RESTRICTED

[ieport No. TO-450a

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 maynot be pub ished nor may it be quoted as representing their views.

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

INTERNATIONAL DEVELOPMENT ASSOC7ATION

CARREGADO THERMAL POWER PROJECT

EMPRESA TERMOELECTRICA PORTUGUESA

PORTUGAL

April 9, 1965

Projects Department

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ZUR2REkTNCY 2QUIVP.-- -TS

U.5. $1 = EzOuloo ?0. Y51sc. 1 - U. . $." 35

Esc. 1 million = U.S. $X; ?7a3

CAiREGADO THE-?1 iAL PC.iER P'LOJGCT

,LiPiPESA TEHvLOEI, CTRICA POiTUGUESA

P01 TUGAL

TABLE OF CONTENTSPage No.

3W13 1'iAY i

I. INTRODUCTION 1

II. THE BORROWER 2

III. POT1TER IA-WKET 2

IV. CUlRi,ET AND FUTUREI PROGRBAi 3

V. THE PROJECT 3

VI. FILNANCIAL ASPECTS 5TariffsAuditPresent Financial PositionPast EarningsFinancing Plan

Financial Prospects

VII CONCLUJSIONS 12

ANNqEXES

lo The Portuguese Power Industry

2. Electric Energy Statistics

3. Actual and Forecast Balance Sheets as of December 31, 1960_1970

4. Actual and Forecast Income Statements 1960-1970

5. Forecast Sources & App'lication of Funds 1964-1970

6. Map

CARREGADO THERHADL POWER PROJECT

EI4PRESA TERMOELECTRICA PORTUGUESA

PORTUGAL

SLIM-ItlARY

i. Empresa Termoelectrica Portuguesa (ETP), one of four power gene-rating companies in the Portuguese primary power system, has applied fora loan of $15.0 million to finance the first phase of construction of theCarregado thermal plant estimated to cost about $25.0 million, includinginterest during construction. The balance of about $10.0 millionequivalent would be financed from sales of new shares and from ETP's ownresources. The proposed loan would be made to the company with thePortuguese Government's guarantee. The first phase includes theinstallation of one 125 MWJ unit and provision for the subsequentinstallation of three similar units to enable the plant to operate atits ultimate capacity of 500 10W. The first unit is expected to becompleted by mid-1967 and would increase the total generating capacityof the primary system to about 1,475 MfW and of the country (totalpublic supply) to about 1,875 14W.

ii. ETP is organized as a private stock company, but the Government'scontrol of its policies, its close supervision of its activities and itsconsiderable share in its financing give it a quasi public character. Thecompany is well managed and organized and, with the help of its consultants,is capable of carrying out and operating the project.

iii. Financial forecasts prepared in accordance with the formula setout in a new decree law show that ETP should be able to maintain a soundfinancial position.

iv. The project is needed to meet the expected increase in powerdemand. The proposed method of carrying out the project is acceptable;the cost estimate and the construction schedule are realistic. Theproject would be suitable for a loan of $15.0 million, for a 20 year term,including a three and a half year grace period.

CARREGADO THE1dAL POWER PROJECT

EMPRESA TER4OELECTRICA PORTUGUESA

PORTUGAL

I. INTRODUCTION

1. A loan of $15.0 million has been requested by Empresa Termo-electrica Portuguesa (ETP) to cover part of the cost of the first phaseof the Carregado thermal plant with an ultimate capacity of 500 MW infour units, including the installation of the first 125 MW unit. Thefirst unit is scheduled to be in operation by mid-1967. The estimatedfirst phase cost is about $25.0 million, including interest during con-struction. The proposed loan would be made to ETP with the PortugueseGovernment's guarantee and would cover about 60 per cent of this total.It would finance the cost of equipment and its erection, the foreignexchange cost of equipment transport and engineering and about $1.0 mil-lion of interest during construction. The balance of about $10.0 millionequivalent would be financed from sales of new shares and from ETP's ownresources.

2. The Portuguese power industry was first reviewed by the Bankin 1962. At that time the Government had put forward three projects as abasis for power loans, one of which was a new hydro project. The Portu-guese subsequently withdrew the hydro project and substituted in theirplanning a 500 MW conventional thermal power source. This was in accordwith Bank thinking as it was apparent,at the time,that Portugal's pre-dominantly hydro power system required firming up with thermal power.

3. Two loans totalling $12.5 million were subsequently made (362-POand 363-PO of November 1963), $7.5 million to Hidro Electrica do Douro (HED)and $5.0 million to ETP. The HED loan financed a part of the completioncost of the Bemposta hydro plant (construction was in the final stages whenthe loan was made) and the ETR loan financed a part of the cost of an addi-tion to ETP ts only generating plant, the Tapada do Outeiro thermal plant.The ETP loan also financed preliminary studies for the new 500 MW thermalplant covered by this report.

4. The Bank had indicated at the time of the first ETP loan that itwould be prepared to consider a loan for the new 500 14W plant as soon asits location and technical features were properly defined. ETP engagedSOFRELEC of France as its engineering consultant; their preliminary reportwas completed in Hay 1964 and a field appraisal was made in July.

5. The organization of the Portuguese power industry was describedin detail in the appraisal report for the previous loans (Report TO-374bof October 18, 1963). Some of the descriptive information from that re-port is attached as Annex 1 and some passages of that report have beenrepeated herein.

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II. THE BORROWER

6. ETP is one of five companies forming the Portuguese primary sys-tem. This system includes the facilities of three hydro generating com-panies, one thermal generating company (ETP) and one transmission company.The five companies are organized as private stock companies and are oper-ated as if under a single ownership. But the Government is, in fact,primarily responsible for determining their expansion programs, forplanning the means of securing the necessary financing and for allocatingthe total revenues accruing to the primary system.

7. The organization of the primary system, which is described in moredetail in Annex 1, has become complex and cumbersome in recent years.This has resulted in increased involvement by the Government in thecoordination of planning, including financial planning, and in thedetermination of the apportionment of revenues among the generatingcompanies (see paragraphs 23 to 25). During negotiations for the proposedloan, the Portuguese delegation informed the Bank that the Secretary ofState for Industry had instructed the Superior Electricity Council toinitiate studies to analyse these problems and to make recommendations fortheir solution. They confirmed that the Bank would be kept informed ofthe progress of these studies.

8. ETP was formed in 1954 for the purpose of building and operatinga small thermal plant (Tapada do Outeiro) which was needed at the time asa safeguard against power shortages in critically dry years. By the endof 1963 it had installed, or planned for construction, a total capacity of150 MW in three units at this plant. ETP has a five member Board, threemembers appointed by shareholders and two by the Government, and a threemember fiscal committee which approves accounts and major financial deci-sions. Two members are appointed by the shareholders and one by theGovernment.

9. A 75-year concession was issued in November 1963 to construct andoperate the Tapada do Outeiro plant. This concession was amended in 1964to include the Carregado thermal plant.

10. ETP's organization has been strengthened significantly since thedecision was made to include major thermal power sources in the Portuguesepower development program. A new chairman wias appointed, wiho acts also asgeneral manager. A chief engineer and additional staff have also beenappointed. The new management is competent and capable of carrying outthe proposed project with the assistance of their consultants.

III. POWER MARKET

11. The bulk of the total public power supply in Portugal is providedby the primary system, at present almost entirely from hydro sources. Themarket is broadly classified by the Portuguese into "permanent" and "non-permanent" parts. This is equivalent to saying that the market is composedof customers with "firm" power requirements and others who use "seasonal"or non-firm power. The firm part consists of utilities which purchase

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power from the system for distribution and sale to utility customers. Theseasonal part consists of a special group of power intensive industrieswhich were organized'by the Government to utilize the non-firm power sup-plies generally available during part of each year because of Portugal'spredominantly hydro power system. System development planning, however,is based on the firm market requirements.

12. Total load and energy requirements have increased at an averagerate of about 12 per cent annually since the early 1950's. This is shownin Annex 2. Annex 2 also shows that the firm power market has grown ata rate averaging 11.3 per cent annually; the extremes being 8.8 per centin 1955 and 13.4 per cent in 1960.

13. To assure adequate power and energy capability to meet futurerequirements, the Portuguese planning authorities assume an average annualgrowth rate of about 10.7 per cent into the early 1970's. On this basis,firm energy (kwh) requirements would increase from 3,324 million kwh in1963 to 8,320 million kwh in 1972. The corresponding peak demand wouldincrease from 684 MW to 1,710 MW. These assumptions are reviewed periodi-cally and are reasonable for planning purposes.

IV. CURRETNT AND FUTURE PROGRAM

14. As a result of the change in planning principles referred to inparagraph 2, the decision was made to add new thermal capacity to the sys-tem, first by installing a third 50 MW unit to complete the Tapada doOuteiro plant, (financed by the previous loan to ETP), and later by theconstruction of' the first 125 MW unit of the new Carregado thermal plant,for which the proposed loan has been requested.

15. The timing of other system additions has been set out in theGovernment's Interim Development Plan for 1965-67. The construction ofthe 180 MWJ Carrapatelo hydro plant and the installation of the second125 MW unit at the Carregado thermal plant are to be started in 1965. Anumber of other hydro schemes are also listed from which further expan-sion projects would be chosen. The first 60 MW unit of the Carrapatelohydro plant is scheduled for completion by mid-1969 with the last twounits being added a year later. The second unit of the Carregado thermalplant is scheduled for completion by mid-1968. It is expected that thelast two units would be installed at 18-month intervals after the commis-sioning of the second unit. This plant should, therefore, be completedby the end of 1971.

V. THE PROJECT

16. The Carregado thermal plant will be near the important consump-tion centers of Lisbon and Setubal. It will be located about 30 kilometersup-stream from Lisbon on the right bank of the Tagus River. This locationwill reduce the present need for large power transfers from the northernpart of the country where most of Portugal's generating sources are con-centrated, with consequent savings in transmission costs. Access to thesite by rail, barge or road is good and foundation conditions appear to be

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excellent. Furthermore, the plant can be tied into the national trans-mission network at low cost. This will be done by the national transmis-sionqXompany, Companhia Nacional de Electricidade - CNE (see Annex 1).Fuel_" can be delivered to the site by barge or by a 25 kilometer pipe-line from the SACOR Refinery in Lisbon, an alternative which is currentlyunder study. SACOR would build the pipeline if, as is expected, it isthe more economical solution. The plant will be set back about 1.4 kilo-meters from the river and although this will require the construction ofrelatively long intake and outlet canals for cooling water, the alterna-tive of locating closer to the river would involve unacceptable founda-tion problems as well as restrictions on the height of the stack due tothe proximity of airports.

17. The plant, of the semi-outdoor type, would be designed for four125 I. units, of which only one would be installed initially. Economicstudies of alternative steam conditions led to the selection of a reheatcycle with steam conditions of 1,800 p.s.i.11Q0000 F/l000°F.

18. The cost estimate is summarized below; a breakdown of the itemsinto foreign exchange and local currency components is not practicable inthe absence of actual bidding results.

Cost (in millions)Equivalent Proposed

Item Escudos Dollars Loan ($)

Land 20.0 .7 -Site work2/ 62.9 2.2 -Canals, pumping 49.2 1.7 -Station construction 64.2 2.2 -Power plant equipment 316.2 11.0 11.0Equipment erection 60.4 2.1 2.1

Sub-total 572.9 19.9

Engineering & administration 49.0 1.7 .5Contingencies:

5% equipment & erection 19.0 .7 .420< civil works 37.0 1.3 -

Sub-total 677.9 23.6

Interest during construction 38.4 1.3 1.0

Total 716.3 24.9 15.0

1/ The only indigenous fuel available is low grade coal and the Tapadado Outeiro plant uses the entire output. The Carregado thermal plantwould be oil-fired and would use imported fuel.

2/ Includes roads, bridges and railroad spurs.

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19. The initial investment of $23.6 million, including contingenciesbut before interest, represents a unit cost of about $190/kw. This includesthe cost of facilities common to all four units, such as land, the canalsystem, roads and railroads, and civil works.

20. The estimate is based on average European prices for equipmentand erection and prevailing Portuguese prices for civil works. The latterwill be let on the basis of relatively small contracts for which only localcontractors are expected to tender. Accordingly, it is proposed to followthe same procurement procedures as agreed upon for the equipment financedunder Loan 363-PO. All major equipment contracts would be open to inter-national bidding - with a formula, which would be set forth in the bid in-vitations, giving a preference to local industry that would take into ac-count the extent of participation by Portuguese manufacturers. ETP willbe permitted to make the award to any qualified bidder, offering in allor in part locally manufactured goods, whose offered price does not ex-ceed that of the lowest qualified bid: (a) by more than 15 per cent, ifthe lowest qualified bid offered only goods manufactured outside Portugal;or (b) by more than 10 per cent, if the lowest qualified bid offered bothgoods manufactured in Portugal and goods manufactured abroad.

21. The construction schedule calls for commercial operation of thefirst unit by mid-1967. Bidding documents for the major items were issuedlast August and some awards have been made. Approximately 30-months havebeen allowed for manufacture, shipping, erection and testing. This scheduleis tight but should be met.

22. SOFRELEC will provide the normal engineering services of bidevaluation, construction supervision, testing and assistance during initialplant operation. ETP personnel will participate in all phases of the workto gain experience for subsequent stages of the project.

VI. FINANCIAL ASPBCTS

Tariffs

23. The Government fixes, by decree, the tariffs at which CNE, thetransmission and marketing agency (see Annex 1), purchases power from thefour generating companies in the primary system. The tariff is based onclosely reviewed and generally conservative estimates of the total genera-tion of the system and the operating expenses and fixed charges of eachcompany. The aggregate proceeds of the sales to CNE are divided among thegenerating companies by percentages established by Government decree. Theallocation is based on the particular financial requirements of the gener-ating companies rather than on thai'i individual contribution of energyto the system. This seemingly complicated. ethod of revenue distribution,described in more detail in paragraphs 24 and 25, is necessary becausethe generating facilities of the four companies are operated in accordancewith central dispatching orders, the object of which is to make the mostefficient use of the different generation sources, regardless of ownership.

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24. By a Decree Law approved in 1964 the tariff at which CNEpurchases power from the generating companies in the primary system, wasincreased by 10 per cent, effective through 1966. This increase, basedon the criteria described above, will provide sufficient revenues to thefour generating comipanies to cover: (a) all operating expenses, includingtaxes, (b) two provisions in lieu of depreciation, based on 3 per centnotional sinking funds for (i) renewing equipment over a 25-year periodand (ii) redeeming the original investment over the remaining life of theconcession, (c) interest chargeable to operations at actual rates and (d)dividends of at least 6 per cent. In addition, and further to undertakingsin Loans 362-PO and 363-PO,the revenues allocated to HED and ETP would alsobe sufficient to (a) cover the surplus, if any, of amortization requirementsover the two provisions in lieu of depreciation and (b) provide 10 per centof the approved capital expenditure for each of the years 1964, 1965 and1966. The tariff will be reviewed again in 1966.

25. The 1964 Decree Law establishes the following order of priorityand percentages for the distribution of revenues: 38.09 per cent to HED,12.04 per cent to ETP to cover all requirements except for fuel cost and43.39 per cent to the two other hydro companies in the system. The 6.48per cent balance of the revenues would accrue to a so-called "Fund for ThermalSupport" which is intended to cover ETP's estimated fuel costs. If, in anyyear, a surplus develops in this fund it can be used for the payment of addi-tional dividends by the four generating companies or for investment in newplants at the discretion of the Secretary of State for Industry. But, ifthese revenues prove inadequate to cover ETP's fuel costs then the aboveallocations would be proportionally reduced. The companies would be re-imbursed for these reductions when sufficient reserves again become avail-able in the "F'und for Thermal Support." Present estimates, on which thetariff is based, provide for about twice ETP's estimated fuel costs thusenabling the generating companies to pay an additional 1 per cent on theirestimated share capital during the 1964-66 period.

26. In the financial forecast prepared for ETP and described inparagraphs 37 and 44 below, it has been assumed that the revenues allo-cated to ETP would permit payment of a 7 per cent dividend. These fore-casts show a satisfactory level of revenues for ETP, enabling it to main-tain a sound financial position. The Government and ETP have agreed, inconnection with the proposed loan, to undertakings regarding revenuessimilar to those of Loan 363-PO.

Audit

27. In accordance with a provision in Loan 363-PO, ETP has retainedBarton, Mayhew & Co., Chartered Accountants, to audit its accounts andthey have already made the audit for 1963. By a provision in the pro-posed loan agreement, ETP has agreed to continue having its accountsaudited annually.

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Present Financial Position

28. Condensed and adjusted balance sheets for the fiscal years endedDecember 31, 1960 to 1963 are shown in Annex 3. ETP's financial position,as of December 31, 1963, is shown below:

(in millions)Escudos $ equivalent

ASSETS

Fixed assets in operation 311.5 10.8Less 3% sinking fund dep. 24.4 .8Net fixed assets in operation 2i7.1 10.0

Work in progress 175.9 6.1

Total net fixed assets 463.0 16.1

Current assets 138.6 4.8

Total 601.6 20.9

LIABILITIES

Capital, reserves & surplus 190.1 6.6Net long-term dlebt 325.0 11.3

Total Capitalizationl! 515.1 17.9

Current liabilities 73.5 2.6Dividends2 ' 13.0 0.4

Total 601.6 20.9

29. Fixed assets in operation at historic cost were Esc. 311.5 mil-lion, construction work in progress was Esc. 175.9 million and currentassets were Esc. 138.6 million, almost twice the current liabilities, ofEsc. 73.5 million. Current assets included coal inventories of aboutEsc. 75 million and cash of about Esc. 31.5 million. Large inventorieswere accumulated as coal supplies purchased on a long-term contract ex-ceeded ETP's requirements during the first few years of operation. Dur-ing 1964, however, ETP has reduced these inventories by Esc. 15 millionand planis to reduce them further to about half their present level by1967. Current liabilities included the current portion of long-termdebt, Esc. 12.0 million, and short-term debts totalling Esc. 40.2 mil-lion. The short-term debts have since been repaid from the proceeds ofa share capital issue and reimbursements from Loan 363-Po.

1/ Details in paragraph 32.

2/ Declared four months after the close of the year and payable annually.

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30. Reserves in lieu of depreciation, for equipment renewals andfor investment redemption (the latter insignificant since the presentconcession was obtained late last year) totalled Esc. 24.4 million. Toevaluate ETP's financial position in terms of returns on investment, acalculation was made of the depreciation which would have been chargedover ETP's five years of operation, had the standard straightline methodbeen followed at an assumed rate of 3.33 per cent annually. On this basis,accumulated depreciation of about Esc. 46.8 million would have accrued,leaving net fixed assets in operation of about Esc. 264.7 million as shownin Annex 3.

31. ETP held a 6.5 per cent interest in Companhia Portuguesa de In-dustrias Nucleares (CPIN), a small company with a staff of six engineers,engaged in nuclear studies. It recently acquired total ownership of thiscompany by purchasing the remaining shares from the other primary systemcompanies at an agreed price of Esc. 5.0 million. Payment for the pur-chase was made with ETP shares.

32. Total capitalization at the end of 1963 was Esc. 515 million,of which debt, excluding the current portion, was Esc. 325 million or63 per cent as follows:

(in millions)Escudos Percent

Capital, reserves & surplus

Share capital: 185,000 shares @ Esc. 1,000 par 185.0 36.oReserves and surplus 5.1 1.0

Total equity 190.1 37.0

Long-term debt

Unsecured debentures,5%, 25-years 168.0 32.0National Development Bank loan, 6%, 20-years 25.0 5.0National Savings Bank loan, 6.5p, 15-years 140.0 27.0Unemployment fund loan, no interest, 5-years _4.0 1.0

Debt 337.0 65.0

Less: current portion 12.0 2.0Total net long-term debt 325.0 63.0

Total Capitalization 515.1 100.0

33. The share capital was increased to Esc. 315 million by two is-sues of Esc. 65 million each, one in January 1964 and the other in Decem-ber 1964. Two Portuguese oil companies, SACOR and SONAP, purchased abouthalf of the first issue, the National Development Bank about a quarterand the balance was purchased by existing shareholders. The second issuewas over-subscribed, but detailed information on its distribution amongthe shareholders is not yet available. The table below shows the distri-bution of ownership of ETP's share capital as it stood before the Decem-ber issue:

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(in millions)---Escudos--- Percent

CNE 33.0 13.0Other primary system companies 26.0 10.0

59.0 23.0

National Development Bank 58.6 24.0Social Security Institutions 50.0 20.0

100.6 b44.

Other power companies 25.2 10.0Mining companies 7.3 3.0Oil companies 37.0 15.0Insurance companies 3.0 1.0General public 9.9 4.0

33.0

2-50.0 TO.

Share capital issue of December 1964 65.0

Total 315.0

34. The only significant change in ETP's long-term debt during 1963was the increase in the National Savings Bank loan, originally obtainedin 1962, from Esc. 100 million to Esc. 140 million. The new loan contract,dated October 28, 1963, provided for a term of 15 years and an interestrate of 6-1/2 per cent, including a half per cent service charge.Loan 363-PO becaxne effective on February 10, 1964. In connection withthis loan, ETP agreed to limit its long-term indebtedness to twice itspaid-in capital and surplus. It further agreed to borrow on terms reason-ably related to future earning capacity and to limit short-term borrowingsto amounts that could reasonably be expected to be repaid out of the pro-ceeds of share capital issues, long-term borrowings or earnings. Similaragreements have been obtained in connection with the proposed loan.

Past Earnings

35. A summary of ETP's actual income statements for the fiscalyears 1960 through 1963 is shown in Annex 4, along with a pro forma cal-culation for 3.33 per cent straightline depreciation. The adjusted earn-ings show returns on average net fixed assets in operation of 5.1 percent in 1961, 4.5 per cent in 1962 and 5.7 per cent in 1963. Dividendswere paid at 5 per cent in the years 1960 to 1962 and increased to 7 percent in 1963. Dividends payments may be deferred until the specific as-sets for which shares were issued are in service. But until 1963, follow-ing a practice permitted by law and its statutes, 3TP paid a 4 per cent"interest" on new shares.

36. ETP's audited financial statements for 1964 have not yet beenreceived. However, the 1964 income statement shown in Annex 4 is basedon information obtained from ETP in January 1965 and is considered tobe reasonably firm. The 1964 income statement reflects the tariff in-crease described above and shows a net income before interest of

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Esc. 58.3 million, over twice the net income before interest of Esc. 20.7million in 1963. A large increase is shown in fuel costs because 1964was a dry year and thermal power generation had to be stepped up. Inaccordance with the 1964 Decree Law, these costs were covered by the"Fund for Thermal Support". The return on average net fixed assets inoperation, adjusted for 3.33 per cent straightline depreciation,was 15.4per cent.

Financing Plan

37. A forecast of sources and application of funds for the sevenyears throug 1970 is given in Annex 5. In the four year period 1964 to1967, ETP's requirements would total Esc. 1$340.1 million, of whichEsc. 1,330.3 million represent capital expenditures on new plant, in-cluding capitalized interest and Esc. 9.8 million net addition to workingcapital. The expenditures on new plant include Esc. 62.2 million for thesecond unit at Tapada do Outeiro and Esc. 265.0 million for the third unit(financed by Bank Loan 363-PO); Esc. 716.3 million for the first unit atCarregado (the proposed project) and Esc. 286,8 million mainly for thesecond and third units at Carregado. Details of ETP's requirements overthis period are as follows:

FINANCfJG PLAN 1964-1967

------------------ (in millions)- - ---1964 1965 1966 1967 Total 4 years-.--------- Escudos---------- Esc. $ equiv.

Tapada do OuteiroUnit 2 48.2 14.o - - 62.2 2.2

Tapada do OuteiroUnit 3 58.2 106.1 82.2 18.5 265.0 9.2

Carregado Ther-mal PlantUnit 1 38.0 208.3 239.4 230.6 716.3 24.9

Future Carregadoexpansion etc. 6.2 18.4 101.1 161.1 286.8 10.0

Working capital 44.6 (44.9) (2.1) 12.2 9.8 0.3

195.2 301.9 420.6 422.4 1,340.1 46.6

38. Under the proposed plan ETP wiould finance about 14 per cent ofits requirements from internal cash generation, about 29 per cent fromthe sale of new shares, and about 57 per cent from borrowings, as shownin the following table:

___-_-_-------(in millions------------------1964 1965 1966 1967 Total 4 years Percent----------Escudos----------- Esc. $ equiv.

Internal cash gene-ration 74.2 84.0 93.4 138.6 390.2 13.6

Iess:Interest 17.4 15.8 14.2 27.0 74.4 2.6Amortization 12.0 12.8 13.4 16.9 55.1 1.9Dividends 13.0 !*.0 22.0 30.1 78.1 2.7

42.4 41.6 49.6 74.0 207.6 7.2

Net cash availablefor expansion 31.8 42.4 43.8 64.6 182.6 6.4 13.7

New share capital 130.0 115.0 80.0 70.0 395.0 13.7 29.4

IBRD Loan 363-PO 33.4 62.0 48.3 - 143.7 5.0 10.7Proposed IBRD Loan - 82.5 171.5 177.8 431.8 15.0 32.2Future expansion loan - - 77.0 110.0 187.0 6.5 14.0

Borrowings 33.4 144.5 296.8 287.8 762.5 26.5 56.9

195.2 301.9 420.6 422.4 1,340.1 46.6 100.0

39. New share capital would be issued for a total of Esc. 395.0 mil-lion. Of this, Esc. 130.0 million has already been raised in 1964. ETPdoes not anticipate any difficulties in raising the balance of its sharecapital requirements in the next three years.

40. Estimated borrowings during 1964-67 would be $26.5 million(Esc. 762.5 million) consisting of (a) the existing Bank loan of $5.0 mil-lion (Esc. 143.7 million) for the completion of the Tapada do Outeiro plant;(b) the proposed Bank loan of $15.0 million (Esc. 431.8 million) to financethe cost of construction of Carregado Unit 1 and assumed to carry interestat 5-1/2 per cent and a term of 20-years including a three and a half yeargrace period, and (c) a future loan of about $11.0 million for CarregadoUnit 2 of which only $6.5 million (Esc. 187.0 million) would be used in theperiod covered by the plan. This loan is also assumed to carry interest at5-1/2 per cent and a term of 20-years.

41. The Government has agreed to arrange for the provision of fundsrequired by ETP to carry out the project should the company be unable toobtain them from other sources.

Financial Prospects

42. Forecast income statements for the seven year period, 1964-70are shown in Annex 4. The returns on average net fixed assets in opera-tion, adjusted for 3.33 per cent straightline depreciation would graduallydecrease from an estimated maximum of 15.4 per cent in 1964 to 7.8 per centin 1970. It must be noted that these returns are merely a consequence ofthe method for allocating power revenues to the company as described inparagraph 24 above. The 1964 Decree Lawxprovides, among other things, that

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ETPts revenues should cover not only ETP's annual costs and dividends butalso 10 per cent of the costs of its rapidly expanding program of new works.Thus, in the early years of the expansion program, when capital expendituresare large, the revenues allocated to ETP are also large, compared to theassets then in operation, producing unusually high returns. When the newworks are completed and enter into service, the increase in the assets base,on which the returns are calculated, becomes more rapid than the increasesin revenues. Consequently, the returns are expected to gradually decreaseas relatively large new plants come into operation towards the end of the1964-70 period.

43. As shown in Annex 5, net income in each of the years 1964 through1970 would be about twice the annual interest charges, with the exceptionof 1964 and 1965 when it would cover interest charges 2.8 and 2.6 timesrespectively. Internal cash generation would cover total debt servicecharges between 1.7 times and 2.3 times over the period 1964-70.

44. Forecast balance sheets as of December 31, 1964 through 1970 areshown in Annex 3. The proportion of debt, excluding the current portion,to capitalization would vary from a minimum of 49 per cent in 1965 to amaximum of 59 per cent in 1967 when the proposed loan would be fully dis-bursed. This is well within the debt limitation covenants in the existingand proposed Bank loan agreements.

VII. CONCLUSIONS

45. The project is necessary to meet the expected increase in powerdemand. It is technically sound and the cost estimates are reasonable.

46. ETP's operations are well managed. With the help of its consul-tants, the company is well qualified to execute and operate the proposedproject.

47. ETP should be able to maintain a sound financial position by in-creasing its revenues as provided for in the 1964 Decree Law relating tothe tariffs of the generating companies in the primary system.

48. The project is suitable for a Bank loan of $15.0 million, for a20-year term, including a three and a half year grace period.

THE POflTUGUiS7, POIlER IFEUSTRY

1. A reorganization of the Portuguese electric power industry wasbrought about by the National Electrification Law of December 19L4, whichwas later modified by a decree-law of December 1960. Pursuant to the moreimportant provisions of the legislation:

(a) power production iwould be mainly hydroelectric;

(b) companies would be formed with government help to develophydroelectric resources and to transmit power throughout thecountry; the new generating and transmission facilities wouldform the primary system;

(c) small existing utilities, engaged in distribution, would purchasepower from the large utilities or from the primary system;

(d) large existing utilities (with generation and distributionfacilities) would form the secondary system; they would beexpected to satisfy their additional requirements by purchasesfrom the primary system;

(e) special categories of large consumers (electro-chemical andelectro-metallurgical plants and irrigation undertakings)would purchase directly from the primary system;

(f) the Government would establish tariffs.

2. The primary system created as a result of this legislation consistsat present of the facilities of five comnpanies, established between 1945 and1951t. There are three hydro companies, each with a 75 year concession todevelop a specific river basin or area; a thermoelectric company, ETP, anda nation-wide transmission company. At the end of 1963 the installedcapacity of the primary system was 1,324 M1RW, of which 1,172 W1l were hydroand 152 MV1 were thermal. An extensive system of transrission lines connectsall generating plants with the load centers.

3. The five companies were organized as private stock companies alongsimilar lines. The law permits participation for up to 50 per cent of theshare capital by the Government or its financial institutions. In practiceit is hard to determine the precise extent of public and private ownershipbecause of the mixed character of the main institutional shareholders. Itis clear, however, that the Government is directly or indirectly the mostimportant shareholder. Government controlled financial institutions alsohold most of the debt of these companies.

4. Each company has a five to six member Board with two membersappointed by the Government regardless of ownership, and the othersselected by the shareholders. Subject to Government approval the Board

ANTNEX 1page 2

elects a Chairman, who is also the chief executive officer. Each companyhas a three member fiscal committee which reviews company accounts andapproves major financial decisions. One of the members is selected bythe Government and two by the shareholders.

5. The Electrification Law also led to the creation of a NationalLoad Dispatching Organization (Repartidor Nacional de Cargas - RNC), res-ponsible for the technical coordination of all power generation. Moreimportant, RNC also carries out statistical and economic studies relatingto the national power program which enables the Government to determineproject priorities within the program. It is administered by a councilrepresenting the operating companies of the primary system, the utilitiesof the secondary system, distributing companies and the Government. Itis managed by an Executive Committee of five members. The Government re-presentative, chairman ex officio, is an official of the Office of theDirector-General for Electrical Services of the Ministry of Economy, theGovernment Office responsible for issuing franchises, establishing ratesand, more generally, for controlling and coordinating the power industry.

6. The primary system is operated as if it were under a singleownership instead of being composed of five separate companies. The fourgenerating companies sell their total output to the national transmissioncompany (Companhia Nacional de Electricidade - CNE) according to load dis-patching instructions received from RNC. CNE, in turn, sells in bulk toutilities of the secondary system and to large power intensive industries.By fixing all tariffs, including CNE's buying and selling tariffs, theGovernment actually determines the revenues of the individual generatingcompanies.

7. The Government is also primarily responsible for ensuring avail-ability of the large funds required for the companies' expansion becauseof Government regulation of the financial market and the large demand onthe Government controlled financial institutions, which provide most ofthe borrowed fuinds as well as the share capital. The Government deter-mines the amounts to be raised, the timing and distribution between sharecapital, bond issues and borrowings from financial institutions.

8. As may be seen frorn the above, the companies in the system,though formlally private, have a quasi public character. The Governmenthas in fact the ultimate responsibility for their policies through itscontrol of their expansion plans, sources of finance, management andallocation of revenues.

9. PortuLgal's hydro energy resources are large in comparison withenergy sources of indigenous fuel. The L;lectrification Law thereforestressed the development of hydro power, the objective being to limitinvestment in conventional thermal capacity until the hydro potential hadbeen exploited. Then instead of further investment in conventional thermalcapacity, it was pJanned to shift to nuclear power. Many low cost hydrosites were developed during the 1950's with the result that in 1962 over95 per cent of the country's total electric energy production came fromhydro plants.

ANNEX 1

page 3

10. Portugal's hydrology is characterized by a low flow season fromItay to November, -with July, jlugust and September being particularly dry.Though storage projects have been built, sites for large reservoirs arescarce and storage is limited.

11. As a result of the Electrification Law, policies and methods wereestablished for determining project priorities. The methods are thorough,if complicated and somewhat theoretical in certain aspects, Prioritiesare established by grading alternative projects in descending order ofeconomic worth, with the gradings periodically revised as the character ofthe load changes. A project, large in relation to market requirementswould rank low, for example, even though attractive on a unit price basis.At a later time, when better suited to market requirements, the same projectmight attain a high rating.

12. The emphasis on hydro has resulted in a system with considerablymore capability in years with average rainfall, than needed to meet firmdemand. '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 becomeuneconomic. This was becoming apparent within the RNC at the time of dis-cussions with Bank staff during 1962 and it is now recognized that additionalconventional thermal facilities will be necessary for economic balance ofthe system as remaining hydro sites are developed.

11.]EX 2

ELECTRIC \j!,RqGY STATISTICS

PORTUGAL

(millions of kwh and megawatts)

Firm Pewer Market Supplied from Primary SystemTotal Energy (SalesT- Per cent

Year Production Energy Demand Energy of Total

1953 1,380 1,l140 234 420 30

1954 1,659 1,276 274 736 44

1955 1,89?0 1,388 295 924 49

1956 2 176 1,546 365 1,149 53

19572/ 22169 1,730 378 12151 53

1958 2,667 1,930 431 1,703 64

1959 2,994 2,133 464 1,877 63

196o 3,263 2L419 501 2,043 63

1961 3,o6l 2,708 590 3,397 94

1962 3,829 3,021 618 3,605 94

1963 4,297 3,324 68h 4h032 94

AverageAnnual Increase 12.0% 11.3% 11.3/to

j Year of low rainfall.

PORTUGAL

EPRESA Tfi4iOELECTPICA PORTUGUESA (ETP)

Actual and Forecast Balance Sheets as of Decnber 11. 1960-1970

(in millions of Escudos)

14$l = Esc. 28.75

Fiscal Year Etaing December 31: ------ Actual- ---- ---- Forecast----1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970Assets

Fixed assets in operation 311.5 311.5 311.5 311.5 533.7 547.7 792.3 1,506.6 1,512.5 1,993.5 2,517.1Less: 3% sinking fund depreciation 7.0 13.3 20.2 24.4 40.3 56.7 73.5 108.6 154.6 216.2 287.4

Net fixed assets in operation 304.5 298.2 291.3 287.1 493.4 491.0 718.8 1,398.0 1,357.9 1,777.3 2,229.7Work in progress U.7 78.2 108.4 175.9 1Q4.3 437.1 615.2 311.1 645.1 469.2 298.1

Total net fixed assets 336.2 376.4 399.7 463.0 597.7 928.1 1,334.0 1,709.1 2,003.0 2,246.5 2,528.1Current assets 102.2 104.0 132.7 138.6 143.0 98.1 96.0 108.2 138.7 145.9 159.2Deferred assets 10.5 7.4 3.8

Total 448.9 487.8 536.2 601.6 740.7 1,026.2 1,430.0 1,817.3 2,141.7 2,392.4 2,687.3

Liabilities

Share capital 185.0 185.0 185.0 185.0 315.0 430.0 510.0 580.0 690.0 760.0 830.0Reserves & surplus 1.6 3.1 4.3 5.1 33.0 62.8 95.1 135.9 169.9 200.4 235.7

Equity 186.6 188.1 189.3 190.1 348.0 492.8 605.1 715.9 859.9 960.4 1,065.7

Debentures 177.2 175.1 172.2 168.0 163.7 159.1 154.3 149.2 43.9 138.3 132.5National Savings i.k 100.0 140.0 134.1 127.8 121.1 114.0 106.4 98.4 89.9National Development Bank 25.0 25.0 25.0 24.2 23.3 22.4 21.4 20.4 19.3 18.1IBRD Loan 363-PO 33.4 95.4 143.7 141.0 135.2 129.2 122.9Proposed IBRD Loan 82.5 254.0 431.8 423.3 405.7 387.1Bank & suppliers' credits 65.5 60.0 25.2 4.0 3.0 2.0 1.0Future loans: Carregado Unit 2 77.0 187.0 313.7 307.5 294.6

Unit 3 77.0 187.0 315.0Unit 4 77.0 187.0

Debt 242.7 260.1 322.4 337.0 358.4 490.1 773.5 1,044.4 1,219.9 1,362.4 1,547.1Less: current portion 7.6 37.8 19.1 12.0 12.8 13.4 16.9 28.2 445 53.3 59.9

Net long-term debt 235.1 222.3 303.3 325.0 345.6 476.7 756.6 1,016.2 1,175.4 1,309.1 1,487.2

Current liabilities 15.2 65.4 31.6 73.5 34.1 34.7 38.2 49.5 65.8 74.6 81.2

Dividends* 12.0 12.0 12.0 13.0 13,0 22.0 30.1 35.7 40.6 48.3 53.2

Total 448.9 487.8 536.2 601.6 740.7 1,026.2 1,430.0 1,817.3 2,141.7 2,392.4 2,687.3Debt as % of capitalization 56 54 62 63 50 49 56 59 58 58 58

Calculation for straiehtlinedeoreciation at 3.33%

Fixed assets in operation, as above 311.5 311.5 311.5 311.5 533.7 547.7 792.3 1,506.6 1,512.5 1,993.5 2,517.1Less: accumulated depreciation, d 3.33% 15.6 26.0 36.4 46.8 64.6 82.8 109.2 147.6 198.0 264.4 339.5

Uet fixed assets in cperation 295.9 285.5 275.1 264.7 469.1 464.9 683.1 1,359.0 1,314.5 1,729.1 2,177.6

Average net fixed a-::ets ln operation 290.7 280.3 269.9 366.9 467.0 574.0 1,021.0 1,336.7 1,521.8 1,953.4

X Declared fcur .onths altcr ti.e clcse of tle yoor andi payable arnually.

February 10. 1965

PORTUGAL

E:.IPRESA TEROULECTRICA OPRTUGU3SA (ETP)

Actual and Forecast Income Statements 1960-1970(in millions of Escudos)

US$1 = Esc. 28.75

- -- -- Actual -------- -- -Forecast--Fiscal Year Ending December 31: 1960 1261 1962 1963 964 1965 1966 1967 1926 1969 1970

Groso revenues 38.6 41.8 54.4 51.8 136.0 124.0 149.0 265.2 334.4 404.3 460.4

Oost of operationsFuel & other variable costs 6.4 9.2 20.4 17.9 48.1 25.0 37.0 90.5 114.0 136.5 165.0General expenses 3.4 3.0 4.2 3.6 5.2 5.5 5.9 12.4 16.2 19.5 21.2Maintenance & repairs .3 .6 .8 1.1 3.5 4.0 4.5 8.1 17.6 25.1 25.1Administration & taxes 3.4 3.7 5.9 3.5 5.0 5.5 8.2 15.6 18.5 19.7 20.8Equipment replacement 4.7 4.7 4.9 4.9 14.8 15.3 15.7 32.7 42.9 57.4 66.4Investment redemption .5 .5 .9 .1 1.1 1.1 1.1 2.4 3.1 4.2 4.8

Sub-total cost of operations 18.7 21.7 37.1 31.1 77.7 56.4 72.4 161.7 212.3 262.4 303.3

Net income before interest 19.9 20.1 17.3 20.7 58.3 67.6 76.6 103.5 122.1 141.9 157.1

Interest & other financial charges 8.6 11.7 14.1 15.6 21.6 28.4 39.0 53.0 65.3 74.0 84.5Less: issue expenses capitalized (1.0) (2.2) (1.6) (1.0) (1.5) ( .7) (1.1)

interest capitalized (2.2) (5.4) (7.9) (10.0) (3.2) (10.4) (23.2) (25.0) (16.3) (10.2) (14.8)Interest charged to operations 6.4 6.3 6.2 5.6 17.4 15.8 14.2 27.0 47.5 63.1 68.6

Net profit 13.5 13.8 11.1 15.1 40.9 51.8 62.4 76.5 74.6 78.8 88.5

Dispositioh of profitl/Reserves .7 .8 .6 .7Dividends & interest on new shares 12.0 12.0 12.0 14.8 13.0 22.0 30.1 35.7 40.6 48.3 53.2Contribution to expansion 14.6 34.6 40.8 40.8 34.0 30.5 35.3Balance forward .8 1.0 (1.5) (.4) 13.3 (4.8) (8.5)

Calculation for straightline depreciation ( 3.33%

Gross revenues, less operating expensesY/ 25.1 25.3 23.1 25.7 74.2 84.0 93.4 138.6 168.1 203.5 228.3Less straightline depreciation @ 3.33% 10.4 10.4 10.4 10.4 17.8 18.2 26.4 38.4 50.4 66.4 75.1

Adjusted net income before interest 14.7 14.9 12.7 15.3 56.4 65.8 67.0 100.2 117.7 137.1 153.2Return on average net fixed assets in operation - 5.1 4.5 5.7 15.4 14.1 11.7 9.8 8.8 9.0 7.8

1/ Estimates for 1964-70 indicate ability of comparn to meet revenue requirements regarding dividends and contribution to expansion2/ Excludes equipment replacement and investment rederrption

February 10, 1965

PORTUAL AIN

EMPRESA TERMOELECTRICA PORTUGUESA (ETP)

Forecast Sources 1; Aplication o0 Funds 196b-1970(in maillions oi' Escudos)

lEe1 = Esc. 28.75

Sub-total TotalFiscal Year Endinp December 31 192 196S a"i 197 1968 1696 1970 7 vears

SOURCES OF FUNDS

Internal Cash GenerationNet income before interp= t 58.3 67.6 76.6 103.5 306.0 122.1 141.9 157.1 727.1Depreciation equival ent 15.9 16.4 16.8 35.1 8b. 46.0 61.6 71.2 26.0

74.2 84.0 93.4 138.6 390.2 168.1 203.5 228.3 990.1New share capital 130.0 115.0 80.0 70.0 395.0 110.0 70.0 70.0 645.0

BorrowingsIBRD Lean No. 363-PO 33.4 62.0 48.3 143.7 143.7Proposed IBRD Loan 82.5 171.5 177.8 431.8 431.8Future Loans: Carregado Upit 2 77.0 110.0 187.0 126.7 313.7Unit 3 77.0 110.0 128.0 315.0

Unit 4 77.0 110.0 187.033.4 144.5 296.8 287.8 762.5 203.7 187.0 238.0 1,391.2

TOTAL SOURCES 237.6 343.5 470.2 496.4 1,47.7 481.8 460.5 536.3 3,026.3

APPLICATION OF FUNDS

Additions to plantTapada do Outeiro Unit 2 47.2 14.0 61.2 61.2

Unit 3 56.0 100.0 74.0 18.5 248. 248.SSub-total 103.2 114.0 74.0 18.5 309.7 309.7

Carregado Thers l PlantUnit 1 (The Project) 37.0 202.0 226.0 212.9 677.9 677.9Unit 2 16.7 95.9 143.0 255.6 177.7 22.0 455.3Unit 3 7.3 7.3 141.4 169.4 186.3 504.4

Unit 4 __99.3 147.1 _46.4Sub-total 37.0 218.7 321.9 363.2 940.8 319.1 290.7 333.4 1,S84.0

Nuclear Studies 6.2 1.5 2.0 2.5 12.2 3 3.5 3,5 22 '146.4 334.2 397.9 384.2 1,262.7 322.1 294.2 '36.9 2,215.9

Working Capital Variations 25.2 (9.0) 12.0 28.2 20.0 20.0 68.2

Intcrest2/Debentures 8.3 8.1 7.9 7.8 32.1 7.4 7.1 6.9 53.5National Savings Bank 9.0 8.6 8.2 7.8 33.6 7.3 6.8 6.3 54.0National Development Bank 1.5 1.5 1.4 1.3 5.7 1.3 1.2 1.1 9.3IURD Loan No. 363-PO 1.2 4.2 6.6 7.9 19.9 7.7 7.4 7.0 42.0Proposed IBRD Loan 3.8 10.2 19.2 33.2 23.8 23.3 22.3 102.6Local Loanss TdO Uniits 2 & 3 0.6 0.6 0.6Future Loans: Carregado Unit 2 3.1 8.0 11.1 14.0 17.3 16.9 59.3Unit 3 2.3 7.9 15.1 25.3Unit 4 __ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _23 7.8" 10.120.6 26.2 37.4 52.0 136.2 63.8 723.3 83.4 356.7

Amortization

Debentures 4.3 4.6 4.8 5.1 18.8 5.3 5.6 5.8 35.5National SavingsBank 5.9 6.3 6.7 7.1 26.0 7.6 8.0 8.5 50.1National Development Bank 0.8 0.9 0.9 1.0 3.6 1.0 1.1 1.2 6.9IURD Loan No. 363-Po 2.7 2.7 5.8 6.0 6.3 20.8Proposod IBRD Loan 8.5 17.6 18.6 44.7Future Loans: Carregado Unit 2 6.2 12.9 19.1Unit 3

Unemployment Fund Loan 1.0 1.0 1.0 4.0 4.012.0 12.8 13.4 16.9 55.1 28.2 44.5 53.3 lS'l.l

Dividends 13.0 13.0 22.0 30.1 78.1 35.7 40.6 48.3 202.7

Di-count & Issue Expenses 1.0 2.2 1.6 1.0 5.8 1.5 0.7 1.1 91TOTAL APPLICATIONS 218.2 388.4 463.3 496.2 1,566.1 471.3 453.3 543.0 3,033.7

Caso at beginning of year 31.5 50.9 6.o 12.9 31.5 13.1 23.6 30.8 31.5

Cash surplus or (deficit) 19.4 (44.9) 6.9 0.2 (18.4) 10.5 7.2 (6.7) (7.4)

Cash at enid of year 50.9 6.o 12.9 13.1 13.1 23.6 30.8 24.1 24.1Number of times intezest covered

by net income 2.8 2.6 2.0 2.0 1.9 1.9 1.9

Number of times debt service coveredby internal cash generation 2.3 2.2 1.8 2.0 1.8 1.7 1.7

J Equipment replacemcnt and investment redemptionJ Includes capitalizedl interest

February 9. 1965

g f-.,..,.--* ---..-....-- 8rogonrso 0

Viono do SALA.E. .Costelo CAN / 'A

B,og Existing I/ED plants MIRA C

\ /D Vito Real s M PC B OA

0

CoTAVORInecnet o

TAPADCA SLDO (FUrUR BOD

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JUL I96 IBR-IIBR

O / // Jr / ~~~~~~~~~~~~Portolegreo *

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R / /^' &/CA~~RREGADO THERMAL PLANr . POWER PROJECTS1 1 //.~e<°t° 4r/25Mw Ul!imotre Crporci/y

/ / / / . EEI~~~~~~~~~~~~~~~~~~~ Hydro plaJnts. existing or

( d E/KI * ~~~~~~~~~~~~~~~~~~~~under construction

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S O~~~~~~~~~~~~~~- IBRD Project

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JULY 1964 IBRD-1138R12