0 884.4 1273.5 1538.5 162B.8 1698.1 1818.9Threeflonths Revenue 57.6 62.2 57.2 70.5 84.9 91.2 102.0

Total Rate Base 723.6 946.6 1330.7 1609.0 1713.7 1789.3 1920.9

Ooerating Income (USS millions) 37.7 91.6 107.8 130.2 149.9 160.2 168.0

Rite of Return (74 5.21 9.6B 8.10 8.10 8.75 8.95 8.75

Debt Service (times)Standard a/ 1.9 2.1 1.6 1.7 2.2 2.5 2.9As Covenanted in Loan 2313-PAN bh 1.0 1.5 1.5 1.5 1.8 2.0 2.0

Debt/Equity RatiosTotal Debt as Z of Total Liabilities 50.4 43.9 38.3 32.6 27.1 22.5 20.4

and EquityLong Tern Debt as Z of Total Lonq 40.5 37.9 33.4 27.7 22.3 17.8 15.9term Debt plus Equitv

Self Financing Ratio (ZR cI 24.6 52.8 67.0 72.2 82.5 80.9 63.6

Operating Ratio dI 0.84 0.63 0.53 0.54 0.56 0.56 0.59

Working Ratio e/ 0.71 0.48 0.31 0.31 0.35 0.35 0.39

Current RatiosCurrent Assets/Current Liabilities 0.61 0.72 0.55 0.72 0.91 0.90 0.90

Current Assets/Current Liabilities 0.44 0.64 0.55 0.72 6.91 0.90 0.90and Short Term Loans(L/C)

a/ 6ross Internal Generation divided bv Debt Service. defined as Amortizations plus Interest charned to Income.bi Gross Internal Generation less oil subsidy (see footnote i/ of Annex 5.2) divided by Debt Service. definedas Amortization p'us Total Interest.

c: Net Internal Sese'ration as a percentaae of Total Applications.d/ Total Operating Costs as percentace of Total Revenues.e/ Total Operatina Costs less Depreciation as percentage of Total Revenues.

February 11.1985

- 54 -

ANNEX 5.2

PANAMA

SEVENTH POWER PROJECT

INSTITUTO DE RECURSOS HIDRAULICOS Y ELECTRIFICACION (IRHE)

Actual and Forecast Income Statement (1982-1989)(millions of current USt1

111982 1983 1984 1985 1986 1987 1988 1989

Eneroy Sales (SNh) a/ 1672.80 1852.70 1943.20 2065.90 2210.40 2459.90 2627.30 2789.50

Average Tariff ver kWh Sold (USc/kwh)

Basic 10.18 10.04 11.14 10.94 12.36 12.45 12.45 12.46Oil Surcharae 1.28 2.40 1.67 0.14 0.40 1.36 1.44 2.17

Total bh 11.46 12.44 12.B1 11.08 12.76 13.81 13.89 14.63

Operating Revenues

Eneruy Sales 191.7 230.5 248.9 228.9 282.1 339.7 364.9 408.1

Total Operating Revenues 191.7 230.5 248.9 228.9 282.1 339.7 364.9 408.1

Operatino Casts cl

Fuel do 66.3 107.9 56.4 6.6 16.7 42.2 47.0 70.5Operation e/ 12.1 14.1 16.8 14.7 18.1 20.9 22.7 24.8Maintenance 6.3 5.5 5.2 5.7 6.5 7.0 7.6 8.1Salaries fl 31.9 35.5 39.5 41.8 44.3 47.0 49.8 52.8Hydrometeorologv q/ 1.2 1.3 1.3 1.3 1.3 1.3 1.3 1.3Depreciation hi' 26.3 28.5 38.1 51.0 65.0 71.4 76.3 82.6

Total Operating Casts 144.1 1?2.8 157.3 121.1 152.9 189.8 204.7 240.1

operating Income 47.6 37.7 91.6 107.8 130.2 149.9 160.2 168.0

Other Income

Non-Operatina Income i/ 4.6 7.3 5.5 0.6 1.6 4.1 4.6 6.9

Total Other Income 4.6 7.3 5.5 0.6 1.6 4.1 4.6 6.9

Net Income before Interest 52.2 45.0 97.1 168.4 131.8 154.0 164.8 174.9Interest Charged to Income J/ 22.1 17.6 34.9 51.0 42.5 30.8 22.9 5.8

Net Income kI 30.1 27.4 62.2 57.4 89.3 123.2 141.9 169.1

---- - ------ - --- -- -- --- - - -- -- -- -- -- ---- - - -- -- -- - -- - - -- -- -- -- ----- - - - - - -- -- ---- - - - - - - - - - - -

a/ Eneray Sales Forecast of Mav 1984.bI Tari4f levels as presently assumed by IRHE's management, includina a 7X reduction enforced in April 1994,

and a total 151 reduction envisaged for January 1985.cr Except where noted otherwise. the operating costs have been estimated based on the historic trend in real

terms and then escalated; operating costs of the new orojects were estimated separately and then added toeach cost item. The 1984 estimate is based on the approved budqet.

df Based on fuel corsumotion projected by IRHE's ioad dispatch proorau.e/ Includes enerqy purchases from PanCanal; forecast purchases are'negligible.fi 35% of general administrative eEoenses have been deducted from charaes to operations and therefore

capitalized to the relevant investment oroqrans.of Cost of hvdrometeoroloaical observation activities torne by IRHE.hi Based on straight-line method; weighted average depreciation rates have been forecast at 3.1% for 1984,

and 2.9% for 1985 and thereafter.i/ Includes tne Government oil subsidvy 10. on IRHE's fuel bills.Ji See forecast interest charges in Annex 5.6ki Net earnings are fully retained as IRHE pays no dividends.I1 1984 financial statement were not available at the time of printina this report. therefore figures

could not be updated.

February 11. 1995

- 55 -

ANNEX 5.3

PA141A

SEVENTH POWER PROJECTINSTITUTO DE RECURSOS HIDRAULICOS Y ELECTRIFICACION IIRHE)Estimated and Farecast Sources and Application of Funds 1902-1989

(millions of current US $1

----- Actual ----- …----------------orecast…--------------…----- - Totals 11982 1983 1984 1955 1986 1987 1908 1989 1984-89 1984-89

SWIRCES--

Internal Cish 6enerationNet Income before interest 52.2 45.0 97.1 108.4 131.8 154.0 14.8 174.9 B31.2 06.0Depreciation 26.3 28.5 38.1 51.0 65.0 71.4 76.3 82.6 394.3 40.D

gross Internal Cash Generation 78.5 73.5 135.2 154 196.8 225.4 241.1 257.5 1215.5 12b.0

Debt ServiceAmortization ai 16.2 20.5 30.9 50.0 73.4 73.5 75.4 84.3 387.5 40.0Interest Charoed to Income b1 22.1 17.6 34.9 51.0 42.5 30.9 22.9 5.8 187.9 19.0

Total 38.3 38.1 65.9 101.0 115.9 104.3 99.3 90.1 575.4 60.0

Net Internal Cash Generation 40.2 35.4 69.4 58.4 90.9 121.1 142. 167.4 640.1 bo.OBorrowinqs c/Existing 136.1 106.8 83.7 40.4 17.0 4.2 0.0 0.0 145.3 15.0Future Loans 0.0 0.0 12.5 2.6 6.3 11.3 19.9 75.2 127.8 13.6Proposed I1RD Loan 0.0 0.0 0.0 0.0 7.9 9.7 13.0 20.4 51.0 5.0

Subtotal 136.1 106.0 96.2 43.0 31.2 25.2 32.9 95.6 324.1 34.0

Short Term Loans 4.7 0 ('.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Total Borrowinas 140.8 106.8 96.2 43.0 31.2 25.2 32.9 95.6 324.1 34.0

Other Sources (Several Items) 0.0 3.9 0.0 0.0 0.0 0.4 0.8 0.4 1.6 0.0

TOTAL SOURCES 191.0 146.1 165.6 101.4 112.1 146.7 176.5 263.4 965.8 100.0

APPLICATIONS

Construction Progra diOngoing Constructions 176.1 120.6 71.3 63.8 16.6 - - - 151.7 16.0Future Construction 0.0 0.0 0. 4 17.7 50.5 87.7 128.0 210.0 494.3 51.0

Sub-Total 176.1 120.6 71.7 81.5 el.1 87.7 128.0 21D.0 646.0 67.0

PROPOSED PROJECTRaising of the Dam 0.0 0.0 0.0 0.0 11.6 11.1 18.6 31.8 73.1 8.0Studies 0.0 0.0 0.8 4.0 1.2 6.0 1.0

Sub-Total 0.0 0.0 0.0 0.0 12.4 15.1 19.3 31.8 79.1 8.0

TOTAL INVESTMENTS 176.1 120.6 71.7 81.5 79.5 102.0 147.8 241.B 725.1 75.0Interest During Construction e; 18.I 29.5 20.0 u .5 11.7 18.3 21.8 37.4 115.7 12.0

_- - - --- -- --- -- - -- - --- -- ---- - -------__ _ _ _ _ _ -- _ - - - - -- ---- -

GRAND TOTAL INVESTMENTS 194.2 150.1 91.7 88.0 91.2 121.1 i69.6 279.2 840.8 87.0

Amortization Short Term Loans 12.0 0.') 34.0 14.2 0.0 0.0 0.0 0.0 48.2 5.0Increase in Iorkinp Capital ft -26.1 -6.4 39.9 -0.8 20.9 25.o 6.9 -15.8 76.8 8.0Other Applications 0.9 2.4 0.0 0.0 0.0 0.0 (.0 0.0 0.0 0.0

TOTAL APPLICATIONS 181.0 146.1 165.6 101.4 112.1 146.7 176.5 263.4 965.8 100.0===== === z= ======= ======= = ===== ==== == == === _ === ==== ======= = === =

a/ See forecast debt amortization statecant in Annex 5.7b/ See forecast interest charuoes in Annex 5.6. (excludes IDC;cI See forecast loans disbursement statement in Annex 5.5.dI See construction program in Annex 4.1.e/ See forecast interest charges in Annex 5.6. Represents interest charged to construction actually Paid

which partially compensates the lOZ cost of capital ieputed by WI8E to its works in progress.fi Norking capital has been defined as the sum of current assets. less current liabilities

(exclusive of the current portion of the lone-term debt).qJ 1984 financial statements were not available at the time of printina this reoort. therefore figures

could not be updated.February 11, 1905

- 56 -

ANNE]X 5.4

PAtINA

SEVENTH POWER PROJECT

INSTITUTD DE RECURSOS HIDRAULICOS Y ELECTRIFICACION (IRHEI

Actual and Forecast Balance Sheet (1982-19091(millions of current US S)

Acktual ---- !-----------------Forecast1982 1983 1984 1985 1906 1987 190B 1989

ASSETS

Gross Fixed Assets 900.4 1016.2 1450.7 1935.4 2156.8 2317.1 2516.0 2003.3Accumulated Depreciation 266.2 310.4 379.0 459.4 555.8 660.5 776.3 905.1

Net Fixed Assets in Service 634.2 697.8 1070.9 1476.0 1601.0 1656.6 1739.7 1098.2Mork in Progress 360.3 478.3 277.6 13.9 18.1 116.9 236.3 404.4

Total Fixed Assets a/ 994.5 1176.1 1348.5 1489.9 1619.1 1773.5 1976.0 2302.6

Deferred Assets 32.0 27.3 27.3 27.3 27.3 27.3 27.3 27.3

Current Assets

Cash 0.1 1.4 1.5 1.8 1.7 1.9 2.1 2.3Temporarv investments 0.0 0.0 3.0 1.3 19.5 33.5 36.9 18.8Accounts Receivable b/ 43.8 53.4 54.6 43.9 46.4 55.8 60.0 67.1Inventories c/ 23.0 19.3 19.3 18.4 20.3 22.8 24.7 27.4Other d/ 3.7 3.9 3.9 3.9 3.9 3.9 3.9 3.9

Total Current Assets 70.6 78.0 82.3 69.3 91.7 118.0 127.6 119.5

TOTAL ASSETS 1097.1 1281.4 1459.1 1586.5 1738.2 1918.7 2130.9 2449.4

EQUITY AND LIABILITIES

Equitycapital 131.6 132.5 132.5 132.5 132.5 132.5 132.5 132.5Retained Earnings 203.2 229.9 292.5 349.9 439.3 562.5 704.5 873.6Capital Revaluation 214.4 273.5 392.3 496.7 599.7 704.3 813.5 943.5

Total Equity 549.2 635.9 017.3 979.1 1171.5 1399.3 1650.5 1949.6

Long-Term Debt 370.3 433.1 490.4 491.4 449.2 400.9 35B.4 369.7less Current Portion 16.6 26.8 50.0 73.4 73.5 75.4 84.3 67.6

rotal Lana Tere Debt 353.7 406.3 448.4 418.0 375.7 325.5 274.1 302.1

Contingent and Other Liabilities 41.6 63.5 3.5 63.5 63.5 63.9 64.7 65.1

Short Term Loans 48.2 48.6 14.2 0.0 0.0 .0 .0 .0

Current LiabilitiesAccounts Payable e/ 55.6 61.9 26.3 14.1 15.6 16.2 18.9 26.6Other Current Liabilities 32.2 38.4 38.4 38.4 38.4 30.4 38.4 38.4Current Portion of Lonq Term Debt 16.6 26.8 50.0 73.4 73.5 75.4 84.3 67.6

Total Current Liabilities 104.4 127.1 124.7 125.9 127.5 130.0 141.6 132.6

TOTAL EQUITY AND LIABILITIES 1097.1 1281.4 1450.1 1586.5 1738.2 1910.7 2130.9 2449.4

a/ IRHE revalues its fixed assets in operation and major works in progress in accordarce with exist:na aoreementswith the Bank.

bh Forecast as an annual percentaqe of total sales representing days of financinq: 1983: 85 (reall. It isexpected to decrease from 80 divs in 1984 to 70 days in 1985 and to 60 days in 19B6 and thereafter.

ca Naterials inventory has been forecast assumina constant the level of 1983 in real terms; fuel inventorymaintaining 15 days reserve.

d/ Miscellaneous current assets, deferred assets and cDntingent and other liabilities have been forecsst constant.eI Accounts payable have been forecast as follows: fuel: 25 davs; other supplies: 60 days; and contractors: 40 days.4/ 1984 financial statements were not available at the time of printinq this report, therefore ficures couldnot be updated.

February 11, 1985

-57-

ANINEX 5.5

PANAMJA

INSTITUTO DE RECURSOS HIDREALICOS Y ELECTZIFlCACION (IRHE)

SEVENTH -POWR PROJECT

Loans Disbursement Statemnt(Millions of USS)

1984 1985 1986 1987 1988 1989

1. Existing

IBRD 1470IBID 1470-1 18.8 5.4IDB 71C-17UFIDS 7A 40.6 8.0It3Lian Export Credit 4.4Skandinaviska 4.6Libra Interuatational BankMitsubishi Trust CompanyBanco UnionIBD-Supplementary 6.6 3.4IBDO-ural Electrification 2.0 10.9 5.7IBRD-322IBRD-2313 3.9 12.7 11.3 4.2IBRD-948IUD- 661IBRD-1778 2.8Bco Nal. (Dillon/Ind. Japan)Exim Bank-DRBSociere Generale BanquePension Plan CSS.cie-SuecaBco. Central VenezuelaSan MiguelitoAmex BankPre Investment Fund (62)VI? 08-60Abengoa and Others

Total 83.7 40.4 17.0 4.2

e2 Proposed IBRD Loan 7.9 9.7 13.0 20.4 a/

3. Future

IDS - Changuinola 1 4.6 3.4 10.5IBBD - Esti-Barrigon 1.3 2.1 3.6 35.01DB - Esti-8arrigon (OC) 5.0 3.5 11.9 28.7Interconection Costa Rica 0.2 2.6Venezuelan Fund 12.3IDB Coal Plant 1.1 1.0 1.0

Total 12.5 2.6 6.3 11.3 19.9- 75.2

a/ Part of this amount to be disbursed in 1990.

February 14, 1985

- 58 -

AhNNEX 5.6

PANAMA

INSTITUTO DE RECURSOS HIDRAULICOS Y ELECTRIFICACION (IRIE)

SEVENM POWER PROJECT

Forecast Interest Charges to 1984-1989(Millions of US5)

1984 1985 1986 1987 1988 1983

1. Existing

IBRD 1470 2.8 2.5 2.3 2.0 1.7 1 5IBRD 1470-1 2.i 3.5 3.7 3.5 3.2 2.8IDB 71C-17UF 5.7 5.5 5.2 4.9 4.6 4.3IDB 7A 3.3 6.5 6.3 5.8 5.2 4.7Italian Export Credit 2.7 2.8 2.2 1.6 1.0 0.4Skandinaviska 4.9 4.2 3.4 2.6 1.9 1.1Libra Internatational Bank 4.8 4.8 4.1 3.2 2.3 1.4Mitsubishi Trust Company 7.3 7.3 6.1 4.4 2.8 1.2Banco Union 0.1IBD-Supplementery 2.3 3.5 3.5 2.7 2.0 1.3IBD-Rural ELectrification 0.1 0.3 0.6 0.6 0.6 0.6IBRD-322 0.1IBRD-2313 0.4 1 9 3.4 3 5 3.2 2.9IBRD-948 1.7 1.5 1.4 1.3 1.1 1.0IBRD-661 2.2 2.0 1.9 1.7 1.6 1.4IBRD-1778 1.7 1.7 1.5 1.4 1.3 1.1Bco Nal. (DillonfInd Japan) 4.5 3.9 3.4 2.9 2.4 1.9Extn Bank-DKB 0.5 0.5 0.4 0.4 0.2 0.1Societe Generale Banque 0.4 0.3 0.1Pension Plan CSS. 0.1 0.1 0.1Gie-Sueca 0.5 0.5 0.3 0.2 0.1Bco. Central Venezuela 0.1 0.1San Miguelito 0.1 0.1 0.1 0.1 0.1 0.1Amex Bank 0.1Pre Investment Found. (oZ)VIF 08-60 0.4 0.4 0.3 0.3 0.2 0.1Abengoa and Others 0.1 0.1

Total 49.0 54.0 4 3.1

2. Proposed IBRD Loan 0.4 0.5 1.3 2.2 4.1

3. Future

IDB - Changuinola 1 0.9 2.2 3.5IBRD - Esti-Barrigon 0.6 0.7 1.1 2.3IDB - Esti-Barrigon 1.1 1.5 2.1 3.8Interconnection Costa Rica 0.1 0.3 0.3 0.2 0.2 0.1Venezuelan Fund 1.0 1.4 1.4 1.2 1.1 1.0IDB Coal Plant 0.2 0.3 0.4

Subtotal 1.1 17: 3.4 7 11.1

Short Term Loans 4.8 1.4TOTAL Interest Charges 54.9 57.5 54.2 49.1 44 7 43.2Interest Charged to Construction a/ 20.0 6.5 11.7 18.3 21.8 37.4Interest Charged to Income 34.9 51.0 42.5 30.8 22.9 5.8

a/ This Interest represents the economic cost of the projects calculated as 102 of the annual constructton cosfeach project, calculated pro-rata tempore.

February 12. 1985

-59 -

ANNEX 5.7

INSTITUTO DE RECURSOS RIDRAULICOS Y ELECTRIFICACION (IRHE)

SEVENTH POWER PROJECT

Forecast Debt Amortization Statement 1984-1989(Millions of US$)

1984 1985 1986 1987 1988 1989

|- exlting

IBRD 1470 3.1 3.1 3.1 3.1 3.1 3.1IBRD 1470-1 1.3 2.6 2.6 2.6IDB 71C-17UF 1.8 3.7 3.7 3.7 3.7 3.7IDB 7A 2.4 4.8 4.8 4.8 4.8Italian Export Credit 5.0 5.0 5.0 5.0 5.0Skandinaviska 9.1 9.1 9.2 8.5 8.5 8.4Libra Internatational Bank 3.7 7.5 7.5 7.5 13.8Kitsubishi Trust Company 6.7 13.3 13.3 13.3 13.4Banco Union 0.3 0.2IBD-Supplenentary 6.0 6.0 6.0 6.0IBD-Rural Electrification 0. 0.4IBRD-322 0.3 0.3 0.3 0.2IBRD-2313 1.3 2.7 2.7 2.7IBRD-948 1.5 1.6 1.7 1.7 2.0 2 2IBRD-61 1.8 2.0 2.1 2.3 2.4 2.6IBRD-1778 1.8 1.8 1.8 1.8 1.8 1.8Bco Nal. (Dillon/Ind. Japan) 3.9 4.5 4.5 4.5 4.5 5.8Exi. Bank-DKB 0.8 0.8 1.0 1.0 1.0 1.0Societe Generale Benque 1.3 1.3 1.3Pension Plan CSS. 0.5 0.5 0.7 0.6 0.6Cie-Suc.a 1.1 1.1 1.1 1.1 1.1 0.4Bco. Central Venezuela 0.3 0.3 0 3 0.4San Niguelito - - 0.1 0.1 - -

Amex Bank 1 5Pre Investment Fund (62) 0.1 0.1 0.1VIF 08-60 0.9 1.0 1.0 1.0 1.0 0.9Abengoa and Others 0.3 0.6 0.8

Total 30.9 50.0 72.0 72.0 71.8 78.6

Proposed IBRD Loan 2.1 4 2

Future

Interconnection Costa Rica 0.5 0 6 0.6 0.6Venezuelan Fund 0.9 0.9 0.9 0.9

Total 1.4 1.5 1.5 1.5

ruary 14, 1985

-60-

AMNZX 5.8

PANAKA

INSTITUTO DE RECURSOS HIDRAULICOS Y ELECTIFICACION (IRHE)

SFVENTH POWER PROJZCT

Schedule of Existing end Proposed Debt

Loan Amount Last OutstandingLoan KilUons of Commitment Interest Maturity Crace Balance

1. Existing Date US$ Fees late In Period as of 12/31/83

IBRD 1470 1977 42.0 3/4 of 12 8-1/5% 1994 8115/81 30.8IUD 1470-1 1983 31.3 1.25: BK + 61 1998 9/15/86 7.0IDB 71Cl17UP-PN 1977 40.0 1.25Z 82 2003 6/1/84 60.8IDB 7A/IC-PN 1983 60.0 1.25X TV 1998 3/1/86 11.2Italian Export Credit 1983 25.0 1.25S TV 1989 4/1/84 20.6Skandinaviska E.B. 1975/8/9 10.5 3/4 of 12 TV 37.6Libra 1981 40.0 1/2 of 1X LIBOR + 1X 1989 1983 40.0Mitsubishi Trust Company 1982 60.0 1.252 TV 1990 1986 60 0Banco Uoion de Venezuala 1975 2.5 - LIBOR + 1-3/4 1985 3/24/77 0.6IDB-Suppleentary-122 1983 30.0 1/2 of 1Z TV 1990 1/15/86 20.0IDB-Rural ElectrifLcation 1982 16.6 1/2 of 12 22 2011 10/89 1.3IBRD-322 1962 4.0 - 5-1/2Z 1987 - 1 0IBRD-2313 1984 32.1 3/4 of 1S BM + 61 1997 12/1/86 -IJRD-94B 1973 30.0 3/4 of 1Z 7-1/4Z 1994 3/1/78 21.2IBRD-661 1970 42.0 3/4 of 1S 7Z 1995 5/1/76 33.0IBRD-1778 1980 23.0 3/4 of 12 7.9Z 1996 15/5/84 19.1Bco NEl. (DillonInd. Japan) 1979 45.0 - LIBOR + 5/8 1991 1983 37.2C.Itoh/Dai I.K. 1982 7.6 0.52-0.752 8.5Z-TV 1992 1986 6.4Societe Generale Banque 1978 7.0 - LIBOR + 1-1/4 1984 10/4/81 3.8Pension Plan CSS. 3.9 - 47 1988 2.9Gie-Sueca 63-77 1977 11.5 - 7-3/42 1989 10/31/79 6.3Bco. Central Venezuela 1977 2.5 3/4 of 12 7-1/22 1987 9/15/79 0.4San Miguelito 1.1 1/2 of 12 8.82 2008 1.1Amex Bank 1977 8.0 3/4 of 12 1984 7/16/79 1.6Pre-Investment Found. (62) 1980 0.7 3/4 of 1S 72 1986 12/31181 0.4VIF 08-60 1979 6.8 - 7-1/2Z 1989 12/31/82 6 8Abengoa and Others 1974 3.4 _ 7-1/42 1986 - 2.0Total Elcisting Debt 433.1

2. Proposed IBiD Loan 1985 51.0 3/4 of 12 9.29S 2000 1988

3. Future

IDB - Changuinola 1 1987 36.9 1.25S 11 52 1998 1990IBRD - Esti-Barrigon 1986 67.0 3/4 of 12 11.62 1999 1990IDB - Esti-Barrigon (OC) 1986 73.3 1.25X 102 2000 1991Iaterconection Costa Rica 1984 2.9 - 11.351 1990 2/1/86Venezuelan Found. 1984 12.3 112 2000 1986IDB Coal Plant 1987 23.4 3/4 of 12 1OX 1994 1989

TV - variable rate

February 12 1985

-61 -

ANNEX 6.1

PANAKA

INSTITUTO DE RECURSOS HIDRAULICOS Y ELECTRIFICACION (IRHE)

SEVENTH POWER PROJECT

Internal Rate of Return for IRIE's Investment Program(In millions US$, 1984 Constant Prices)

C 0 S T S B E N E F I T STotal a/ Operatlon b/ Fuel b/ Total Incremental c/ Avg. Rate d/ Total

Investments & Kaintenance Costs Costs Sales CWh USc/lWh Benefits

69.1 - 0 69.1 - - -76.3 1 2 0 77.5 127 10.4 13.270.2 0.2 0 70.4 270 10.9 28.783.7 0.3 0 84.0 513 10.9 54.9

110.6 0.4 0 111.0 672 10.2 68.5167.5 0.1 0 167.6 822 10.1 83.0140.0 1.0 0 141.0 982 10.1 99.240.0 1.0 0 41.0 1,204 10.1 121.640.0 1.0 0 41.0 1,399 10.1 141.3

119 - 1.0 0 1.0 1,399 10.1 141 3

Sensitivity Analysis

Came Rate of Return X

1. Bame case as shown above 18.5

2. Capital Investment and 0 & K costs 20Z higher 15.1

3. Benefits 20Z lower 14.4

4. All costs 20; higher, all benefits 20% lower 11.7

aiME's total investment program (Annex 4.1). In the period 1990-92 only the investments required to completethe Esti-Barrigon hydroelectric project and for routine distribution and general plant are considered.LnCremental costs with respect to 1984 (Annex 5.2), expressed in 1984 constant prices. Fuel savings due tothermal generation substitution realized with the operation of the Fortuna I Project were not considered, as theinvestment for this project was done before the period of analysis.incremental sales with respect to 1984 (Annex 3.1)"-rjected average annual rate as assumed for financial forecast (Annex 5.2), expressed in constant prices.

y 14, 1985

t~~~~~~~~~~~~~~~~~~~~~~~I sO

.gx t'-PANAMASEVENTH POWER PROJECT

Instituto de Recursos Hidraulicos yElectrificacion (IRKE)

N n \ - .. :

COCLE £

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\ 'CIA N 4 t iute o au l6o~

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Concepc.6n^//k

Progreto dw to

qnce. 6 9edreg0l Pbeno _

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- _ PA~~NAM'JA )9- THIINIDAD. -

Son FranciscoCIRI GRANDF Sur

k 0zhorre-Arrailan

Coronado A

Hydroelectric Projects: SANMIGUELI '

DAMS and RESERVOIRS -r

I Ex.stng

I Under construction

I Future

UNDERFUTURE CONSTRUCTION PROJECT EXISTING

- 0,s .) Project area

Los Toablos TrUnsmission lines:o - inmm 230i kv or more

115 1k

35 kv or less

Generating plants:_ / Therrnal

- ~HydroD~ * ''0 Substations i

A Srnall Hydro PlantsRivers 0 > ! COLO MBIAProvincial Boundaries -I

*- - International Boundaries

KILOMETERS 0 20 40 50 80 100

MILES O to 20 30 40 50 60

Go0 7 78