RESTRICTED Report No. TO-374b This report was prepored 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 The report may not be published nor may it be quoted as representing their views.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 HIDRO ELECTRICA DO DOURO EMPRESA TERMOELECTRICA PORTUGUESA POWER PROJECTS PORTUGAL October 18, 1963 Department of Technical Operations CURRENCY EQUIVALENTS US $ = Esc. 28. 75 Esc. 1 = $. 035 Esc. 1 million = $34, 783 HIDRO ELECTRICA DO DOURO EMPRESA TERMOELECTRICA PORTUGUESA POWER PROJECTS PORTUGAL TABLE CF CONTENTS Page No. SUMMARY i I, INTRODUCTION 1 II. THE POWER INDUSTRY 1 III. PLANNING PRINCIPLES 3 IV. POW7ER MARKET 4 V. CURRENT PROGRAM 5 VI. TARIFFS 5 VII. HIDRO ELECTRICA DO DOURO - HED 6 The Borrower 6 The Project 7 Engineering and Supervision of Construction 7 Cost Estimate 7 Schedule of Construction 8 Financial Aspects 8 VIII. EMPRESA TERMOELECTRICA PORTUGUESA - ETP 13 The Borrower 13 The Project 13 Financial AsDects 14 IX. CONCLUSIONS 18 LIST OF ANNEXE 1. Electric Energy Production in Portugal 2. Forecast of Electric Energy Requirements and Source 3. Bemposta Hydro Project - Cost Estimate 4. Hidro Electrica do Douro (HED) - Actual and Forecast Balance Sheets as of I>oeember 31., 1959 through 1967 5. Details of HED's Debt 6. Hidro Electrica do Douro (HED) - Actual and Forecast Income Statements 1959 through 1967 7. Hidro Electrica do Douro (HED) - Forecast Sources and Applications of Funds 1963-1967 8. Tapada do Outeiro - Unit 3 - Cost Estimate 9. Empresa Termoelectricn Portuguesa (ETP) - Actual and Forecast Balance Sheets as of December 31, 1960 through 1968 10. Empresa Termoelectrica Portuguesa (ETP) - Actual and Forecast Income Statements 1960 through 1968 11. Empresa Termoelectrica Portuguesa (ETP) - Forecast Sources and Applications of Funds 1963-1968 MAP HIDRO ELECTRIGA DO DOURO ENPRESA TERMOELECTRICA PORTUGUESA POW-ER PROJECTS PORTUGAL SUIvMARY i. In 1961 the Government of Portugal requested a loan to assist in financing a part of the country's power expansion program. Subsequent discussions led in late 1962 to two loan applications, one from Hidro Electrica do Douro (HED) and the other from Enpresa Termoelectrica Portuguesa (ETP). The application by HED was for the financing of two bydro projects, one of which has since been withdrawn as a result of a change in the Portuguese power development program; ETP's anplication was for the expansion of an existing thermal station. The projects now proposed provide a basis for loans of $7.5 million to HED and $5 million to ETP. The cost of the two projects totals about $44 million including interest during construction; the Bank loans would finance about 28 percent of this total. ii. The projects would add 210 Mg of hydro capacity and 50 MW of thermal capacity to the Portuguese primary power system. Upon completion of the projects, and others now under construction, the total generating capacity of this system would be increased to about 1,500 MW. iii. HED and ETP are organized as private stock companies, but the Government's control of their policies, its close supervision of their activities and its considerable share in their financing give them a quasi public character. They are well managed and organized, and capable to carry out and to operate the projects. iv. A substantial portion of HEDTs capitalization is in the form of short term advances, credits and loans. Satisfactory arrangements have been made for funding or extending these debts. v. The Government has agreed to make appropriate tariff adjustments to increase the revenues of the two companies, effective January 1, 1964, so as to enable them to maintain a sound financial position. vi. The projects are needed in view of the expected increases in load growth; the cost estimates and construction schedules are realistic. vii. The projects form a basis for Bank loans of: - $7.5 million, to HED, for a 25 year term, including a two year grace period, and of - $5 million, to ETP, for a 20 year term, including a four year grace period. HlDRO ELECTRICA DO DOURO EMPRESA TERMOELECTRICA PORTUGUESA POWER PROJECTS PORTUGAL I. IiNITRODUCTION 1. Late in 1961 the Bank indicated its willingness to consider a loan for the Portuguese power sector. Subsequent discussions between Bank staff and Portuguese officials in Lisbon indicated that a loan could be used most effectively to assist the orogramsof two companies, Hidro Electrica do Douro (HED) and Enpresa Termoelectrica Portuguesa (ETP). These discussions also indicated a need to clarify certain planning principles followed in formulating a long range power program before proceeding with an appraisal. After this question had been settled, a field appraisal was made during January 1963. Subsequently the Portuguese Government decided to postpone one of the hydro projects proposed by HED and to replace it with a new thermal station. This decision is in line with recommendations made by Bank staff. The new thermal station will be located near Lisbon, and ETP is presently reviewing proposals from engineering firms, one of which will be selected to prepare feasibility studies and cost estimates. The cost of these studies would be financed under the proposed loan to ETP. The Bank has agreed to consider an additional loan to finance part of the first stage of this station after the feasibility study has been prepared. 2. The HED loan of $7.5 million would assist in financing the Bemposta hydro power plant, the total cost of which is estimated at $35 million. The ETP loan, amounting to $5 million, would assist in financing the expansion of an existing thermal station at Tapada do Outeiro, the full cost of which is estimated at $9 million. The loans would be disbursed against both foreign and local expenditures. II. THE PCTWER INDUSTRY 3. A reorganization of the Portuguese electric power industry was brought about by the National Electrification Law of December 1944, which was later modified by a decree-law of December 1960. Pursuant to the more important provisions of the legislation: (a) power production would be mainly hydroelectric; (b) companies would be formed with government help to develop hydroelectric resources and to transmit power throughout the country; the new generating and transmission facilities would form the primary system; (c) small existing utilities, engaged in distribution, would purchase power from the large utilities or from the primary system; - 2 - (d) large existing utilities (with generation and distribution facilities) would form the secondary svstem; they would be expected to satisfy their additional requirements by purchases from the primary system; (e) special categories of large consumers (electro-chemical and electro-metallurgical plants and irrigation undertakings) would purchase directly from the primary system; t (f) the Government would establish tariffs. 4. The primary system created as a result of this legislation consists at present of the facilities of five companies, established between 1945 and 1954. There are three hydro companies, including HED (one of the proposed borrowers), each with a 75 year concession to develop a specific river basin or area; a thermoelectric company, ETP (the other proposed borrower); and a nation-wide transmission company. At the end of 1962 the installed capacity of the primary system was 959 MW, of which 909 MW were hydro and 50 MW were thermal. The installed capacity of the secondary system was 363 MW, of which 261 were hydro and 102 MW were thermal. An extensive system of transmission lines connects all generating plants with the load centers. 5. The five companies were organized as private stock companies along similar lines. The law permits participation for up to 50 percent of the share capital by the Government or its financial institutions. In practice it is hard to determine the precise extent of public and private ownership because of the mixed character of the main institutional shareholders. It is clear, however, that the Government is directly or indirectly the most importance shareholder of HED and ETP (see paragraphs 42 and 73). Govern- ment controlled financial institutions also hold most of the debt of these companies. 6. Each company has a five to six member Board with two members appointed by the Government regardless of ownership, and the others selected by the shareholders. Subject to Government approval the Board elects a Chairman, who is also the chief executive officer. Each company has a three member supervisory committee which reviews company accounts and approves major financial decisions. One of the members is selected by the Government and two by the shareholders. 7. The Electrification Law also led to the creation of a National Load Dispatching Organization (Repartidor Nacional de Cargas - RNC), responsible for the technical coodination of all power generation. More important, RNC is also responsible for statistical and economic studies relating to the national power program, and for establishing project priorities within the program. It is administered by a council representing the operating companies of the primary system, the utilities of the secondary system, distributing companies and the Government. It is managed by an Ex-ecutive Committee of five members. The Government representative, chairman ex officio, is an official of the Office of the Director-General - 3 - for Electrical Services of the Ministry of Economy, the Government Office responsible for issuing franchises, establishing rates and, more generally, for controlling and coordinating the power industry. 8. The primary system is operated as if it were under a single owner- ship instead of being composed of five separate companies. The four generating companies sell their total output to the national transmission company (Companhia Nacional de Electricidade - CNE) according to load dis- patching instructions received from RNC. CNE, in turn, sells in bulk to utilities of the secondary system and to large power intensive industries. By fixing all tariffs, including CNE's buying and selling tariffs, the Government actually determines the revenues of the individual generating companies. 9. The Government is also primarily responsible for ensuring availa- bility of the large funds required for the companies' expansion because of Government regulation of the financial market and the large demand on the Government controlled financial institutions, which provide most of the borrowed funds as well as the share capital. The Government determines the amounts to be raised., the timing and distribution between share capital, bond issues and borrowings from financial institutions. 10. As may be seen from the above, the companies in the system, though formally private, have a quasi public character. The Government has in fact the ultimate responsibility for their policies through its control of their expansion plans, sources of finance, management and allocation of revenues. III. PLANNING PRINCIPLES 11. Portugal's hydro energy resources are large in comparison with energy sources of indigenous fuel. The Electrification Law therefore stressed the development of hydro power, the objective being to limit investment in conventional thermal capacity until the hydro potential had been exploited. Then instead of further investment in conventional thermal capacity, it was planned to shift to nuclear power. Many low cost hydro sites were developed during the 1950's with the result that in 1962 over 95 percent of the country's total electric energy production aame from hydro plants. 12. Portugal's hydrology is characterized by a low flow season from May to November, with July, August and September being particularly dry. Though storage projects have been built, sites for large reservoirs are scarce and storage is limited. 13. As a result of the Electrification Law, policies and methods were established for determining project priorities. The methods are thorough, if complicated and somewhat theoretical in certain aspects. Priorities are established by grading alternative- projects in descending order of economic worth, with the gradings periodically revised as the character of the load changes. A project, large in relation to market requirements would rank low, for example, even though attractive on a unit price basis. At a later time,when better suited to market requirements, the same project might attain a high rating. 14. The emphasis on hydro has resulted in a system with considerably more capability in years with average rainfall, than needed to meet firm demand. While presenting no particular economic problem to date, a continua- tion into the 1970's of a program predominantly hydro would widen this im- balance to a point where even relatively inexpensive new hydro would become uneconomic. This was becoming apparent within the RNC at the time of dis- cussions with Bank staff during 1962 and it is now recognized that additional conventional thermal facilities will be necessary for economic balance of the system as remaining hydro sites are developed. The next major plant addition after completion of the 50 MW exDansion of ETPFs thermal station in the North, will therefore be a 500 MW thermal station (4 x 125 MW), to be constructed by ETP near Lisbon. This plant will firm up system capacity so that 90 percent of the hydro energy theoretically available in an average hydrological year would be usable. The next hydro Droject (Carrapatelo, 3 x 60 MW) originally proposed as a basis for a loan to HED will be delayed so as to come into operation along with the third and fourth 125 MW thermal units of the new Lisbon station. IV. POVER MARKET 15. With the predominant amount of hydro capacity existing in the Portuguese power system at oresent, substantial amounts of non-firm energy are usually available. This energy is called "non-permanent" and is supplied to power intensive industry served directly from the primary system. Firm energy from the primary system is supplied to the utilities of the secondary system. Expansion plans are based on the estimated increase in firm energy requirements. 16. Total load and energy consumption have increased rapidly since the early 1950's, total consumption increasing by about 13 percent annually. Firm energy requirements grew at a lower but still rapid rate of about 11 percent. For comparison, in western Europe as a whole, power consumption increased by about 8 percent annually during the 1950's. 17. Most of the increased demand was supplied by the primary system. In 1951, its first year of operation, this system supplied about 25 percent of Portugal's total energy requirements. By 1955 its share of the market was almost 50 percent and in 1961, 70 percent. This is shown in Annex 1. 18. For planning purposes firm energy requirements are estimated to continue growing at about the same rate as in the past. Over the period 1963-1970 they would thus increase from 3.4 to 7 billion kwh or at an average annual rate of 10.6 percent. Total energy production, including estimated supplies of non-permanent energy, would increase over the same period from 4.5 to 8.5 billion kwh. This would represent an increase in load from 869 MW in 1963 to 1,624 MA in 1970. These projections are reasonable. Details are shown in Annex 2. - 5 - V. CURRENT PROGRAM 19. Three hydro plants and one thermal addition are under construction by the companies of the primary system. The thermal additions a second 50 MW unit at the Tapada do Outeiro plant of ETP, will be completed by the end of 1963 (see map attached). It will be followed in 1964 and 1965 by the Bemposta, Tavora and Pisoes hydro projects with installed capacities of 210 MW (3 x 70 MW), 64 MW (2 x 32 MW) and 72 MW (2 x 36 MW) respectively. HED is constructing the Bemposta and Tavora projects and Hidro Electrica do Cavado (HICA) the Pisoes project. When these are completed the primary system will have about 1,300 MW total capacity, and the country about 1,700 Mg. Of the total, aDproximately 1,500 MW or 88 percent, will be hydro. In average water years, the short term peaking #pacity of the public system would be about 1,200 YS. This could be reduced by 30-40 percent, however, in critically dry years. Further capacity to be added will be primarily from thermal sources, as described in paragraph 14. 20. The completion of the Bemposta plant mentioned above and the 50 MW expansion at Tapada do Outeiro would form the basis for the proposed loans to HED and ETP. VI. TARIFFS 21. The aggregate proceeds of hydro power sales to CNE, at tariffs fixed by decree, are divided among the three hydro companies, in principle by mutual agreement, but in fact, since agreement has never been reached, by percentages established by Government decree. The decrees are promul- gated by the Minister of Economy upon recommendation of the Director General for Electrical Services and are based on closely reviewed estimates of total hydro generation and of the particular revenue requirements of each company. As a result of this arrangement, HED and the other two hydro companies obtain revenues which, though depending on the total generation, are not tied to their individual contribution of energy to the system. 22. ETP will take part in these arrangements when larger and more regular thermal generation makes it practical, i.e. when the third 50 MW unit comes into service. Until that time the present arrangements will be continued under which CNE contracts (a) to pay ETP specified amounts covering all fixed charges, including fixed operating expenses, debt service and also dividends and (b) to buy all the energy generated at a tariff calculated to cover variable operating expenses. The contract is approved by decree, also based on the detailed studies and recommendations of the Office of the Director General for Electrical Services. 23. Under existing regulations, revenues generally provide for: (a) operating expenses, including taxes; (b) two provisions, in lieu of depreciation, based on 3 percent notional sinking funds for (i) renewing equipment over a 25 year period and (ii) redeeming the original investment, less half of the investment in equipment, over the remaining life of the concession (actually a period of 50 to 75 years); and (c) a return of 6 percent on the original investment. How the provisions in lieu of depreci- ation compare with straightline depreciation at conventional rates may be seen in Annex 6 for HED and Annex 10 for ETP. - 6 - 24. Following the above method, at the end of a concession the original investment could be paid-off and the residual value of properties turned over to the State free of charge as provided by law. These rules are particularly unfavorable to hydro companies which, because of a relatively smaller invest- ment in renewable equipment, are allowed only low depreciation charges. Consequently they would not generate sufficient cash to amortize the debt necessary to finance their investments on the terms normally available. In practice this has been compensated by a flexible application of the rules, made possible by the Government's close supervision and understanding of the companies' finances and also, for the senior companies in the system, by the low cost at which funds were originally borrowed. In view of the higher interest rates now prevailing and the scarcity of long term resources, however, substantially higher revenues are required for the more recent companies, HED and ETP, to finance expansion adequately. 25. In connection with the proposed loan, the Government prepared a tentative plan to increase power rates so as to provide the four generating companies with revenues sufficient to cover: (a) all operating expenses, including taxes, (b) interest, exclusive of interest during construction; (c) depreciation or amortization (whichever is larger); (d) cash dividends; and (e) about 10 percent of their expansion requirements, including capitalized interest. 26. The financial forecasts prepared on this basis showed adequate earnings for HED and ETP, as discussed in paragraphs 60 and 84. The Government and the two companies have agreed to incorporate these principles into a rate covenant. The Government is now carrying out a general review of its tariff system for the entire country, in part to implement its undertakings under the rate covenant. The new tariff system is expected to come into force early in 1964. The Government has agreed to provide the necessary increases in revenues to HED and ETP effective January 1, 1964. VII. HIDRO ELECTRICA DO DOURO - HED The Borrower 27. HED, the largest of the three hydro companies in the primary system, was formed in 1953 to develop the hydro electric resources of the Douro River and some of its tributaries. The Company is well staffed and fully capable of designing, constructing and operating the project. 28. The Douro River originates in Spain, then becomes the international border between Spain and Portugal for a stretch called the International Douro, and eventually turns into Portuguese territory for the rest of its course. The lower stretch of the river is called the National Douro. Water rights for the development of the river were defined by a Portuguese- Spanish agreement of 1927. The agreement contains provisions on uses of water, power exchange, navigation on the navigable part of the river and technical cooperation as well as the apportionment of the International Douro for hydro power uses. Spanish and Portuguese authorities are cooperating in the implementation of the Agreement and in the operation of - 7 - existing plants on the respective national sections of the river as well as on the International Douro. 29. HED's early planning was aimed at developing Portugal's stretch of the International Douro. A three stage development was selected. Picote, with three 60 MW units, began operations in 1958 and Miranda, with three 52 MI units in 1960. Construction of the third, Bemposta, began in 1960 and will be completed in 1964. All are run-of-river installations with only weekly pondage. The Project 30. Bemposta, which will have a capacity of 210 MW, is the last and farthest downstream of the three hydro developments on Portugal's stretch of the International Douro. The dam is of the concrete gravity arch type, 87 meters (285 feet) high and 242 meters (784 feet) long with a four-gate central spillway. The lower center part of the dam is hollow to reduce the volume of concrete. The gross head developed will be 69 meters. The power intake on the right abutment will be connected by short penstocks with three turbines) each driving a 70 MW generator in an underground powerhouse. A common tailrace will discharge a short distance below the dam. 31. The plant will be connected to CNE transmission lines through a switchyard on the right abutment. The average annual energy production will be 990 million kwh, giving a 53 percent plant factor.i/ Engineering and Supervision of Construction 32. HED's design and construction departments are well organized and staffed with over 100 engineers and technicians. Individual consultants are engaged to review particular problems but the company generally does all engineering design and supervision of construction with its own forces. Design is based on excellent hydrological records and thorough geological investigations. 33. HED secures competitive international bidding before awarding major contracts. Procedures are generally satisfactory; bid evaluations are made on a "before duty'", or c.i.f. basis with some preference, generally ranging between 10 and 15 percent, to Portuguese manufacturers. 34. All major procurement has been completed for the Bemposta project. The proposed loan would therefore be used to pay remaining costs of contracts already awarded. Cost Estimate 35. Total cost including interest during construction is estimated at Esc. 1,010 million ($35 million). This is equivalent to $116 per kilowatt installed, a low cost for hydro capacity. Approximately Esc. 500 million had been spent through 1962. The proposed loan would finance Esc. 216 2/ The ratio of lsable energy to theoretical maximum energy that could be generated by total capacity operated 100% of the time. - 8 - million ($7.5 million) of the remaining construction costs of about Esc. 510 million, including some expenditures made during 1963. Contin- gencies of about 14 percent, which should prove ample, are included in the estimate of remaining construction costs. The estimate is shown in Annex 3. Schedule of Construction 36. Construction of Bemposta is well advanced. The first of the three 70 MW units should be in operation early in 1964, the second by the middle of the year and the last by the end of the year. Financial Aspects 37. Audit: The financial statements of HED are certified by its suoervisory committee as required by law and its statutes. The supervisory committee, however, is not required to, and does not oarry out a complete audit of the accounts. The company has agreed to retain independent accountants for this purpose. 38. Present Financial Position: Condensed balance sheets for the fiscal years ended December 31, 1959 through 1962 are shown in Annex 4. As of December 31, 1962, fixed assets in service, the Picote and Miranda plants, totalled Esc. 1,580 million ($55 million) at historic cost; con- struction work in progress, mostly on the Bemposta project, was Esc. 670 million (423 million); net current assets were about Esc. 58 million ($2 million). 39. Reserves in lieu of depreciation, for equipment renewals and investment redemption, totalled Esc. 60 million ($2 million). To evaluate HEDts financial position in terms of returns on investment, a calculation was made of the depreciation which would have been charged over HED's 4 years of operation, had the standard straightline method been followed at an assumed rate of 2 percent annually. On this basis, reserves of about Esc. 88 million ($3 million) would have accrued, leaving net fixed assets in service of about Esc. 1,492 million ($52 million) as shown in Annex 4. 40. The December 31, 1962 capitalization, broken down by main sources of funds, was as follows (in millions of Escudos): Share Long & medium Advances and Sources Capital Debentures term loans credits Total Social security institutions 419.6 278.9 - _ 69g.5 National Develop- ment Bank 130.6 - 222.5 216.7 569.8 National Savings Bank - 215.0 - 215.0 Public 329.8 281.4 - - 611.2 Commercial Banks - - - 90.8 90.8 Escudos 880.0 560.3 437.5 307.5 2,185.3 (Millions $ equiv.) (30.6) (19.5) (15.2) (10.7) (76.0) - 9 - 41. The capitalization, excluding insignificant reserves and surplus, was Esc. 2,185 million, of which paid-in share capital was Esc. 880 million and debt, both short and long term, was Esc. 1,305 million, or about 60 per- cent. 42. The share capital, last increased by Esc. 200 million in 1962, is represented by 880,000 shares with a par value of Esc. 1,000. The shares are nominative (registered) or bearer shares. Two-thirds must be in the name of Portuguese nationals. About 48 percent of the shares were owned by social security institutions, 15 percent by the National Development Bank and the balance, or 37 percent, by private investors. 43. About Esc. 560 million of unsecured, 5 percent 30 year debentures were outstanding under eight series issued locally between 1955 and 1960. A ninth series of otherwise similar 25 year debentures, totalling Esc. 110 million, was issued earlier this year bringing the total to Esc. 670 million. Including the last issue, almost 60 percent of debentures outstanding are held by social security institutions, the balance by the public. 44. HED's other borrowings totalled Esc. 745 million with interest averaging 5 to 5j percent, as detailed in Annex 5. All borrowings are in local currency except for $3.15 million (Esc. 90 million), the proceeds of foreign medium term borrowings relent by the IJational Development Bank. All were raised from two Government controlled institutions, the National Development Bank and the National Savings Bank, except for three to six month short term credits from commercial banks, totalling about Esc. 90 million. 45. Most borrowings were for short or medium terms, regularly renewed on maturity. Of the total Esc. 745 million borrowings mentioned above, Esc. 307.5 million were three to six months advances and credits and Esc. 215 million were National Savings Bank one year loans subject to renewal without limit for additional periods of one year. The balance consisted of the $3.15 million (Esc. 90 million) loan already referred to, which is repayable in three equal annual tranches starting 1964, and of three 20 year loans, totalling Esc. 132.5 million, from the National Development Bank. 46. Part of the Esc. 307.5 million advances and credits were funded this year by the Esc. 110 million debenture issue described in paragraph 43. In order to further consolidate its capitalization, HED has agreed to fund, prior to effectiveness of the proposed Bank loan, the Esc. 197.5 million balance of advances and credits, the Esc. 215 million one year loans from the National Savings Bank (since reduced to Esc. 209 million), and Esc. 66.2 million of short term credits incurred in connection with the take over of the Tavora project as described in paragraph 49. Funding would be by a share capital issue of Esc. 200 million and by 15 year loans totalling Esc. 362.5 million, to be obtained from the National Savings Bank and the National Development Bank. These long term resources would exceed the amounts to be funded by some Esc. 90 million, which would be applied to the financing of HED's current expansion. - 10 - 47. After the above funding has taken place, HED's capitalization would be entirely in share capital, debentures and long term loans except for: (a) the Esc. 90 million medium term loan, described in paragraph 45; (b) Esc. 73.8 million of medium term loans and advances incurred in connection with the take over of the Tavora project as described in para- graph 49 below, and (c) other credits and loans incurred since January 1, 1963 in order to proceed with the current expansion. This last item includes, in addition to short term facilities to be repaid within ths year, two loans obtained from US commercial banks with the guarantee of a private local bank (The Banco Pinto y Sotto Mayor); one loan is for $4 million (Esc. 114.5 million), interest at 7 percent, repayable in four equal annual tranches starting 1964; the other is for $2.5 million (Esc. 71.6 million), interest at 6.3 percent, due next year. The comnany indicated that the above loans, totalling Esc. 349.9 million, would be funded as they mature over the next four years; Esc. 204 million in 1964, Esc. 58.6 million each in 1965 and 1966 and Esc. 28.7 million in 1967. With respect to future borrowings, including those necessary to fund the above loans as they mature, HED has agreed to borrow on terms reasonably related to future earning capacity and to limit short term prefinancing of expansion to amounts that could reasonably be expected to be repaid on maturity out of the proceeds of share capital issues, long term borrowing or earnings. 48. The Tavora Project: In December 1962, HED took over management of the Tavora project from Hidro Electrica Portuguesa (HEP), a private utility of the secondary system. The purchase by HED, on Government instruc- tions and already contemplated in its concession, will be finalized within a few months. No cash is involved as HED will take over the liabilities and issue shares to HEP for the balance of the purchase price. 49. Construction work in progress at the time of take over was estimated at Esc. 359 million ($12.5 million) financed in a 42/58 ratio of share capital of Esc. 150 million ($5.2 million) and debt, Esc. 209 million ($7.3 million). The debt consisted of Esc. 69 million of 20 to 25 year debentures and Esc. 140 million of short term loans and credits, of which Esc. 66.2 million would be funded this year and Esc. 73.8 million next year, as already indicated. 50. Past Farnings: A summary of actual income statements for the fiscal years 1959 through 1962 is shown in Annex 6, along with a proforma adjustement of net income and returns for 2 percent straightline depreci- ation (paragraph 39). The adjusted returns for the four years, respectively 4.1, 6.8, 5.3 and 5.* percent were somewhat low, considering the average cost of debt, slightly under 5-i1 percent in 1962, and the dividends require- ments. 51. Dividends were paid at 5 percent from 1958, the first year of operation, through 1960 and at 6 percent for fiscal years 1961 and 1962. Dividend payments may be deferred until the specific assets for which shares were issued are in service. But, starting 1960, HED used a provision in the law and its statutes allowing payment of a preferential 4 percent "interest" on new shares, for a maximum period of three years. - 11 - 52. Financing Plan: A forecast of sources and applications of funds for the five years through 1967 is given in Annex 7. This forecast assumed that in addition to the current program, HED would start construction of the 180 MW Carrapatelo project in 1965 for completion in 1970. 53. In the three year period through 1965, during which the Bemposta and Tavora projects would be completed, capital exrenditures, including interest during construction, are expected to total about Esc. 947.1 million. Funding existing short term advances and loans would require Esc. 582.7 million in 1963 and a total of Esc. 845.3 million for the three year period. An estimated cash surplus of Esc. 58.3 million, to build up working capital during the period, would bring the three years' requirements to about Esc. 1,850.7 million, as follows (in millions): 1963 1964 1965 Total 3 years -----Escudos-- Esc. c epuiv. Bemposta 313.5 176.5 20.0 510.0 17.7 Tavora 198.1 22.0 36.0 256.1 8.9 Studies etc. 9.0 7.0 7.0 23.0 .8 Carrapatelo 158.0 158.0 5.5 520.6 205.5 221.0 947.1 32.9 Funding 582.7 204.0 (58.6 845.3 29.4 Cash surplus 4.4 34.5 19.4 58.3 2.0 1,107.7 444.0 299.0 1,850.7 64.3 54. The financing plan contemplated may be summarized as follows (in millions): 1963 1964 1965 Total 3 years -----Escudos----- Esc. $ equiv. Internal cash generation 128.3 228.2 282.5 639.0 22.2 less: interest charged to operations 43.5 72.4 102.0 217.9 7.6 amortization of long term debt 18.3 3.6.4 52.1 106.8 3.7 dividends paid 42.4 66.4 98.4 207.2 7.2 Sub-total 104.2 175.2 252.5 531.9 18.5 Net cash available for expansion 24.1 53.0 30.0 107.1 3.7 Share capital 200.0 100.0 100.0 400.0 13.9 Sub-total: own resources 224.1 153.0 130.0 507.1 17.6 Debt: Proposed IBRD loan 150.0 66.0 - 216.0 7.5 Debentures 110.0 - - 110.0 3.8 National Develop- ment Bank 142.5 - 142.5 5.0 National Savings Bank 220.0 - - 220.0 7.6 (Cont'd.) - 12 - 1963 1964 2 1965 Total 3 years (Debt Cont'd.) Banco Pinto y Sotto Mayor 186.1 - - 186.1 6.5 New local loans 75.0 225.0 169.0 469.0 16.3 Sub-total borrowings 883.6 291.0 169.0 1,343.6 46.7 Total 1,107.7 444.0 299.0 1,850.7 64.3 55. HED would finance about Esc. 507 million from its own resources, including Esc. 107 million from internal cash generation (net of interest chargeable to operations, amortization of existing debt and cash dividends assumed at 8 percent) and Esc. 400 million from share capital issues. The company has already taken the necessary steps to place an issue of Esc. 200 million in the near future and prior to effectiveness of the proposed Bank loan, as indicated in paragraph 46. 56. The borrowingscontemplated would total Esc. 1,343.6 million or about 73 percent of the period's requirements. However, in view of the large amounts of short term debts to be funded, the net increase in debt during the period would be less than Esc. 500 million, as compared with the Esc. 507 million to be financed from HED's own resources as indicated above. 57. The proposed Bank loan of $7.5 million (Esc. 216 million) is assumed to carry interest at 5-z percent and a term of 25 years, including a two year grace period. 58. The other borrowings would include: (a) the Esc. 110 million debenture issue already realized; (b) two loans, totalling Esc. 186.1 million, already obtained from Banco Pinto y Sotto Mayor, and (c) two 15 year loans, totalling Esc. 362.5 million, which would be obtained prior to effectiveness of the proposed Bank loan from the National Savings Bank and the National Development Bank,at an assumed interest rate of 7 percent. About Esc. 469 million would still be needed to complete the period's requirements, of which only Esc. 75 million to cover 1963 expenditures. It was assumed that these borrowings would be partly in the form of 7 per- cent, 15 year loans and partly in the form of a 5i percent, 25 year loan. 59. The Government has agreed to provide HED with the funds necessary to carry out the project should HED be unable to raise these funds from the normal sources of financing. 60. Estimated Future Earnings and Financial Position: Forecast income statements for the five years through 1967 are shown in Annex 6. The return on average net fixed assets in operation, adjusted for 2 percent straight- line depreciation, would increase from an estimated 6.6 percent in 1963 to 8.1 percent in 1964, reflecting increased power revenues. After a small setback to 7.3 percent in 1965, returns would increase to 8.6 Percent in 1966 and 1967 respectively. - 13 - 61. As shown in Annex 7, net income, after deduction of the provisions for renewals and redemption, would cover total interest charges 1.2 and 2.0 times respectively in 1963 and 1964 and at least 2.3 times thereafter. Debt service, excluding maturities to be funded, would be covered 1.2 times in 1963 and 1.7 times thereafter by internal cash generation. Starting 1965, internal cash generation would be sufficient to cover all debt service payments, including maturities to be funded. Coverages would increase from 1.3 in 1965 to 1.5 times in 1967. These coveragqs are adequate. 62. Forecast balance sheets as of December 31, 1963 through 1967 are shown in Annex 4. These indicate a ratio of debt to capitalization improving from 59 percent in 1962 to about 54 percent by 1967. HED has agreed to a covenant limiting its long term indebtedness to a maximum of twice its paid in capital and surplus. VIII. EPRESA TERMOELECTRICA PORTUGUESA - ETP The Borrower 63. ETP was formed in 1954 with a dual purpose. One, to construct plants for firming-up the hydro capacity of the primary system in critically dry years; and two, to find a use for poor grade coal produced as a by- product of coal mining operations in the Douro basin. ETP undertook con- struction of the Tapada do Outeiro thermal plant, designed for final expansion to three units of 50 MW each. The plant is on the Douro, approxi- mately halfway between two coal mines, and connected to both by overhead conveyor systems. The first unit was completed in 1959. A second identical unit is now under construction, with completion expected later this year. 64. The installation of the third unit, which would be partially financed by the proposed loan, would complete the station. Future large scale thermal plant construction is planned by ETP in the south near the main load centers and forecasts below are based on this expectation. The new plant will be fired by imported oil due to the scarcity of indigenous fuels. The ProJect 65. The project would consist of the addition of the third 50 MW unit in the Tapada do Outeiro Station. It would have similar characteristics as the first two units. Basic features include pulverized coal fired boilers with a capacity of 210 tons of steam per hour and turbines operating at a pressure of 1,200 p.s.i. and a temperature of 9680F. The project would also include the feasibility study for the new thermal plant to be built in the Lisbon area. 66. ETP supervised the installation of the first two units without consulting assistance. The work was divided into two major packages, the boiler and accessories and turbo-generator and accessories. Proposals for design, fabrication and erection were invited based on specifications prepared by ETP. While defining general design criteria, these specifi- cations left the bidders free to propose detailed design and performance - 14 - characteristics. After award of the main contracts, ETP prepared necessary interconnecting and related drawings, specifications for miscellaneous items and, in general, all engineering, coordinating and supervising functions required to complete the job. 67. The procedures outlined above would be followed for the third unit. The installation would present no new problems, being identical in all important aspects to the installations already made. In these circum- stances, the procedures proposed by ETP are acceptable. The Government and ETP have agreed to international competitive bidding with a formula which defines the preference to be granted to Portuguese industry in evaluating bids and which will be included in the bid invitations. A margin of protection for articles manufactured in Portugal of up to 15 percent will be allowed, in lieu of the custom duties normally applicable which in most cases are considerably higher. 68. The installation of the third unit is expected to cost about Esc. 258 million ($9 million) including interest during construction of about Esc. 18 million ($0.6 million). The estimate is based on second unit costs with ample contingencies added. The proposed loan would finance about Esc. 140 million ($4.85 million), or about 54 percent. The estimate is shown in Annex 8. The loan would also include $150,000 for engineering studies for the planned Lisbon thermal plant. 69. Fabrication and erection should require about 30 months after major contracts are awarded. Bids would be invited during the last quarter of 1963 and the scheduled completion date of mid-1966 should be easily met. Financial Aspects 70. Audit: The same comments and conclusions apply as for HED (see paragraph 37). 71. Present Financial Position: Condensed balance sheets for the fiscal years ended December 31, 1960, 1961 and 1962 are shown in Annex 9. As of December 31, 1962, fixed assets in service at historic cost were Esc. 313.0 million ($10.9 million); construction work in progress was Esc. 107 million ($3.7 million); current assets were Esc. 133 million ($4.6 million), about four times the current liabilities, of Esc. 32 million ($1.1 million). Current assets included coal inventories for about Esc. 75 million ($2.6 million). These large inventories accumulated as coal supplies purchased on a long term contract exceeded ETP's requirements during the first few years of operation. Based on the existing contract and the forecast increases in generation of expanded facilities, the increase in coal inventories should stop this year. During 1965 and 1966 they would be reduced to a reasonable level, about half of the present one. Reserves for equipment renewals and investment redemption totalled about Esc. 20 million, as compared with the estimated Esc. 36 million depreciation reserve, which would have accrued over ETP's 4 years of operation, had straightline depreciation been charged at a conventional rate of 3.33 percent per annum. - 15 - 72. The December 31, 1962 capitalization totalled Esc. 493 million, of which debt, excluding the current portion, was Esc. 303 million or 62 percent as follows (in millions): Escudos $ eauiv. Sbare capital: 185,000 shares at Esc. 1,000 par 185.0 6.4 Reserves and surplus 4.3 .2 189.3 6.6 Debt 5 percent, 25 year, unsecured debentures 172.2 6.0 National Development Bank loan, 6 percent, 20 years 25.0 .9 National Savings Bank loan 100.0 3.4 Banks, suppliers' credits 25.2 .9 Total debt 322.4 11.2 Less: current portion 19.1 .7 Net long term debt 303.3 10.5 Total capitalization 492.6 17.1 73. Ownership of the share capital was distributed as follows: Millions of Escudos Percent CNE 30.0 16.2 Other primary grid companies 26.0 14.1 Sub-total: primary grid 56.0 30.3 Other power companies 19.4 10.5 Mining Companies 7.1 3.8 National Development Bank 43.3 23.4 Social Security Institutions 50.0 27.0 Sub-total financial institutions 93.3 50.4 Public 9.2 5.0 185.0 100.0 74. The Esc. 25 million National Development Bank loan of July 1961 was guaranteed by CNE; the Esc. 100 million NJational Savings Bank loan, resulting from a joint borrowing with CNE, was obtained at the end of 1962. The contract has not yet been signed but interest is expected to be about 7 percent and the term of the loan at least 15 years, as assumed in this report. The balance of ETP's debt is in short term bank loans and a small amount of suppliers' credits. - 16 - 75. Past Earnings: A summary of ETP's actual income statements for fiscal years 1960, 1961 and 1962 is shown in Annex 10, along with a pro- forma adjustment for 3.33 percent straightline depreciation. The adjusted returns on average net fixed assets in operation were low, about 5 percent in 1960 and 1961 and 4.5 percent in 1962. The Company started paying 5 percent dividends in 1960. Statutory 4 percent interest is paid on new share capital on the same basis as already described for HED (paragraph 51). 76. Financing Plan: A forecast of sources and application of funds for the six years through 1968 is given in Annex 11. The program includes completion of the Tapada do Outeiro station and the planned construction of a new thermal station in the South, starting next year with an initial 125 M unit (paragraph 64). 77. In the four years through 1966 ETP's requirements would total Esc. 946 million, of which Esc. 367 million for capital expenditures including capitalized interest on the current program (including the Bank project) and Esc. 579 million for expenditures on the new station, as follows (in millions): 1963 196 1965 1966 Total 4 .rears ------Escudos - Escudos $ equiv. Tapada do Outeiro Unit 2 98.3 25,4 123.7 4.3 Tapada do Outeiro Unit 3 37.8 63.9 71.2 70.4 243.3 8.5 New Station Unit 1 105.2 146.4 1S2,1 433.7 15.1 New Station Unit 2 145.8 145,8 5.0 136.1 194.5 217.6 398.3 946.5 32.9 78. Under the proposed plan ETP would finance about 47 percent of its requirements from its own resources and sales of new shares, and about 53 percent from borrowings, as shown in the following table (in millions): 1963 1 1966 Total_& ears ----Escudos----- Escudos j e.uiv. Percent Internal cash generation 29.5 74.7 82.3 110.0 296.5 10.3 less; interest 9.1 19.1 18.7 18.4 65.3 2.3 amortization 19.1 12.0 6.4 6.7 44.2 1.5 dividends 12.0 12.0 20.0 26.0 70.0 2.4 40.2 43.1 45.1 51.1 179.5 6.2 Net cash available for expansion (10.7) 31.6 37.2 58.9 117.0 4.1 12.4 Decrease of working capital 16.3 9.4 (15.6) 25.4 35.5 102 3.8 New share capital 65.0 75e0 75.0 75.0 290.0 101 30.6 Sub-total: own re- sources 70.6 116.0 96.6 159.3 442.5 15.4 46.8 (Cont'd.) - 17 - 1963 1964 1965 1966 Total 4 years -…-Escudos---- Escudos $ equiv. Percent Proposed IBRD loan 25.5 27.5 38.0 53.0 144.0 5.0 15.2 National Savings Bank 40.0 40.0 1.4 4.2 New Station Unit 1 loans 51.0 83.0 102.0 236.0 8.2 24.9 New Station Unit 2 loan 84.0 84.0 2.9 8.9__ Sub-total: borrow- ings 65.5 78.5 121.0 239.0 504.0 17.5 53.2 Total 136.1 194.5 217.6 398.3 946.5 32.9 100.0 79. Internal cash generation, net of interest chargeable to operations, amortization and dividends would amount to Esc. 117 million, about 12.4 per- cent of total requirements. Net cash generation before dividends would represent about 20 percent of additions to plant. About Esc. 35.5 million would be provided from the planned reduction of coal inventories mentioned earlier. 80. New share capital would be issued for about Esc. 290 million, or 30.6 percent of requirements. Only about Esc. 130 million would be required in connection with the current program. The balance would be needed for the new plant. ETP has agreed to place an issue of Esc. 65 million in the near future, prior to effectiveness of the proposed Bank loan. 81, The proposed Bank loan of $5 million is assumed to carry interest at 5-1- percent and a term of 20 years, including a four year grace period. 82. Out of other estimated borrowings totalling Esc. 360 million only Esc. 40 million, are needed in connection with the current program. ETP has agreed to raise this amount prior to effectiveness of the proposed Bank loan. Interest at 7 percent and a term of 15 years were assumed. Future loans for the new thermal station were assumed to carry interest at 5i per- cent and a term of 25 years. 83. The Government has agreed to provide ETP with the funds necessary to carry out the project, should the company be unable to obtain them from the normal sources. 84. Estimated Future Earnings and Financial Position: Forecast income statements for the six years through 1968 are shown in Annex 10. They indicate satisfactory returns on average net fixed assets in operation, adjusted for 3.33 percent straightline depreciation. The returns would increase from 7 percent in 1963 to 15.2 percent in 1964 and a maximum of 15.4 percent in 1966. They would then decrease to 8.9 percent in 1968. After the new power rates are implemented, in 1964, the variations in the returns mostly reflect variations in ETP's expansion program, due to the prooosed method for determining power revenues, based on annual financial - 18 - charges, including dividends, and a surolus to cover 10 percont of expansion requirements (see paragraph 25). Considering this method, and the Drospects for further expansion of ETP beyond 1968, returns will probably be maintained at about their 1968 level in future years. 85. As shown in Annex 11, starting 1964 net income in each year would be about twice the interest charges of the same year; internal cash generation would cover total debt service charges at least 1.9 times and up to 2.3 times during the period through 1968. 86. The ratio of debt, excluding current portion, to capitalization is expected to decrease from 62 percent in 1962 to 56 percent in 1968, as shown in Annex 9. 87. ETP has agreed to the same covenants as HED with respect to limitation of short and long term indebtedness (see paragraphs 47 and 62). IX. CONCLUSIONS 88. The proposed projects are necessary to meet the expected increase in power demand. They are technically sound. The cost estimates are reasonable. 89. The managements of the two proposed borrowers are experienced and the companies are well qualified to execute and operate the projects without outside assistance, 90. The Government has prepared a satisfactory plan for increasing the revenues of the two companies effective January 1, 1964. On this basis both companies would achieve and maintain sound financial positions. 91. The projects would form a suitable basis for Bank loans of: - p7.5 million to HED, for a 25 year term, including a two year grace period, and of - $5 million to ETP, for a 20 year term, including a four year grace period, Jctober 18, 1963 ANINEX 1 Electrie Energy Production in Portugal (Millions of K4H-rounded) Priniry- Percentage by Year Total Stcr_ U st= 1950 942 - 1951 1,043 264 25 1952 1,339 477 36 1953 1,380 420 30 1954 1,659 736 44 1955 1,890 924 49 1956 2,176 1,149 53 1957 / 2,169 1,151 53 1958 2,667 1,703 64 1959 2,994 1,877 63 1960 3,263 2,043 63 1961 3,611 2,529 70 Average annual increase 1951-1961 13.2% 25.2% 2/ Years of low rainfall. The non-permanent market was -curtailed in both years. AfT X 2 Forecast of Electric Energy Requirements and Source Energy ReQuirements Total Load Energy Source (millions kwh) (M(0 millions kwh) Year Non-Permanent Permanent Total rirl Other Total 1963 1,100 3,440 4,540 869 3,290 1,250 4,540 1964 1,315 3,850 5,165 957 3,S00 1,365 5,165 1965 1,405 4,265 5,670 1,050 4,160 1,510 5,670 1966 1,480 4,710 6,190 1,145 4,540 1,650 6,190 1967 1,500 5,200 6,700 1,249 4,970 1,730 6,700 1968 1,520 5,730 7,250 1,362 5,550 1,700 7,250 1969 1,530 6,320 7,C50 1,488 6,100 1,750 7,850 1970 1,540 6,970 8,510 1,624 6,735 1,775 8,510 4. 9 10.6% 9.4o, 9.3% 1 OA. 5.1 9.-o (Average annual increase 1963-1970) VIncluding systerl. losses ENNEX 3 Bemposta Hydro Project Cost estimate (in ra.adllionz) Dollar Escudos Egivalent Land and access roads 30 1.04 Sitework and camps 80 2.78 River diversion 36 1.25 Dam 240 8.35 Powerhouse 100 3.48 Construction equipment 25 .87 Turbines and generators 155 5.40 Auxiliary equipment 40 1.39 Engineering and administration 155 5.40 Contingencies 64 2.22 925 32.18 Interest charges 85 2.95 TOTAL 1,010 35.13 P 0 5. T U G A L JJID.0 FL'I;UlcA DO DOUQO (HSCD) Actuel and Farocast Bslance Sheets as of December 31. 1959 through 1967 (In rmillions of 7scudos) US;1 = Esc. 28.75 --------------------------Actual---- -- ------rcst------ HOD Tavora Consolidated Fiscal Year Endini December 31: 15 1960 1961 ___--- 2---------- 3963 364 1965 1966 3967 VIl::od as;;ets in operation 682.1 685.3 1,536.4 1,50.2 - 1,580.2 1,580.2 3,1492.2 3,205.2 3,205.2 3,205.2 Less: 3,' sinking fund depreciation 9.5 19.0 34.5 60.1 - 60.1 76.1 105.7 138.0 170.3 202.6 Vet fixed assets in oporatJon 672.6 666.3 3,501.'J 1,520.1 - 1,520.1 1,504.1 3,043.5 3,067.2 3,034.9 3,O02.6 Work in progress 615.1 8C6.7 359.0 669.8 355.7 1,025.5 1,546.1 182.6 347.6 724.0 1,119.8 Total net fimed assets 1,287.7 1,553.0 1,860.9 2,189.9 355.7 2,545.6 3,050.2 3,226.1 3,414.8 3,758.9 4,122.4 i?et current assets / 49.5 73.3 67.5 57.7 3.3 61.0 65.4 99.9 119.3 136.3 179.2 1,337.2 1,626.3 1,928.4 2,247.6 359.0 2,606.6 3,115.6 3,326.0 3,534.] 3,895.2 4,301.6 LIABILI''I S Share capital 5S0.0 630.0 680.0 880.0 150.0 1,030.0 1,230.0 1,330.0 1,430.0 1,560.0 1,700.0 Eeserves and surplus 4.6 7.2 11.2 19.9 19.9 22.3 50.1 91.9 159.8 238.3 7ouity equivalent 584. 6 637.2 691.2 899.9 150.0 1,049.9 1,252.3 1,380.1 1,521.9 1,719.8 1,938.3 Debt Long and mcdium trrm Proposed I:s;D l oan 150.0 216.0 213.7 208.9 203.9 Debentures 450.0 568.1 565.4 560.3 69.0 629.3 731.5 720.3 705.6 690.1 673.8 !eatlonal Develcpmcnt Oank 59.i. 137.5 215.6 222.5 °4.0 316.5 434.3 319.0 276.9 234.0 220.2 BTationl. Savinos Bank 200.0 215.0 6.0 221.0 220.0 209.2 198.1 186.4 174.3 Banco Pinto y Sotto Mayor lS6.1 85.9 57.3 28.7 Future loans 75.0 297.1 454.2 712.9 966.3 °9.J. 705.6 98i.0 997.P 169.0 1,166.8 1,796.9 1,847.5 1,905.8 2,061.0 2,238.5 Short, term 228.5 2r'!4.5 200.5 307.5 40.0 347.5 To L.,- 737.6 °60.1 l,]Fl.5 1,305.3 209.0 1,514.3 1,796.9 1,047.5 2,705.0 2,061.0 2,238.5 Dividend i/ 15.0 29.0 55.7 42.4 _ 42.4 66.4 98.4 106.4 114.4 124.8 1,337.2 1,626.3 1,928.4 2,247.6 359.0 2,606.6 3,1t5.6 3,326.0 3,534.1 3,895.2 4,301.6 Total debt as " of capital ization 56 60 63 59 58 59 59 57 56 55 54 Adjustrtent o raline _n oition at 2' Fixed assets In operation, as above 682.1 685.3 1,536.4 1,5S0.2 1,580.2 3,1/,9.2 3,205.2 3,205.2 3,205.2 Less: accumueated depreciation, at 2,' 20.5 314.2 56.4 88.0 119.6 166.9 231.0 295.1 359.2 Adjusted net fixed assets in operation 661.6 651.1 1,480.0 1,492.2 1,460.6 2,982.3 2,974.2 2,910.1 2,846.0 aI Current li-b'litiec have been deducted fron current assets except for (i) the current portion of long and i:ediun term debts and (ii) the short term debts incurred 'or 7refinarcinq expansion shown on the liabilities side of the balance sheet. The Details of the future debt service nay be 3een in Annex 7. 2/ Declared four ronths after the close of the y.ear and payable anrually. DETAILS OF HED'S DEBT Source Date Original Outstanding Interest Term Amortization Security (millions of Esc.) Loans National Develop- semi annually ment Bank 2/28/56 40.0 33.6 4% 5 to 20 years 1959-76 negative pledge National Develop- semi annually ment Bank 9/1/59 20.0 18.9 4%' 20 years 1962-78 negative pledge National Develop- semi annually ment Bank 4/20/60 80.0 80.0 6% 5 to 20 years 1963-80 negative pledge National Develop- 3 equal payments ment Bank 7/27/62 90.0 . 90.0 7% 2 to 4 years 1964-5-6 National Savings pledge of Bank 9/7/61 200.0 195.0 4%0 1 to ? years / Not specified revenues National Savings Bank 1962 20.0 20.0 Same conditions as above but contract not finalized Total loans 450.0 437.5 Advances Purpose National Develop- ment Bank 7/8/61 50.0 50.0 7% 3 months Towards future foreign credits National Develop- ment Bank 12/9/61 30.0 30.0 75i": 6 months Towards future loans or shares National Develop- ment Bank 12/28/62 30.0 30.0 7% 3 months Towards future foreign credits National Develop- ment Bank 1962 106.7 106.7 3 months Towards future debenture issues4/ Private Banks 90.8 90M8 3 to 6 months Financing of construction stores Total advances 307.5 307.5 )j Discount rate of the Bank of Portugal, plus lo%. ;2 Dollar loan. 2 Renewable indefinitely; repaynent assumed by HED in ten approximately equal annual installments. / Corresponding issue already realized. P O R T U G A L HIDRO-ELECTRICA DO DOURO (HED) Actual and Forecast Income Statements 1959 through 1967 (In millions of Escudos) US$1 = Esc. 28.75 -Actual-------------- ---------- - --------…Forecast - ------------ Fiscal Year ending December 31: 19S9 1960 1961 1962 1963 1964 1965 1966 1967 Gross revenues 46.7 65.1 109.2 137.0 156.0 270.1 334.2 371.9 397.4 Cost of operations Operating expenses 6.3 7.0 9.0 12.7 18.8 30.5 38.2 40.0 43.8 Taxes 6.3 8.9 11.4 13.5 1.5.3 17.7 Equipment replacement 2.8 3.0 7.5 10.0 10.0 15.6 18.3 18.3 18.3 Investment redemption 2.8 6.3 7.6 17.1 6.0 14.0 14.0 14.0 14.0 Sub-total: depreciation equivalent 5.6 9.3 15.1 27.1 16.0 29.6 32.3 32.3 32.3 Total 11.9 16.3 24,1 46.1 43.7 71.5 84.0 87.6 93.8 Net receipts from operations 34.8 48.8 85.1 90.9 112.3 198.6 250.2 284.3 303.6 Other income .3 .4 .7 .5 Net income before interest 35.1 49.2 85.8 91.4 112.3 198.6 250.2 284.3 303.6 Interest and other financial charges 26.6 37.6 54.6 68.0 94.8 102.9 111.0 117.4 128.1 less: issue expenses capitalized 4.0 2.0 2.0 2.6 2.8 interest capitalized 9.0 20.2 28.6 27.6 47.3 28.5 7.0 12.8 25.0 Interest charged to operations 17.6 17.4 26.0 40.4 43.5 72.4 102.0 102.0 100.3 Net profit 17.5 31.8 59.8 51.0 68.8 126.2 148.2 182.3 203.3 Disposition of profit Reserves 2.5 2.8 4.0 8.6 2.4 Dividends and interest on new shares 15.0 29.0 55.8 42.4 66.4 98.4 106.4. 114.4 124.8 Amortization in excess of depreciation 6.8 19.8 29.9 39.5 Contribution to expansion 21.0 22.0 38.0 39.0 Adjustment for straightline depreciation at 2% Gross revenues less operating expenses, as above 40-4 58.1 100.2 118.0 128.3 228.2 282.5 316.6 335.9 deduct: straightline depreciation at 2% 13.6 13.7 22.2 31.6 31.6 47.3 64.1 64.1 64.1 Adjusted net income before interest 26.8 44.4 78.0 86.4 96.7 180.9 218.4 252.5 271.8 Return on average net fixed assets in operation 4.1 6.8 7.3 5.8 6.6 8.1 7.3 8.6 9.4 A1 7 P ORT UGA L HIDRO-E.LECTDICA DO DOURO (HED) Forecast Sources and Applications of Funds 1963-1967 (In millions of Escudos) US$1 = Esc, 28.75 Sub-total Total Fiscal years ending December 31: 1963 1964 1965 3 years 1966 1967 5 years SCUiLIEs OF FUNDS Internal cash generation Net income before interest 112.3 198.6 250.2 561.1 284.3 303.6 1,149.0 Depreciation equivalent 16.0 29.6 32.3 77.9 32.3 32.3 142.5 128.3 228.2 282.5 639.0 316.6 335.9 1,291.5 Share capital 200.0 100.0 100.0 400.0 130.0 140.0 670.0 Debt Propesed IBRD Loan 150.0 66.0 216.0 216.0 Debentures 110.0 110.0 110.0 National Savings Bank 220.0 220.0 220.0 National Development Bank 142.5 142.5 142.5 Banco Pinto and Sotto Mayor one year 71.6 71.6 71.6 Banco Pinto and Sotto Mayor medium term 114.5 114.5 114.5 Future Loans 75.0 225.0 169.0 469.0 276.0 278.0 1,023.0 883.6 291.0 169.0 1,343.6 276.0 278.0 1,897.6 TOTAL SOUE1CES 1,211.9 619.2 551.5 2,382.6 722.6 753.9 3,859.1 APPLICATIONS OF FUNDS Additions to plant Bemposta 279.0 148.0 20.0 447.0 447.0 Tavora 185.3 22.0 36.0 243.3 243.3 Equipment, studies etc. 5.0 5.0 5.0 15.0 55.0 25.0 95.0 Carrapatelo - 151.0 151.0 306.0 343.0 800.0 469.3 175.0 212.0 856.3 361.0 368.0 1,585.3 Interest Proposed IBRD Loan .5 10.2 11.8 22.5 11.7 11.5 45.7 Debentures 36.7 36.2 35.7 108.6 34.9 34.2 177.7 National Development Bank 27.3 23.9 19.1 70.3 16.1 14.3 100.7 National Savings Bank 8.8 8.6 8.2 25.6 7.7 7.3 40.6 Future Loans 5.2 13.5 30.2 48.9 42.4 58.0 149.3 Other interest 12.3 8.5 4.0 24.8 2.0 26.8 90.8 100.9 109.0 300.7 114.8 125.3 540.8 Amortization Proposed IBEO Loan 2.3 2.3 4.8 5.0 12.1 Debentures 7.8 11.2 14.7 33.7 15.5 16.3 65.5 National Development Bank 4.5 11.5 12.1 28.1 12.9 13.8 54.8 National Savings Bank 6.0 10.8 11.1 27.9 11.7 12.1 51.7 Future Loans 2.9 11.9 14.8 17.3 24.6 56.7 18.3 36.4 52.1 106.8 62.2 71.8 240.8 Funding National Development Bank 217.5 30.0 30.0 277.5 30.0 307.5 National Savings Bank 209.0 209.0 209.0 Commercial Banks 90.0 90.0 90.0 Tavora 66.2 73.8 140.0 140.0 Banco Pinto and Sotto Mayor, medium term 28.6 28.6 57.2 28.6 28.7 114.5 one year 71.6 71.6 71.6 582.7 204.0 58.6 845.3 58.6 28.7 932.6 Dividends 42.4 66.4 98.4 207.2 106.4 114.4 428.0 Discounts and issue expenses 4.0 2.0 2.0 8.0 2.6 2.8 13.4 TOTAL APPLICATIONS 1,207.5 584.7 532.1 2,324.3 705.6 711.0 3,740.9 Cash surplus 4.4 34.5 19.4 17.0 42.9 Cumulative surplus 4.4 38.9 58.3 58.3 75.3 118.2 118.2 Number of times interest covered by net income 1.2 2.0 2.3 2.5 2.4 Number of times interest and amortization covered by internal cash generation 1.2 1.7 1.7 1.8 1.7 ,,NNEX 5 Tapada do Outeiro - Unit 3 Cost estimate (in r,lllions) Dollars Escudos Ecuivalent Boiler and accessories 80.0 2.78 Turbo-generator and accessories 63.0 2.19 Main transformer 4.5 .16 Extensions to structure and foundation 28.0 .97 Extension tovater treatmient system , coal handling plant and ash removal system 9.0 .31 Miscellaneous 5.0 .17 Engineering and administration 18.0 .63 Contingencies 32.5 1.13 240.0 8.34 Interest charges 18.0 .63 258.0 8.97 P ORT U GA L EMPHESA TEMNOELCTRICA PORTUGUESA (ETP) Actual and Forecast Balance Sheets as of December 31. 1960 through 1968 (In millions of Escudos) US401 = Esc. 28.75 c----Actual__________ - … -----------Forecast------ …---------_… Fiscal year ending December 31: 1960 1961 1962 1963 1966 1965 1966 1967 1968 ASSETS Fixed assets in operation 313.0 313.0 313.0 313.0 543.6 543.6 766.9 1,460.0 1,460.0 less: 3% sinking fund depreciation 7.0 13.3 20.2 28.6 44.2 59.8 79.4 110.2 148.3 Net fixed assets in operation 306.0 299.7 292.8 284.4 499.4 483.8 707.5 1,349.8 1,311.7 Work in progress 30.2 76.7 106.9 243.0 206.9 424.5 579.5 333.1 640.2 Total net fixed assets 336.2 376.4 399.7 527.4 706.3 908.3 1,287.0 1,682.9 1,951.9 Current assets 102.2 104.0 132.7 116.4 107.0 122.6 97.2 109.8 110.6 Deferred assets 10.5 7.4 3.8 3.8 3.8 3.8 3.8 3.8 3.8 448.9 487.8 536.2 647.6 817.1 1,034.7 1,388.0 1,796.5 2,066.3 LIABILITIES Share capital 185.0 185.0 185.0 250.0 325.0 400.0 475.0 620.0 700.0 Reserves and surplus 1.6 3.1 4.3 4.3 24.3 46.3 86.3 129.3 160.3 Equity equivalent 186.6 188.1 189.3 254.3 349.3 4.46.3 561.3 749.3 860.3 Debentures 177.2 175.1 172.2 169.2 165.0 160.5 155.8 150.9 145.7 National Savings Bank 100.0 140.0 140.0 140.0 140.0 134.9 129.5 National Development Bank 25.0 25.0 24.2 23.3 22.4 21.4 20.4 19.3 Banks' and suppliers'credits 65.5 60.0 25.2 9.9 3.0 2.0 1.0 Proposed IBBD loan 25.5 53.0 91.0 144.0 138.5 132.7 Future loans: New Station Unit 1 51.0 134.0 236.0 360.0 350.7 Unit 2 84.0 192.0 282.0 Unit 3 84.0 Debt 242.7 260.1 322.4 368.8 435.3 549.9 782.2 996.7 1,143.9 less: current portion 7.6 37.8 19.1 12.0 6.4 6.7 17.5 26.8 28.4 Net long term debt 235.1 222.3 303.3 356.8 428.9 543.2 764.7 969.9 1,115.5 Current liabilities 15.2 65.4 31.6 24.5 18.9 19.2 30.0 39.3 40.9 Cash dividends 12.0 12.0 12.0 12.0 20.0 26.0 32.0 38.0 49.6 448.9 487.8 536.2 647.6 817.1 1,034.7 1,388.0 1,796.5 2,066.3 Debt as % of capitalization 56.0 54.0 62.0 58.0 55.0 55.0 58.0 56.0 56.0 Adjustment for strai tline depr2ciation at 3,33%f Fixed assets in operation, as above 313.0 313.0 313.0 313.0 543.6 543.6 786.9 1,460.0 1,460.0 less: accumulated depreciation, at 3.33% 15.6 26.0 36.4 46.8 64.9 83.0 105.2 142.8 191.4 Adjusted net fixed assets in operation 297.4 287.0 276.6 266.2 478.7 460.6 681.7 1,317.2 1,268.6 Average net fixed assets in operation 292.2 281.8 271.4 372.4 469.7 571.1 999.5 1,292.9 / Declared four months after the close of the year and payable annually. 0 1 T -U G A L ISA TE,7J1iO.EZCTLTCA PORTUGUESA (¶L?P) Actual and F-ecast Income Statements 1960 tnrough 1968 (Tn millions of Cscudos) US$1 = Esc. 28.75 --- Actual - ------------------------Forecast-------------------------- Fiscal year ending, Decermber 31: 1960 1961 1962 1263 1964 1965 1966 1967 1968 Gross revenues 38.6 41.8 54.4 92.4 118.8 136.2 205.3 348.1 419.9 Cost of operations uiael and other variable costs 6.4 9.2 20.4 54.8 33.4 42.6 81.9 187.3 225.2 General expenses 3.4 3.0 4.2 3.1 4.1 4.3 4.9 5.5 8.1 Main4anenance and repairs .3 .6 .8 .7 1.3 1.6 2.1 10.1 12.7 Administration and taxes 3.4 3.7 5.9 4.3 5.3 5.4 6.4 7.3 10.3 Equip,i,ent renlacement 4.7 4.7 4.9 7.6 14.3 14.3 18.0 28.2 34.8 Investment redemption .5 .5 .9 .8 1.3 1.3 1.6 2.6 3.3 Sub-total: depreciation equivalent 5.2 5.2 5.8 8.4 15.6 .6 30.8 37.1 Total 18.7 21.7 37.1 71.3 59.7 69.5 114.9 241.0 294.4 Nct income before interest 19.9 20.1 17.3 21.1 59.1 66.7 90.4 107.1 125.5 Interest and other financial charges 8.6 11.7 14.1 22.0 27.9 32.8 43.8 52.7 62.0 less: issue expenses capitalized (1.3) (1.5) (1.5) (2.4) (2.6) (2.1) interest capitalized 2.2 5.4 7.9 (11.6) (7.3) (12.6) (23.0) (24.0) (15.0) Interest charged to operations 6.4 6.3 6.2 9.1 19.1 18.7 18.4 26.1 44.9 Net profit 13.5 13.8 11.1 12.0 40.0 48.0 72.0 81.0 80.6 Disposition of profit Reserves .7 .8 .6 Dividends and interest on new shares 12.0 12.0 12.0 12.0 20.0 26.0 32.0 38.0 49.6 Contribution to expansion 20.0 22.0 40.0 43.0 31.0 Balance forward .8 1.0 (1.5) Adjustment for straightline depreciation at 3.335, Gross revenues less operating expenses, as above 25.1 25.3 23.1 29.5 74.7 82.3 110.0 137.9 163.6 deduct: straightline depreciation at 3.33% 10.4 10.4 10.4 10.4 18.1 18.1 22.2 37.6 48.6 Adjusted net income before interest 14.7 14.9 12.7 19.1 56.6 64.2 87.8 100.3 115.0 0 Return on average net fixed assets in operation - 5.1 4.5 7.0 15.2 13.7 15.4 10.0 8.9 ANNEX 11 P O R T U G A L EIWFESA TBlIOELECTRICA POFSUGUESA (ETP) Forecast Sources and Applications of Funds 1963-1968 (In millions of Escudos) US$1 = Esc. 28.75 Sub-total Total Fiscal Year endinr December 31: 1963 1964 1965 1966 4 years 1967 1968 6 years SOU CES OF FUNDS Internal cash generation Net incone before interest 21.1 59.1 66.7 90.4 237.3 107.1 125.5 469.9 Depreciation equivalent 8.4 15.6 15.6 19.6 59.2 30.8 38.1 128.1 29.5 74.7 82.3 110.0 296.5 137.9 163.6 598.0 New share capital 65.0 75.0 75.0 75.0 290.0 145.0 80.0 515.0 Borrowings Proposed TBRD Loan 25.5 27.5 38.0 53.0 144.0 144.0 National Savings Bank 40.0 40.0 40.0 Future loans: New Station Unit 1 51.0 83.0 102.0 236.0 124.0 360.0 UnIt 2 84.0 84.0 108.0 90.0 282.0 Unit 3 84.0 84.0 65.5 78.5 121.0 239.0 504.0 232.0 174.0 910.0 TOTAL SOURCES 160.0 228.2 278.3 424.0 1,090.5 514.9 417.6 2,023.0 APPLICATION'S OF FUNDS Additions to plant Tapada do Outeiro Unit 2 87.4 25.0 112.4 112.4 Unit 3 (The proJect) 35.8 60.7 65.5 62.9 224.9 15.1 240.0 Sub-total 123.2 85.7 65.5 62.9 337.3 15.1 352.4 New Station Unit 1 100.0 138.0 170.0 408.0 205.0 613.0 Unit 2 140.0 140.0 180.0 150.0 470.0 Unit 3 140.0 140.0 Sub-total 100.0 138.0 310.0 548.0 385.0 290.0 1,223.0 123.2 185.7 203.5 372.9 885.3 400.1 290.3 1,575.4 Interest Deb'entures 8.6 8.5 8.2 8.0 33.3 7.8 7.5 48.6 National Savings Bank 9.1 9.1 9.1 9.1 36.4 9.1 8.8 54.3 National Development Bank 1.5 1.5 1.4 1.3 5.7 1.3 1.2 8.2 Proposed IND Loan .5 3.0 4.5 7.0 15.0 7.9 7.6 30.5 Local loans: Tdo Units 2 and 3 1.0 1.0 1.0 3.0 3.0 Future loans: New Station Unit 1 3.3 7.1 11.6 22.0 17.0 19.8 58.8 Unit 2 4.4 4.4 7.0 10.6 22.0 Unit 3 4.4 4.4 20.7 26.4 31.3 41.4 119.8 50.1 59.9 229.8 Amortization Debentures 3.0 4.2 4.5 4.7 16.4 4.9 5.2 26.5 National Savings Bank 5.1 5.4 10.5 National Development Bank .8 .9 .9 1.0 3.6 1.0 1.1 5.7 Proposed IBID loan 5.5 5.8 11.3 Local loans: Tdo Units 2 and 3 Future loan: New Station Unit 1 9.3 9.3 Banks' and suppliers' credits 15.3 6.9 1.0 1.0 24.2 1.0 25.2 19.1 12.0 6.4 6.7 44.2 17.5 26.8 88.5 Dividends 12.0 12.0 20.0 26.0 70.0 32.0 38.0 140.0 Discount and issde expenses 1.3 1.5 1.5 2.4 6.7 2.6 2.1 11.4 TOTAL APPLICATIONS 176.3 237.6 262.7 449.4 1,126.0 502.3 416.8 2,045.1 ,ash at beginning of year 18.7 2.4 (7.0) 8,6 18.7 (16.8) (4.2) 18.7 Cash surplus or (deficit) (16.3) (9.4) 15.6 (25.4) (35.5) 12.6 .8 (22.1) Cash at end of year 2.4 (7.0) 8.6 (16.8) (16.8) (4.2) (3.4) (3.4) Number of times interest covered by net income 1.0 2.2 2.1 2.2 2.1 2.1 Number of times debt service covered by internal cash generation - 1.9 2.2 2.3 2.0 1.9 VILA NO VA, PSE Viaonodo SAAOD Castelo CANAt7A C>oghSP X ~~~~~~Erisfins HtED plants MIRANDA \ // Vila RrdcI -OSTA CARRAPATLor To\ VORA /ntr,connetI,oo TAPADA DO (FUTrURE) ;er V;seu / GucrVise.. 0~~~~~~~~ 0~~~~~~~~~~~~~~~~~~~~ qb Figl.eirUf Cc/lo , CSTE'LODOOD s ) / S//niarel/ ~~~~~~~~~~Portalegre, * .... / *PORTUGAL POWER PROJECTS 2 I // - Hydrd plat. exist n or ( * | . under const ruti o n 0/ Evoro-o under construction IBRD Projects Bela OCTOBER 1963 - BRD- 1138R1