RESTRICTED FILE COPYT CT t2 r4 Xpy Report No. TO- 349a This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION APPRAISAL OF A SECOND YANHEE PROJECT YANHEE ELECTRICITY AUTHORITY THAILAND February 18, 1963 Department of Technical Operations CURRENCY EQUIVALENTS US $1 = Baht 20 APPRAISAL OF A SECOND YANHEE PROJECT YANHEE ELECTRICITY AUTHORITY THAILAND TABLE OF CONTENTS Page No. SUMMARY i I. INTRODUCTION 1 II. THE BORROWER 1 III. THE PREVIOUS LOAN 2 Provisions of the Previous Loan 2 IV. THE POW4ER MARKET 4 Bangkok Market 4 Up-country Market 5 V. THE PROJECT 6 Cost of the Project 6 Arrangements for Engineering and Construction 7 Schedule of Construction and Expenditures 8 VI. JUSTIFICATION FOR THE PROJECT 8 VII. FINANCIAL ASPECTS 9 Rates 9 Auditors 9 Depreciation 10 Financial Position 10 Financing Plan 11 Estimated Future Earnings 11 Debt Service Coverage 12 Debt/Equity Ratio 13 Debt Limitation Provisions of the Previous Loan 13 VIII. CONCLUSIONS 13 LIST OF ANNEXES Annex 1 - Yanhee Electricity Authority - Actual and Forecast Balance Sheets 1961-70 Annex 2 - Yanhee Electricity Authority - Actual and Forecast Income Statements 1961-70 Annex 3 - Yanhee Electricity Authority - Forecast Sources and Applications of Funds 1962-70 MAP APPRAISAL OF A SECOND YANHEE PROJECT YAITHEE ELECTRICITY AUTHORITY THAILAND SUNMARY i. The Yanhee Electricity Authority (YEA) has requested a loan of $6.6 million to help finance the cost of transmission line facilities to be built during the next 3 years. The cost of the project is estimated to be equivalent to about $11 million. ii. In 1957 the Bank made a loan of $66 million to YEA to assist in financing the Yanhee Multipurpose Project. The project is now in the final stages of construction with completion expected by the end of 1963. iii. The YEA is a Government-owned organization, created in September 1957 as a condition of the previous loan. It is, in effect, an autonomous organization and its management is competent. Because the YEA did not have an orgrnization initially, the responsibility for carrying out the Yanhee project was delegated to the Royal Irrigation Department. Nevertheless, to be in a position to take over generating facilities owned by other govern- ment agencies, and to expand them as required by conditions of the previous loan, YEA began to acquire staff early in its existence. It negotiated loans with the Export-Import Bank for new steam units in Bangkok and supervised their construction; it became operational in March 1961 when first power sales were made. Its financial position at the end of the first year of full operation (fiscal 1962 ending September 30) is satisfactory. iv. The rate of return is expected to be poor in 1964 when the major investment in the Yanhee project is brought into YEA fixed assets; debt service coverage would also be low. This is to be expected, as its facilities would be only partially utilized. Improvement would be rapid, however, reflecting better utilization of plant investments in succeeding years. By 1970, sound interest and debt service coverage ratios of 3 times and 2 times would be reached, and the rate of return on net fixed assets including work in progress would improve to about 9 percent. v. The proposed method of carrying out the project is satisfactory and the cost estimates should prove reliable. The project would be suitable for a loan of $6.6 million including interest during construction of about t0.4 million, for a term of 20 years including 3 years' grace. APPRAISAL OF A SECOND YANHEE PROJECT YANHEE ELECTRICITY AUTHORITY THAILAiD I. INTRODUCTION 1. The Yanhee Electricity Authority (YEA), an agency of the Govern- ment of Thailand, has applied to the Bank for a loan of $6.6 million to cover the foreign exchange cost of transmission lines to supplement those now being constructed as part of the Yanhee Multipurpose Project. 1/ The first phase of the Project was financed in part by a Bank loan of $66 million (175 TH) in November 1957. This would be the Bank's second loan to YEA. 2. The transmission lines would include a second high-voltage circuit between Yanhee and Bangkok and extend YEA service to 11 towns, bringing to 24 the communities ?/ outside of Bangkok to be served by the YEA system. The total cost of the project including interest during con- struction is estimated to be the equivalent of about $11 million. This report is based on information supplied by the YEA and on various reports by YEA's consultants. Through successive end-use visits to follow up on construction work, the Bank staff was generally familiar with the proposed works to be included in the project; hence no special appraisal mission was required in this instance. II. THE BORROWER 3. The Yanhee Electricity Authority was established by law in September 1957 to be the sole agency for generation and transmission of electric energy in the most developed and populated area of Thailand. Its service area will extend ultimately to 33 of the 71 provinces in Thailand. It has various rights including the right to determine rates for electric energy, to acquire land - through condemnation if necessary - and to borrow and invest funds. It has a Board of Directors consisting of a Chairman and not less than four nor more than six other members, exclusive of the General Manager, who is an ex-officio member of the Board. The chairman and Directors are appointed for six-year terms by the Council of Ministers, one half being reappointed or replaced every three years. The Board appoints the General Manager subject to the approval of the Council. 4. The YEA was created as a condition of the first Bank loan. Since it did not have an organization at the time, arrangements were made for YEA to delegate to the Royal Irrigiation Department (RID) authority to carry 2/ The dam has been named Bhumiphol Dam but the project is still referred to as the "Yanhee Project". g/ Ten communities are to be served through lines being constructed under the previous loan; eleven more would be connected as part of the proposed project and three were connectel into the YEA system through lines built by others. - 2 - out the first phase of the Yanhee Project. The RID is presently administering the construction of the project and also performing some of the construction work and support functions with its own forces. 5, At the time of the 14an it was planned that the YEA would be staffed and become an operational entity by assimilating existing generating facil- ities and personnel in Bangkok, and by constructing interim facilities. The YEA organization would thus be ready to take over, operate and carry out the balance of the Yanhee program on completion of the Yanhee Project. In accordance with this plan, the YEA became an operational entity in March 1961 and now supplies all bulk energy in the Bangkok area. The physical facilities which YEA has for meeting this responsibility include about 36 M4W of diesel capacity and 115 MW of steam capacity. III. THE PREVIOUS LOAN 6. The previous loan was made to cover the foreign exchange cost of the first phase of the Yanhee Multipurpose Development. The total cost of the first phase was estimated to be $100 million. It included: a 154 meter high concrete arch dam on the Ping River to create a reservoir with a capacity of 12,200 million cubic meters; a power plant with an initial capaci..y of two 70 MW units (ultimate capacity 560 MW); a 230 kv single circuit transmission line to Bangkok; substations; and 69 kv transmission lines to serve 10 towns between the dam and Bangkok. Construction started late in 1958. The project is expected to be substantially completed by the end of 1963. 7. When the Bank appraised the project early in 1957, the physical construction period was expected to be about 5 years. One additional year was allowed for design review, bid inTitation, analysis of bids and con- tractor mobilization. The project was expected to become revenue earning by early 1963. The physical construction period has been about as expected. However, delays in starting construction have led to the present estimate of early 1964 for first commercial operation. Above average rainfall in the fall of 1963 could advance the date of first operation but there is also the possibility of below average rainfall. In the latter case signifi- cant amounts of power production could not be expected until the 1964 nmonsoon, or early in YEA's fiscal year 1965. 8. Recent estimates indicate that the projectts cost will exceed the original estimate by about 10%. The overrun is on the local currency side. Foreign exchange still available in the loan appears adequate to complete the project. Provisions of the Previous Loan 9. Two important provisions of the Yanhee loan required that: (a) a single retail distribution agency be created in Bangkok to rebuild the Bangkok distribution system so as to be able to market bulk power to be supplied by YEA; and (b) the YEA would construct interim thermal power facilities of not less than 30 MW nor more than 50 MW to meet load growth in Bangkok prior to completion of the Yanhee Project. 10. At the time, the responsibility for the electric system in Bangkok was divided between two non-interconnected and separately managed power utilities. Generation was from six separate stations which in turn were not interconnectcd. Fuel costs and losses were exceedingly high and system reliability low. It was recognized that the 30 MW to 50 MW of additional capacity could do little more than prevent the system from becoming hope- lessly overloaded. Nevertheless, in the light of facts available at that time, it was thought to be imprudent to plan for greater capacity having regard to the expectation that Yanhee would be in operation by the end of 1962. It was important, also, to hold the cost of the investment by YEA to a minimum. 11. The first condition was met by merging the two utilities into one new organization called the Metropolitan Electricity Authority (MEA). With the assistance of a U.S. Development Loan Fund loan of $20 million, the PlEA is rebuilding and modernizing the Bangkok distribution system. Tbh main power distribution centers in Bangkok, formerly the sites of the isolated generating facilities, have all been properly interconnected and work has proceeded fairly well on rebuilding low voltage distribution lines and customer connections. The system will be adequate to handle the expected power requirements of the city when the first phase of the Yanhee project is completed. 12. The second condition could not be met until all aspects of interim and long range generation requirements had been examined. This was done oy competent consultants in 1958. At that time the generating capacity in Bangkok consisted of small diesel and old steam units totalling about 75 MW. The consultants concluded that potential savings in fuel costs would almost pay for a high efficiency steam unit in the pre-Yanhee period. The need for high efficiency (a re-heat plant) dictated that the size be at least 60 MW and a longer range view of the integrated system indicated a size about equal to a Yanhee unit (70 MW). A single unit 75 MW plant was finally selected and, with Bank agreement, financing was arranged through an Ex-Im Bank credit of t14 million in April 1959. This unit was substantially completed and in commercial operation by the end of March 1961. Except for boiler cleaning in October 1961, it has been in continuous operation since. 13. Late in 1960 the YEA engaged management and engineering consultants to help set up its operating procedures and accounts. The consultants were also given the assignment of studying and making recommendations on the technical operation of the system, particularly up to the time Yanhee would be ready for commercial operation and for the first several years thereafter. They concluded that, based on recorded variations from the previously calcu- lated runoff of the Ping River at Yanhee, full power output of the first two Yanhee units might not be achieved until 1965, and hence the single new 75 NW unit plus the miscellaneous plants (about 75 MW) taken over from MEA, lacking reserve capacity, would be inadequate to provide reliable service in the interim period. This was vieved with particular apprehension by the Government and YEA because of the growing expectation on the part of the public that electric service would not continue to be subject to the frequent and prolonged interruptions which occured previously. In view of these developments, the Bank approved YEA's requests for permission to add another identical boiler and a second complete 75 Mg unit (also to be financed by the Ex-In Bank) to its installations in Bangkok. 14. A third provision of the Yanhee loan required the Government to provide adequate distribution systems in the 13 provincial areas outside of Bangkok to which Yanhee power would be made available initially. To do this the Government in 1960 created the Provincial Electricity Authority (PEAS. It was made responsible for generation 2/ and distribution of electric energy in most areas and towns outside the metropolitan Bangkok area. However, in spite of Bank efforts, including an offer to consider a loan for the provincial work, the PEA has not yet developed into an organization capable of planning and carrying out the utility responsibilities for which it was created. While existing provincial systems will be capable of connection into the YEA system, the benefits of reliable central station service cannot be fully utilized by the ultimate consumers until distribution systems are improved and expanded. 15. The Government has recently acc-epted an offer by Germany to provide four advisers to PEA for a period of two years. They have now arrived in Thailand and may be able to provide the management and technical guidance that PEA requires. IV. THE POWER MARKET 16. The YEA service area will include two distinct markets: the Bangkok metropolitan area as one and the "up-country towns" as the other. The relative importance of the two is illustrated by the fact that present estimates indicate the Bangkok area will account for over 90% of all sales through 1970. Bangkok Market 17. The demand for power as measured at the generating plantsincreased from about 22 MW in 1950 to 115 MW in September 1962, or an average of about 15% per year. During this period, until May 1961, when the first YEA 75 MW steam plant went into operation, it was common practice to shed load during peak hours, black out sectiomsof the city, depress voltage and frequency and refuse or discourage service requests. As a consequence, by 1960 about 55 MW of captive capacity had been installed by various industrial and commercial enterprises. Use of energy was also restricted by a rate structure which, contrary to normal practice, gave no incentive to large power users. One rate was used for all customers. This was about 3t US cents per kwh for the first 50 kwh per month and about 5 US cents per kwh there- after. g/ PEAts generation facilities are to be shut down as YEA service becomes available. - 5 - 18. Records of YEA's first 18 months of operation indicate that demand is not increasing as rapidly as YEAts consultants had forecast in recent surveys. Therefore, for the purpose of this report, the consultants' fore- cast has been scaled down. The figures in this report assume increases of about 15% during each of the next two years, decreasing to 8% per year from 1967 on. The average rate of increase between 1962 and 1970 would be about 10%. Up-country Market 19. A power market survey was made for most of Thailand by consultants supplied through a U.S. ICA program in 1959 and 1960. The survey indicated that municipal, industrial and commercial power loads outside the Bangkok area are generally served by diesel electric generators with poorly constructed and inadequate distribution systems not built to permit expansion. Often the plants are operated to furnish power for lighting only a few hours a day. Industrial users have generally provided their own power sources where warranted by the size of the operation. 20. Present loads are low in the towns to be served from the YEA system. In Chiengmai, the second largest city in Thailand, the load in 1960 was only about 2.7 NW. Generation in that year was about 5 million kwh for a load factor of only 21%. It should be noted that the utility system was relatively good compared to many others in the YEA service area. 21. There was undoubtedly a larger market potential in the Chiengmai area than indicated by the 1960 generation figures considering the size of the city (about 70,000) and population of Chiengmai province (about 800,000). However, how the Chiengmai and other up-country markets will grow will depend on the initiative of PEA. As the ability and initiative of PEA has yet to be demonstrated, a conservative estimate of up-country load growth is necessary. 22. Load growth and sales estimates for the rural areas as well as for Bangkok are summarized below. YEA System DemandlJand Sales Forecast Bangkok Area "Up-country Area" Demand Sales Demand Sales Total Sales Year (W (kwh millions) (MW) (kwh millions) (kwh millions) 1961 (YEA in operation only part of year) 1962 107 480 480 1963 125 550 550 1964 I4" 630 _ _ 630 1965 161 705 8 26 731 1966 177 775 17 51 826 1967 191 835 21 65 900 1968 205 900 23 70 970 1969 222 970 25 76 1,046 1970 240 1,050 27 82 1,132 I/ Net demand not including system losses or station service. - 6 - 23. Although the estimates for the Bangkok area are not much below the Bank's 1957 forecasts, the present estimates for the up-country area are much more conservative. V. THE PROJECT 24. The proposed project would include: a second 230 kv circuit between Yanhee and Bangkok; 115 kv and 69 kv lines to areas southeast and southwest of Bangkok, extending down both sides of the Gulf of Thailand; and also lines originating at Yanhee and extending in an easterly direction. The main elements of the project would be: (a) Installation of a second 230 kv circuit between Yanhee and Bangkok (452 km). Provisions for the circuit have been made on double circuit steel towers now under construction. (b) Construcbion of a 115 kv transmission line from Bangkok to Cholburi and of a 69 kv transmission line from Cholburi to Sattaheop and Rayongto the southeast (227 km). The line would be operated initially at 69 kv. (c) Construction of 69 kv transmission lines from Bangkok to Nakorn Pathom, Rajburi and Petchburi to the southwest (156 km), and from Yanhee to Tak, Sukhothai, Pitsanuloke, Pichit and Uttradit in the north (335 km). (d) Extensions of existing substations and construction of others so that, at each of the above terminal towns, voltage at 11 kv would be avail- able for distribution into the surrounding area. (e) The proposed project would also include a 69 kv transmission line from Yanhee to Mae Sawd on the Burma border (95 km), but this line would not be built unless arrangements for a proposed zinc mine and smelting plant near Mae Sawd were finalized. 25. The stringing of the second 230 kv circuit must be phased into the present work schedule. Consequently, the YUA has been advised that foreign exchange costs would be reimbursed when and if the proposed loan is made, should it be necessary to proceed with the work before the loan would become effective. However, no disbursements will be made for the 115 kv and 69 kv line extensions until the Bank was satisfied that PEA had made adequate arrangements, including a determination of construction priorities, for distribution systems in the 11 communities to be connected. Cost of the Project 26. The project is estimated to cost about $10.9 million of which $6.6 million including interest during construction of about $0.4 million would be foreign exchange. The estimate is summarized below: ___-- -Thousands_of dollars---------- Foreign Local Exchange Currencvr Total Second 230 kv circuit 2,280 380 29660 230 kv substation work 660 190 850 115 kv circuits 460 680 1,140 69 kv circuits 920 1,630 2,550 69 kv substations 1,190 600 1,790 Subtotal 52510 3,480 8,990 Design, supervision and administration 350 270 620 Contingencies 350 550 900 Interest during construction 390 - 390 Subtotal 1,090 820 1,910 TOTAL 6,600 4,300 10,900 27. The Contractor building the first 230 kv circuit and towers hao made a favorable offer, in lire with the original contract, to install the second 230 kv circuit. This work, therefore, will be performed as an extension of the first contract at costs more favorable than could be expected from a Contractor selected as a result of new tenders. It is thus possible for the installation of the second circuit to be coordinated with the work underway without interference. Other work is similar to that which YEA forces are presently doing. Since good pricing data were avail- able the cost estimates should prove reliable. Contingencies have accord- ingly been kept low, about 10% on foreign costs over and above those for the second 230 kv circuit, and about 15% on the estimated local cost components. Contracts for materials (except those to be supplied by the 230 kv line contractor) would be awarded after international bidding. Arrangements for Engineering and Construction 28. No engineering design would be necessary for the second 230 kv circuit as it would simply duplicate the first circuit. 29. Design criteria, material specifications and layouts for 69 kv lines now under construction were prepared by Yanhee project consultants. This basic work would be utilized by YEA forces in preparing the detailed layouts for 115 kv and 69 kv lines and substations. Construction would be by YEA forces assisted by personnel supplied by consultants. Most of the engineering would be performed by YEA, but the proposed loan would include funds for foreign personnel to augment and supervise the YEA staff in both engineering and construction. - 8 _ Schedule of Construction and Expenditures 30. The project would be carried out over three years as follows: Construction 230 kv facilities - by the end of 1963 115 kv facilities - by the end of 1964 69 kv facilities - by the end of 1965 Expenditures ------Thousands of dollars… 1963 196 1965 Total Foreign Exchange 3,450 2,020 1,130 6,600 Local Currency 1,000 1,800 1,500 4,300 Total 4,450 3,820 2,630 10,900 VI. JUSTIFICATION FOR THE PROJECT 31. The transmission line distance between Yanhee and Bangkok is about 450 kilometers. When the first Bank loan was made it was planned to construct in the initial stage two 138 kv transmission lines on wooden poles, following different routes, which was considered to be the most satisfactory and economical solution of the transmission problem during the time when only two units were in operation at Yanhee and when back-up capacity in Bangkok was so inadequate. It was then planned that when the third unit at Yanhee was built the first 230 kv transmission line between Yanhee and Bangkok would be added and that the transmission system would then be adequate to carry the loads of the fourth and fifth units. With the construction at Bangkok of a new 75 M thermal plant and the subsequent decision to add a second similar unit, the transmission requirements were radically changed. Studies proved that in this situation it would be more economical and more efficient to construct at the outset one circuit of a 230 kv transmission line, with provision on the towers to add a second 230 kv circuit when requirements justified. The amount of money set aside for transmission lines in the Bank loan plus savings in the estimate for purchase of equipment were adequate to cover the increased cost of about 45 million required for the steel transmission towers and one 230 kv line. The loan now proposed would provide the second line which would be consistent with the program to keep abreast of the rapidly expanding load in the Yanhee service area. 32. Some of the proposed transmission extensions, particularly those to the south of Bangkok, are justified by present market forecasts. On the other hand, the lines in the north and probably those extending southeast beyond Chacherngsao could not be expected to be profitable initially. - 9 - However, the investment in lines of this category would be extremely small, amounting to less than l1% of fixed assets in 1965 and would have no significant effect on the forecast financial position VII. FINANCIAL ASPECTS Rates 33. YEA has the right to set its rates. Its present rate structure was established along lines recommended by a rate consultant engaged as part of the general management advisory services contract (paragraph 13). It provides for both demand and energy charges, the latter decreasing with increased consumption. 34. For the present 52% load factor in Bangkok (the MEA system) the unit energy charge is about B 0.38 per kwh (1.9 cents/kwh). This is a fairly high price for bulk wholesale power but still considerably less than MEA unit costs before YEA became the sole bulk power supplier. 35. MEA put into effect on October 1, 1962 a new incentive type rate structure varying, for residential rates, between about 4 US cents per kwh for ccnsumption of only 200 kwh per month to about 3.3 US cents per kwh for consumption of 1,000 kwh per month. These rates are high (compared to Washington, for instance) but particularly so relative to the generally low purchasing power of most MEA customers. As MEA rates are tied to YEA rates, it is doubtful whether YEA revenues could be increased significantly through rate increases at the present time due to the depressing effect an increase would have on load growth. 36. The rate covenant of Loan 175 TH states that rates should provide revenues: "(a) to cover operating expenses, including proper provision for maintenance and depreciation and interest; (b) to meet repayment of indebtedness to the extent that such repayments exceed provisions for depreciation, and to meet increases in the cost of replacement of assets; and (c) to produce such surplus as shall be reasonable and proper in a well- ordered and self-sustaining public utility enterprise, sufficient (inter alia) to finance a substantial proportion of any development, including the subse- quent stages, that may be undertaken within the scope of its responsibilities to satisfy future power demands in the areas to be supplied by it." The covenant is not being changed for the present loan. Auditors 37. A provision of the YEA Act required YEA to have an annual audit. The Government Audit Council has been designated by the Government to audit YEA accounts. Since YEA is now an operational entity with a responsibility for recording its operations as a public utility undertaking, the Bank will require to be satisfied that the accounts are being audited by auditors experienced in public utility accounting. - 10 - Depreciation 38. The YEA follows conservative depreciation practicts; the entire initial investment in the Yanhee project is to be written of' at 2'% (40-year) straight-line depreciation. A rate of 3% (33-year is used for the thermal plant and transmission facilities. Financial Position 39. Condensed balance sheets for the fiscal years ending 3eptember 30, 1961 through 1970 are shown in Annex 1. It should be noted that YEA became operational only during fiscal year 1961, and that work in progress on the Yanhee project is not carried on YEA books since the RID is responsible for the project until fiscal year 1964. 40. As of the end of fiscal year 1962, net fixed assets and work in progress are estimated to total B 810 million (WZ.O.5 million). Capitalization would consist of B 450 imillion ($22.5 million) debt and B 421 million ($21.0 million) equity. The debt/equity ratio would be 52/48 as shown below: Pro-Forma Capitalization as of September 30, 1962 (rounded) Lona.Term Debt (millions of baht) IBRD Loan 175 TH, 5-3/4%, 1957-82 18 Ex-Im Bank Credit 1054, 5j%, 1959-73 257 Ex-Im Bank Credit 1769, 5-3/4%, 1962-76 150 WEA debt assumed on transfer of properties 25 450 52% Equity and Surplus Government equity 234 Surplus: MEA property transferred free of charge 140 MEA contributions to construction 1 Retained earnings 46 Total equity and surplus 421 48% Total Capitalization 871 100% 41 The B 18 million IBRD debt represents cost of transmission properties completed as part of the Yanhee project and taken over by YEA; Ex-Im credits of j14 million and $10 million respectively were for the two 75 MNW steam units; MEA debt represents supplier credits and an ICA loan, both repayable in baht. If the Yanhee project were carried on YEA books, capitalization would be increased by about B 1,747 million, the approximate value of work in progress on September 30, 1962. Long-term debt would then be increased to B 1,595 million ($79.7 million) and equity and surplus to B 1,023 million ($51.1 million). The debt/equity ratio would be 61/39. - 11 - 42. Government contributions are pledged to cover local costs of Yanhee and both steam units. The contributions made, or scheduled, will be as equity or long term loans. The YEA Act, which cannot be changed without Bank approval during the term of Loan 175 TH, provides that revenues in excess of those required to meet the objectives of the rate covenant (paragraph 36) would accrue to the State. On the other hand, the Act also provides that the Government would appropriate funds as needed by YEA, should revenues be insufficient to meet these objectives. Financing Plan 43. Annex 3 gives a forecast of sources and applications of funds for the period through fiscal 1970. During these years the following additions would be made to fixed assets or to construction work in progress: (Baht millions - rounded) Yanhee project 2,171 Thermal units 1 & 2 301 Proposed project 210 Yanhee units 3 & 4 120 Other system expansions 132 2,934 In addition YEA would have to meet debt service totalling 1,325 Total 1962-70 4,259 These requirements would be met from the following sources: (Percent) IBRD Loan 175 TH 1,302 31 Ex-Im Credits 1054 & 1769 206 5 Equity (or Government loans) 1,023 24 Proposed IBRD Loan 132 3 Earnings 1,596 37 4,259 100 The proposed loan has been assumed at 5i-% interest with a term of 20 years including 3 years' grace. Estimated Future Earnings 44. Forecast income statements through fiscal 1970 are shown in Annex 2. Net income before interest is expected to increase from B 45.4 million in 1962, the first full year of YEA operations, to B 256.1 million in 1970. The rate of return on net fixed assets in operation excluding work in progress would be 7.7% in 1962, and 5.6% in 1963. These returns are adequate considering that by 1963 the complete two-unit (2 x 75 SW) steam plant, while still only partially utilized is brought into fixed assets on the balance sheet (Annex 1). I/ Scheduled to be installed by 1967 and 1970. - 12 - 45. In 1964 when the Yanhee Project would be brought into fixed assets and the corresponding loan into liabilities, the rate of return would drop to around 2.7% and then progressively improve by about one point per year to around 9% by 1970. Two factors should be noted in judging these returns. One, the conservative depreciation policy (paragraph 38) and the other, the fact that the total cost of the Yanhee project, although having multipurpose benefit, is to be amortized by power revenue and carried as a fixed power asset of YEA. 46. It was estimated in the Bankts 1957 appraisal report (Report TO 137-a) that about 75% of the cost of the project would be allocable to power. If such an allocation were made and if a depreciation rate of about 1.6% (62.5 years straight-line )Llwere used, the returns would be significantly improved as shown by the following comparison. 1964 1965 1966 1967 1968 1262 1970 Forecast rate of return?! 2.7 3.8 4.8 5e6 6.8 7.8 9.0 Adjusted rate of return 3.6 5.1 6.3 7.2 8M7 10.0 11.0 47. Substantial amounts of cash will accumulate starting in 1967, which would be available to accelerate reduction of debts, to accumulate reserves again-nc future construction costs or to make payments to the Government. After 1967 the financial prospects should be reviewed from time to time, in order to judge whether a reduction in rates might be practicable. Debt Service Coverage 48. Debt service and interest coverage ratios are shown in Annex 3. Debt service requirements build up rapidly in 1964 and 1965, reaching a maximum in 1966. During this period, when assets would be only partially utilized, debt service coverages would be but 1.2, 1.1 and 1.3 times. This is the result of the partial impact in 1964 and full impact in 19652" of debt service on the previous loan and in 1966 of the proposed loan. However, improvement would be rapid; by 1968 a sound position would be reached when interest and debt service would be covered 2.3 times and 1.7 times respec- tively. By 1970 ample coverages of 3 times interest and 2 times debt service would be reached. 49. The 1.1 debt service coverage forecast for 1965 is uncomfortably low. A reduction of about 10% in 1965 revenues would drop this coverage to unity and, of course, give rise to a liquidity problem. However, if this / While in no way criticizing the YEA policy, the point could be made that a depreciation rate of about 1.6% (62.5 years straight-line), as used in the 1957 Bank report, might be more realistic considering that most of the cost is represented by a concrete dam which should have a useful life of 100 years or more. v Rate of return on net fixed assets excluding work in progress. From Annex 2. S/ Although the first full year's amortization starts in fiscal 1964, interest during that z'aar will be partly covered from interest during construction included in the loan. - 13 - were foreseen the cash position could be improved by delaying some of the 69 kv transmission line work, which cottld be done without any particularly detrimental results. Debt/Equity Ratio 50. The debt/equity ratio is forecast to peak at 55/45 in 1964 when the first stage of the Yanhee project (both the assets and the corresponding liabilities) would be entered on YEA's books. After 1964, when the volume of construction work would be small, and financed by retained earnings, the debt/equity ratio would rapidly improve to 3W/62 in 1970. Debt Limitation Provisions of the Previous Loan 51. Section 5.08(b) of the previous Loan Agreement requires Bank approval for YEA to incur debt prior to the completion of "Subsequent Stages'!Vy The exact wording is as follows: Section 5.08 (b) "The Borrower shall, progressively and consistently with its financial capabilities and resources, carry out the Subse- quent Stages in pace with the growth of power demand in the areas to be supplied. Before the completion of the Subsequent Stages, the Borrower shall undertake any additional project, other than the thermal generating facilities referred to in paragraph (a) of this Section, or enter into any finauvial commitment in respect thereof, only with the prior agreement of the Bank." 52. The Subsequent Stages will probably be completed in the mid-1970's. At that time the debt limitation provision of the previous loan would cease to exist with approximately half of the previous loan and most of the proposed loan still outstanding. Consequently, a more general undertaking was agreed upon during negotiations. The new covenant requires prior Bank agreement for YEA to incur debt, other than for debt that might be incurred in com- pleting the Subsequent Stages. VIII. CONCLUSIOITS 53. The project is relatively simple and the arrangements for engineering and construction are adequate. The cost estimate is based in part on actual quotations / and should prove reliable. The proposed method of carrying out the project is acceptable. 54. The YEA forecast financial position indicates an initially weak but improving situation. 55. The proposed project is suitable for a loan of $6.6 million for a term of 20 years including 3 years of grace. 2/ The "Subsequent Stages" are defined to mean the completion of the Yanhee Project (installation of future generating units) plus all transmission necessary to meet the requirements of the system. 2/ Paragraph 27. YANHEE ELECTRICITY AUTHORITY ACTUAL AND FORECAST BALANCE SHEETS 1961-70 (millions of baht) ACTUAL F 0 R E C A S T ,Fiscal years ending September 30) 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 ASSETS __ Fixed Assets 615.80 626.o5 953.02 3,203.18 3,358.18 3,360.18 3,439.48 3,473.78 3,493.08 3,572.38 Less: Depreciation reserve 9,80 35.10 60.70 123.40 215.80 312.90 411.90 511.50 612.30 715.50 Net fixed assets in operation 606.00 590.95 892.32 3,079.78 3,142.38 3,047.28 3,027.58 2,962.28 2,880.78 2,856.88 Work in progress 22.26 219.51 102.13 110.95 45.55 97.85 42.85 57.85 87.85 27.85 Total net fixed assets 628.26 810.46 994.45 3,190.73 3,187.93 3,145.13 3,070.43 3,020.13 2,968.63 2,884.73 Current and other assets (net) 46.32 60.14 55.40 100.04 57.37 57.17 113.86 180 20 279 9A 428. Total Assets 674.58 870.60 1,049.85 3,290.77 3,245.30 3,202.30 3,184.29 3,200.33 3,240.89 3,312.97 LIABILITIES Government equity contributions 192.84 233.84 289.68 1,216.30 1,216.30 1,216.30 1,216.30 1,216.30 1,216.30 1,216.30 Surolus 157.44 186.89 221.53 270.37 286. ~3 334.44 -407,67 _-517.87 655.68 827.74 Total capital and surplus 350,28 420.73 511.21 1,486.67 1,502.63 1,550.74 1,623.97 1,734.17 1,871.98 2,044.04 Debt: IBRD 175 TH 18.39 18.39 18.39 1,281.90 1,241.56 1,198.88 1,153.72 1,105.92 1,055.32 1,001.76 ExIm 1054 274.16 256.67 233.34 210.01 186.68 163.35 140.02 116.69 93.36 70.03 ExIm 1769 - 150.00 200.00 191.67 175.00 158.33 141.66 124.99 108.32 91.65 MEA No. 1 18.64 14.33 10.05 5.88 4.81 3.74 2.67 1.60 .53 - MEA No. 2 13.11 10.48 7.86 5.24 2.62 - - - - - Proposed IBRD loan - - 69.00 109.40 132.00 127.26 122.25 116.96 111.38 105.49 324.30 449.87 538.64 1,804.10 1,742.67 1,651.56 1,560.32 1,466.16 1,368.91 1,268.93 Total Liabilities 674.58 870.60 1,049.85 3,290.77 3,245.30 3,202.30 3,184.29 3,200.33 3,240.89 3,312.97 Debt/equity ratio 48/52 52/48 51/49 55/45 54/46 52/48 49/51 46/54 42/58 38/62 YANHEE ELECTRICITY AUTHORITY ACTUAL AND FORECAST INCOME STATEMENTS 1961-70 (millions of baht) ACTUAL F 0 R E C A S T Totals (Fiscal years ending September 30) 19611' 1962 1963 1964 1965 1966 1967 1968 1969 1970 1962-70 Sales (millions of kwh) 480 550 630 730 825 900 970 1,045 1,130 Average revenue per kwh sold (baht) .38 .38 .38 .38 .38 .38 .38 .38 .38 Operating revenue 62.78 182.40 209.00 239.40 277.40 313.50 342.00 368.60 397.10 429.40 2,758.80 Operating costs: Operating expenses 31.90 111.75 133.45 92.50 64.65 69.50 74.35 67.30 70.40 70.10 754.00 Depreciation 7.01 25.30 25.60 62.70 92.40 97.10 99.00 99.60 100.80 103.20 -7057 Total 38.91 137.05 159.05 155.20 157.05 166.60 173.35 166.90 171.20 173.30 1,459.70 Net income before interest 23.87 45.35 49.95 84.20 120.35 146.90 168.65 201.70 225.90 256.10 1,299.10 Income deductions: Interest payable 7.55 15.08 Z7.55 48.11 101.87 97.87 92.97 87.72 82.39 76.87 630.43 Less: Interest charged to construction - - 13.75 14.55 - - - - - -28.30 Interest charged to operations 7.55 15.08 13.80 33.56 101.87 97.87 92.97 87.72 82.39 76.87 602.13 YEA staff bonus - .82 1.51 1.80 2.52 .92 2.45 3.78 5.70 7.17 26.67 Net profit 16.32 29.45 34.64 48.84 15.96 48.11 73.23 110.20 137.81 172.06 670.30 Return on net fixed assets: Including work in progress 3.8 5.6 5.0 2.6 3.8 4.7 5.5 6.7 7.6 8.9 Excluding work in progress 3.9 7.7 5.6 2.7 3.8 4.8 5.6 6.8 7.8 9.0 / In operation only part of the year. YANHEE ELECTRICITY AUTHORITY FORECAST SOURCES AN) APPLICATIONS OF FUNDS 1962-70 (millions of baht) Totals (Fiscal years ending September 30) 1962 1963 1964 126 1966 19627 1968 1969 1970 1962_70 Sources of Funds Internal cash generation: Net income before interest 45.35 49.95 84.20 120.35 146.90 168.65 201.70 225.90 256.10 1,299.10 Depreciation 25310 2S.60 62.70 92.40 97.10 ogSnc 99.60 100.t0 103.20 70S.70 Total internal cash generation 70,65 75.55 146.90 212.75 244.00 267.65 301.30 326.70 359.30 2,004.80 Government contributions 41.00 55.84 926.621/ - - - - - - 1,023.46 Borrowings: IBRD 175 TH - _ 1,3o-.611/ _ _ _ i_3o1.61 ExI 1054 5.84 - -- - 5.84 ExIm 1769 150.00 50.00 - - -- - 200.00 Proposed IBRD loan - 69.00 40.40 22.60 - - - - - 132.00 Total Borrowings 155.84 119.00 1,342.01 22.60 - - - - - 1.639.45 Total sources of funds 267.49 250.39 2,415.53 235.35 244.00 267.65 301.30 326.70 359.30 4,667.71 Applications of Funds Additions to plant: Yanhee project - - 2,171.03# - - - - - - 2,171.03 Thermal plants 1 & 2 195.00 105.84 - - - - - - 300.84 Proposed IBRD project - 86.00 71.40 52.60 - - - - 210.00 Yanhee units 3 & 4 _ _ _ 30.00 30.00 - 30.00 30.00 - 120.00 Other system expansions 12.0 4.00 2.00 7.00 24.30 24.30 19.30 19.30 19.30 132.00 Total additions to plant 207.50 195.84 2,244.43 89.60 54.30 24.30 49,30 49.30 19.30 2,933.87 Interest: IBRD 175 TH _ - 19.10-j 73.13 70.79 68.40 65.67 62.87 59.91 419.87 ExIm 1054 15.08 13.80 12.51 11t23 9.95 8.66 7.38 6.10 4.81 89.52 Exlm 1769 - 10.75 11.50 10.78 9.82 8.87 7.91 6.95 5.99 72.57 Proposed IBRD loan - 3.00 5.00 6.731 731_ 7.04 6.76 6.47 _.16 48.47 Total interest 15.08 27.55 43.11 101.87 97.87 92.97 87.72 82.39 76.87 630.43 Amortization: IBRD 175 TH - - 38.10 40.34 42.68 45.16 47.80 50.60 53.56 318.24 ExIm 1054 23.33 23.33 23.33 23.33 23.33 23.33 23.33 23.33 23.33 209.97 ExIm 1769 - - 8.33 16.67 16.67 16.67 16.67 16.67 16.67 108.35 MEA No. 1 4.31 4.28 4.17 1.07 1,07 1.07 1.07 1.07 .53 18.64 HEAl No. 2 2.63 2.62 2.62 2.62 2.62 _ _- - 13.11 Proposed IBRD loan - - - 4.74 5.01 5.29 5.58 5.89 26.S1 Total amortization 30.27 30.23 76.55 84.03 91.11 91.24 94.16 97.25 99.98 694.82 Total debt service 45,35 57.78 124.66 185.90 188.98 184.21 181.88 179.64 176.85 1,325.25 YEU staff bonus .82 1.51 1.80 2.52 .92 2.45 3,78 5.70 7.17 26.67 Total applications of funds 253.67 255.13 2,370.89 278.02 244.20 210.96 234*96 234.64 203.32 4,285.79 Net cash accrual (deficit) 13.82 (4.74) 44.64 (42.67) (.20) 56.69 66.34 92.06 155.98 383.92 Cash at beginning of year 16.92 30.74 26.00 70,64 27.97 27.77 84.46 150.80 242.86 16.92 Cash at end of year 30,74 26.00 70.64 27.97 27.77 84,46 150.80 242-86 398.84 398.84 Times interest covered by net income 3,0 1.8 1.7 1.2 1.5 1.8 2.3 2.7 3.3 Times debt service coyered by cash generation 1.6 1.3 1.2 1.1 1.3 1.4 1.7 1.8 2.0 3IRD Loan 175 TH is shown as drawn in 1964, as is the Government equity contribution to Yanhee project construction, to balance the project's transfer to assets on completion by the RID of first stage construction. I/ IBRD Loan 175 Th interest in 1964 is that over and above the amount made available in the loan to cover interest during construction. CHIENGMAE * Mae Moh LM 0 (12.5 MW Slenm Plant) ( S~~ (r tJ/afF+ t UTTRADIT -I /-. 8 ,THAILAND DAMHEo TRANSMISSION LINE .. ELECTRICITY AUPR O JEC T |1 ,w' T \________--- SUKHOTHAI1 1 YANHEE ELECTRICITY AUTHORITY TAK6 f S\ PITSANULOKEF EXISTING TRANSMISSION .n 4s PICHIT 230 KV J< >4 - 69KV Z 4t Project includes second P PROJECT 230kv circuit POOE RJC 115 KV Nkhon Sawan ---- -- 69 KV 1 jfO\ l~~~~~~~~~~~ ~~~~Substation) UTHAITHANI e CHAINAT 20 0 20 40 60 80 SINGHBURI LOPBURI \ \ . l :7) 05 2 K 2~~~~~~~~~~~~~~~~9 L O M E T E R S 0 .0 0 10 20 30 40 50 s0 10 40 lSubstotion) Angthon M L E 5 SUPHANBURI AR5UR AYUTHYA N~~~AKORN 5 -X) PAT H O M --- ---- % aUE1U) t 4 J -(~~~~~~~~~OK H N 1GSAO RAJBURI CHOLBURI I N~~~~~~~~~~~~I Petchburi b DECEM8ER 1962 IBRD-1065R