Document of The World Bank FOR OFFICIAL USE ONLY I A1J 3/3 f-73 Report No. 8051-TH STAFF APPRAISAL REPORT THAILAND SECOND POWER SYSTEM DEVELOPMENT PROJECT NOVEMBER 7, 1989 Industry and Energy Division Country Department II Asia Regional Office T'his document has a restricted distribution and may be used by recipients only in the performance of their officfid duties. Its contents may not otherwise be disclosed without World flank authorizaSion. CURRENCY EQUIVALENTS (As of August 1989) Currency Unit = Thai Baht (B) US$1 = B 25.6 B 1 = US$0.039 GOVERNMENT AND EGAT FISCAL YEAR October 1 to September 30 WEIGHTS AND MEASURES bpd - barrels per day kV - kilovolt (1,000 volts) kVA - kilovolt-ampere (1,000 volt-amperes) MVA - megavolt-ampere (1,000 kiluvolt-amperes) kW - kilowatt (l,0OO watts) MW - megawatt (1,000 kilowatts) kWh - kilowatt-hour (1,000 watt-hours) GWh - gigawatt-hour (1 million kilowatt-hours) kcal - kilocalorie (3.97 British thermal units) tcf - trillion cubic feet MMcfd - million standard cubic feet per day MMBtu - million British thermal tnits MMt - million metric tonnes tpa - tonne per annum toe - tonne of oil equivalent MMtoe - million tonnes of oil equivalent ABBREVIATIONS AND ACRONYMS ADB - Asian Development Bank BOOT - Build-Own-Operate-Transfer DMR - Department of Mineral Resources EGAT - Electricity Generating Authority of Thailand ERR - Economic Rate of Return ESMAP - Energy Sector Management Assistance Program IFR - Internal Financial Rate of Return I1P - Independent Power Producer LRMC - Long Run Marginal Cost MEA - Metropolitan Electricity Authority MIS - Management Information System MOF - Ministry of Finance NEA - National Energy Administiation NEPO - National Energy Policy Office NESDB - National Economic and So(ial Development Board PEA - Provincial Electricity Arthority PDP - Power Development Plan PTT - Petroleum Authority of T1,ailand ROR - Rate of Return on Fixed Assets RTG - Royal Thai Government FOR OFFICIAL USE ONLY THAILAND SECOND POWER SYSTEH DEVELOPMENT PROJECT Loan and Proiect SumnarX Borrower: Electricity Generating Authority of Thailand (EGAT) Guarantor: Kingdom of Thailand Amount: US$94 million equivalent Lending Terms: Repayable over 20 years, including five years of grace, at the standard variable interest rate. Project Description: The proposed loan would finance a two-year (FY90- 91) time slice of EGAT's FY87-91 investment program. It would help meet the growth in power demand expected over the medium-term; and strengthen the capabilities of EGAT in environ- mental monitoring and evaluation through technical assistance and acquisition of environmental monitoring equipment. The investment program of EGAT involves the expansion of generation facilities, the reinforcement and extension of transmission systems, the expansion of lignite mining capacity and other miscellaneous works. The program supports the development and economic use of domestic lignite and natural gas. Benefits and Risks: In supporting the timely development of the power sector, the loan would help sustain Thailand's economic growth. Further, as the bulk of EGAT's proposed investments in power generation is predicated on the use of domestic lignite and natural gas, the proposed development plan would lead to substantial savings in the import of fuel. There are no major risks associated with the program. Although EGAT's Power Development Program is ambitious, the utility's demonstrated experience with system expansion and its state of preparedness assure a successful implementation of the program. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. - ii - Estimated Cost: Local Foreign Total EGAT's Investment Program (FY90-91) ------- (USS million) - Thermal Plants 436 1,025 1,461 Hydro Plants 48 57 105 Power Transmission 103 203 306 Lignite Mining 103 57 16C Miscellaneous 39 3 42 Taxes and Duties 296 0 296 Total Base Cost 1,02' 1,345 2,370 Contingencies Physical 45 58 103 Price 41 53 94 Total Cost 1,111 1,456 2,567 Interest during construction 185 28 213 Total Financing Required 1,296 1,484 2,780 financing Plan: Local Foreign Total Sources -------- (US$ million) ------- World Bank Ongoing Power Transmission Project - 70 70 Ongoing Power System Dev. Project - 70 70 Proposed Loan - 94 94 Other borrowings (from official 541 1,250 1,791 lenders, commercial banks, and export credits) Internal cash generation 755 - 755 Total 1,296 1,484 2,780 Estimated Disbursements: Bank FY FY90 FY91 FY92 FY93 ------------- (US$ million) ------------- Annual 10 40 40 4 Cumulative 10 50 90 94 Rate of Return: 15X - iii - THAILAND SECOND POWER SYSTEM DEVELOPMENT PROJECT STAFF APPRAISAL REPORT Table of Contents Loan and Project Summary . . . . . . . . . . . . . . . . . . . . . . I. THE ENERGY SECTOR .1... . . . . . . . . . . . . . . . . . . . A. Overview .1... . . . . . . . . . . . . . . . . . . . . . . B. Resource Endowment .1.. . . . . . . . . . . . . . . . . . . C. Energy Consumption . . . . . . . . . . . . . . . . . . . . . 3 D. Organization and Planning. 4 E. Energy Sector Is3ues and Strategy . . . . . . . . . . . . . 5 F. Private Sector Participation . . . . . . . . . . . . . . . . 5 II. THE POWER SUBSECTOR . . . . . . . . . . . . . . . . . . . . . . 8 A. The Power Market ................... . 8 B. Generation and Transmission Facilities . . . . . . . . . . . 9 C. Fuel Options for Power Generation . . . . . . . . . . . . . 10 D. EGAT's Power Development Plan . . . . . . . . . . . . . . . 11 E. Past Bank Experience and Sector Strategy . . . . . . . . . . 13 III. THE BORROWER.. .................. 15 A. Organization and Management . . . . . . . . . . . . . . . . 15 B. Staffing and Training ... . . . . . . . . . . . . . . . . 16 C. Operational Performance ... . . . . . . . . . . . . . . . 17 D. Financial Management ... . . . . . . . . . . . . . . . . . 18 IV. THE BANK LOAN .... . . . . . . . . . . . . . . . . . . . . . 19 A. Objectives of the Bank Loan .19 B. Utilization of Proceeds of the Bank Loan . . . . . . . . . . 20 C. Implementation .21 D. Environment .21 E. Cost Estimates .23 F. Financing Plan . . . . . . . . . . . . . . . . . . . . . . . 24 G. Procurement .25 H. Disbursements . . . . . . . . . . . . . . . . . . . . . . . . 26 V. FINANCIAL ANALYSIS . . . . . . . . . . . . . . . . . . . . . . . 26 A. Past Performance . . . . . . . . . . . . . . . . . . . . . . 26 B. Present Financ'al Position . . . . . . . . . . . . . . . . 28 C. Financial Outlook . . . . . . . . . . . . . . . . . . . . . 29 D. Lignite Mine Operations . . . . . . . . . . . . . . . . . . 32 E. Subsector Finances . . . . . . . . . . . . . . . . . . . . . 32 F. Tariff Levels and Structure . . . . 33 G. Financing Plan ....................... 34 - iv VI. PRfjJECT JUSTIFICATION .... . . . . ... . . . . . . . . . . 35 A. Economic Analysis . . . . . . . . . . . . . . . . . . . . . 35 B. Risks ..... . . . . . . . . . . . . . . . . . . . . . . 36 VII. AGREEMENTS REACHED AND RECOMMENDATION . . . . . . . . . . . . . 36 A. Agreements .... . . . . . . . . . . . . . . . . . . . . . 36 B. Recommendation. 38 ANNEXES 1. Highlights of EGAT, MEA and PEA Operations ...................... 39 2. EGAT's Existing Generating Capacity ............................. 40 3. EGAT's Existing Transmission and Substation Facilities .......... 41 4. EGAT's Power Development Plan ................................... 42 5. Balance of System Load Requirements and Capabilities ............ 44 6. Projected Energy Balance ........................................ 45 7. EGAT's Demand Forecast .......................................... 46 8. Evaluation of EGAT's Operational Efficiency: Consultancy Study Terms of Reference ..... ............... 47 9. Supervision Plan ................................................ 51 10. EGAT's Investment Program FY90-91 ............................... 52 11. Disbursement Schedule ..................... 53 12. EGAT's Past Financial Performance ............................... 54 13. EGAT's Financial Projections .................................... 57 14. Power Subsector Financial Projections ........................... 63 15. EGAT's Tariff Structure ......................................... 66 16. Rate of keturn on EGAT's Power Development Plan ................. 67 17. Environmental Review - Summary .................................. 68 18. List of Documents in Project File ............................... 76 CHART EGAT's Organization Chart This report is based on the findings of an appraisal mission to Thailand in July/August 1989, comprising Darayes Mehta (Senior Power Engineer), Margaret Hanson (Financial Analyst), Peter Kotschwar (Principal Mining Engineer), Dennis Bateman (Mining Engineer), Peng Hing Tio (Consultant, Environment), Harvey Salgo (Consultant, Privatization) and Graham Shore (Consultant, Privatization). THAILAND SECOND POWER SYSTEM DEVELOPMENT PROJECT I. THE ENERGY SECTOR A. Overview 1.1 The social and economic transformation of the Thai economy over the past 25 years has resulted in rapid growth in energy consumption. Most of this growth was initially met by energy imports: at the time of the second oil crisis in 1979/80, Thailand's dependence on imported oil was in excess of 902 of total primary commercial energy. In the ensuing years, however, efforts made by the Royal Thai Government (RTG) to promote the development of indigenous energy resources bave had a visible impact on the pattern of commercial energy consumption: the share of oil has fallen markedly, being reduced from 91% in 1977 to 62X in 1988, with that of imported oil down to 52Z. Converrely, the shares of indigenous lignite and natural gas have grown steadily, reaching 10X and 24Z, respectively. This notwithstanding, the energy situation in Thailand remains characterized by relatively modest commercial energy consumption in relation to the country's development (284 tonnes of oil equivalent [toe] per US$ million of GDP), with traditional energy, particularly fuelwood, remaining the predominant fuel in rural households. The outlook is therefore for rapid growth in commercial energy consumption as the economy continues expanding. 1.2 Within this general context, the power system in Thailand has grown at a rapid pace over the past two decades. Considerable progress has been made in making electricity widely available, especially in provincial urban areas. Industrial consumption has also been growing rapidly. Overall, growth in power demand has consistently exceeded that of commercial energy consumption. This has resulted in a per capita electricity consumption in Thailand (about 556 kWh in 1988) higher than the average for countries at the same income level. SimiLar trends are expected to prevail in the future as the country's industrial and socio- economic development accelerates. B. Resource Endowment 1.3 Thailand has a diversified energy resource base, consisting of bio-mass, petroleum (oil and natural gas), lignite, hydropower, and geothermal energy which is still at an exploratory stage in the Northern Region. Both natural gas and lignite are expected to gain greater prominence in the country's energy balance as key fuels for electricity generation over the next decade. Oil and Gas 1.4 Thailand has a substantial potential for oil and gas: some 519 million barrels of liquid (crude oil and condensate) and 13 trillion cubic feet (tcf) of gas (2.3 billion barrels of oil equivalent) already have been identified out of ultimate recoverable reserves estimated at 4-5 billion barrels of oil equivalent. 1.5 Petroleum exploration has led to substantial gas discoveries: in the Gulf of Thailand, by Unocal (previously, Union Oil) and Seagram (previously, the Texas-Pacific Co.); and onshore at Nam Phong in the Khorat basin by Esso. Proven and probable economically recoverable gas reserves are currently indicated at about 5.5 tcf. While, so far, only part of the Unocal reserves have been brought into production, output of natural gas is expected to increase sharply in future years as additional reserves are brought under development. The Petroleum Authority of Thailand (PTT), which owns and operates the pipeline linking the Unocal fields to Bangkok, is currently negotiating with Unocal and Esso for the purchase of additional quantities of gas. PTT has also taken over the Seagram offshore concession area, which it expects to bring into production by the early-to- mid 1990s. Overall, gas production, which averages about 500 million cubic feet per day (MMcfd) at present, is expected to double over the next ten years. The development of the gas sector, however, has been made difficult by the complex geology of reservoirs which is responsible for a higher than usual degree of uncertainty in production levels and costs. The main problem facing policy makers is therefore to optimize the timing of the development of each area, taking into account uncertainties in the magnituue of economically recoverable reserves and the lead-time required to develop a market for the gas, particularly in the power sector which offers some of its most economically attractive uses. Lignite 1.6 Thailand's coal resources are all relatively low grade, of the variety generally categorized as lignite. Geological lignite reserves amount to a total of 2.1 billion tonnes, i.e., 450 million tonnes of oil equivalent (MMtoe), 702 of which is in the Mae Moh basin in Northern Thailand which has been developed by the Electricity Generating Authority of Thailand (EGAT). Economically minable reserves are estimated at 1,152 million to-mes (MMt), of which 812 MMt are located in Mae Moh. Potential for additional discoveries is good; recent nation-wide exploration by EGAT has resulted in a number of discoveries, including that in 1987 of a major deposit at Saba Yoi in Southern Thailand with potential reserves in excess of 200 MMt. Lignite production increased over the last ten years from 0.6 MMt to about 7 MMt in 1988, of which 782 was at the Mae Moh mine, owned and operated by EGAT. Annual output is scheduled to expand further to 11 MMt by 1991, mainly to fuel additional power generation capacity. It is expected that lignite will continue over the long-term to be an important fuel for power generation. A recent study of the lignite sector conducted jointly by the Bank and NESDB (Report No. 7815-TH) inter alia identified areas in which the private sector could participate in lignite development (para. 1.20). Hydropower 1.7 Thailand's hydropower potential, excluding that of its two main international rivers--the Mekong and the Salween, is estimated at 10,626 MW. Of this, about 2,250 KW, with an annual generation capability - 3 - of 5,400 GWh, have already been harnessed by EGAT. However, higher investment costs and environmental concerns are seen as major constraints to the further development of hydro sites as evidenced by the recent shelving of a major hydro project (Nam Chon) for environmental reasons. The hydro potential of rivers within Thailand is dwarfed by that of rivers forming the Thai frontier with Laos and Burma. The development of possible sites would require agreement between the riparian powers, including in particular acceptable terms for Thailand to use a major part of the energy generated since the other countries are unlikely to be in a position to absorb the energy provided by such projects. Preliminary discussions have beer. initiated for a possible joint project with Burma, while feasibility studies are under way for a hydro project in Laos. Bio-mass 1.8 The process of modernization occurring in rural Thailand notwithstanding, use of traditional fuels has remained predominant in rural avAar. About two-thirds of the reliance on bio-mass consists of charcoal and firewood use by rural households (at the rate of 10 MMtoe/year), and consequently forests near inhabited areas have been heavily over-cut. The remaining third of bio-mass supply consists of bagasse and paddy husks used as fuel in the sugar and rice industries. Thailand suffers from an increasing scarcity of woodfuels and other wood products, particularly in the Northeast. A Woodfuel Preinvestment Study was completed by the Energy Sector Management Assistance Program (ESMAP) in February 1988; the study recommends that the Governiment aim at curbing further deterioration of the country's bio-mass endowment by promoting the participation of the rural population in reforestation efforts. A follow-up project, to be financed with bilateral assistance, has been designed to support such a strategy. Concerns about the preservation of already dwindling forests make it necessary in the long-term to switch to other forms of generating energy in rural areas. C. Energy Consumption Consumption Trends 1.9 Rapid economic growth in Thailand over the last two decades has been accompanied by growing energy consumiption. Final commercial energy consumption grew at an average rate of 5.52 between 1978 and 1988. The sectoral composition of energy demand has been marked by a progressive increase in the share of the transport sector, which reached 562 in 1987, accounting for 63? of petroleum products consumption. Electricity consumption has increased faster than energy consumption as a whole, averaging 142 per annum in the last three years. As a result, the share of electricity in final commercial energy consumption has grown from 112 to 152 between 1978 and 1988, with a similar increase in the share of electricity in primary energy use (from 252 to 332). Energy Pricing 1.10 The Government has been attentive to the need to set energy prices at levels above international prices for traded commodities and -4- economic costs for non-tradables. Thus, retail prices of the principal petroleum products are, on average, higher than international prices. The Oil Stabilization Fund, which was established by the Government in 1974 as a mechanism to dampen the effect of large short-run movements in international oil prices on retail product prices, is being progressively phased out with the stable trend now envisaged for oil prices. In December 1987 the Government took a major step towards floating retail oil prices by tying local ex-refinery prices to the world market through weekly price adjustments based on Singapore posted prices. However, significant distortions still exist in the relative price structure, particularly between diesel and gasoline. The Government is aware that such distortions may, over time, encourage uneconomic decisions for refinery investments and interfuel substitution, and it has taken steps to narrow down the remaining differences to reflect more closely the structure of international prices and domestic refining costs. Greater flexibility in price setting will also facilitate maintenance of price parity between heavy fuel oil and natural gas, the price of which is linked, inter alia, to a basket of crude prices. Electricity tariffs have been ra.sed regularly and broadly reflect the marginal cost of power generation (paras. 5.20-5.23). D. Organization and Planning 1.11 A number of well managed public institutions operate in the energy sector. The Petroleum Authority of Thailand (PTT)-- the dominant entity in the petroleum sector--is responsible, inter alia, for the purchase, transport, processing and saie of natural gas. The power sector is organized around three state enterprises: EGAT is responsible for power generation and transmission, while the Metropolitan Electricity Authority (MEA) and the Provincial Electricity Authority (PEA) are responsible for power distribution in the Bangkok metropolitan area and the rest of the country, respectively. Highlights of the operations of EGAT, MEA and PEA are included in Annex 1. 1.12 Energy sector policy and planning involve the National Economic and Social Development Board (NESDB), which is under the Office of the Prime Minister and oversees public investment planning; the National Energy Administration (NEA), under the Ministry of Science and Technology, which is primarily engaged in the promotion of energy conservation and the development of renewable resources; and the Department of Mineral Resources (DMR) of the Ministry of Industry, which is responsible for regulating petroleum and lignite exploration and production on behalr of the Government. The National Energy Policy Committee (NEPC), which acts on behalf of the Cabinet on all matters related to energy policy and planning, with the National Energy Policy Office (NEPO) under the Prime Minister's Office serving as its secretariat, facilitates the interface between the petroleum, power and refining subsectors. 1.13 While public enterprises engaged in the energy sector enjoy a large degree of autonomy in the conduct of day-to-day operations, they are subject to strict government control in all matters related to investment planning and financing. In particular, reflecting growing concern over public sector indebtedness, recent government reforms have introduced U -~~~~~~~~~~~~5 - ; stringent procedures for the control of public debt. All loans made by public (nterprises requiring government guarantee must now be approved by the National Debt Policy Committee and by the Cabinet, and subsequently endorsed by the Fiscal Policy Office of the Ministry of Finance. Moreover, in 1985 a National State Enterprise Committee was appointed under the Prime Minister to monitor compliance by public enterprises with government guidelines in the area of pricing. These procedures have not affected the efficient operation of power utilities. E. Energy Sector Issues and Strategy 1.14 To meet the rapidly increasing demand for energy, the Government's energy strategy calls for: (a) continued emphasis on energy conservation begun with the oil shocks of 1970s; (b) rational development of domestic sources of energy to substitute for imported fuel; and (c) a substantially increased program of investments in the power subsector. Conservation is being accomplished in part through economically efficient pricing of resources, with energy prices being set at levels above international prices for traded commodities and economic costs for non- tradables. Electricity tariffs have been raised regularly and broadly reflect the marginal cost of power generation. In support of its objective of increased reliance on domestic fuels, the country is developing its large lignite resources and has proposed the addition of 4,460 MW of lignite-fired power plants over the FY89 to FY01 period. In addition, production ot natural gas is being given priority so that its use can be increased in the power sector (para. 1.5). Regarding investments in the power subsector, the Government envisages investments of about $15 billion in EGAT alone over the next ten years. Concerned about the magnitude of these investmesits and the implications for public sector debt. Government is emphasizing the importance of a greatly enhanced role of the private sector in funding power projects. A considerable amount of work is required to deveiop the regulatory framework for private participation in the power sector, either through build-own-operate-transfer (BOOT) type operations or through a sale of EGAT equity on the securities markets. The Bank is working with the Government and EGAT in this regard and would expect to continue this relationship over the implementation period of the proposed loan (paras 1.15 - 1.21). The Government is also committed to the development of the sector in an environmentally sound manner. Measures to strengthen EGAT's capabilities in this area are discussed in paras. 4.10 - 4.12 below. F. Private Sector Participation 1.15 The Government has made increased participation of private investors in the energy sector one of the main planks of its energy program. Participation of the private sector is already prominent in the petroleum industry, particularly in tihe exploration and production of oil and gas, refining of petroleum, and import and distribution of petroleum products. The Government is conscious of the need to maintain Thailand's competitiveness vis-a-vis other countries in attracting foreign investment, and petroleum legislation was updated accordingly in 1987 to provide - 6 - additional incentives for the international oil industry to undertake petroleum exploration in Thailand. 1.16 Out of serious concern over the magnitude of the public debt, the Government currently is further investigating ways of encouraging private Initiatives in segments of the economy dominated by the public sector. In this regard, in April 1988 the National Economic and Social Development Board (NESBD) published a white paper which considered privatization of various state enterprises, either through a full or partial sale of equity, a contr'cting out of specific activities (such as through BOOT schemes), or through joint venture arrangements. It was expected that privat,zation could: (a) reduce the ex.ernal borrowing of state enterprises and thereby help maintain the Government's foreign debt ceiling; (b) increase the efficiency of the state enterprises and reduce Government subsid4es thereto; and (c) strengthen the country's capital markets and thereby assist in mobilizing private savings. 1.17 The development of Thailand's power system is particularly capital intensive and has been a major burden on the financial resources available to the country. Accordingly, in the white paper, EGAT was targeted as a priority candidate for private sector participation. Recently, the Energy Policy Committee (chairc by the Prime Minister) decided that EGAT should aim to secure privat 7unding for about 30? of its future power development program. A Committe' for Private Sector Participation in Power Generation was appointed, and members included the Minister of Finance, the Permanent Secretary of MOF, the Secretary of NESDB, the Director General of the Comptroller-General Department, the Director General and Deputy Director General of the Fiscal Policy Office, a NEPO representative, the EGAT General Manager, and the Director of Loan Policy and Management Division of MOF. The committee was charged with formulating proposals for power sector p;ivatization and pursuing appropriate activities towards implementation of the. e proposals. 1.18 The Government outlined four approaches to attracting private sector capital into the electric utility industry and has sought Bank advice with regard to implementation. The four approaches are: (a) commercialization of EGAT and sale of cGAT equity on the securities markets; (b) sale of electricity to EGAT from utility-scale privately owned power plants (i.e. establishment of BOOT or related schemes); (c) increased private participation in the mining sector; and (d) cogeneration (including generation fromi residual fuels and renewable energy sources) with purchase of surplu. electricity by EGAT. 1.19 Private sector participation in the power sector auld be achieved through any of these options, or through pursuing several or all of the options simultaneously. With regard to a potential 7 - commercialization of EGAT, the Government could take steps towards regulation of the utility under an independent legal aud regulatory framework regardless of its eventual decision about a sale of EGAT equity on the Thailand and/or international securities markets. Though in many respects EGAT is currently run on commercial lines (for example it achieves an acceptable rate of return, has an acceptable capital structure, and works to defined financial covenants), in other important respects EGAT differs from a normal commercial company (for example it has no formal fuel supply arrangements, operates without explicit tariff setting formulas, is exempt from corporate income tax, and needs Government approval of its development plans and capital expenditures). Full commercialization of EGAT would involve formalizing the regulatory framework; establishing arms- length fuel supply contracts; giving EGAT greater freedom to determine its investment program; ceasing to provide Government guarantee for EGAT debt; and applying subsidies for electricity consumption in a more transparent manner. Considering the legal and regulatory actions necessary prior to a sale of EGAT equity, such privatization could only be accomplished over the longer-term (2-3 years). Purchases of power from private producers under long-term contract could be implemented more quickly and ten plants included in the EGAT investment program have been selected as candidates for full or partial private ownership. For at least some of these plants, a BOOT approach could be utilized and the private sector could construct, own and operate the plants, with private financing secured by contractually agreed capacity and energy payments from EGAT to the Independent Power Producer (IPP). However, the BOOT approach has raised concerns regarding its effect on reliability and integrity of the system, flexibility and dispatchability, and cost of electricity to the consumers. 1.20 Following discussions with the Bank, the Government intends to commissis'n studies to address these issues. As a part of the preparation of the proposed loan, the Bank assisted the Fiscal Policy Office of the Ministry of Finance (which is charged with the responsibility of developing and implementing the Government's decisions on privatization) in preparing terms of reference for the studies. 1.21 In the coal sector, a joint review by NESDB and the Bank idertified several possible areas for private participation (para 1.6). The study reviewed possibilities for private participation in the mining sector and analyzed the prospects for contracting out the overburden removal at various EGAT mines, and including private equity in a possible association between EGAT and the private sector at other mines. The study recommended changes in the institutional and policy framework to attract private sector investment in the exploration and development of lignite resources. The implementation of the recommendations of the study is being developed by NESDB. 1.22 Initial steps towards privatization in the power sector through purchase of electricity from industrial cogenerators and from small-scale systems based on agricultural wastes (such as bagasse, rice husks and sugar cane wastes) are already in progress. As of July 1989, EGAT had drafted a solicitation document to invite proposals for purchases of electricity of up to 50 MW per plant, with total purchases for the system not to exceed 300 MW. A relatively low ceiling of 52 of EGAT's system capacity was set - 8 - for cogeneration purchases since the puichase contracts would not include dispatchability, but rather EGAT would take any electricity delivered from the plants and accordingly would lose flexibility. II. THE POWER SUBSECTOR A. The Power Market 2.1 The electricity market has grown at a very rapid pace over the past two decades. Total sales of electricity at.r per capita consumption increased from 467 GWh and 19 kWh, respectively, in 1961 to about 29,493 GWh and 556 kWh in 1988. Growth since 1980 has averaged 9.5Z p.a. (compared to an average GDP growth rate of 5.0Z). Over the years, the industrial sector has become the major electricity consumer, accounting for 422 of electricity sales in FY88. Recent growth, however, has been fueled largely by a substantial expansion in residential consumption both in urban and rural areas. As a result, EGAT's daily load curves have shown an increasingly pronounced evening peak. There is limited scope in the foreseeable future for suppressing the contribution made to the system peak by small consumers through conventional load management techniques. Significant opportunities exist, however, for reducing the demand of large industrial consumers at system peak time, partly through the introduction of time-of-day tariffs (as agreed with the Bank under Loan 2915-TH) which EGAT recently initiated (para. 5.23). 2.2 A sharp upsurge in economic activity in the late 1980s (GDP growth was 7.42 in FY87 and 10.42 in FY88) has translated into much higher than expected growth in electricity demand (142 in FY87 and FY88) and the outlook is for continued rapid growth over the medium term. Taking these developments into account, in February 1988 EGAT revised its load forecast and reformulated its 5-year Power Development Program (PDP), with emphasis on acceleration of generation capacity additions to keep system reliability at acceptable levels during the early 1990s. 2.3 EGAT's latest load forecast (Table 2.1) envisages a 121 growth rate in electricity generation over the next three years. This is reasonable in view of the high GDP growth rate anticipated for the same period (6.3Z) and the high historical elasticity of demand for electricity in periods of rapid economic growth. These projections have been endorsed by the Government as providing a suitable basis for planning purposes. Table 2.1: EGAT'S LOAD FORECAST, 1988-2001 FY88 FY91 FY96 FY01 Peak Generation (MW) 5,444 7,440 11,066 15,112 Net Energy Generation (GWh) 31,997 45,062 69,065 96,373 Annual Load Factor (Z) 67.1 69.1 71.3 72.8 Growth Rates (average Z p.a.) Peak Generation 11.0 8.3 6.4 Net Energy Generation 12.1 8.9 6.9 B. Generation and Transmission Facilities 2.4 As of February 1989, EGAT's installed capacity was approximately 6,900 MW with another 2,369 MW under construction. Generating facilities (Annex 2) consist of conventional thermal plants (52Z), hydropower (33Z), combined cycle plants (11Z) and combustion turbines (4Z). Over the years, EGAT has converted most of its oil-based thermal capacity (2,400 MW) to dual oil/gas firing to take advantage of the increasing availability of natural gas. Other thermal plants include lignite-fired units (865 MW) and the remaining oil-fired units (340 MW). The share of gas-dedicated capacity (i.e., essentially the combined cycle units) has remained low and the system has an inbuilt flexibility to adjust easily to changes in the fuel supply situation. Overall, there has been a substantial substitution away from fuel oil, with EGAT's oil consumption declining from 2.5 MMt in FY80 to 0.7 MMt in FY88 when natural gas consumption for power generation reached 463 MMcfd and lignite consumption, 5.9 MMt. By FY88, the share of oil-based generation had been reduced to 9%, down from a peak of 81% in FY80. Electricity purchases from Laos accounted for another 2% of total generation. 2.5 Plans for additional generation capacity were deferred for some time partly because of the slowdown in economic activity during the mid-80s and Government's decision to deter noncritical public investment so as to minimize public sector indebtedness. As a result, the hitherto comfortable plant reserve margin is expected to deteriorate substantially in the short term due to the recent resurgence in the demand for electricity. 2.6 EGAT's transmission facilities are tabulated in Annex 3. In addition to the construction of transmission lines and substations required to evacuate the output of new generation plants, EGAT is progressively developing a transmission system to serve various areas of the country. At present, EGAT operates 16,563 circuit-kilometers (ckm) of transmission lines, including 326 ckm constructed for 500 kV. - 10 - C. Fuel Options for Power Generation 2.7 EGAT has several fuel options on which to base its long-term generation expansion strategy. For base-load generation these options include domestic natural gas and lignite, and imported fuel oil and coal. Thailand has no major hydro schemes suitable for base load generation-- apart from those that could develop following international agreements. Many issues are involved in making the appropriate fuel choices. With respect to indigenous energy resources (natural gas and lignite), the principal factors include the magnitude of economically exploitable reserves, their respective timing, and economic costs in relation to the price of alternative fuels. A constant re-examination of the program is thus inevitable in view of the uncertainties involved. 2.8 Within the range of foreseeable prices and costs, both natural gas and lignite score over 4mported coal and fuel oil although imported coal is seen to play a major role in EGAT's plans for years after 1996 when presently identified reserves of gas and lignite could be fully committed. In a comparison of generating costs based on current and anticipated fuel price relationships, combined cycle plants are the most attractive option because of their lower capital and running costs, shorter construction period and higher efficiency compared to conventional steam units. However, because combined cycle plants can only operate using natural gas or middle distillates (the latter are more expensive than fuel oil by about 30-40Z), the attractiveness of the combined cycle option hinges on the long-term supply availability of natural gas. Any long-term supply constraint, however, can be skirted by r-lying on dual-fired (gas/fuel oil) conventional steam plants. Generating costs in lignite-fired and gas-fired steam plants are comparable when differentials in transmission requirements are factored in, and both are lower than imported coal-based generation costs. Although both natural gas and lignite are available in substantial quantities, both need to be developed further to meet the growing requirements of the power sector. Moreover, the timing of development of gas fields which depends on agreements to be reached with oil companies has proved difficult to predict accurately, while there are technical and institutional constraints on the pace at which the Mae Moh lignite mine can be developed. To minimize the risk of fuel disruptions, EGAT's PDP is based on balanced reliance on the two fuels, which are being developed in parallel with the common ,bjective of deferring the development of imported coal-fired capacity as much as possible. The Natural Gas Option 2.9 The future of gas-based generation relates closely to both the supply and cost of natural gas. As indicated in para. 1.5, gas production is projected to double over the next ten years, with the power sector expected to remain the main gas consumer. The viability of possible gas development schemes is being worked out by PTT so as to guarantee competitiveness with fuel oil (cif in Bangkok); royalty payments by the producer (12.5Z both on gas and recovered condensate) further improve the economic attractiveness of natural gas vis-a-vis imported fuel oil and coal, in the case of coal largely because of the high capital costs of coal-fired plants. A delicate planning issue will be to optimize the - 11 - balance between the use of gas in dual-fired (oil/gas) thermal plants and in more efficient combined cycle plants which, as indicated earlier, require an assured long-term supply if natural gas. Complexities involved in the negotiating process with oil companies have hindered attempts at optimizing the development of the gas sector, let alone the necessary integration of gas and power development plans. For these reasons, as well as its limited operational experience with combined cycle plants, EGAT has chosen to follow a cautious approach to combined cycle expansion (Table 2.2); this approach is appropriate under the cizcumstances. As its experience with combined cycle plants grows, and the gas market in Thailand reaches greater maturity, EGAT would be treading on firmer ground in maximizing its reliance on combined cycle installations. The Lignite Option 2.10 Lignite production for power generation is concentrated at the Mae Moh open pit mine in Northern Thailand. Delineation of the deposit has essentially been completed. As indicated in para. 1.6, economically minable reserves are estimated at 1,152 MMt of which 628 MMt has already been scheduled for power stations of 4,425 MW total. The other 524 MMt need further geotechnical evaluation for confirmation. The volume of economically minable reserves was determined on the basis of, inter alia, a cutoff cost of US$l0/Gcal or US$25/tonne (based on an average estimated heating value of 2,500 Kcal/kg). This is in line with the expected long- term import price of coal and provides a suitable basis for sector planning. Based on current economic costs of production (about US$13/tonne or US$5.1/Gcal), domestic lignite is competitive with imported coal; the separate accounts set up for EGAT's lignite mining operations under previous Bank-financed projects will provide a convenient instrument to monitor the competitiveness of lignite as both lignite production costs and international coal prices evolve in the future. D. EGAT's Power Development Plan 2.11 EGAT's latest power development plan (PDP) reflects the load forecast presented in Table 2.1. The Bank has had a significant input in its formulation, first through the 1985 Energy Assessment Report (Report No. 5793-TH), which advocated increased reliance on domestic lignite and natural gas for thermal generation and, more recently, through a study carried out by ESMAP jointly with the Government on appropriate investment strategies in the light of uncertain oil prices. EGAT's investment program is in line with the recommendations made in these two studies, and involves an immediate acceleration of generation capacity additions to keep system reliability at acceptable levels during the early 1990s. EGAT's PDP also takes account of the expectation of a more abundant supply of natural gas over the next 10-20 years, and includes a "gas/lignite" phase in the medium term followed by a "coal" phase starting around 1997 when presently known reserves of lignite and natural gas could be fully committed. EGAT's long- term generation expansion program was reviewed during project appraisal and found reasonable (Annexes 4, 5 and 6). It is summarized in Table 2.2. - 12 - Table 2.2: EGAT's POWER GENERATION DEVELOPMENT PLAN (FY89-2001) (CAPACITY ADDITIONS IN MW) Type of Facility FY89-91 FY92-96 FY97-01 Total Steam Plants Natural Gas/Oil - 1,200 - 1,200 Lignite 600 3,000 900 4,500 Coal - - 3,000 3,000 Fuel Oil 75 - - 75 Combined Cycle 1,230 663 - 1,893 Hydro 180 560 560 1,300 Total 2,085 5,423 4,460 11,968 2.12 EGAT's projections assume an average energy growth of 12Z p.a. during FY89-91 (Anriex 7). They indicate that the system's firm generating capacity (defined as total dependable capacity (hydro and thermal] less dependable capacity of the first and second largest units in the system) would go below system peak demand in 1989-90 and would be barely above peak demand in mid-199j1. This underscores the need for EGAT to expedite the installation of additional capacity, and further justifies the priority given to facilities with short construction periods such as combined cycle plants, part of whose power output becomes available as soon as the gas turbine portion of the plant has been completed (roughly 12-15 months after construction start-up). 2.13 EGAT's transmission program is aimed at extending high voltage 230 kV and J15 kV transmission facilities to all provinces of Thailand by the mid-199Js. The extra high voltage 500 kV transmission system, which is super-imposed on the 230 kV system, is required for bulk power transmission to accommodate the large-scale development of lignite-fired power plants at Mae Moh. EGAT's transmission development plan, shown in Table 2.3, is considered to be reasonable. 2.14 Overall, EGAT's PDP is appropriate to the present circumstances. Project supervision would provide the Bank with an opportunity to review regular updates of EGAT's PDP to monitor the impact of changes in power demand and fuel supply scenarios on the composition and magnitude of power investments. During the tenure of the proposed loan. EGAT will carry out an annual review and update of its 5-year investment program and keep the Bank informed. - 13 - Table 2.3: EGAT's TRANSMISSION DEVELOPMENT PLAN (FY88-2001) FY88-91 FY92-96 FY97-..l Total Transmission Lines (in ckm) 500 kV /a 208 1,950 310 2,468 230 kV 1,346 1,166 2,291 4,803 115 kV 1,326 1,575 894 3,795 Total 2,880 4,691 3,495 11,066 /a Excluding conversion of 326 km of 230 kV lines to 500 kV. E. Past Bank Experience and Sector Strategy Experience with Past Loans 2.15 The Bank has made 16 loans to Thailand for power, of which thirteen have been made to EGAT and its predecessor for financing the expansion of electricity generation and transmission facilities, and three to PEA for rural electrification. Of the thirteen loans to EGAT, ten have been fully disbursed and one is almost so; the other two are progressing on schedule. All loans to PEA have been fully disbursed. 2.16 In the last several years, EGAT completed four Bank-financed projects for power generation: Bang Pakong Thermal (Loan 1690-TH) and Khao Laem Hydro (Loan 1770-TH) in 1985, Pattani Hydro (Loan 1485-TH) in 1983 and Power Subsector (Loan 2000-TH) in 1987. The corresponding project completion reports and project performance audit reports highlight EGAT's financial recovery following the oil price increases of the 19709 from a -2Z rate of return on revalued assets in FY79 to 10.82 in FY88. These projects were completed on schedule and within the appraisal cost estimates with the exception of the Khao Laem Hydro project which was 12 months behind schedule and had a 42 cost overrun because of unexpected complications in civil vorks, and the Power Subsector project, which was 15 months late and 512 under the appraisal project cost estimate because inflation assumptions used to project contingencies were higher than actual increases, and because one component of the project was cancelled. One lesson learned from previous experience is that careful consideration needs to be given to subsurface investigations before embarking on large power projects so as to minimize the risk of cost overruns on civil works. This aspect is being taken care of in future projects. 2.17 Bank participation in the power subsector has helped EGAT to develop into a technically competent and efficient power utility. The Bank's association with PEA is also oriented towards achieving major institutional improvements. Through its continuing dialogue with the subsector institutions, the Bank has been instrumental in the - 14 - implementation of adequate overall electricity tariff levels, ensuring the sector's financial soundness and the cost effectiveness of power generation investments. Bank-sponsored sector work in investment planning and energy pricing also represented significant contributions towards improving sector coordination. Overall, the Bank's presence in the power subsector has helped ensure that utilities were soundly managed and has encouraged other lenders to provide investment financing for the subsector on favorable terms. 2.18 In the lignite mining subsector, the Bank has made two loans to EGAT to finance the development of the Mae Moh mine. The first loan (Loan 1852-TH), which financed expansion of production capacity from 1 million tpa to 2.8 million tpa, was closed in April 1988; a PCR is under preparation. The second loan (Loan 2407-TH), supporting further expansion of production capacity to 5 million tpa, is scheduled to close April 30, 1990. Through these two projects EGAT received substantial technical assistance that has led to improved capabilities in all aspects of mining operations, including the exploration for and evaluation of lignite reserves in other parts of the country. Establishment of a mine accounting system separate from accounts for power operations and the carrying out of a lignite pricing study have enabled the monitoring of costs and establishment of an internal lignite pricing formula based on appropriate economic and financial criteria. Bank Strategy in the Sector 2.19 The Bank has been closely involved in the financing of EGAT's power generation, transmission and lignite mining investments in the past. Its ongoing participation assisting in the formulation of sound investment decisions in a rapidly changing economic environment is a logical continuation of this involvement. The proposed loan would continue the time-slice financing approach initiated under the first Power System Development Project (Loan 3027-TH), approved in March 1989. Through the proposed loan, the Bank would continue its ongoing work with the power subsector: (a) in providing a continuous review of EGAT's PDP to ensure that optimum decisions are made in regard both to its composition and overall magnitude, and in assisting with efforts to pursue the path of privatization; (b) in improving the future performance of EGAT through a study to measure its operational efficiency; (c) in strengthening EGAT's capabilities in the field of environment through technical assistance and procurement of environmental monitoring equipment; (d) in reducing the country's dependence on imported fuels by supporting the concomitant development and economic use of domestic lignite and natural gas; and (e) in monitoring power tariffs through financial covenants to ensure that EGAT and the power subsector are financially able to undertake and operate future system expansions effectively. - 15 - III. THE BORROWER 3.1 The Borrower of the proposed loan would be the Electricity Generating Authority of Thailand (EGAT), which was established in 1968 by a merger of three generation and transmission authorities. EGAT operates as a bulk supplier of electricity, relying on MEA and PEA for retail distribution except for a few large industrial consumers. EGAT is owned wholly by the Government of Thailand and comes under the direct jurisdiction of the Prime Minister. It is a well-run organization, capable of managing the substantial growth in investment and electricity sales expected over the project period. A. Organization and Management 3.2 EGAT functions as a modern public utility and enjoys a considerable degree of autonomy in its day-to-day operations. Although decisions concerning planning, contracting, pricing, and financing of investment are subject to Government's approval, EGAT management provides the predominant inputs. EGAT's operational and policy decisions are made by a Board of Directors, which consists of a Chairman and not more than ten other members, including the General Manager. With the exception of the General Manager, the Board members, who are appointed by the Council of Ministers, act in a part-time capacity. Implementation of the Board's decisions is the responsibility of EGAT's management. 3.3 EGAT's operations are divided into six divisions, each headed by a Deputy General Manager: Administration, Accounting and Finance, Hydropower and Transmission System Development, Thermal Power and Mine Development, Transmission System Operation, and Power Plant Operation. Separate departments for Legal, Internal Audit, Economic Policy, Power System Planning, Corporate Planning, Public Relations, and Research and Development report directly to the General Manager (see Chart 1). EGAT's organizational structure appears to be sound and appropriate to its operational needs. However, a review of the cost effectiveness of EGAT's organization and its operations at this stage would be useful and this will be undertaken during the tenure of the proposed loan (para. 4.6). Thermal Power Development Directorate 3.4 The Thermal Power Development Directorate is responsible for engineering and construction of new thermal power plants and for general construction work. The Thermal Engineering Department has a staff strength of about 330; it employs consultants to the extent necessary to meet its workload and to avail itself of expertise in specialized areas. The Thermal Construction Department has a staff strength of about 1,500; it lets out work on contract as required depending on the number of projects simultaneously under construction. The Directorate's -workload is expected to be very high over the next 5-10 years and it will therefore need to draw substantially upon external assistance for both design and construction. - 16 - Lignite Mine Directorate 3.5 The Lignite Mine Directorate consists of a central office in Bangkok and field offices in Mae Moh and Krabi. Two departments under the Lignite Mining Directorate are the Mine Engineering Department (MED) and the Mine Operation Department (MOD). MED consists of seven divisions and is responsible for geology, mine planning, technical design and Krabi field operations. MOD consists of twelve divisions and is responsible for field operations and mine related activities on site. EGAT operates its mining activities as separate profit centers with their own accounts dnd financial statements. There is a separate Mine Accounting Section within EGAT's Controller's Department. During negotiations, agreement was reached that EGAT would continue to operate its mining activities as separate profit centers, and to maintain separate accounts and financial statements for each center. Power System Planning Department 3.6 EGAT's Power System Planning Department is responsible for survey, site investigation, planning of generation and transmission projects, economic studies, power development programming and system planning, financial forecasting and review of tariffs. The Department is well staffed and makes an extensive use of computer models, whose scope and quality are among the best in East Asia. It also oversees EGAT's electronic data processing activities; as such, it plans and installs equipment, and develops and maintains all user software in relation to teleprocessing within the corporation. B. Staffing and Training 3.7 EGAT's management and staff are competent and well qualified. As of 1988 over half of the staff had received some form of higher education, and the number of university graduates as a percentage of total staff increased substantially during the 1982 to 1988 period, rising from 12Z to 17Z. EGAT staffing ratio is five employees per MW installed. The main reason for this somewhat high ratio is that EGAT carries out most of its field investigations, survey and geological explorations using its own staff and maintains a large construction force for the construction of access roads, site preparation works and installation of equipment. Since construction workers are not given permanent employment status, EGAT has been able to reduce its manpower over the last four years after completion of two generation projects in the early 1980s. EGAT's staff amounted to 31,355 as of September 30, 1988 (Table 3.1), of which about 6,000 are on temporary status. With the proposed substantial increase in EGAT's generating capacity between 1989 and 1991, the ratio of staff to installed capacity is projected to decrease over the next five years. - 17 - Table 3.1: EGAT STAFFING EVOLUTION Increase 1912-61 FY82 FY68 FY64 FY6s FY86 FY67 FY6s X p.a. University graduates 8,232 8,600 4,866 4,682 4,610 6,210 5,479 9.2 Diploma and higher professional education 3,869 4,011 4,529 4,662 4,79" 4,479 4,666 5.6 Higher vocational education 5,168 6,026 6,680 6,758 6,611 6,469 6,456 8.6 Others 15,016 16,240 16,6a2 15,764 16,136 14,982 14,756 (0.3) Total 26,769 gn.377 82,157 81,601 81,157 81,110 31,865 2.7 Source: EGAT. 3.8 Training falls under the overall responsibility of EGAT's Administration Department. EGAT has three training centers for technical and managerial training, with the largest center at the Bang Pakong Thermal Power Complex. This center provides training in the operation and maintenance of power plants and transmission systems, and is equipped with a replica simulator of the Bang Pakong steam power plant. FGAT's training program is comprised of three courses: (a) basic--for apprentices; (b) upgrading--for promotion to higher positions; and (c) management--for senior officers. Training is imparted both by in-house and external staff through regular courses and special seminars, and is adequate to EGAT's needs. 3.9 EGAT's Lignite Mining Department also has a training center at Mae Moh. In-house training is supplemented with training abread financed under bilateral grants. The most fruitful and continuing technical assistance has been provided by the Australian Development Assistance Bureau, which has assisted in previous lignite expansion projects and imparted specialized training to EGAT's mining staff. C. Operational Performance 3.10 EGAT operates its plants and equipment satisfactorily. EGAT conducts regular maintenance within stipulated intervals, but while the standards observed for major maintenance work are satisfactory, further improvement would be achieved through the introduction of a computerized maintenance management system (Loan 3027-TH). Likewise, a critical review of all facets of its operations would be useful in further improving EGAT's operational efficiency (para. 4.6). Power losses, including both transmission and generation losses, amount to slightly less than 9% of electricity produced, with estimated transmission losses being about 5Z and auxiliary consumption being nearly 4Z of generation. Network losses are relatively high when compared to those recorded for the more developed power grids of countries such as South Korea and Japan, but are reasonable in view of EGAT's large transmission system which is still under evolution. Network losses are projected to decline in the 1990s, with the implementation of EGAT's high voltage and extra high voltage transmission expansion programs (para. 2.13). - 18 - 3.11 EGAT has a good record in project cost control, implementation and management. It has been borrowing from the Bank since 1957 and is very familiar with the Bank's procurement guidelines. Processing of tenders and award of contracts are undertaken equitably and expeditiously. D. Financial Management Accounting 3.12 EGAT's accounting system conforms to modern power utility practices. The staff is well qualified and competent. Accounting applications such as general ledgers, payroll, inventory transactions, accounts payable, and accounts receivable have been fully computerized. EGAT prepares annual budgets for its capital and operating expenditures. Periodically, reports are prepared enabling management to compare actual results against budgeted amounts. The awdget process has been operating satisfactorily. 3.13 EGAT's billing and collection system is adequate. Accounts receivable decreased from an average of 76 days of sales at the end of FY87 to 71 days at the end of FY88. In accordance with a government regulation requiring all state enterprises to collect receivables within 60 days, EGAT's accounts receivable are projected to be 60 days by the end of FY89. EGAT's efforts to reduce its receivables, however, are hindered by PEA's inability to collect its own bills promptly. At the time of appraisal, EGAT's receivables from PEA averaged 68 days, those from MEA, 61 days and from EGAT's direct customers, 63 days. Given PEA's difficulty in reducing its own receivables, the target set for EGAT of 60 days of receivables is appropriate. 3.14 EGAT has been developing an online MIS since 1984. Currently, over 200 reports dealing with operational and financial matters, construction, procurement and personnel can be retrieved. Although the system is not fully i:tegrated--a step which depends on software implementation on a recently acquired mainframe computer-- it is already used by EGAT's top management on a regular basis. Audit 3.15 EGAT has an Internal Audit Department with a staff of 68 auditors, which reports directly to the General Manager. The Internal Audit Department reviews the accounts of each operating unit throughout the year as they are compiled by the Controller's Department. EGAT's year-end financial statements are also reviewed, primarily to check for accuracy and compliance with regulations of the Ministry of Finance (MOF). There would now be scope for EGAT to broaden its internal audit function to deal not only with purely financial issues but also with operational aspects including internal procedures and efficiency improvement measures. - 19 - 3.16 EGAT's external audit is performed by the Office of the Auditor General, the government organizatica responsible for auditing all state enterprises. The international accounting firm Coopers and Lybrand has been retained as financial consultant to cooperate with the Auditor General and issue a separate report on EGAT's annual accounts. To date, reportr have been submitted on time and the performance of the consultant has been satisfactory. As provided under previous Bank loans, agreement was reached during negotiations that EGAT would submit to the Bank audited annual financial statements for its mining operations and EGAT as a whole, on both an unconsolidated and consolidated basis, within six months of the close of each fiscal year. EGAT also agreed during negotiations to continue employment of independent auditors. Insurance 3.17 In FY79, EGAT shifted to a self-insurance program and established a sinking fund to which it contributes annutally an amount equal to what it would have paid otherwise as insurance premiums. Under Loan 2407-TH, EGAT's self-insurance policy and procedures were evaluated by an indepen- dent expert and deemed satisfactory by tne Bank. The status of the sinking fund was reviewed during FY89, when EGAT hired the Royal Insurance to assess its risk and determine that the sinking fund was adequate. During negotiations, agreement was resched that EGAT would continue to make provisions satisfactory to the Bank to provide insurance against such risks and in amounts consistent with appropriate practice. Taxes 3.18 Prior to September 30, 1982, EGAT was exempted by a Cabinet Resolution from the requirement to remit any of its net income to the MOF because power tariff increases had lagged behind the rise in oil prices. Under a January 1983 Resolution, however, and following successive tariff adjustments, it was determined that EGAT would remit a portion of its net income to the MOF as determined by the Ministry on a periodic basis. EGAT has been remitting taxes each year at a level which has risen from 52 of net income in FY82, to an agreed 152 in FY88-90 subject to EGAT's attaining a self-financing ratio of at least 25Z (para. 5.5). 3.19 Customs duties and business taxes on imported equipment and materials for EGAT's projects included in the Fourth and Fifth Five-Year Development Plans (1977-1986) were cove,.ed by the Government in the form of equity contributions. However, the -overnment did not agree to EGAT's request for a similar concession for projects in the Sixth Five-Year Development Plan. Duties and taxes are therefore now met from EGAT's own resources. - 20 - IV. THE BANK LOAN A. Obiectives of the Bank Loan 4.1 The proposed loan will finance a two-year (FY90-91) time slice of * EGAT's investment program during the Sixth Five-Year Plan period (FY87-91). Its main objectives are to: (a) meet the growth in power demand expected over the medium II term at least cost; and (b) strengthen EGAT's capabilities in environmental monitoring and evaluation through technical assistance and acquisition of environmental monitoring equipment (para. 4.12). B. Utilization of Proceeds of the Bank Loan 4.2 Major components of EGAT's FY90-91 investment program which will be financed by the proposed loan include the installation of additional generation capacity, the reinforcement and expansion of its transmission system as required to transmit the additional production of electricity, the expansion of its lignite mining capacity to fuel additional lignite- fired thermal units, and miscellaneous works and equipment acquisition. 4.3 Use of the loan proceeds to cover part or all of the cost of any subproject of EGAT's investment program during the FY90-91 period would be permissible, provided that the subproject meets the following criteria: (a) is technically sound and economically justified; (b) has been approved by the Government; (c) has its environmental and resettlement aspects covered in a manner satisfactory to the Bank; and (d) has procurement arrangements consistent with the Loan Agreement. 4.4 EGAT would provide the Bank with the necessary subproject justification and background information sufficiently in advance of implementation to allow expeditious processing. 4.5 At negotiations, EGAT agreed with the above eligibility criteria for financing subprojects under the proposed loan. Institutional Development 4.6 During the tenure of the proposed loan, EGAT has agreed to imple- ment measures to strengthen its capabilities in environmental monitoring and evaluation (para. 4.12). Additionally, EGAT will also undertake a - 21 - study for evaluation of EGAT's operational efficiency and definition of related performance norms. The basic objectives of that study would be: (i) to review the operational efficiency of EGAT; (ii) to assess the productivity of its departments and determine whether they are operating in the most cost-effective manner; (iii) to identify general areas for improvement; and (iv) to recommend specific measures for improvement including development of norms for monitoring of performance. The Bank will be fully involved in this study and has already provided EGAT draft terms of reference for consultancy assistance (Annex 8). C. Implementation 4.7 EGAT will be fully responsible for the implementation of its investment program. The directorates for Thermal Power Plant, Mines, Hydro Power Plant and Transmission Development will be responsible for executing the respective program components. In view of EGAT's long experience in the execution of large thermal, hydro and transmission projects, no major problems are foreseen in successful and timely implementation. In view of its heavy work load in the near to medium term, EGAT will be making greater than normal use of consultancy services for design, engineering and construction supervision. To relieve pressure on its permanent construction forces, EGAT will be letting out works on centract to the extent necessary. For some of the large thermal and transmission line projects which need to be completed on an urgent basis to meet the heavy load growth over the next five years, a turnkey type approach would be adopted for contracting. In the lignite mining sector, EGAT will continue to let out overburden removal to private contractors while retaining control on all other mining operations. EGAT's project preparation work, execution plans and implementing schedules are generally satisfactory to the Bank; specific cases for which Bank funding is sought will be reviewed in greater detail at the appropriate time. Monitorina and Reporting 4.8 Satisfactory procedures for monitoring the progress of the loan in terms of physical execution and financial reports have been agreed with EGAT which will furnish quarterly progress reports. Relevant portions of the Project Completion Report will be drafted by the Bank not later than six months after completion of the loan and will be reviewed with EGAT within three months thereafter. Supervision Plan 4.9 The supervision plan of the proposed loan is shown in Annex 9. D. Environment 4.10 The Government and EGAT are committed to sound environmental policies and practices. There is a regulatory framework in place which ensures environmental screening of projects prior to Government sanction. - 22 - EGAT has a full-fledged Environmental Division that is well-staffed and well-equipped. Environmental impact assessments of projects are evaluated in a professional manner with consultancy assistance whenever called for; in addition, EGAT conducts a regular environmental monitoring program especially at the environmentally sensitive Mae Moh mining site. EGAT's resettlement policies and plans and their implementF-ion have in the past been generally satisfactory to the Bank. At appraisal, a review was undertaken of several environment related aspects which have a bearing on the future performance of EGAT in the field of environment. The findings and recommendations of this review are contained in the report "Environmental Review", a summary of which is presented in Annex 17. 4.11 In brief, the report concludes that while EGAT handles its environmental functions well, there are a number of areas in which further strengthening is required: (a) some restructuring of the Environmental Division accompanied with a clearer definition of policy and substantial training of staff in interpretive evaluation and quantitative prediction; (b) a review of monitoring practices, although EGAT is fairly well equipped with environmental monitoring instruments; (c) expert assistance in the analysis and interpretation of the large quantity of environmental data that EGAT collects at Mae Moh, before a meaningful control strategy could be evolved; also, expert assistance in formulating acid rain measurement and monitoring strategies; and (d) greater ecological assessment and monitoring in future environmental impact assessments. On a national scale, while there are several agencies concerned with environmental regulatory and policy aspects and projects do pass through the process of getting environmentally approved, there is a need to strengthen the coordinating, authorizing and enforcement role of the central agency, the National Environmental Board (NEB); likewise there is a need to centralize setting environmental standards and augmenting existing standards relevant to the power sector. 4.12 At negotiations, EGAT agreed to implement, in consultation with the Bank, appropriate measures for the purpose of strengthening its capabilities in environmental monitoring and evaluation, including the following: (a) EGAT will prepare a formal document stating its environmental policy, and associated objectives and procedures (currently this does not exist). This will delineate authority, allocate responsibilities and formalize procedures leading to a more efficient functioning of the Environmental Division, both within the overall organizational framework and within the division itself; (b) To meet the needs of a rapidly developing power program, EGAT will restructure its Environmental Division taking into consideration recommendations made in the report (Annex 17). To the extent feasible, the division's functions will be organized around the following five areas of expertise: (i) general environmental management; (ii) - 23 - atmospheric environmental issues; (iii) aquatic environmental issues; (iv) acoustic environmental issues; and (v) social and resettlement issues; (c) EGAT will strengthen the practical capabilities of its Environmental Division staff in the interpretive evaluation and assessment of environmental impact monitoring data and the quantitative prediction of impacts. This will be accomplished by engaging an expert who will: (i) conduct with EGAT personnel a detailed review of typical EIA reports; and (ii) assist in the analysis, evaluation and interpretation of envirotnmental impact monitoring data; (d) Foilowing recommendations outlined in the report (Annex 17), EGAT will undertake, with the assistance of an expert, a study of its environmental monitoring equipment and environmental monitoring practices, and implement the recommendations of this study in a manner mutually satisfactory to EGAT and the Bank; (e) With regard to the Mae Moh miav and power station expansions, EGAT will, with expert assistance: (i) analyze, evaluiate and interpret environmental impact monitoring data on water and air quality, with specific emphasis on dust concentrations and sulfur dioxide levels; and (ii) expand the area for monitoring rain acidity, adopt a methodology for rain acidity study suitable in tropical areas, and carry out plume chemistry study; and (f) In future environmental impact assessments and monitoring, EGAT will take into account various ecological aspects as recommended in the report (Annex 17), including measurement of electric field intensities near high voltage transmission lines. E. Cost Estimates 4.13 Total financing required by EGAT for its investment program in FY90-91 (including capitalized interest during construction) is estimated at about US$2,780 million, with a foreign exchange component of US$1,484 million. Costs are based on July 1989 price levels. Physical contingencies are only about 4.5Z of base cost, as prices for a substantial portion of the program have been definitely established. Price contingencies for local cost components are estimated on the basis of escalation factors of 4.0Z for 1990 and 1991, while foreign costs are escalated at 7.2? in 1990 and 4.4? in 1991, following Bank guidelines. Price contingencies are applied to those components of the program for which definitive prices have not been established. Table 4.1 summarizes the cost estimates of EGAT's FY90-91 program; details are in Annex 10. l - 24 - Table 4.1t SUMMARY OF COSTS /a FX as 2 FY9O-91 Program Baht million /b US$ million total Local Foreign Total Local Foreign Total cost Thermal Plants 11,174 26,248 37,422 436 1,025 1,461 70 Hydro Plants 1,224 1,447 2,671 48 57 105 54 Transmission 2,624 5,199 7,823 103 203 306 66 Lignite Mining 2,635 1,451 4,086 103 57 160 36 Miscellaneous 986 81 1,067 39 3 42 1 Taxes and Duties 7,577 0 7,577 296 0 296 0 Total Base Cost 26,220 34,426 60,646 1,025 1,345 2,370 57 Contingencies Physical 1,147 1,477 2,624 45 58 103 56 Price 1,040 1,360 2,400 41 53 94 56 Total Cost 28,407 37,263 65,670 1,111 1,456 2,567 57 Interest during 4,763 717 5,480 185 28 213 13 construction Total Financing 33,170 37,980 71,150 2,296 1,484 2,780 53 Required /a July 1989 price levels. /b Exchange rate US$1 = B 25.6. F. Financing Plan 4.14 Table 4.2 below summarizes the expected financing sources for EGAT's PDP during FY90-91. - 25 - Table 4.2: FINANCING PLAN Foreign Local Total (2) ------- US$ million ------ World Bank Loans Outstanding a/ 140 - 140 5 Proposed Loan 94 - 94 3 Other borrowings 1,250 541 1791 65 Internal cash generation - 755 755 27 Total 1,484 1,296 2,780 100 a/ Power Transmission Project (Loan 2915-TH) and Power System Development Project (Loan 3027-TH) 4.15 Bank financing, including expected disbursements under the ongoing loans, would account for about 82 of EGAT's overall investment program during the FY90-91 period. The proposed loan would meet about 32 of the program cost and about 62 of its foreign component (including interest during construction). The loan would be made to EGAT at the standard variable interest rate for a 20-year term including a 5-year grace period. EGAT would bear the foreign exchange and interest rate risks. The Kingdom of Thailand would guarantee the loan. G. Procurement 4.16 Contracts for the supply and erection of equipment to be financed by the Bank would be awarded on the basis of International Competitive Bidding (ICB) in accordance with the Bank's procurement guidelines. In the evaluation of bids, domestic price preference would be applicable for specific components as approved by the Bank. Civil works and local equipment would be awarded through Local Competitive Bidding (LCB) procedures which are acceptable to the Bank. Prior Bank review of bid documents would be mandatory for contracts expected to cost the equivalent of US$2.0 million or more. This would cover over 902 of total contract value. Contracts expected to cost less than US$200,000 equivalent each and not exceeding, in the aggregate, US$5.0 million, may be awarded through local shopping, or following LCB procedures open to foreign suppliers. Civil works up to an aggregate of US$2.0 million may be procured under contracts awarded following LCB procedures. Specialized mining instruments and control equipments, not exceeding US$0.7 million in the aggregate, would be procured from proprietary sources to achieve uniformity in operation and maintenance. Consultant services would be awarded in accordance with the Bank's guidelines for the use of consultants. - 26 - 4.17 Procurement following ICB procedures is expected to aggregate to about US$ 86 million or about 912 of the loan amount. H. Disbursements 4.18 The Bank loan would be disbursed against (a) 100Z of foreign expenditures of directly imported equipment and materials; (b) 1002 of local expenditures (ex-factory) of locally manufactured items procured through ICB; (c) 502 of local expenditure for materials and works procured locally; and (d) 1002 of total expenditures for consulting services. 4.19 For equipment and material contracts above US$2.0 million equivalent, disbursements would be made against full documentation. Reimbursements for expenditures relating to contracts valued at less than US$2 million equivalent would be made on the basis of Statements of Expenditures (SOEs). Documentation supporting the SOEs need not be submitted to the Bank but would be retained by EGAT and be made available for review by the Bank supervision missions. There will be no Special Account opened for this loan. However, EGAT will ensure that each withdrawal application would not be less than US$50,000 equivalent, irrespective of the currencies involved or the disbursement procedures used. 4.20 Annex 11 gives the disbursement schedule for the proposed Bank loan as well as the standard profile of disbursements for power projects in Asia. The loan is expected to be disbursed faster than indicated by the standard profile because of the time-slice funding approach and advanced stage of preparation by EGAT for its investments in FY90 and 91. The project would provide for substantial flexibility in the use of the loan proceeds and facilitate disbursements. The loan closing date would be March 31, 1994. V. FINANCIAL : KLYSIS A. Past Performance 5.1 EGAT's performance for the period FY82-88 is summarized in Table 5.1. Detailed statements are given in Annex 12. Data cover both EGAT's lignite mining, and power generation and transmission activities. - 27 - Table 6.1: SUMMARY OF E0ATVS FINANCIAL OPERATING STATISTICS, FYs 82-0S (shet million) Fiscal year ending September 80 1932 1998 1984 1986 196e 1997 19m Energy soles (CWh) 15,408 17,68a 19,886 21,196 22,558 26,778 29,494 Average revenue (B/kWh) 1.48 1.89 1.37 1.86 1.aa 1.80 1.26 Operating revenues 22,084 24,878 26,483 28,902 80,120 88,716 87,474 Operating expenses /a 17,808 19,726 21,691 28,316 22,941 24,082 27,770 Operating income 4,226 4,647 4,542 5,586 7,179 9,634 9,704 Net Income 2,845 8,096 8,878 1,702 1,078 4,196 8,892 Rate base 42,260 47,692 66,788 70,178 79,960 86,544 90,082 Long Term Debt 81,499 89,129 89,841 61,062 68,882 68,120 61,908 Primary Ratio,: Rate of X turn (X) /b 10.0 9.7 8.0 8.0 9.0 11.1 10.8 Debt service coverage (times) 2.8 1.8 2.4 1.8 1.4 1.4 1.6 Operating ratio (X) f 81 81 88 81 76 71 74 Current ratio (ti mesa 0.9 1.0 0.9 0.8 0.9 1.0 1.0 Debt as X of total capitalization 47 48 46 50 65 61 s0 Self-financing ratio (U) (3-year average) 81 16 47 41 388 3 44 la Including taxes, but excluding interest charged to operations and foreign exchange losses. lb On average net revalued fixed assets in operation for power. 5.2 During the period FY82-88, EGAT's energy sales increased from 15,403 GWh to 29,494 GWh--at an average annual growth rate of over 112. Higher economic growth and stable electricity prices caused energy sales to increase an average of 10 per year in the FY82 to FY86 period. Buoyed by the country's overall economic expansion in FY87 and FY88, EGAT sales increased over 14? in each of those years. 5.3 During the past seven years, EGAT has been a strong financial performer, largely because of a three-step tariff Increase in FY81. EGAT's self-financing ratio, which averaged 36Z during the FY82 to FY88 period, increased from 18Z in 1983, to 47Z in 1984, and was 44? in FY88. Its rate of return (ROR) on net revalued assets in operation has remained at or above 82 between 1982 and 1988, and was 10.8? in FY88. 5.4 Tariff reductions of 4X in April 1983 and 5? in June 1987 were implemented to correspond with declines in EGAT's operating costs resulting from oil price decreases. Because of the rate decreases and substantial increase in EGAT's rate base, EGAT's self-financing ratio fell from 31? in 1982 to 18? in 1983, and its rate of return dropped from 10% in FY82 to 9.7? in FY83 and 8? in FY84 and FY85. However, with strong sales performance in FY87 both the self-financing ratio and the rate of return rose in FY87 in spite of the 1987 tariff decrease, and they remained at robust levels in FY88. Although substantial foreign exchange losses (B 1:289 million in FY85 and B 2,821 million in FY86) reduced net income in - 28 - both FY85 and FY86 to below 1983 levels, the sizeable sales volume increase of FY87 enabled net income to surpass its earlier levels, though foreign exchange losses remained high (B 1,786 million in 1987). Continued high foreign exchange losses in FY88 (B 1,942 miillion) caused a slight deterioration in net income in that year. 5.5 EGAT, which was not obligated to pay income tax before FY82, has been required since then to remit to the Ministry of Finance a portion of its net income, at a level determined at year's end by the Ministry according to the needs of the National Treasury. For FY82 and FY83, EGAT paid remittances of about 52 of its net income. The remittance level was increased to 102 for FY84, 132 for FY85, 142 for FY86, and 152 for FY87 through FY90. For any year in which EGAT's self-financing ratio (SFR) falls below 252, the Government will, among other measures, reassess EC-AT's financial obligations to the State (para. 3.18). 5.6 EGAT's borrowings have been heavy, and the amount of its debt has been expanded substantially by the appreciation of the Japanese yen, German mark and Swiss franc, the currencies in which most of EGAT's debt is denominated (para. 5.8). Long-term debt in foreign currencies is exchanged into baht at the exchange rate effective on September 30 of the year for which the financial statements are prepared. At year end FY88, the total unrealized exchange loss on the revaluation of loans for completed projects was B 14.1 billion. Debt service coverage fell from 2.4 times in FY84 to 1.5 times in FY88. Nevertheless, EGAT's capital structure has remained satisfactory. Debt as a percentage of total capitalization increased from 45Z in FY84 to 532 in FY86 but fell to 502 in FY88. B. Present Financial Position 5.7 EGAT's financial position as of FY89 is healthy, with a self- financing ratio of 412, an ROR of 132, and a debt service coverage of 1.7 times. Substantial sales increases in FY87, FY88 and FY89 (142 p.a.) and relatively low capital expenditures both contributed to these robust financial ratios. While operating income decreased by 72 between FY87 and FY88 because of a mid-1987 tariff decrease which was effective for all of FY88, it increased by 222 in FY89. In turn, net income is expected to increase in FY89 by 402 over FY88's level. Foreign Exchange Exposure 5.8 As of September 30, 1988, EGAT had long-term debt (net of current maturities) of B 61,903 million, of which over half was denominated in Japanese yen, German mark, or Swiss franc. Since the Baht has weakened substantially against these currencies, EGAT has incurred considerable foreign exchange losses, which it plans to write off over the respective terms of the loans. This policy reflects a 1986 Ministry of Finance directive that all state enterprises revalue foreign currency loans as of September 30 of each year starting in 1986, and either take the entire exchange loss in FY86 or spread the loss over the remaining terms of the loans. Before 1986, EGAT had deferred such losses and charged them against revenue only when the loans were repaid. Since FY86, EGAT has adopted the - 29 - policy of revaluing the loans each year and writing the exchange losses off over the remaining terms of such loans. The Government policy and the alternative adopted by EGAT are appropriate since spreading the foreign exchange losses is a far better alternative than affecting the net profit of one single year by the entire amount of the loss. The deferred exchange adjustment account enables EGAT to reflect the loss in a timely manner and at the same time smooth out the effect of the exchange rates swings on the net income of any given year. Even with the sudstantial increase in EGAT's debt caused by the inclusion of the foreign exchange adjustment component, the debt to equity ratio remains well within the 60/40 ratio previously agreed with the Bank (para. 5.12). C. Financial Outlook 5.9 EGAT's healthy financial performance is projected to continue through 1997. The challenge for EGAT, particularly over the next five years, will be to assimilate and finance the expected sizeable expansions in its electricity sales and capital investment. Its current financial strength should allow it to do this without excessive difficulty. Key indicators of EGAT's financial performance for the period FY89-97 are presented in Table 5.2, and detailed projections are shown in Annex 13. Table S.2: Summary of EMAT' Financial Opcrmting Statistecs, FY 89-97 (Baht Million) Fiscal Yoar Ending Septembr 30 1989 1990 1991 1992 1993 1994 1995 1996 1997 6Eergy sales (aWh) 33749 3772? 41724 46104 50223 54896 59189 63949 68533 Average revenue (8/kWh) 1.26 1.26 1.41 1.41 1.41 1.55 1.64 1.70 1.77 Operating revenues 42S89 47671 59176 61i37 71205 84874 97034 106664 121241 Operating aepenees 30703 36276 41979 46965 S3215 63080 7?;040 82221 92737 Operating incose 11885 11396 17197 18410 17990 21794 24994 26443 28503 Net incose 6475 5633 10947 10291 8449 11302 13944 14941 15847 Rat.e asee 94921 104961 121856 149066 183167 215826 247039 282773 326809 Long-teor debt 66063 81389 100598 118573 131744 143594 163999 181714 193941 Primery ratios: Rate of return N) /b 12.6 10.9 14.1 12.3 9.8 10.1 10.1 9.4 8.7 Debt service coverage (time) 1.7 1.7 1.7 1.6 1.4 1.4 1.4 1.4 1.3 Operating ratio(l1) /a 72 76 71 72 75 74 74 76 76 Current ratio (times) 1.3 0.9 0.9 1.0 0.9 0.8 0.7 0.7 0.7 Lcng-term debt. as N of total capitalizatiorn 45 46 47 48 47 46 45 44 42 SoIf-financing ratio (S) (3-year *verag.) 41 25 25 29 26 25 26 25 25 /t Including taxes, but excluding intarest charged to operatione and foreign exchange losses. On average net revalued fixed asete in operation for poser. - 31 - 5.10 Agreement was reached at negotiations that EGAT would set its tariffs so as to generate funds from internal sources (as defined in Annex 14) equivalent to not less than 252 of the annual average of its capital expenditures incurred, or expected to be incurred, for that fiscal year, the previous fiscal year, and the next following fiscal year. A similar self-financing covenant would apply to the power subsector as a whole (para. 5.19). According to current projections, EGAT's prices for electricity sales to MEA and PEA would need to be increased in FY91 in order to stay above the covenanted 252 self-financing ratio level; total increases averaging 5.02 per annum over the 1991-97 period would be required. If the volume of EGAT's investment increases over the projected amounts and/or if the remittance to the Government is higher than the 152 assumed here, additional rate increases would be required. Government and EGAT currently are exploring a variety of approaches to keep near-term rate increases to a minimum: these include negotiated oil and gas price reductions, equity participation by the private sector in EGAT or specific EGAT capital projects, and lower remittances to the Government. 5.11 Because of continuing strength in the Thai economy, EGAT's energy sales growth is currently nrojected to increase an average of 1'. per year through FY92, and then by about 82 p.a. between FY93 and FY97. EGAT's net income is projected to increase with sales growth throughout the period except that increased depreciation resulting from EGAT's substantial investment program will cause some net income deterioration in 1992 and 1993. The operating ratio for power sales will range between 712 and 762 during the projected period, increasing in later years as the rate of return declines. The ROR is projected to remain above 82 throughout the 1989 to 1997 period. EGAT's power assets, which are revalued each year according to an index published by the Ministry of Finance, will increase at about 172 p.a. from B 116,985 million in FY89 to B 421,930 million in FY97. 5.12 EGAT's debt service coverage ratio will range between 1.3 and 1.7 times throughout the projected period. The capital structure will remain satisfactory: the debt/total capital ratio is expected to average 46? and remain below 49%. EGAT's current debt control test provides for Bank review of borrowings when the debt-equity ratio exceeds 60/40; agreement was reached at negotiations to continue this test for the proposed loan. In addition, EGAT has been required under previous Bank loans not to contract short- and medium-term debt (debt which matures within five years) in excess of 152 of its total debt outstanding. EGAT has always complied with this covenant, and agreement was reached at negotiations to continue it under the proposed loan. 5.13 EGAT has maintained a current ratio averaging 0.9 over the past seven years, with the ratio never falling below 0.S. Projections show that the current ratio will not fall below 0.7 during the project period. Since EGAT has easy access to short-term borrowing in the case of cash constraint, its liquidity position is satisfactory. - 32 - D. Lignite Mine Operationa 5.14 The operations of EGAT's Lignite Mine Directorate comprise the Mae Moh and Krabi mines. Each mining operation is treated as a separate accounting center and overhead costs are allocated proportionately. The transfer price is based on a methodology agreed with the Bank under previous loans. The transfer price reflects the long run marginal cost of lignite; it is equal to the sum of EGAT mining costs and a depletion premium that accounts for the increasing economic scarcity value of lignite and the associated cost to the economy of the early use of an exhaustible resource. The depletion premium is derived from the opportunity cost of lignite (based on imported coal as a substitute), future mining costs and the magnitude of reserves. Agreement was reached during negotiations that EGAT would continue to set the transfer price for the lignite produced and used in its power plants on the basis of economic principles and so as to ensure the financial viability of its lignite mine operations, in accordance with the methodology previously agreed with the Bank. 5.15 To ensure that adequate financial discipline continues to govern mining operations, agreement was reached during negotiations that the Lignite Mine Department would meet standard debt covenants as agreed under previous lignite mining operations. The covenants are (a) a debt:equity ratio not exceeding 60:40; and (b) a debt service coverage of at least 1.3. E. Subsector Finances 5.16 Consolidated financial projections of the power subsector (EGAT, PEA and MEA) are presented in Annex 14. 5.17 Tariff increases in the early 19809 brought the average retail electricity price in Thailand to a level which was at or above the long-run marginal cost (LRMC) of supply, and created the base for the financial viability of the power subsector during the FY82-88 periGd. Although extensive capital expenditures in FY84 and FY85 (which increased the rate base in those years by 19Z and 24?, respectively) reduced the rate of return of the power utilities between FY83 and FY85, reductions in fuel prices in 1986 and 1987, as well as substantially increased electricity sales in 1987, helped to keep the self-financing ratio above 25? for both EGAT and the power subsector as a whole. 5.18 With rate increases beginning in FY91 and averaging 4.0Z per year through FY97, the subsector would produce the covenanted 252 self-financing ratio level throughout the projected period, and earn an average rate of return on revalued net fixed assets of 10.3?. With the estimated tariff increases, the subsector will remain financiallv strong through 1997. Energy sales will increase at an average annual rate of 11 between 1990 and 1992 and at 82 per year thereafter. Revalued net fixed power assets will grow at about 15? per year throughout the FY89 to FY97 period. The debt service coverage is projected to be at least 1.3 times. Debt as a percent of total capital will average 442 during the FY89 to FY97 period and will not rise above 462. - 33 - 5.19 Agreement was reached at negotiations that tariffs for the power subsector would be set so that the sector would generate funds from internal sources equivalent to not less than 252 of the annual average of its capital expenditures incurred, or expected to be incurred, for that fiscal year, the previous fiscal year, and the next following fiscal year. For this purpose the Government will provide to the Bank consolidated financial statements for the power subsector within six months after the end of each fiscal year. This covenant will ensure that the subsector remnins financially sound. The co-enant is used to determine the appropriate tariffs with all retail customers--whether of EGAT, MEA or PEA--paying according to the same schedule. Once the sector self-financing ratio has been ensured, self-financing ratios are set for the individual utilities. Because PEA, with its extensive rural distribution system and low density coverage, has costs which exceed those of EGAT and MEA on a per kWh basis, subsidies from EGAT and MEA to PEA are bui.; into the rates charged by EGAT to each utility (EGAT's tariff to MEA n 1989 is B 3 48 and to PEA B 1.04, compared to its average tariff of B 1.26). F. Tariff Levels and Structure 5.20 Successive power rate increases in FY80 and FYR1 resulted in an average increase of 158? in the tariffs charged by EGAT to PEA, MEA and its large direct consumers. Retail tariffs charged by PEA and MEA were correspondingly increased by 111? and 1312 respective±y. These tariff adjustments have been sufficient to keep EGAT revenues at healthy levels to the present time and even to allow occasional small rate reductions--the lact time in June 1987--as EGAT's operating costs were reduced due to the oil price decline. FEGAT's tariff structure is given in Annex 15. 5.21 As agreed under Loan 3027-TH, agreement was reached during negotiations that EGAT would review quarterly the adequacy of its rates and maintain a fuel cost variation charge clause in its tariff structure. Although EGAT and the sector have complied substantially with these covenants, rate adjustments to reflect fuel cost variations have not been automatic, but subject to Government review. Accordingly, in the past, tariff adjustments have at times been delayed. The Government undertakes periodic reviews of EGAT's bulk supply tariffs to PEA and MEA and the retail tariffs to the consumers to ensure that: (a) they are adequate to meet the financial covenants for EGAT and for the power subsector; and (b) they accomplish the required cross-funding between MEA and PEA. Government is now considering shifting in the future toward a tariff policy based on automatic fuel cost adjustment. 5.22 Annex 14 shows the calculation of the average rate levels for the power subsector that would be necessary to keep a minimium self-financing ratio of 25X. The rate levels projected at current prices (in baht per kWh) are presented in Table 5.3 below. They are within 15% of the average revenue that would result from strict LRMC pricing. - 34 - Table 6.3: POWER SUSSECTOR--PROJECTED AVERAGE RETAIL TARIFF Current level FY69 FY90 FY91 FY92 l:Y98 FY94 FY95 FY96 FY97 Avereg. tariff (B/kWh) 1.69 1.06 1.64 1.64 1.'d 2.10 2.16 2.20 2.20 Projected tariff Increase (%) - - 9.4 - 2.1 11.6 2.9 2.2 - 5.23 Under Loan 2915-TH, EGAT agreed to undertake a program of adjustments in the existing tariff structure so that tariffs would (a) reflect cost differences between the inain voltage levels of delivery; (b) reflect cost differences arising frs:n marked variations in consumers' usage patterns, viz. load factor, power .actcr and intensity of peak-time demand; and (c) reduce subsidies for consumers falling outside low-income groups. In the pursuit of these objectives, in June 1987, the Government eliminated tariff surcharges and simplified the tariff structure. For industrial and business customers for whom a two-part tariff is applicable, kW demand charges were increased and kWh charges were reduced to reflect the relative marginal capacity costs and energy costs. Tariff differences between high, medium and low voltage users were introduced to reflect network costs and energy losses. Time-of-day rates for large industrial consumers, with rates differing for each of three daily periods, will be effective from January 1, 1990. G. Financing Plan 5.24 A financing plan for EGAT and the subsector over the project period (FY90-91) is presented in Table 5.4. - 35 - Tuble S4: BAU AN SECTOR FMANCINO PLAN PY9O-91 EQAT Power Sector eht us u-- Z USS s (Mi11llons) (11illi;ons) Financial Requirements EGAT Investments (Includin IDC) 71148 2780 104S 71148 2780 90S MEA/PEA In.estents (Including IOC) 0 0 0_ 11476 448 15_ Total Investwent 71148 270 t04S 82624 3228d 10SS Decrease in Deferred Llibillties 157 6 O 157 6 ox Working Capital IRequirements -3203 -12f -s% -3917 -153 -SS Total Requiresnts 6101 2661 1001 78864 3082 0OO0 Sources Internal Cash Generation 41664 1628 61s 63368 2085 e68 Less: Debt Service 23687 926 36# 29580 11SS 381 Net Internal Cash Omneration 17977 -- 02-- 26S 23788 929 30% Borrowings 51834 2026 761 S2955 2069 67S Equity 0 0 O0 1697 66 2S Assts Disposal *nd Other Iteme (Not) -1710 -a6 -38 424 1S 1i Total Sources of Fund 6WI;01 2661 -tOS 78864 3082 1O00 5.25 The proposed project, including interest during construction, represents 901 of the overall power sector investment program during the FY90-91 period. The proposed Bank loan of US$94 million is expected to meet 4Z of EGAT's total financing requirements for the period. During the FY90-91 period, EGAT and the power sector expect to meet 26Z and 30Z, respectively, of their total capital requirements from internally generated funds. 5.26 Borrowings from external sources amount to 76Z of EGAT's financing requirements for FY90 and FY91. EGAT has a longstanding association with the Asian Development Bank (ADB), and the Overseas Economic Cooperation Fund of Japan and more recently with the Kuwait Fund and the OPEC Fund. A list of EGAT's loans and their terms is included in the project file. No difficulties have arisen in the past in obtaining bilateral financing and suppliers credits. For the past ten years, EGAT has made increasing use of Euro-dollar and other foreign financing sources, local bond markets, and commercial bank loans; it will continue to use these sources to cover any financing gap. VI. PROJECT JUSTIFICATION A. Economic Analysis 6.1 The time-slice forms a part of EGAT's least-cost expansion plan. To confirm the economic viability of EGAT's PDP, an adjusted Internal Financial Rate of Return (IFR) is calculated, as an approximation of the - 36 - Economic Rate of Return (ERR), on the basis of the incremental cost and benefit streams associated with the 1989-98 time-slice of EGAT's overall investment program. This period covers all the proposed gas- and lignite- fired generating units predicated on present reserve estimates of each of the two domestic fuels; subsequent units which are presently assumed to be based on imported coal are not included in the analysis. The (adjusted) IFR on this expansion program is 14.b. Incremental fuel costs are based on the Bank-defined scenarios of international fuel prices. Estimates of the economic cost of natural gas are derived from the contract terms for the purchase of gas from Unocal by PTT, net of royalty payments both on the gas itself and on recovered condensate. Additional benefits accruing from the recovery of LPG are ignored. Estimates of the economic price of lignite are based on the methodology agreed between EGAT and the Bank for the establishment of the transfer price of lignite within EGAT, net of taxes, duties and royalty payments. The projected levels of EGAT tariffs producing the minimum covenanted 252 self-financing ratio are used as a proxy for benefits, ignoring possible consumer surplus. The ERR on EGAT's expansion program would, therefore, be greater than the IFR. Because financial covenants are agreed to ensure tariff adjustments in response to changes in EGAT's cost structure, the (adjusted) IFR is relatively insensitive to changes in EGAT's fuel costs. Even though EGAT's PDP can be adapted relatively easily to changes in load forecast by modifying the timing of future units, the IFR was tested with a decline in projected demand. A reduction of 5Z in the sales of electricity brings the IFR down to 132. The IFR is less sensitive to program costs, dropping to 132 for an increase of 102 in capital and operation and maintenance costs. Details of calculations are in Annex 16. B. Risks 6.2 Although the PDP is ambitious, no major risks are foreseen in its successful and timely implementation, in view of EGAT's demonstrated experience in the execution of large thermal, hydro and transmission projects, and its advanced state of preparedness on procurement and implementation. To reduce the implementation period for some of the urgently needed generation projects, EGAT will be letting out single- responsibility contracts. Major transmission line projects will be implemented on turnkey basis. In view of the anticipated heavy work load on its engineering and design staff, EGAT will be making much greater than normal use of consultancy assistance for project design and construction supervision. VII. AGREEMENTS REACFED AND RECOMMENDATION A. Agreements 7.1 During negotiations, agreement was reached with EGAT that it would: - 37 - (a) continue to operate its lignite mining activities as separate profit centers and to maintain separate accounts and financial statements for such centers (para. 3.5); (b) submit to the Bank audited annual financial statements for the mining operations and EGAT as a whole, on both an unconsolidated and a consolidated basis, within six months of the close of each fiscal year and continue to have the accounts audited by independent auditors (para. 3.16); (c) continue to make provisions for insurance consistent with appropriate practice (para. 3.17); (d) submit to the Bank for its review and approval an evaluation of any sub-project to be financed under the loan, establishing that the sub-project is technically sound and economically justified, has been approved by the Government, and meets environmental standards and provides for resettlement plans satisfactory to the Bank (para. 4.5); (e) to implement, in consultation with the Bank, appropriate measures for purposes of strengthening its capabilities in environmental monitoring and evaluation (para. 4.12); (f) maintain a debt/equity ratio not exceeding 60:40 and short- and medium-term debt at no more than 15Z of all debt (para. 5.12); (g) continue to set the transfer price for the lignite producea and used in its power plants on the basis of economic principles and so as to ensure the financial viability of its lignite mine operations, in accordance with the methodology previously agreed with the Bank (para. 5.14); (h) limit borrowing related to lignite mining activities such that the Lignite Mine Department's debt/equity ratio is no greater than 60:40 and its debt service coverage ratio is at least 1.3 (para. 5.15); and (i) provide a quarterly review of the adequacy of its rates and maintain a fuel cost adjustment clause in its tariff schedule (para. 5.21). 7.2 During negotiations, agreement was reached with the Government that it would: (a) undertake a periodic review of power rates to ensure that tariffs are adequate for both EGAT and the power subsector to produce fund- from internal sources equivalent to not less than 25Z of the annual average capital expenditures - 38 - incurred,, or expected to be incurred, by them for that fiscal year, the previous fiscal year, and the next following fiscal year (paras. 5.5, 5.10 and 5.19); and (b) provide the the Bank consolidated financial statements for the power subsector within six months after the end of each fiscal year (para. 5.19). B. Recommendation 7.3 The proposed program is suitable for a Bank loan of US$94 million equivalent to EGAT with the Guarantee of the Kingdom of Thailand at the Bank's standard variable interest rate for a 20-year term including a 5-year grace period. 39 - ANNEX 1 THAILAND SECOND POWER SYSTEM DEVELOPMENT PROJECT Electricity Generating Authority of Thailand Highigahts of ECAT. MEA and PEA Operations FY81 FY82 FY83 FY84 FY86 FY86 FY87 FY8S ECAT Peak generation (MW) 2,589 2,888 8,204 8,647 8,878 4,181 4,784 6,444 Annual load factor (X) 70.9 67.9 67.9 67.6 68.7 67.7 68.0 67.1 Not energy genoration (GWh) 15,960 16,882 19,066 21,066 23,857 24,780 28,193 31,997 Energy sold (GWh) 14,652 16,388 17,544 19,838 21,208 22,629 25,75 29,494 Network losses (GWh) 1,408 1,496 1,622 1,728 2,149 2,251 2,487 2,503 Network losses (as X of generation) 8.82 8.86 7.98 8.20 9.20 9.08 8.64 7.82 Number of employes 22,28) 26,769 80,077 82,157 81,801 81,157 81,110 81,356 Employee per MW installed 6 7 6 6 6 6 S S MEA Peak demand (MW) 1,B88 1,499 1,631 1,776 1,828 1,988 2,178 2,432 Energy purchased (GWh) 8,492 8,719 9,666 10,498 10,910 11,891 12,930 14,564 Energy sold (GWh) 8,182 8,488 9,166 9,917 10,830 10,672 12,104 13,679 Losses (GWh) 81O 281 5OO 581 580 719 826 886 Losses (as X of purchases) 8.7 3.2 5.2 5.6 5.8 6.3 6.4 6.1 Number of consumers ('000) 794 888 876 914 962 1,001 1,052 1,118 Sales/consumer (kWh) 10,305 10,069 10,468 10,850 10,788 10,661 11,506 12,267 Annual load factor (X) 69.8 66.4 67.7 67.8 68.8 65.6 67.8 68.4 Number of employes 10,045 10,11 10,264 10,801 10,422 10,640 10,866 11,014 Number of consumers/employee 79 82 8S 89 92 94 97 101 PEA Peak demand (MW) 1,181 1,836 1,86S 1,722 1,955 2,082 2,876 2,745 Energy purchases (GWh) 5,261 6,428 7,385 8,222 9,424 10,213 11,808 13,760 Energy generatd (OWh) 45 35 27 21 19 26 25 21 Energy available (GWh) 5,806 6,465 7,412 8,248 9,443 10,238 11,888 18,781 Energy sold (GWh) 5,210 5,840 6,680 7,488 8,667 9,305 10,944 12,694 Losses (GWh) 696 618 732 810 886 93a 889 1,087 Losses (as X of available) 10.3 9.5 9.9 9.8 9.4 9.1 7.5 7.9 Consumers ('000) 2,270 2,723 3,186 3,620 4,054 4,542 6,069 6,561 Average energy sales/consumer (kWh) 2,295 2,145 2,097 2,063 2,110 2,049 2,159 2,287 Annual load factor (X) 56.1 55.2 64.1 54.6 56.1 56.1 66.9 56.8 Number of employees 16,262 18,188 19,605 21,382 22,584 23,602 24,897 25,017 Number of consumers/employee 189 150 162 169 179 193 208 222 - 40 - ANNEX 2 THAILAND SECOND POWER SYSTEM DEVELOPMENT PROJECT EGAT's Euisting Generating Capacity (As of February 1989) Average energy omissonng Not. ofapacityS eMW) cp ability Plant type do te(s) units inotg N. oC at Mt yr) Hydroelectric Plant linumlDoI 1964-82 7 535.0 710.0 1,200.0 Sirikit 1974 3 375.0 500.0 1,000.0 Ubolratana 1966-68 3 25.0 25.0 56.0 Sirindhorn 1971-84 3 36.0 36.0 86.0 Chulabhorn 1972 2 40.0 40.0 95.0 Kang Rrachan 1974 1 19.0 19.0 78.0 Nam Pung 1965 2 6.0 6.0 15.0 Srinagarind 1980-85 4 540.0 720.0 1,140.0 Bang Lang 1981 3 72.0 72.0 200.0 Yha Thung Na 1981-82 2 38.0 38.) 165.0 Khao Lsem 1984-85 3 300.0 300.0 760.0 Huai Kum 1982 1 1.3 1.3 2.0 Ban Yang 1974 3 0.12 0.12 0.3 Ban Santi 1982 1 1.3 1.3 6.0 Ban Chong Rlum 1984 1 0.02 0.02 0.2 Bank Rhun Klang 1983 2 0.18 0.18 0.7 Mae Ngat 1985 2 9.0 9.0 29.0 Huai Saphan Hin 1986 2 12.2 12.2 27.0 Rajjaprabha 1986-87 3 240.0 240.0 550.0 Total 48 2,250.12 2.730.12 5,410.2 Thermal Power Plant .lae nOn (iignite)- 1987-85 7 825.0 5,420.0 Krabi (lignite) 1964-68 2 40.0 200.0 North Bangkok (oil) 1961-68 3 237.5 1,250.0 Surat Thani (oil) 1973 1 30.0 210.0 Khanom PPB (oil) 1981 1 75.0 525.0 South Bangkok joil/gas) 1970-77 5 1,300.0 9,110.0 Bang Pakong (oil/gas) 1983-84 2 1,100.0 7,710.0 Total 21 3.607.5 24.425.0 Combined Cvcle Power Plant sang Pakong (gas) 1980-83 2 771.6 4,055.0 Total 2 771.6 4.055.0 Gas Turbine Naknon Katchasima 1968 1 15.0 33.0 Udon Thani 1969 1 15.0 33.0 Hat Yai 1969-71 3 45.0 99.0 Surat Thani 1969-70 3 45.0 99.0 Lan Krabu 1969-81 7 145.0 735.0 Total 15 265.0 1054.0 GRAND TOTAL 86 6,894.22 35.042.2 - 41 - ANNEX 3 THAILAND SECOND POWER SYSTEM DEVELOPMN PROJECT EGAT's Existing Transmission and Substation Facilities (As of February 1989) Transmission lines Substations (circuit-kilometers) Region and Transformer La Double- Single- system voltage Number capacity (MVA) circuit circuit Total Region 1 230 kV 19 5,060 2,750 18 2,768 115 kV 41 2,281 641 1,437 2,078 69 kV 1 31 - 128 128 Subtotal 61 8.372 3,391 1.583 4.974 Region 2 230 kV 1 400 290 - 290 115 kV 28 1,057 1,711 1,686 3,397 69 kV 4 47 - 327 327 Subtotal 33 1.504 2,001 2.013 4,014 Region 3 230 kV 3 400 806 - 806 115 kV 21 976 1,149 1,137/b 2,286 Subtotal 24 1,376 1.955 1,137 3,092 Region 4 500 kV - - - 326 326 230 kV 8 750 2,040 218 2,258 115 kV 20 924 640 1,072 1,712 69 kV 5 125 - 187 187 Subtotal 33 1.799 2,680 1,803 4,483 All Region 500 kV - - - 326 326 230 kV 31 7,610 5,886 236 6,122 115 kV 110 5,244 4,141 5,332 9,473 69 kV 10 203 - 642 642 Total EGAT 151 13.057 10,027 6,536 16,563 /a Station service and generator unit transformers are excluded. b Nine circuit-km of 132 kV transmission line are included. -42 - ANI 4 Page=1of 2 TH4AILAND SECOHM FO0E1 SYSTEM DEvELOPMENT PRFOjCT EAT's Power Development Plan Caps- Schedul ed capital investment Unit city coplIetion Ferelign Local Tot I no. Typo (MW) date ---- (US *iPlion) ------ Under Construction i.e Nab 8 Ther_al S00 Jul 1909 171.8 99.7 271.5 Mae mob 9 Thermal t00 Dec lo0 166.8 61.4 249.7 Khano second power plant barge 2 Thermal 7S Jul 1909 64.9 23.4 n2.8 SiV tronmiasion systm stage 2 (for MVa mob unit 6) - - - Apr 1969 17.7 11.4 29.1 EHV tranmisgion system stage 8 (for Mae Moh unit 9) - - - Apr 1900 48.8 81.6 74.9 Second centrol-southern ti lIlne - - - Feb 100 18.9 18.2 82.1 Transmission systm expansion no. 7 part A - - - 1000 51.5 45.6 97.8 part S - - - 1990 7.8 6.9 14.2 Mae Moh mine expansion for Mae Moh units 5 6,7 - - - 1909 26.3 46.6 77.4 Mao MoN mine expansion (stage 1) for Mae Moh units 8,9 - - - 1991 81.7 184.9 166.2 Srinogorind 5 Hydro 160 Apr 1091 26.4 11.6 8 8.2 Sang Pakong combined cycle 8 Gas turbine A 807 Jun 1091 118.2 83.5 179.7 combined cycle Song Pakong combined cycle 4 Gas turbine & 807 Aug 1091 108.6 46.1 149.7 combined cycle MVe Mob 10 Thbrmal 800 Feb 1992 186.4 122.4 288.8 Bang Pokong therml 8 Thermal 600 May 1992 198.9 215.4 414.8 Bong Pakong thermal 4 Thermal 6oo May 1998 167.2 204.8 891.6 280 kV Khon Ka-n 3 - Roi Et trana- - - - Jan 1991 10.9 11.5 22.4 mission project 280 kV Tha Tako-Khon Keen 8 - - - Jan 1992 16.5 17.7 84.2 ENV transmission systm for Mae Mob - - - Feb 1992 106.7 96.1 200.8 unit 10 ENV transmission system for Mae Moh - - - Feb 1993 2.2 1.6 3.6 unit 1- Misc, transmiosion system expanslen - - - 1997-91 10.6 161.4 172.0 and construction work Total - - 2.99 New Pr?J*cts Bhuoibol hydro plant renovation 1-2 Hydro (140) Mar 1002 18.6 4.6 28.4 Pak Mun 1-4 Hydro 18S Nov 1998 74.6 74.6 149.2 Keeng Krung 1-2 Hydro *0 Dec 1994 62.4 67.2 119.6 Mae -tsng 1-2 Hydro 26 Jun 1995 22.8 19.2 41.6 Shumibol 6 Hydro 176 Jan 1996 64.9 42.8 107.7 Sirikit & Lower Sirikit 4 Hydro 140 Feb 1996 70.6 82.1 102.7 Rsyong combinod cycle 1 Gas turbine S o80 Sep 1991 184.6 77.8 212.6 combined cycle Rayong combined cycle 2 oa* turbine A S80 Oct 1991 102.8 68.1 160.9 combined cycle Rsyong combined cycle 8 Goa turbine & 808 Jon 1992 106.7 66.3 162.0 combined cycle Nam Phong combined cycle 1-2 Gas turbine A 855 Dec 1991 126.1 76.2 201.3 combined cycle Mae Moh 11 Thermal 800 Feb 1993 136.4 98.9 280.3 Mao Moh 12 Thermal 8o0 Oct 1993 178.6 180.6 309.4 Mae Moh 18 Therml 380 Apr 1994 186.6 120.2 814.7 Me Moh 14 Thermal 0oo Oct 1994 186.6 136.0 322.6 Mae Moh 15 Therema 800 Apr 1996 194.7 183.6 328.3 Mae Moh 16 Thermal 800 Nov 1996 194.7 141.8 838.6 North Bangkok plant renovation 1-8 Thermol (287.6) Aug 1998 84.6 16.8 61.3 South Bangkok plant renovation 1-6 Thermal - Dec 1995 48.4 16.4 63.8 Snba Yol 1 Thermal 150 Oct 1095 126.7 97.1 225.8 Saba Yol 2 Thermal 150 Apr 1996 116.7 77.8 194.6 Accelerated transmission project - - - Apr 1992 47.8 37.7 86.0 EHV transomosion system for Mao Mob - - Oct 1098 66.8 62.0 116.8 unit 12 ENV transmloion system for Mae Moh - - - Apr 1994 48.0 85.8 78.8 unit 18 ANNEX 4 * etrf 2 Cope- Scheduled Capitol invatasnt Unit city completion oreigsn. Local Total no. Type (MW) dat ---- (USS eIllion) ------ Mm Mroc.ts (contttd) HV tronum1ssion system for Ma. Mob - - - Oct 19n4 2.2 1.6 8.7 unit 14 EH transmisslon *systm for Use Mob - - - Apr 1SM 1S.6 11.8 27.1 unit 15 EH tronsmisslon systo for Mee Moh - - - Nov 1996 2.8 1.6 8.9 unit 16 Transmioslon system expansion No. I - - - Apr 1998 07.8 *7.1 164.4 Tran_oission system expansion No. 9 - - - Apr 1995 56.6 56.8 114.9 ime Moh mine expansion (stago 2) - - - 1096 29.6 14.1 48.9 for Mae Mob units 8,9 Mee Moh mine *xpanelon for Me Mobh - - - Feb 1992 7.6 65.9 68.4 unit 10,11 Moo Moh mIni expansion for Mae Mob - - - Oct 1998 62.6 49.0 181.6 unit 12 Mee Moh mine expanslon for Moo Mob - - - Apr 1994 74.1 84.7 109.6 unIt 18 Mae Moh min- expanslon for Mae Moh - - - Oct 19n4 25.1 18.6 J86. unit 14 Mae Mob mine expansion for Mae Mob - - - Apr 1095 26.2 18.4 89.6 unit 15 Me Mob mine expansion for Ma Mob - - - Nov 1996 102.5 49.8 162.8 unit 16 Saba Yoi mine development for Saba - - - 1016 61.9 179.4 261.8 Yol units 1,2 Total _ _ Proieto be Initiated (but to be completed after September 1996) 8 Thermal 800 Oct 1996 208.6 147.9 851.7 Mae Mob 17 Thermal 800 Nov 1996 208.8 147.6 860.8 Moo Mob 16 Themal W0 Apr 1"7 212.2 145.2 857.4 NeW therml 1 Thermal 600 Oct 1997 487.4 474.8 911.7 Moo Mob 19 Thermal 800 Nov l1m 221.6 160.8 381.9 Lower Mae Ping 1-2 Hydro 40 Jul 19 49.9 62.8 102.7 New thermal 2 Theerml 6e0 Oct 1996 425.8 468.9 669.2 Sibs Yol 4 Thermal W8O Nov 1997 247.1 181.4 426.6 N&e Kh.k 1-4 Hydro 120 Feb 1999 90.7 96.6 167.3 New therml 8 Therml 600 Oct 1999 444.1 483.6 927.7 Ns- Chern 1-4 Hydro 400 Nov 1999 118.9 90.7 204.6 New thormal 4 Thermal 600 Oct 2000 468.6 502.9 966.5 Now thermal 6 Therml 600 Jon 2001 434.0 496.9 962.9 EHV transmission system for Mee Mob - - - Nov 1906 28.0 28.4 51.4 unit 17 EHV transmission system for Mae Mob - - - Apr 1097 104.8 107.1 211.4 unit 16 EHW tronmission system for Moe Mob - - - Nov 1997 2.6 1.6 4.4 unit 19 Tranomission system expansion No. 10 - - - Apr 1997 68.9 61.0 124.9 Transmisslon system expansion No. 11 - - - 1999 69.6 66.8 186.9 Tronsmlisson system expansion No. 12 - - - 2001 75.9 71.6 147.7 Transmlsolon system expansion No. 1J - - - 2008 62.7 77.9 160.6 Moa Job mine expansion for Mee Mob - - - Nov 1996 27.4 14.7 42.1 unit 1I Mae Mob min- expansion for Mae Moh - - - Apr 1997 96.1 46.4 148.5 unit 16 Mee Moh mine expansion for Mae Moh - - - Nov 1997 15.4 6.9 24.3 unit 19 Saba Yol mine dovelopment for Soba - - - 190 98.5 08.9 162.4 Yoi units 8,4 Total 5,060 Notes: (1) Data as of PDP88-02 (July 1999). (2) Including Interest during construction. 8) Exchonge rate: US01.00 a B 26.0. 4) Under-construction projects are the projects that hove alroedy been approved by the NESOB and hod budget In FY1969. - 44 - ANNEX 5 THAILAND SECOND POWER SYSTEM DEVELOPHENT PROJECT Electricity GeneratinR Authority of Thailand Balance of System Load Requirements and Capabilities ! Requirement Capability and reserve margin Peak Energy Capacity Energy genera- genera- Reserve capacity Reserve Fiscal tion tion Installed Dependable Gross/a Net/b Firm from firm year (HW) (GWh) -------- (MW) ------ ----- (2) ------ (GWh) (Z) 1980 2,417.4 14,753.7 3,239.4 3,084.2 27.58 12.36 16,673.1 13.01 1981 2,588.7 15,960.0 3,739.4 3,555.0 37.33 23.11 18,576.5 16.39 1982 2,838.0 16,882.0 4,097.7 3,910.2 37.78 24.81 21,195.8 25.55 1983 3,204.3 19,066.3 4,992.0 4,801.9 49.86 24.64 22,813.7 19.65 1984 3,547.3 21,166.4 5,859.2 5,668.3 59.79 37.01 28,622.0 35.87 1985 3,878.4 23,356.7 6,457.7 6,163.7 58.92 38.09 33,155.9 41.95 1986 4,180.9 24,779.5 6,622.2 6,328.9 51.38 32.05 34,397.7 38.82 1987 4,733.9 28,194.3 6,928.4 6,483.3 36.95 19.88 32,765.9 16.21 1988 5,444.0 31,997.0 6,894.2 6,392.5 17.42 2.59 33,065.4 3.34 1989 6,098.( 36,584.0 7,269.2 6,748.8 10.67 -2.57 33,411.1 -8.67 1990 6,759.0 40,746.0 7,891.2 7,339.7 8.59 -3.36 36,250.3 -11.03 1991 7,440.0 45,062.0 9,325.2 8,711.1 17.08 6.23 43,857.3 -2.67 1992 8,173.0 49,793.0 10,542.2 9,867.3 20.73 10.27 50,204.8 0.83 1993 8,867.0 54,240.0 11,442.2 10,722.3 20.92 11.28 56,352.1 3.89 1994 9,578.0 58,964.0 12,148.2 11,334.8 18.34 9.42 62,445.4 5.90 1995 10,304.0 63,924.0 12,854.2 12,008.0 16.54 8.24 66,605.4 4.19 1996 11,066.0 69,065.0 13,642.2 12,781.9 15.51 7.78 70,770.9 2.47 1997 11,816.0 74,016.0 14,542.2 13,636.9 15.41 8.17 76,129.4 2.86 1998 12,596.0 79,170.0 15,452.2 14,503.4 15.14 8.36 82,894.8 4.70 1999 13,414.0 84,660.0 16,472.2 15,468.0 15.31 8.94 89,052.6 5.18 2000 14,271.0 90,568.0 17,427.2 16,402.1 14.93 8.94 93,192.2 2.90 2001 15,112.0 96,373.0 18,427.2 17,352.1 14.82 9.17 98,978.2 2.70 la Dependable capacity minus peak demand. /b Gross reserve minus dependable capacity of first and second largest units in the system. -45 - mAN SECOG POW SYST4 OpeYLOE PFROJECT Prolected Enuerpy Suince Types of pomer plant FY69 FY90 FY91 FY92 FY93 FY94 FY93 FY98 FY97 FY96 FY99 FY200 FY2001 Hydro awh 4,531 4,567 4,502 5.410 5,410 5.727 5,942 6,060 6.0e2 61,62 6,506 6.so5 6,599 t 12.4 11.2 10.0 10.9 10.0 9.7 9.3 6.6 0.2 7.7 7.7 7.3 6.6 Natur3l &jl C#h 18,491 15,708 19,120 21,011 26,240 29,862 31,241 32.611 32.610 82,o53 32.431 31.923 31.867 S 50.5 30.6 42.4 42.2 48.4 50.B 48.9 47.2 44.1 41.1 8s.3 35.2 33.1 9SaCFD 466 420 524 527 657 ueo 648 86e 66 888 as8 870 870 H..vy O;Il owh 5,741 11,319 10,082 11,796 8,745 5,935 5.361 4,9S9 4,54 2.840 2.164 4,531 3.460 S 15.1 27.7 22.4 23.7 16.1 10.1 8.4 7.2 6.2 3.6 2.6 5.0 3.6 Million liters 1,474 2,926 2,014 2,926 2,199 1.S06 1,865 1,273 1,172 731 58 1,147 851 DiWnl Oil owh 119 166 46 - - - - - - - - - - U 0.8 0.4 0.1 - - - - - - - - - - Million liters 67 9b 28 - - - - - - - - - - Lia;it. OtVh 7,118 8.296 10,622 10,866 13.110 16,735 20,675 24,700 30.0S5 82,990 34,960 34.960 34,960 F r 19.5 20.4 23.6 21.8 24.2 28.4 82.3 35.8 40.6 41.7 41.3 38.6 36.3 Million tons 6.10 7.366 9.014 10.806 12.870 1S.&58 20.144 24.022 29.163 82.005 33.899 83.899 33.s99 I rted Coal aWh - - - - - - - - - 3,950 7,900 11.e50 18,762 s - - - - - - - - - 5.0 9.3 13.1 19.5 Million ton - - - - - - - - - 1.517 3.035 4.652 7.204 Purchase Gwh 564 690 690 710 705 705 705 705 705 705 705 705 705 U 1.6 1.7 1.5 1.4 1.3 1.2 1.1 1.0 1.0 0.9 0.8 0.8 0.7 Other. OWh - - - - - - - - - - - - I - - - - - - - - - - - - - Total fG*) S8 S84 40.74O 4A82 49.793 4Za40 58.084 ss 924 69.0e6 74Z0 79 170 I4.I66 900568 9s.s73 - 46 - ANNZX 7 THA[LAND SECOND POWER SYSTEM DEVELOPMENT PROJECT EGAT's Demand Forecast FY89 FY90 FY91 FY92 FY93 FY94 FY95 FY96 Energy Sales (GWh) MEA Residential 3,306 3,347 3,701 4,125 4,552 5,019 5,521 6,056 Business 4,646 5,090 5,585 6,178 6,774 7,430 8,121 8,848 Industrial 6,054 6,836 7,456 8,153 8,824 9,549 10,314 11,098 Special rates 642 642 642 642 642 642 642 642 Government, hospitals and education 1,050 1,147 1,241 1,351 1,460 1,579 1,701 1,827 Street lighting 72 76 80 83 86 89 92 96 Network losses 1,061 1,171 1,278 1,403 1,528 1,661 1,804 1,953 Received from EGAT 16,561 18,309 19,983 12,935 23,866 25,969 28,195 30,520 PEA Residential 4,025 4,456 4,939 5,500 6,053 6,630 7,238 7,899 Business 2,479 2,858 3,266 3,700 4,112 4,516 4,958 5,435 Industrial 6,613 7,685 8,774 9,821 10,677 11,594 12,545 13,464 Special rates 246 260 276 294 312 332 353 375 Government, hospitals and education 1,186 1,315 1,455 1,630 1,806 1,982 2,145 2,316 Street lighting - - - - - - - - Losses - generation, free of charge 1,336 1,496 1,677 1,864 2,031 2,201 2,377 2,556 Received from EGAT 15,885 18,070 20,387 22,809 24,991 27,255 29,616 32,045 EGAT's direct customers 1,303 1,348 1,354 1,360 1,366 1,372 1,378 1,384 Grand Total 33,749 37,727 41,724 46,104 50,223 54,596 59,189 63,949 EGAT newtork losses (GWh) 2,835 3,019 3,338 3,689 4,017 4,368 4,735 5,116 As 2 of net generation 7.75 7.41 7.41 7.41 7.41 7.41 7.41 7.41 EGAT net generation (GWh) 36,584 40,746 45,052 49.793 54,240 58,964 63,924 69,065 EGAT load factor (Z) 63.49 68.82 69.14 69.55 69.83 70.28 70.82 71.25 EGAT peak demand (MW) 6,098 6,759 7,440 8,173 8,867 9,578 10,304 11,066 HEA peak demand (MW) 2,751 3,016 3,291 3,5d3 3,890 4,206 4,526 4,875 MEA load factor (2) 68.71 69.29 69.32 69.89 70.03 70.48 71.12 71.46 PEA peak demand (MW) 3,178 3,589 4,023 4,469 4,862 5,263 5,676 6,095 PEA load factor (2) 57.07 57.47 57.86 58.26 58.63 59.11 59.56 60.02 47 - ANNEX 8 Page 1 of 3 THAILAND SECOND POWER SYSTEM DEVELOPMENT PROJECT Consultancy Study Evaluation of EGAT's Operational Efficiency and Defining Norms for Performance Draft Terms of Reference Background 1. The Electricity Generating Authority of Thailand (EGAT), wholly owned by the Government, is charged with the responsibility of generating and transmitting electricity throughout the Kingdom of Thailand. Distribution of electricity is undertaken by two separate entities, the Metropolitan Electricity Authority (MEA) and the Provincial Electricity Authority (PEA). EGAT's current installed generating capacity is about 7,000 MW (comprising about 2,500 MW hydro, 1,000 MW coal-fired thermal and 3,500 MW gas/oil- fired thermal), while its transmission network comprises about 17,000 km of lines at voltages of 69, 115, 230 and 500 kV. The staff of EGAT numbers about 32,000 persons. EGAT's operations are divided into six divisions each headed by a Deputy General Manger: (a) Administration; (b) Accounting and Finance; (c) Hydropower and Transmission System Development; (d) Thermal Power and Mine Development; (e) Transmission System Operation; and (f) Power Plant Operation. Separate departments for Legal, Internal Audit, Economic Policy, Power System Planning, Corporate Planning, Public Relations, and Research and Development report directly to the General Manager. Faced with a rapid increase in demand (12-142 per annum), EGAT has a large power development program, which over the next 10 years envisages addition of about 11,000 MW of generating capacity, 10,000 km of transmission lines and involving an investment outlay of about US$ 10 billion. Objective of the Study and Expected Output 2. The basic objectives of this study are: (a) to review the operational efficiency of EGAT; (b) to assess the productivity of its departments and determine whether they are operating in the most cost- effective manner; (c) to identify areas for improvement; and (d) to recommend specific measures for improvement including development of norms for monitoring of performance. This exercise needs to be done considering both the current size of EGAT's system and the rapid system growth over the next ten -ears In recommending norms for performance (i.e. performance indicators) the consultant shall be expected to provide comparisons with similar utilities in the region, making due allowance for the conditions prevailing in Thailand. The consultant would also be expected to provide order of magnitude figures for the costs and benefits of introducing a -48 - ANNEX 8 Page 2 of 3 Performance Honitoring System, including its data base and reporting requirements. The recommended system should consider systems already in place and focus on incremental issues. A review of historical performance trends would be useful if it could be achieved without spending excessive effort. The recommendations should comprise a plan of action for implementation. Scope of the Study 3. It is not intended to specify the detailed scope of the consultant's work, which to a great extent should be specified by the consultant in its work plan. The consultant will be expected to focus on the following areas: (a) Regulatory Framework Current regulations and need for change; (b) Organization Structural adequacy, operational efficiency, reporting systems (MIS), monitoring systems, performance norms, incentives, automation, staffing levels and composition; (c) Corporate Planning Clarity of objectives, coordination of planning activities, planning efficiency; (d) Financial Systems Clarity of objectives, efficiency of the systems; (e) Power System Planning Efficiency of techniques and norms, cost effectiveness of the development plan for generation and transmission, system reserves; (f) Generating Plants Operation Cost-effectiveness of operation and maintenance practices, availability and outage rates of units, monitoring of efficiency; (g) Fuel Purchase Policy Effectiveness of policy, optimization of fuel cost; (h) Transmission System Operation Effectiveness of regionalization, cost effectiveness of operation and maintenance practices; outage rates; - 49 ^ ANNEX 8 Page 3 of 3 (i) System Dispatch Effectiveness of dispatch techniques, operational reliability, overall system cost optimization; (j) Stores and Inventory Effectiveness of control and minimization of costs; (k) Mining Operations Effectiveness of operations, possibilities of cost reduction; (1) Design Under/over adequacy of designs and standards for typical systems (thermal plants, transmission lines, hydro plants), areas for cost reduction; (m) Construction Effectiveness of procurement practices, use of consultants, in- house expertise, implementation costs and schedules; (n) Analysis of Operating Costs Reasonableness of costs, scope for improvement, targets of cost per KWH. Conduct of the Study 4. The study will be conducted in the following two phases: Phase 1 To be completed within 6 months. This phase will comprise intensive discussions by consultant's experts with EGAT's management and staff, review and compilation of data, which would be followed by analysis. This phase of study should identify areas for improvement. The Phase 1 report should be discussed with EGAT and the Bank prior to embarking on Phase 2. Phase 2 To be completed within 12 months. This phase will comprise recommendations for improvement, a performance monitoring system and a plan of action for implementation. The draft final report should be discussed with EGAT and the Bank prior to finalization. Consultant' s Inputs 5. It is expected that the consultant will be a combination of a management consulting firm and a utility. A total of about 50 manmonths of inputs is envisaged for the study. However, the consultant shall be free to recommend its own manmonth efforts considering the scope of work. - 50 - ANNEX 9 THAILAND SECOND POWER SYSTEM DEVELOPMENT PROJECT Supervision Plan Approximate Expected Staff Dates Skill Input Month/year Activity Requirement Staff-weeks 4-5/90 Supervision Mission (a) Initiation of Efficiency Study - Power Engineering 3 (b) Initiation of Environmental - Financial Analysis Assistance - Environment (c) Review of EGAT finances (d) Delineation of loan components 7-9/90 Review of procurement documents - Procurement 1 10/90-12/91 Supervision Mission - Power Engineering 2 (a) Review of Efficiency Study. (b) Review of progress on - Financial Analysis Environmental Assistance - Power System Planning (c) Review of EGAT PDP and finances - Environment 1-3/91 Review of procurement documents - Procurement 1 Review of financial statements - Financial Analysis 4-6/91 Supervision Mission (a) Implementation of Efficiency Study - Power Engineering 2 (b) Review of Environmental - Financial Analysis Assistance (c) Review of loan progress - Environment 10-12/91 Supervision Mission - Power Engineering 3 (a) Overall review of loan - Financial Analysis (b) Preparatory work for PCR - Environment (c) Review of EGAT PDP 51 - ANNEX 10 THAILAND Page 1 of 2 SECOND POWER SYSTEM DEVELOPMENT PROJECT EGAT's Investment Program FY90-91 (in million Baht) FY90 FY91 Local Foreign Total Local Foreign Total A. Thermal Plants Mae Moh t 9 156 476 632 20 398 418 B.Pakong CC t 3 575 2,075 2,650 91 253 344 B.Pakong CC t 4 339 1,644 1,983 45 445 490 Rayong CC I 1 308 1,903 2,211 606 999 1,605 Rayong CC 1 2 262 1,464 1,726 497 719 1,216 NamPhong CC # 1 475 1,056 1,531 475 1,056 1,531 Rayeng CC t 3 146 1,094 1,240 345 582 927 Mae Moh I 10 384 2,079 2,463 552 718 1,270 B.Pakong Th.# 3 450 1,672 2,122 2,096 1,076 3,172 Mae Moh I 11 252 756 1,008 568 861 1,429 B.Pakong Th.1 4 249 180 429 1,211 1,126 2,337 Mae Moh 1 12-14 281 1,221 1,502 791 2,395 3,186 Subtotal 3,877 15,620 19,497 7,297 10,628 17,925 B. Hydro Plants Srinagarind t 5 118 557 675 0 82 82 Bhumibol Renov. 5 3 8 11 386 397 Pak Moon 1 1-4 132 29 161 466 267 733 KaenKrung t 1-2 162 20 182 277 91 368 Bhumibol t 8 0 0 0 53 12 65 Subtotal 417 609 1,026 807 838 1,645 C. Transmission Central-South Tie 2 37 31 68 0 0 0 EHV Stage 3 96 59 155 0 0 0 Trans.Expn. 7 301 527 828 0 0 0 ThaTako.-KonKaen 3 31 305 336 149 64 213 KonKaen-Roi Et 73 137 210 48 7 55 EHV Stage 4 136 683 819 793 1,467 2,260 Accel.Transm.Proj. 142 306 448 352 752 1,104 EHV Stage 5 0 0 0 2 10 12 Trans.Expn. 8 3 0 3 332 666 998 EHV Stage 6 1 0 1 128 185 313 Subtotal 820 2,048 2,868 1,804 3,151 4,955 - 52 - ANNIEX 10 Page 2 of 2 FY90 FY91 Local Foreign Total Local Foreign Total D. Lignite Mining Mae Moh Expn.t 8-9 823 428 1,251 1,339 289 1,628 Mae Moh Expn.t 10-11 0 0 0 333 0 333 Mae Moh Expn.# 12 0 0 0 140 159 299 Saba Yoi Development 0 0 0 0 575 575 Subtotal 823 428 1,251 1,812 1,023 2,835 E. Miscellaneous Transmission 526 0 526 84 81 165 Power Plant 124 0 124 252 0 252 Subtotal 650 0 650 336 81 417 Duties and Taxes 3,685 0 3,685 3,892 0 3,892 Total Base Cost 10,272 18,705 28,977 15,948 15,721 31,669 Contingencies Physical 449 802 1,251 698 675 1,373 Price 306 561 867 734 799 1,533 Total Prolect Cost 11,027 20,068 31,095 17,380 17,195 34,575 53 - ANNEX 11 THAILAND SECOND POWER SYSTEM DEVELOPMENT PROJECT Disbursement Schedule IBRD Estimated disbursement Disbursement Profile Country fiscal year Annual Cumulative Project Standard (US$million) (X) 1990 10.0 10.0 11 1 1991 40.0 50.0 53 6 1992 40.0 90.0 96 22 1993 4.0 94.0 100 52 1994 74 1995 90 1996 100 -54- ANNEX 12 PFTg e- f 8 THAILAND SECOND POWER SYSTEM DEVELOPMENT PROJECT ECAT's Post Financial Performance Financial Statements 1982-88, Income Statement (Baht million) 1912 198a 1984 1985 1986 1987 1988 Energy sales (OWh) 16,403 17,568 19,885 21,196 22,568 25,778 29,494 Increase (X) 5.8 14.0 10.1 9.6 6.4 14.3 14.4 Average price (B/kWh) 1.48 1.89 1.37 1.86 1.88 1.80 1.26 Orating Revenue bSale o9f T lctricity 21,996 24,862 26,879 28,800 80,064 88,646 37,124 Other rovenue a8 21 64 99 56 170 850 Total 22,084 24,873 26,48a 28,902 30,120 83,716 87,474 Ope!rating Exp!nses FI-l/bulk pow1r 12,77 18,835 16,266 16,087 14,468 14,802 17,610 Operations 2,722 8,269 8,411 8,697 4,004 4,724 4,788 Deprecltlon La 2,120 2,872 2,688 8,262 3,874 4,096 4,461 Remittance to govern mnt 190 250 652 470 6oo 960 1,061 Total Operating Expenses 17,808 19,728 21,89 23,31j 22,941 24,082 27,770 Operating Income 4,226 4,647 4,542 5,686 7,179 9,834 9,704 Nonop rating Exm s s Inteirst chargo to operations 1,937 1,686 2,017 8,203 8,828 4,206 4,621 Foreign exchnsne loss - - 102 1,289 2,821 1,786 1,942 Previous years' adjustments - - -774 - - - - Mining Income (-) -56 -115 -176 -608 -548 -658 -761 Total Nonoperating Expenses (Net) 1,881 1,551 1,169 8,884 6.101 6,488 6,812 Net Income 2,846 8,096 8,878 1,702 1,078 4,196 8,892 Rate base 42,250 47,692 6e,788 70,178 79,950 86,644 90,082 Rate of return (X) 10.0 9.7 8.0 8.0 9.0 11.1 10.8 Operating ratio (X) 81 81 88 81 76 71 74 /a On revalued assets. ANNEX 12 - 55 re9 e- 2 iof a THAILAND SECOND POWER SYSTEM DEVELOPMENT PROJECT EOAT*s Post Financial Performance Financial Statemnts 1982-8U Sources and Application of Funds (Bsh million) 1982 1983 1984 1986 1986 1987 1988 SOURCES OF FUNDS Internal Cash eneration Operating income 4,226 4,847 4,542 5,566 7,179 9,634 9,704 Other income 58 116 848 -481 -2,273 -1,235 761 Depreciation 2,120 2,372 2,068 8,262 8,874 4,096 4,461 Other items not involving cash 774 241 657 787 8,428 1,807 -481 Total 7,176 7,876 8.780 8,906 12,208 13,804 14,485 Less increase/add decrease in working capital -47 -1,897 422 G0a -1,951 -1,716 676 Net Internal Cash Generation 7,129 5,478 9,162 9.408 10,257 12,088 16,010 Borrowing 9,819 9,084 8,002 10,084 6,292 2,822 6,821 Lose: Refinancing - - -B8,22 -5,712 -869 - -1,564 Net Borrowing 9,819 9,084 4,180 4,322 5,488 2,822 8,767 Government equity 1,046 2,442 992 8 440 161 114 Proceeds of disposal of assets 26 18s 62 226 804 947 224 Unpaid bonuses and government remittances 291 146 840 -191 287 448 85 Repayment of bank overdraft -1,267 - - - - - - Increase (-)/decrease In deferred interest -124 8 19 267 96 92 89 TOTAL SOURCES OF FUNDS 16,929 17,298 14,786 14,357 16,816 16,058 19,289 APPLICATION OF FUNDS Capital *xpenditure-power 12,228 12,485 8,828 6,881 7,222 5,261 7,201 Interest during construction 1,092 1,876 1,472 86 676 702 487 Total Capital Expenditure-Power 13,820 1S 810 10 296 7,898 7!.! 6.988 7,A^88 Irrigation, mine and development capital expenditure 508 8s6 689 1,285 1,526 1,446 1,286 Debt Service Principal 1,169 1,484 5,666 7,885 4,424 4,489 7,248 Less: Refinancing - - -8,822 -6,712 -659 - -1,564 Interest charged to operations 1,937 1,666 2,017 8,203 8,828 4,206 4,621 Total Debt Service 8,106 8,lOf 8,761 6,376 7,893 8,644 10,316 TOTAL APPLICATION OF FUNDS 16,929 17,298 14,785 14,867 16,816 16,053 19,239 Debt service coverage - times 2.8 1.8 2.4 1.8 1.4 1.4 1.6 Self-financing ratio / (X) 31 18 47 41 33 38 44 /a Interaal cash generation less debt service expressed as a percentage of three yeors' average cnpital expenditure on power, irrigation, mine and development. -56 - ANNEX 12 THAILAND SECOND POWER SYSTEM DEVELOPMENT PROJECT EQAT's Past Financial Performanco Flnanciol Stateb nts 1982-86, Balance Sheet (Baht million) 1962 1968 1964 1965 1906 1 07 1986 ASSETS FT7--d Assts - Power Plant in sorvic- (r-valued) 64,622 72,866 89,121 107,878 116,248 181,268 186,670 Less: Depreciation 19,440 22,683 26,846 80,295 85,481 40,996 46,679 Net 45,082 50,808 68,278 77,088 82,817 90,272 69,891 Work In progress 19,80D 26,619 17,181 11,269 12,088 6,779 11,862 Total Fixed Asosts - Power 64,462 76,922 8464 86,862 94,650 97,051 101,77B Irrigation, mine a development assets 4,862 5,241 9,824 10,862 11,106 11,464 11,872 Total Fixed Asseto 69,844 82,168 89,776 98,704 105,958 106,515 11,8645 Insuranco fund A mine reclamation 428 971 1,989 1,887 2,057 8,688 6,402 Current Assets Ca-s 999 944 609 974 486 2,020 2,889 Inventories 1,626 1,768 2,044 1,784 2,051 2,808 2,860 Receivables 8,859 4,674 4,999 6,875 6,297 6,968 7,846 Total 6,484 7,891 7,862 8,o06 8,888 11,816 12,091 Deferred foreign exchange adJustment -484 158 -1,864 6,524 14,657 14,964 14,077 TOTAL ASSETS 76,822 90,008 97,eo4 115,148 181,421 18s, 78 145,215 E%WITY AND LIABILITIES EquitY VPiT--ln capital 6,842 8,783 7,420 7,501 7,848 7,980 8,061 Government contribution for dams 2,4865 2,450 4,774 4,986 4,986 4,945 4,905 Retained earnings 6,880 8,887 12,514 18,880 15,167 19,298 28,165 Revaluation reserve 20,986 28,207 22,878 25,158 27,684 20,801 81,678 Total Equity 85,6.3 42,277 47,581 61,454 65,654 61,619 67,729 Insurance reserve A mine recla- motion 428 971 1,989 1,687 2,067 2,868 2,666 Long-term debt-net 81,499 89,129 89,841 51,052 68,892 68,120 61,908 Bank overdraft - - - - - - - Current Liabilities FPyatles 5,281 8,988 4,717 5,814 4,326 5,028 6,874 Current maturities 1,989 2,448 2,622 3,606 4,495 6,078 5,531 Accrued Interest 785 988 1,142 1,279 1,067 1,188 1,182 Total 7,362 7,409 8,481 10,199 9,887 11,237 12,687 Deferred intorest a other liabil- Ite* 890 882 s8a 6oo G11 419 380 TOTAL EQUITY AND LIABILITIES 75,822 90,668 97,64 115,148 131,421 188,678 146,216 Debt as X of debt and equity 47 48 45 50 58 51 50 Current ratio 0.9 1.0 0.9 0.8 0.9 1.0 1.0 -57 ANNEX 13 Page 1 of 6 THAILAND SECOND POWER SYSTEM DEVELOPMENT PROJECT EGAT's Financial ProJections Revenues 1. The average price of electricity is about B 1.26 per kWh sold in 1989. No price increase will be necessary in 1990 to maintain EGAT's 25Z self-financing ratio in that year. Price increases averaging about 5.0? per year between FY91 and FY97 will be required in order to keep the self-finan- cing ratio at 25Z. EGAT's average electricity price annual increases, and self-financing ratios for FY89 through FY97 are shown below: FY89 FY90 FY91 FY92 FY93 FY94 FY95 FY96 FY97 Average energy price (B/kWh) 1.26 1.26 1.41 1.41 1.41 1.55 1.64 1.70 1.77 Price increase - - 12.32 - - 9.72 5.5? 3.72 4.12 Self-financing ratio 41? 25? 25? 29? 262 25? 25? 25? 25? 2. Energy sales will grow at 11X per year through 1992, and then by about 8? p.a. on average based on projections made by the Load For-:asting Working Group. These projections are basically extrapolations of recent trends checked against econometric models involving assumptions on the growth of the gross domestic product. Fuel Costs 3. The fuel mix is based on EGAT's least cost generation plan. Finan- cial prices for these fuels are inclusive of taxes and royalties which amount to 25? for fuel oil, B 15/ton for lignite, and 10.3? for natural gas. The resulting price profiles are as follows: (a) Fuel oil and diesel prices escalate from 1989 prices of B 2.89 and B 5.97 per liter, respectively, to B 4.32 per liter and B 8.92 per liter in 1997, increasing at approximately 5.4? per year. (b) Lignite prices are based on the current EGAT transfer price of B 465/ton and are assumed to escalate at approximately 5.5? per year over the study period. -58 - ANNEX 13 Page 2 of 6 (c) Natural gas prices escalate from the current B 70/MMBtu average price at approximately 3.72 per year. Operating Costs 4. Generation expenses are based on current EGAT experience, with pro- jections for future plants based on historical costs for similar plants and escalated with inflation rates of 42 per annum. 5. Power purchased from Laos is prices at B 0.7930/kWh and from Malaysia at B 1.0473/kWh throughout the projection period. 6. Transmission expenses are projected on the basis of unit costs and additions in line length and transformer capacity in EGAT's expansion program. Other operation and maintenance expenses, including General and Administrative expenses, are based on current levels, inflated at 42 per annum. 7. Depreciation is based on the straight-line method on revalued fixed assets. The average rate of depreciation is 1.33Z for hydropower plants, 42 for other generating facilities, 2.5? for transmission lines and 42 for sub- stations. 8. The rate of remittance to the Government of Thailand is assumed to be 152, which has been agreed between EGAT and the Government for the Sixth Five- Year Development Plan period, through 1990. This is to date the highest tax rate levied by the Ministry of Finance on EGAT's net income (based on unre- valued depreciation). Capital Investment 9. Construction costs are those estimated to provide the additional plant and equipment required to meet the demand forecast, escalated in accord- ance with thi latest projection of inflation rates. The expenditure schedule is included in the project file. Equity 10. Equity contributions represent the Government of Thailand's reim- bursement for import duties on construction equipment and partial payment with respect to the irrigation portion of multipurpose dams. Foreign Exchange Losses 11. Deferred foreign exchange losses represent the profits and losses from exchange rate variations on long-term debt. The projected figures are the amount on EGAT's accounts at the end of FY88 less the incremental amounts which are scheduled to be written off over the remaining periods of EGAT's existing loans. The amounts shown in the income statement and balance sheet reflect currency movements against the Baht through December 31, 1988. --' - ANNEX 13 Page 3 of 6 Borrowings 12. Future foreign loans have been assumed at annual interest rates vary- ing from 3 to 9Z and for terms of up to 20 years including from 3 to 5 years of grace. Local borrowings have been assumed at the annual interest rate of 102, and for terms of up to 13 years, including 3 years of grace. Actual loans outstanding and their terms are listed in the Project File. 13. Accounts receivable are projected to be approximately 2 months of revenues in accordance with a government regulation affecting State Enter- prises. THALAND SECOND POIER SYSTEM DEVELOPMENT PROJECT ECAT's Financial Projection. Income Statement (8tht mlli on) Foremet Yearr Ending Sw.tem*r 30 14 19W0 1991 19"2 1V 199 19 1 17 Enert.y S... ( 38749 37727 41724 46104 559 C 59189 68949 41818 5.1.. Incrase = 14.43 11.83 10.41 10. a 8.93 0.7n 8.4# 0.00 7.25 Averag iErw r /e 1 ( 111h) 1.26 1.26 1.41 1.41 1.41 1.51 1." 1.70 1.77 Prie Increr g CIS) -0.21 0.26 12.3 0.06 0.0( 9.73 5.6 S.73 4.1U Operating Revenue E I b Revenue 42269 47461 S69 65145 706 4424 9774 1064 12091 Other Operating Revenue 200 210 220 220 240 250 250 270 280 Tot Operating Revenue 47S71 59176 6u7 71205 674 l71 121241 Uperating Expen e Fuel and Purchaeed Poeer 196 23445 25627 2629 22518 2861 44065 50S27 6154 operation A Neintenance 5599 6066 7612 8E7 9250 10770 1290 14019 1620 Ompr ciation 4746 437 696 7806 9306 177 127 14167 169 Reittance to Oovern_nt IJ06 2341 235l 21S4 2727 38 26 879 Total Operating Ep e 30706 26 41979 46965 52215 630*0 72040 am 927 Operatin Income 11139 17197 410 190 21794 24994 26448 20 Nen-Operat.ng Euppense Interest Chaired fo Operationa (Net) 5S 4417 gm62 7060 g4 96 11170 12101 14060 t.ea on Eachang 1922 1997 1772 66 11 15 1269 1106 oS2 Rining Incom_ ___ -5 _ -_ __ -716 -719 -19 -2181_1 -2___ Total Non-Operating Eapene 6410 5783 6261 6119 95d41 10492 1160 11*02 12686 Nnt Income E475 SW 10947 10291 6449 102 13944 14941 16647 Average Rato 8ma - Poser 94221 104961 121656 149066 180187 213* 247009 2277 328809 Rate ot Return t ) 12.63 10.93 14.j1 12.321 9. 10.213 10.13 O.4 7.7#i Operating Rat'io CS) 725 763 71S 726 75K 743 743 76 786 so Sr 99 THAIUN SECOND POWER SYSTEMi DEVELOPMENT PROJECT ECOT's Financial Projections Funds Flow Sttement (Bal t million) Forecat Years er4ing September 30 1969 1990 1°91 102 190O 1904 106 1906 197 Sources of Fund. Intermal Soarce. Operating Income 1m 11396 17197 18410 17990 21794 24904 2644 2U03 AAdd Dpreciation 474n 64 665 7T6 930 10767 12 141 19 Mining Income 637 661 564 869 716 719 116 218 2264 Total Internal Source 17269 17484 24180 2602 2014 33260 36710 4613 471" Noncasl Itu-N;ining -66 -549 -1161 -2459 -2J66 -2459 -212 2 -27f6 -1I64 Aeeeta Diapooel CoD't. Contribution - Poer 62 Govt. Contribution - Irrigation Increas in Long-Tere Debt 1056 233S7 26497 2676 263 27617 36734 396 36573 Further Borroeing 0 0 0 0 0 0 0 0 0 Total Borermins 10316 233S7 26497 2 26 2761 36734 896 J3S73 Othbe tame(Nt) 0 0 0 0 0 0 0 0 0 Total Source of Funds 27071 40272 1816 6SI21 52031 561 742 79106 60900 Application of Fund. Capital Ineestseeit Cap;itl apenditure.-Poer 1806 2839 32618 26556 260 3002 43832 42 3U14Z Interest During Constructio an 1 _9 36 _ 32_3 3453 3034 97 4_14 460 Total Capitel Investment-Poer 14164 303 36500 29793 2 0 47615 4 42734 0 Capital Expenditures-Iining 1307 290 1920 271070 7 276 260S 1106 11Sf Total Capital Investmnt 13471 32726 36420 32503 96 3133 601 41204 4293 Debt Servica Interest S125 4417 SO0S 7060 66t4 669 11170 12602 14060 Principal 5531 6176 6031 9266 10903 13212 15767 ism 21370 Total Debt Service 10636 19 1309l 4 16323 19349 2271 27 6061 6410 Decr.as in DWferred Liabiitis 92 67 70 44 19 1s 0 0 0 Increase in Mon-cash Working Capital -1063 -336 2532 4S2 -172 40S SD 41 m Incrooe in Cash 1935 -2600 -26O, 2SW -289 #3 -2990 a6 10 Incrase in Total WorIing Capital 6S2 -3135 -U 4367 -41 417 -2470 d 1527 Total Application df Funds 27071 40272 SS16 531 520 7462 10 60900 - - - -- -- - - Debt Service Coverage 1.7 1.7 1.7 1.6 1.4 1.4 1.4 1.4 1.3 3 Years Averago Investent 16629 26873 34550 3S461iS 3520 3'4 44497 47434 4S8 Self-Financing Ratio (3 Yre. Ave.) (5) 41S 25 255 291 26112 261ill 26 DO 60 THAILAND :Ol* POWER SYSTEM DEVELOPIENT PROJECT EOAT's Financial Projections Balance She" (Usht lMi II ion) Forecast Years ndin September 30 lU9 90 1991 1992 1993 1994 t 19 7 Fl pd Aase.t.--Pocser Plant in Seric as 1318 178197 2061427 249101 296561 841620 190048 446708 119174 Lee: Accu.ee_d Deprc ;ation 56 61M 72767 3469 963 11051 1270U7 14U140 l1in ot Operating Plant ge50 1137 54 165332 200642 281109 26266 0ll 1 work in Pr"rm 16435 166 S4768 si6 4729 Sl027 7446 741 702 Total Fmixd me Pser I 1165 l3 187103 2170 24671 22186 041 3704 4219D Finad Asata-Irr.gsticn 4148 476 4714 46 45U 4476 43I 4 402 Cro_ Mi as Me"at 5026 60 6150 16lt0 10171 17266 266 24192 2744 Lee: Accubm.ltd Depreciation 2m7 319 1W 4033 421 Sao 64 70 63m Not mine Ae*se 22S9 201 4597 677S 9060 11942 146 10 19120 W1k in progrees 16 3074 3294 Jf6l 45 20 376 131 1974 Total Fined Ass*ta-wMning 65 5955 7691 101 184s .0 146 621 21094 Dsvelopast Ependi tars 8265 6995 44 1U120 142 17101 Is9 2172 Total Fised A.et. - Irr;at.on/"sningjDev 1768 152 19600 24 726M A8 4406J 47069 Sinking Find 2969 300 3696 4116 465 828 3 66 7309 Current Aoete Ceab 6844 5544 2944 662 654 655 1664 8691 4096 Receivables 7001 73M 9726 10747 11706 1192 1096 171163 1l9w Inventories 2770 290 2907 8167 844 amt 4IJf 497 mm39 l Total Current A tI88 10 1579 207 3 21691 281 27 1 Deerred Lee- en Ecehange 1215 1011S 63s 67gm 5117 668 229 1113 21i Total eet. -60 I09 S193619 2 6 273640 3C0966 349J2 40214 148607 6S0943 ---- ------------ Equety and Libi l ities ESq i ty Poid-in Capitel 8143 8143 6143 6143 8148 0143 6143 6143 143 lrrigation Contribution 4345 4715 4714 463 4518 4471 43 4318 23 Retatned Earnins 2e6 34294 45240 5851 6 0 7 904167 1i2014 Revslustion Surplu- 3S66 47019 53726 6216 72486 63991 97060 11074 1260 Tote I Equi ty 315 94239 11_ 110 149117 171694 1947 202 26206_ Long-Ters Debt Long-Ter. Debt 72259 59420 10 129476 144956 19S 185 2004 217267 Le": Current Oaturities 6176 805 9266 10903 13212 117677 I9 21317 234 Long-Ters Debt (Not) 6606 61StS9 100696 1873 131744 149 1699 U171 1 Further Borrosings 0 0 0 0 0 0 0 0 0 Sinking Fund 296 3300 3M69 4116 465 5234 59 6I 709 Deferred Liabilit.wx 238 11 el 37 1s 0 0 0 0 Current L;abi l iti " Account. Paiahla 6838 7T2 6964 78 62 9U61 11217 12611 14416 Current Vaturities 6176 6Wl 92 1090 13212 18767 1ism 21370 284 Accrued Interest on Long Term Debt 1370 law 1891 2396 2614 3474 44 Gm se6 Totel Current L,Cbilities 14364 175 13163 2060 24324 291W 33670 39206 436o Totsl Elulty and L b I it, 1s I4009 196619 234365 273840 6O3 349628 402414 456207 506945 Debt a a 7 of Totel Cap. tal 479 49 WSO W0 49n 481 449 471 451 Long-Tera Debt as a of Total Cap tel 4W1 465 473 481 479 46% 459 449 436 Irh Curr-nt Ratio 29 93 I U 101n 7 641 71 79 70 6I THILAND SECOND POWER SYSTEM DEVELOPMENT PROJECT Power Subsector Financial Projections Incme Statmnt (8aht Million) Forecast Years Ending Septeler 30 1989 1990 1991 1992 199S 1994 1995 1996 1997 VErgy Sals, (GWh) 312 34909 a8s88 42 46417 80447 54680 59065 63294 Sales Incrs ) 14.21 11.71 10.81 10.SS 8.9S 8.7S 8.4S 8.01 7.2S Averaog Tarff 8/h) 1.69 1.68 1.84 1.84 2.88 2.10 2.16 2.20 2.20 Propoed Tariff Increse CS) 0.0O 0.01 9.41 -0.1S 2.1i 11.S1 2.91 2.2 -0. 1S Operating Revenue raeR Revenue 826r7 8s86 711Z3 78451 87210 105617 117861 130092 139198 Other Operating Revenue 826 818 ass 8as s7 870 88s 895 907 Total Operating Revenue 8499 9624 71956 79304 88067 106887 118746 130987 140105 Operating Efpense. Fuel and Purchased Power 1406 23519 25706 28318 32589 88898 44161 50405 56282 Operation A Maintenance 9898 11010 18009 14881 1S586 17923 20025 22406 25268 Depreciation 7300 8090 9703 11479 28888 1l175 17120 19596 22055 Remittance to Oovarnmnt 1894 1762 288 3317 4431 7504 9210 10462 10163 Total Operating Expense 68198 44681 5130 8769s 66229 79495 90517 102668 118739 Operating Income 18802 14948 20682 21609 21889 27092 28.29 28319 26367 Non-Operating Expen_s Interet Charged to Operations 6705 E805 6320 8687 10175 11091 11719 12844 14466 w Other Non-Operating Expense CNet) 176 __1426 1298 1s8 1 040 M8s 26 -873 -1279 Totel Mn-Operating Expenes 801 6981 7618 985 1215 1074 11745 11971 18187 Not Income 721 sol 1 11774 10624 18018 16484 16848 13180 Average Rate Base 1258 189683 159742 189l26 224229 257218 288598 324874 368410 Rate of Return (1) 12.2S 10.7S 12.91 11.41 9.71 10.8S 9.85 8.71 7.21 Rate of Return Before Remittance (I) 18.41 12.05 14.71 18.21 11.71 18.451 13.0 12.01 9.91 Operating Rat'io 1x 781 711 731 781 781 763 ?81 811l OQ - 0 o 6h THAILAND SECOND POWER SYSTEM DEVELOPMENT PROJECT Power Subsector Financial Projections Funds Flow Statement (Baht Mill ion) Forecast Feruc~~~~ --t ------- Years Ending Septeeber 30 1989 190O 1991 1992 199S 1994 199 1i996 1997 Sources of Funds Internal Sources Operating Income 1S02 14948 20682 21609 218S9 27092 28229 28819 26867 Add: Depreciation 7300 8m90 970S 11479 133 18173 1712D 19396 22055 Mining Income and Non-op. Reveues 742 741 649 629 736 719 189 2183 2266 Noncash Item-Mining -686 -649 -1161 -24S9 -2868 -249 -222 -2796 -1841 Total Internal Sources 22707 28525 29843 81258 38661 40527 43917 47108 48847 Equity.Contributions 110 29 SO 0 0 0 0 0 0 Borrowings 12l26 1988 33067 36899 2B7S0 29929 30660 89831 3bi41 Crants and Customer Contributioe 1044 8s8 78S 71B 650 610 690 S70 550 Assets Dispoal/Unpaid Bonuss,R1mittances 211 215 209 157 208 208 203 203 208 Othr Iteme (Not) 0 0 0 0 0 0 0 0 0 Total Sources of Funds 36898 44512 63981 68062 63164 71268 78360 S7707 88141 Application of Fund- Cap itoal Investment Capital Expenditures 20299 36886 40257 34081 84278 872D3 S1614 49697 48526 Interest Dur ng Coatruction 556 1599 38852 828 3458 8034 S977 4314 4609 Total Capital Investment 20655 38485 44189 87266 87731 40287 5!i91 54011 50185 Debt Service Interest 6705 SSOS 6820 86S7 10173 11091 11719 12844 14466 Princi pal 7054 7891 9864 12415 18527 l1574 16821 19830 22795 Total Debt Service 13759 1396 161t84 21062 23702 26464 2990 82674 37261 Decrease in Deferred Liabilities 92 87 70 44 19 18 0 0 0 Incr_ase in Non-cash Working Capital -791 -224 S589 154 251 2770 1576 1021 746 Increse in Cash 2984 -7232 0 9817 1462 1779 -11757 0 0 Incrse(Decrswaa) in Workino Capital 2192 -7486 8589 9671 1712 4848 -10181 1021 746 Total Application of Funds 36398 44512 68981 68082 68164 71268 75860 87707 38141 Debt Service Coverage 1.7 1.8 1.8 1.5 1.4 1.5 1.S 1.4 1.3 8 Years Average Investmnt 24058 34498 39968 39712 8411 44820 49947 54538 51427 Self-Financing Rntio (3 Yro. Ave.) (5) 40S SOS 255 255 255 25S 255 255 815 IOCt 0D 00 O -- .. - . .. .l S . TH"WAO SECON POWER SYSTEM DEVELOPMENT PROJECT Poe. Subnector Financi;l Proxictione blIanc. Sh t (bht Mi ll ion) Forecnt Year, Ending Spteab.r 30 1969 1990 1991 1992 199J 1994 1995 1996 1997 Fix d Aaeet Plant in Sarice 221S79 2546 294141 344684 406788 460720 S19t89 866m 67220 Le": Accumolated Deprcition aw 97020 110674 126402 14466 16U491 10o21 215740 24t175 #t Operating Plant 16 1778 1837 221902 251067 29"iM M6 873693 426106 Work in Progem 26906 47924 6a93 6967 88494 59016 78948 845 80868 Total Fixed A_ets Power 166795 208897 2478S0 2816i9 31681 84244 406U6 486428 866t78 Fined Amato - Irrisationjlning/Develop. 15765 16572 19600 24728 30024 34559 8997 440J8 47069 Sinking Fund 2969 300 69 4116 4655 5H4 9 65a 7309 Other A 26 2451 2244 200 1890 1690 1490 1290 lo9 Current Aeget. Co"k Is 900 900 18517 19979 21757 10000 10000 10000 Rceivabler 9069 1018 12299 13564 1809 18S 201 22674 24199 Inventories 7443 78167 7302 7851 7697 659 9457 10482 11416 Tot.l Cutrrnt Asaets 327 299 200 89482 42970 46a 896r 48027 45614 Deferred Loea o Exchafng 1U3988 11791 9044 8017 6241 4589 3124 1814 27 Totel Aset. 231905 264068 311689 wo 4023 44894 496922 s68179 fo6 Equity and Liabilities Paid-in Capi tl 10168 10197 10227 10227 O127 10227 10227 10227 10227 Irriation Contribution 484 4788 4714 4836 4886 4478 49 4818 4268 Ret ined Earn;ing 367 4676 89 715495 e29 97287 111 1009 148249 Revaluation Surp i-a 466 60614 70C 6184 9447S 10944 12951 144561 1660 Grant. and Customar Contriboutions 10727 1188 12368 1306 1373 148148 14938 130 01603 Total Eruity 118101 13s82 157147 M 20M94 2 2 26920 3073 39767 Leng-Tfr- Debt Long-Term Debt 97778 116219 137869 156462 171688 1623 206996 23477 245409 Losse Current Mturities 71 9s64 12415 127o 14996 17617 20020 2290 24892 Long-Term Debt (Not) 89667 13O5 1 4 143672 186 166722 16697 207369 0617 Further Sorrowing, 0 -6444 -4591 0 0 0 -10340 -11618 -11004 Sinking Fund 2969 3S00 3696 4116 465 S51%4 8896 685m 7309 Defrred Liabi I ities 2S8 151 61 87 is 0 0 0 0 Other Li bilities 74 77 79 62 a5 a 91 94 97 Current LiabIlitlee Accunt. Peyab Ia 664 9810 712 7104 79S4 8062 0297 9004 9479 Current laturitie 7891 9664 12415 U790 14996 17517 20020 22006 24892 Accrued Interest an Lang Term Debt 1870 l150 m19 2896 2814 3474 4124 502S W46 Ot. r Current Liabilities 7789 682 6694 91U6 9696 10117 1062S 1i113 11677 Total Current Liabiliti,. 25614 29006 8012 81458 85490 S9160 4S064 48070 81696 Total Equity and Liobilities 23190S 266408 811689 860282 40281 448984 496922 885179 60658 Debt as a I of Total Capital 461 456 461 461 461 44S 425 425 411 00 Long-Tore Debt as a I orf Total Capital 441S 31 431 44 481 425 401 391 361 f Current Ratio U81 921 961 125b 1211 1241 931 901 661 0 .4. -66- ANNEX 15 THAILAND SECOND POWER SYSTEM DEVELOPMENT PROJECT EGAT's Tariff Structure (as of June 1987) Type Demand Charge Energy Charge (B/kW/month) (B/kWh) Industrial Large 170 1.22 Medium 174 1.23 Small 177 1.23 Time of Day Rates for Large Industries (Effective Jan.1 1990) Peak 180 1.22 Partial Peak 90 1.22 Off-Peak 0 1.22 Business Large Below 11 kV 239 1.28 11 kV or over 229 1.23 Small 0 First 40 kWh (Minimum B 88.12) Next 260 kWh 1.77 Next 200 kWh 1.88 Next 500 kWh 2.21 Next 2,000 kWh 2.43 Over 3,000 kWh 2.50 Government Institutions 0 First 10 kWh (Minimum B 18.2) (including water works below 30 kW) Over 10 kWh 1.82 Agricultural Pumping 0 First 100 kWh (Minimum B 117) Over 100 kWh 1.17 Residential 0 First 5 kWh (Minimum B 5) Next 10 kWh 0.70 Next 10 kWh 0.90 Next 10 kWh 1.17 Next 65 kWh 1.58 Next 50 kWh 1.68 Next 150 kWh 1.76 Next 100 kWh 2.02 Next 400 kWh 2.11 Over 800 kWh 2.43 Notes: 1. Minimum demand charge for Industrial and Large Business consumers - 302 of the previous 12 months demand charge 2. 47 billing discount applicable to Industrial consumers 3. Special rates apply for specific industries like electrolysis THAILAND SECOND POWER SYSTEM DEVELOPMENT PROJECT Rate of Return on EGAT's PDP (1989-1998) (Baht million) Energy Incremental Tariff Blkwh Fiscal Capital O&M Fuel Total Sales Energy Sales Current Constant Sales Net Year Costs Costs Costs Costs GWh GWh Price Price Revenue Benefit 1985 660 - - 660 - (660) 1986 1,115 - - 1,115 - - (1.115) 1987 3,701 - - 3,701 - - - - (3,701) 1988 6,720 - - 6,720 29,488 - 1.27 1.27 - (6,720) 1989 20,942 238 1,322 22,502 33,749 4.261 1.26 1.22 5,198 (17,304) 1990 25,735 650 3,950 30,335 37,727 8,239 1.26 1.17 9,640 (20,695) 1991 16,564 1,136 6,415 24,115 41,724 12,236 1.41 1.26 15,417 (8,697) 1992 14,969 1,632 8,151 24,752 46,104 16,616 1.41 1.21 20,105 (4,646) 1993 17,585 1,983 10,623 30,191 50,223 20,735 1.41 1.16 24,052 (6,138) 1994 20,106 2,425 14,127 36,658 54,596 25,108 1.55 1.23 30,883 (5,775) 1995 20,611 2,826 16,559 39,996 59,189 29,701 1.64 1.25 37,126 (2,870) 1996 14,961 3,301 19,144 37,406 63,949 34,461 1.70 1.25 43,076 5,670 1997 6,727 3,817 21,396 31,940 68,533 39,045 1.77 1.26 49,197 17,256 1998 2,309 4,364 21,894 28,567 73,480 43,992 - 1.26 55,430 26,863 1999 0 4,364 22,413 26,717 73,480 43,992 - 1.26 55,430 28,653 2000-2014 0 4,364 22,941 27,305 73,480 43,992 - 1.26 55,430 28,125 2015 (30,325) 4,364 22,941 (3,020) 734,890 43,992 - 1.26 55,430 58,450 ERR - 14.5Z EM - 13Z with capital and OM costs increased by 1OZ ERR = 13Z with energy sales reduced by 5Z -68- MNNEX 17 Page 1 of 8 THAILAND SECOND POWER SYSTEM DEVELOPMENT PROJECT Environmental Review - Summary 1. An environmental study was carried out on behalf of the World Bank by Elcom Services Pty. Ltd. in accordance with the terms of reference (TOR) detailed in the World Bank's letter dated June 29, 1989. The following is a summary of findings and recommendations. Environmental Policy, Objectives and Procedures 2. The Study found that currently there is no formal environmental policy and specified environmental objectives within EGAT. 3. It is considered that a formal statement of policy and objectives ara necessary to ensure that all EGAT's staff fully appreciate the commitment of their organization to the protection of the environment and to allow the Group within EGAT responsible for the various environmental matters to discharge their responsibilities effectively. 4. It is recommended that EGAT executives instruct its Ecology and Environment Division (EED) to prepe:^e, for their approval, an environmental policy, objectives and environmentaL procedures. 5. It is also recommended that on approval, the policy and objectives be includ.d in EGAT's corporate plan and objectives and more importantly disseminated to all levels within EGAT. 6. It is strongly recommended that the Group and/or Division with the overall responsibility to ensure that all EGAT's activities are carried out in accordance with EGAT's environmental Policy, objectives and procedures be clearly identified. EED Organizational Consideration 7. Some aspects of the current structure of EED warrant review. One of these is the maintenance of functional skills now residing in project teams which are to be dissolved on completion of projects. Another is the division of functional responsibility and functions having logical linkages in two or more sections/groups. 8. It is recommended that EED reviews its current structure taking into account the above comments as well as likely future needs resulting from changes which will see EGAT increasingly involved in thermal power stations and mining activities. EED Environmental Capability 9. Academically speakl.ag, EED's staff are very well qualified. However, a brief appraisal of the results of their efforts (such as environmental monitoring reports and EIA's) showed some limitations in the analysis - 69 ANNEX 17 Page 2 of 8 of data and the assessment of the environmental impacts of power development projects. The limitations are considered to be associated with the lack of experience in practically orientated environmental data analysis and impact assessment. 10. Consequently, it is recommended that training abe given to the relevant staff of EED in the interpretative evaluation and assessment of environmental impact monitoring data and the "quantitative" prediction of impacts. 11. Training of the staff can be achieved by engaging an expert consultant with practical experience in the prediction and subsequent monitoring and interpretative assessment of the environmental impacts of power development projects: a. to review some of the latest EIA reports, and b. to assist and guide in the analysis, evaluation and interpreta- tion of the environmental monitoring data collected to date. Methodologies and Procedures 12. It is considered that ECAT has very progressive planning procedures which take into consideration environmental issues in the very early stage of project planning. 13. The effectiveness of this approach will be enhanced with formal adoption of an environmental policy and objectives into EGAT's corporate plan and documentation of the procedures. Access to Technologies 14. It is considered that EGAT has adequate access to new technologies. 15. The issue is not one of access, but one of capability to identify the technologies appropriate for the situations prevalent in Thailand and to adopt the selected technologies wisely to suit EGAT's requirements. Training of personnel involved in the implementation of the adopted technologies is very important as it will decide the success or otherwise of the technologies adopted. Environmental Monitoring 16. EGAT is adequately equipped for the range of monitoring being carried out at present. 17. The question here is not one of having sufficient monitoring equipment. It is one of adequacy of the monitoring being carried out. It is a question of the adequacy of the data collected being able to provide enough information to allow an assessment of the actual levels of the environmental impacts of activities being monitored. Availability of expertise to analyze and understand the data is also important. 18. An assessment was made regarding the adequacy of individual monitoring equipment, the levels of data analysis carried out and the implications of data collected. The most critical finding was that no interpretative analysis of collected data has been made. - 70 - ANNEX 17 Page 3 of 8 19. Therefore, apart from some specific recommendations, of lesser significance, regarding individual equipment and environmiental parameters, it is recommended that an interpretative analysis of environmental data collected be carried urgently. 20. Following the analysis, it is recommended that a review of the monitoring of ecological parameters should be included in the review. Mae Moh Valley Air Quality 21. According to the 1988 Mae Moh Air Quality Report there were a total of 19 monitoring stations in the Mae Moh Valley. 22. From the Summary of the Air Quality Report made available, it was concluded that all parameters monitored (dust deposition rates, total suspended particulates, sulfur dioxide and oxides of nitrogen) show an increasing trend. Most of the maxima either exceeded or were very close to levels considered to be acceptable. 23. Apart from the basic statistical analysis of determining maxima and annual averages, not other analyses have been carried out to understand the circumstances under which high maxima occurred. 24. In addition to the various air quality parameters mentioned above, rain acidity has been monitored since June, 1988. Again no data analysis has been carried out. A brief appraisal of the raw data showed that the rain acidity could be as low as 3.5 pH units and ranged between 3.7 to 6.7 pH units. According to EED, the ionic concentrations of the rain water were low and so were the conductivity measurements. 25. The planned and proposed increases in lignite-based generating capacity and aesociated mining activities in the Mae Moh Valley are yet to be fully implemented. The high values of the various air quality parameters and the low rain acidity are cause of concern. 26. It is important that a study be carried out to identify the reasons behind the high maxima of the various air quality parameters, the increasing trends of these parameters and the low rain water acidity be ascertained urgently. Results of the study will allow more accurate assessment of the impacts of the planned and proposed capacity and the formulation of a control strategy based on proper understanding of the critical issues involved. 27. Several recommendations are made regarding the monitoring of air quality in the Mae Moh Valley. Those of major significance and urgency are repeated below: a. An interpretative analysis of the air quality data be carried out urgently. b. Rain acidity monitoring be expanded to include urban centers and areas remote from industrial emissions and other human activities which may modify the natural rain water acidity, so that the measurements from Mae Moh Valley can be put into proper context. - 71 - ANNEX 17 Page 4 of 8 c. An expert experienced in the monitoring and assessment of rain acidity with practical knowledge of tropical rain water characteristics be engaged to review, advise and assist in the development of a rain acidity study. d. An expert research organization be employed to carry out plume chemistry study to allow better understanding and hence more accurate prediction of the potential of acid rain problem from the lignite power station emissions. This Report supports the location of the proposed Units 12-19 of the Mae Moh lignite power station to the valley next to Mae Moh as a correct step. Future Hydro Power Development Projects 28. No new environmental issues are anticipated for hydro power development projects. EIA reports on these projects show that all issues were identified and addressed. 29. It is considered that there is a need to strengthen the assessment of ecological impacts of such development projects. This is especially relevant with the expected future increase in the level of debate on environmental issues. The increase is predicted based on the assessment of the increasing public awareness on environmental issues as well as increasing public realization of the availability of the political process for achieving their objectives which may or may not be based on genuine concern for the environment. Future Thermal Power Development Projects 30. Three major environmental issues are identified with respect to the thermal power development projects. These are: a. ecological impacts of thermal discharges from power stations (mainly combined cycle power stations at this stage) using once through cooling water system; b. sulfur dioxide emissions from lignite fired power stations; c. dust emissions from open it mining. All these need to be addressed fully in all future projects. Control measures available to mitigate against any adverse impacts with respect to sulfur dioxide and dust emissions are discussed in this Report. 31. However, intentionally no recommendations have been made regarding the preferred control strategy for the Mae Moh Valley developments. Such decisions should only be made based on proper understanding of the critical issues involved which may lead to adverse impacts. The urgency for the various studies in relation to the Mae Moh Valley air quality cannot be over- emphasized. - I - ANNEX 17 Page 5 of 8 32. Another environmental issue which is likely to gain importance in the future, though may not be critical to thermal power development projects, is noise impacts assessments. 33. It is recommended that EED commence a program to measure the strength of the various existing noise sources, such as boiler-turbine complex, fans, mills, steam vent, safety valves, transformers, circuit breakers and mobile plants and ambient noise monitoring at settlement areas around EGAT power station and mine. 34. With the location of the proposed Units 12-19 to a valley next to the Mae Moh Valley, it is understood that a conveyor may be used to transport lignite for up to twenty-five (25) kilometers to these units. EGAT has yet to experience conveyor noise related impacts. Experience of EGAT's sister organizations may be useful to EGAT. Future Transmission Line Projects 35. For EGAT's projects all environmental issues related to transmission line projects have been covered adequately, except for health related effects of electromagnetic radiation (EMR). 36. It is recommended that EED carry out a literature review of the environmental impacts of EMR with emphasis on the health effects. In addition, measurements should be made for the EMR strength of EGAT's transmission liens within areas where public access is available, for example, land along and within transmission line right of way being used for farming purposes. 37. An aspect of transmission line related environmental issues is urban transmission line congestion. EGAT's transmission lines, which generally terminate at substations around the perimeter of urban centers, are not and are unlikely to be involved. 38. Current urban transmission line congestion is consequence of rapid population growth and industrial developments in urban areas. Increase in population density and concentration of industry are beyond the control of electricity distribution authorities charged with the statutory responsi- bility to provide adequate electricity to satisfy the increase in energy need and demand per unit area. Proliferation of transmission lines is unavoidable. 39. There is no reason to believe that at present these lines are posing any hazards with respect to mechanical failure or electrical effects, as transmission lines are designed and constructed according to various design standards to ensure integrity of the lines with respect to safety and supply reliability. 40. It is considered that the only significant impact of transmission line congestion would be in terms of aesthetics. 41. To mitigate against aesthetic impact, a solution is to replace existing lines with underground cables and to require all future lines to be underground. - 73 - MiU L17 Page 6 of 8 42. It is understood that a 10 km of 230 kV underground line has been constructed and there are plans for more underground lines. Economic considerations will determine when the planned underground lines will be constructed. Resettlement and Compensation 43. The most consistent issues in all EGAT's projects are the resettlement of persons/families displaced by EGAT's projects and the associated compensation. 44. It is understood that EGAT has a very progressive policy with respect to resettlement which requires that the quality of life of persons/families should be improved as a result of the resettlement. 45. For each EGAT's project the resettlement and compensation matters are overseen by two special committees set up by the Government through the Office of the Prime Minister. 46. It is considered that with EGAT's positive policy and the tight Government supervision, resettlement and compensatioui of persons/families will not become issues in their own right. However, with the increase in living standards with increasing industrialization, such matters could become critical in the decision making process with respect to EGAT projects. Statutory Environmental Planning Reguirements 47. The basis of the environmental legislation in Thailand is the Improvement and Conservation of National Environmental Quality (ICNEQ) Act. The Act established the National Environmental Board (NEB) and the Office of National Environmental Board (ONEB), the executive arm of NEB. 48. According to the current legislations, all projects and activities which are prescribed by Government Notification under the ICNEQ Act are required to submit an EIA report, environmental mitigation plan and implementation schedule to NEB for approval before they are allowed to proceed. In practice the administration of this requirement is invested in Government agencies which have the permitting responsibility with respect to the prescribed projects and activities. 49. All EGAT's hydro and thermal power developments and mining projects are subject to the EIA process. For transmission lines which go through areas defined by legislations as environmentally sensitive but not protected the EIA process is also applicable. 50. However. it is understood that EIA reports prepared by EGAT for its projects have noL been submitted to NEB for approval either directly or through the "permicting" government agsncies. 51. In this Report shortcomings of the current environmental planning regulatory framework are discussed. It was concluded that the environ- mental planning approval responsibility for prescribed projects and activities should be invested in a single government agency. NEB is the logical choice of such a role. Fur. hermore, it is considered that enabling /4 - ANNEX 17 Page 7 of 8 amendments to the ICNEQ Act be made to require proponent of prescribed projects and activities to submit application through ONEB to the NEB for approval. The amendments should also require permitting agencies not to process an application for permit to carry out a project or activity unless NEB approval has been obtained. 52. This approach should endorse NEB and ONEB with the appropriate level of authority to perform their duties effectively. Environmental Control 53. At present, there is no formal legislation with respect to enforcement of environmental control. The ICNEQ Act does not give the NEB or the ONEB this role. The enforcement functions are performed by the various government agencies with responsibilities to issue permit for the various developments. These permitting agencies are empowered to attach environmental conditions to permit issued under their respective Acts. It is understood that they are also empowered to set environmental standards. However, it is not clear if the power is explicitly stated in any Acts or just a default power by virtue of their power to attach environmental conditions to permits. 54. It is considered that during the implementation stages of an approved prescribed project or activity, the proponent should be required to submit design details of environmental protection/control plant and equipment to a government agency other than the permitting agency for approval to proceed. This should minimize costly retrofit of plant and equipment by minimizing the likelihood of inadequate plant and equipment being installed resulting in adverse impacts in the future. 55. During the operational phase of a prescribed project or activity, in addition to the permit from the permitting agency, the operator should be required to obtain license to operate from an environmental c^ntrol authority on an annual basis. 56. The ONEB is the logical candidate to be nominated as the government agency with the authority tao issue planning approval for prescribed projects and activities. The ONEB is also the logical agency to be invested with the environmental control enforcement responsibility. Environmental Standards 57. With respect to the power sector, the only emission standard for atmospheric discharges is the limit on intensity of smoke emissions measured in terms of Ringlemann scale. There is no noise emission standards other than in relation to occupational exposure. There are emission standards for industrial effluent which may be regarded as applicable to power station discharges. 58. There are no ambient noise standards. There are ambient air quality standards and two types of water quality standards. 59. One set of the water quality standards is applicable to specified coastal waters. The other is the surface water quality standards. - 75 - ANNEX 17 Page 8 of 8 60. It is considered necessary that both standards are def4.ned. However, only emission standards should be included in legislations. The environmental control enforcement authority should be charged with the responsibility to ensure the achieve of the various ambient standards through: a. setting of appropriate emission standards; b. co-ordinated environmental planning process to avoid undesirable concentration of polluting industries or activities and to avoid locating of incompatible uses on adjoining areas. 61. The environmental control enforcement authority should be charged with the responsibility to set the various ambient standards. Amendments to the ICNEQ Act should be made to ensure that the various standards and goals are set with consultation, apart from experts, with industries, government agencies with legitimate interests and representatives of relevant special interest groups. 62. As discussed earlier there are only limited environmental standards of relevance to the power sector except for those related to water discharges. Recommendations are made in this Report regarding environmental parameters for which emission standards and/or ambient standards should be set. 63. The setting of environmental standards be it emissions or environmental quality standards, is necessarily an exercise in compromise. The final outcome reflects the balance of what is acceptable from public health point of view, what is desirable for the environment, what is achievable technically and what is economically affordable. The decision is influenced by environmental considerations, the social and economic objectives of a government and the prevalent political realities at the time of the decision. 64. Therefore, no recommendations have been made in this Report on the appropriate levels which should be adopted in the case of Thailand. Instead, recommendation is made regarding sections of community which should be included in the process to ensure a balance decision. - 76 - ANNEX 18 THAILAND SECOND POWER SYSTEM DEVELOPMENT List of Documents in Project Files A. EGAT - General A.1 EGAT Power Development Plan (1988-2001), Report N4o. 10600-3106, EGAT, August 1988. A.2 Environmental Review B. Financial Reports 1.1 Annual Report 1987, EGAT. B.2 Project Loans Report, June 30, 1989. 3.3 Lignite Mine Sector Financial Statement, 1987. I HI1 fH p W i~ I 1" 1"g i_ l Xii't LiLJ L§ L@LJ !~ ~~~~~~~ tjSS ft II