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 maynot 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

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CURRENCY EQUIVALENTS

US $ = Esc. 28. 75Esc. 1 = $. 035Esc. 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 6The Project 7Engineering and Supervision of Construction 7Cost Estimate 7Schedule of Construction 8Financial Aspects 8

VIII. EMPRESA TERMOELECTRICA PORTUGUESA - ETP 13

The Borrower 13The Project 13Financial AsDects 14

IX. CONCLUSIONS 18

LIST OF ANNEXE

1. Electric Energy Production in Portugal2. Forecast of Electric Energy Requirements and Source3. Bemposta Hydro Project - Cost Estimate4. Hidro Electrica do Douro (HED) - Actual and Forecast Balance

Sheets as of I>oeember 31., 1959 through 19675. Details of HED's Debt6. Hidro Electrica do Douro (HED) - Actual and Forecast Income

Statements 1959 through 19677. Hidro Electrica do Douro (HED) - Forecast Sources and

Applications of Funds 1963-19678. Tapada do Outeiro - Unit 3 - Cost Estimate9. Empresa Termoelectricn Portuguesa (ETP) - Actual and Forecast

Balance Sheets as of December 31, 1960 through 196810. Empresa Termoelectrica Portuguesa (ETP) - Actual and Forecast

Income Statements 1960 through 196811. 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 infinancing a part of the country's power expansion program. Subsequentdiscussions led in late 1962 to two loan applications, one from HidroElectrica do Douro (HED) and the other from Enpresa TermoelectricaPortuguesa (ETP). The application by HED was for the financing of two bydroprojects, one of which has since been withdrawn as a result of a changein the Portuguese power development program; ETP's anplication was for theexpansion of an existing thermal station. The projects now proposedprovide 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 interestduring construction; the Bank loans would finance about 28 percent of thistotal.

ii. The projects would add 210 Mg of hydro capacity and 50 MW ofthermal capacity to the Portuguese primary power system. Upon completionof the projects, and others now under construction, the total generatingcapacity of this system would be increased to about 1,500 MW.

iii. HED and ETP are organized as private stock companies, but theGovernment's control of their policies, its close supervision of theiractivities and its considerable share in their financing give them a quasipublic character. They are well managed and organized, and capable tocarry out and to operate the projects.

iv. A substantial portion of HEDTs capitalization is in the form ofshort term advances, credits and loans. Satisfactory arrangements havebeen made for funding or extending these debts.

v. The Government has agreed to make appropriate tariff adjustmentsto 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 inload 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 atwo year grace period, and of

- $5 million, to ETP, for a 20 year term, including a fouryear 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 aloan for the Portuguese power sector. Subsequent discussions between Bankstaff and Portuguese officials in Lisbon indicated that a loan could beused most effectively to assist the orogramsof two companies, HidroElectrica do Douro (HED) and Enpresa Termoelectrica Portuguesa (ETP). Thesediscussions also indicated a need to clarify certain planning principlesfollowed in formulating a long range power program before proceeding withan appraisal. After this question had been settled, a field appraisal wasmade during January 1963. Subsequently the Portuguese Government decidedto postpone one of the hydro projects proposed by HED and to replace it witha new thermal station. This decision is in line with recommendations madeby Bank staff. The new thermal station will be located near Lisbon, andETP is presently reviewing proposals from engineering firms, one of whichwill be selected to prepare feasibility studies and cost estimates. Thecost 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 thefirst stage of this station after the feasibility study has been prepared.

2. The HED loan of $7.5 million would assist in financing theBemposta hydro power plant, the total cost of which is estimated at $35million. The ETP loan, amounting to $5 million, would assist in financingthe expansion of an existing thermal station at Tapada do Outeiro, thefull cost of which is estimated at $9 million. The loans would be disbursedagainst both foreign and local expenditures.

II. THE PCTWER INDUSTRY

3. A reorganization of the Portuguese electric power industry wasbrought about by the National Electrification Law of December 1944, whichwas later modified by a decree-law of December 1960. Pursuant to the moreimportant provisions of the legislation:

(a) power production would 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;

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(d) large existing utilities (with generation and distributionfacilities) would form the secondary svstem; 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;

t (f) the Government would establish tariffs.

4. The primary system created as a result of this legislation consistsat present of the facilities of five companies, established between 1945 and1954. There are three hydro companies, including HED (one of the proposedborrowers), each with a 75 year concession to develop a specific river basinor area; a thermoelectric company, ETP (the other proposed borrower); anda nation-wide transmission company. At the end of 1962 the installedcapacity of the primary system was 959 MW, of which 909 MW were hydro and50 MW were thermal. The installed capacity of the secondary system was363 MW, of which 261 were hydro and 102 MW were thermal. An extensivesystem of transmission lines connects all generating plants with the loadcenters.

5. The five companies were organized as private stock companies alongsimilar lines. The law permits participation for up to 50 percent 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 mostimportance shareholder of HED and ETP (see paragraphs 42 and 73). Govern-ment controlled financial institutions also hold most of the debt of thesecompanies.

6. 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 Boardelects a Chairman, who is also the chief executive officer. Each companyhas a three member supervisory committee which reviews company accountsand approves major financial decisions. One of the members is selectedby the Government and two by the shareholders.

7. The Electrification Law also led to the creation of a NationalLoad Dispatching Organization (Repartidor Nacional de Cargas - RNC),responsible for the technical coodination of all power generation. Moreimportant, RNC is also responsible for statistical and economic studiesrelating to the national power program, and for establishing projectpriorities within the program. It is administered by a council representingthe operating companies of the primary system, the utilities of thesecondary system, distributing companies and the Government. It is managedby an Ex-ecutive Committee of five members. The Government representative,chairman ex officio, is an official of the Office of the Director-General

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for Electrical Services of the Ministry of Economy, the Government Officeresponsible 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 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.

9. The Government is also primarily responsible for ensuring availa-bility of the large funds required for the companies' expansion because ofGovernment regulation of the financial market and the large demand on theGovernment controlled financial institutions, which provide most of theborrowed funds as well as the share capital. The Government determines theamounts 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 hasin fact the ultimate responsibility for their policies through its controlof their expansion plans, sources of finance, management and allocation ofrevenues.

III. PLANNING PRINCIPLES

11. Portugal's hydro energy resources are large in comparison withenergy sources of indigenous fuel. The Electrification 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 planned to shift to nuclear power. Many low cost hydrosites were developed during the 1950's with the result that in 1962 over95 percent of the country's total electric energy production aame from hydroplants.

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

13. 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 of

the 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.

14. 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. The next major plantaddition after completion of the 50 MW exDansion of ETPFs thermal stationin the North, will therefore be a 500 MW thermal station (4 x 125 MW), tobe constructed by ETP near Lisbon. This plant will firm up system capacityso that 90 percent of the hydro energy theoretically available in an averagehydrological 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 delayedso as to come into operation along with the third and fourth 125 MW thermalunits of the new Lisbon station.

IV. POVER MARKET

15. With the predominant amount of hydro capacity existing in thePortuguese power system at oresent, substantial amounts of non-firm energyare usually available. This energy is called "non-permanent" and issupplied to power intensive industry served directly from the primarysystem. Firm energy from the primary system is supplied to the utilitiesof the secondary system. Expansion plans are based on the estimated increasein firm energy requirements.

16. Total load and energy consumption have increased rapidly since theearly 1950's, total consumption increasing by about 13 percent annually.Firm energy requirements grew at a lower but still rapid rate of about11 percent. For comparison, in western Europe as a whole, power consumptionincreased 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 percentof Portugal's total energy requirements. By 1955 its share of the market wasalmost 50 percent and in 1961, 70 percent. This is shown in Annex 1.

18. For planning purposes firm energy requirements are estimated tocontinue growing at about the same rate as in the past. Over the period1963-1970 they would thus increase from 3.4 to 7 billion kwh or at anaverage annual rate of 10.6 percent. Total energy production, includingestimated supplies of non-permanent energy, would increase over the sameperiod from 4.5 to 8.5 billion kwh. This would represent an increase inload from 869 MW in 1963 to 1,624 MA in 1970. These projections arereasonable. Details are shown in Annex 2.

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V. CURRENT PROGRAM

19. Three hydro plants and one thermal addition are under constructionby the companies of the primary system. The thermal additions a second 50 MWunit at the Tapada do Outeiro plant of ETP, will be completed by the end of1963 (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 isconstructing the Bemposta and Tavora projects and Hidro Electrica do Cavado(HICA) the Pisoes project. When these are completed the primary system willhave about 1,300 MW total capacity, and the country about 1,700 Mg. Of thetotal, aDproximately 1,500 MW or 88 percent, will be hydro. In average wateryears, the short term peaking #pacity of the public system would be about1,200 YS. This could be reduced by 30-40 percent, however, in criticallydry years. Further capacity to be added will be primarily from thermalsources, as described in paragraph 14.

20. The completion of the Bemposta plant mentioned above and the 50 MWexpansion at Tapada do Outeiro would form the basis for the proposed loansto HED and ETP.

VI. TARIFFS

21. The aggregate proceeds of hydro power sales to CNE, at tariffsfixed by decree, are divided among the three hydro companies, in principleby 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 Generalfor Electrical Services and are based on closely reviewed estimates of totalhydro generation and of the particular revenue requirements of each company.As a result of this arrangement, HED and the other two hydro companiesobtain revenues which, though depending on the total generation, are nottied to their individual contribution of energy to the system.

22. ETP will take part in these arrangements when larger and moreregular thermal generation makes it practical, i.e. when the third 50 MWunit comes into service. Until that time the present arrangements will becontinued under which CNE contracts (a) to pay ETP specified amounts coveringall fixed charges, including fixed operating expenses, debt service and alsodividends and (b) to buy all the energy generated at a tariff calculated tocover variable operating expenses. The contract is approved by decree, alsobased on the detailed studies and recommendations of the Office of theDirector General for Electrical Services.

23. Under existing regulations, revenues generally provide for:(a) operating expenses, including taxes; (b) two provisions, in lieu ofdepreciation, based on 3 percent notional sinking funds for (i) renewingequipment over a 25 year period and (ii) redeeming the original investment,less half of the investment in equipment, over the remaining life of theconcession (actually a period of 50 to 75 years); and (c) a return of6 percent on the original investment. How the provisions in lieu of depreci-ation compare with straightline depreciation at conventional rates may beseen in Annex 6 for HED and Annex 10 for ETP.

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24. Following the above method, at the end of a concession the originalinvestment could be paid-off and the residual value of properties turned overto the State free of charge as provided by law. These rules are particularlyunfavorable 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 debtnecessary to finance their investments on the terms normally available. Inpractice this has been compensated by a flexible application of the rules,made possible by the Government's close supervision and understanding ofthe companies' finances and also, for the senior companies in the system, bythe low cost at which funds were originally borrowed. In view of thehigher interest rates now prevailing and the scarcity of long term resources,however, substantially higher revenues are required for the more recentcompanies, HED and ETP, to finance expansion adequately.

25. In connection with the proposed loan, the Government prepared atentative plan to increase power rates so as to provide the four generatingcompanies 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, includingcapitalized interest.

26. The financial forecasts prepared on this basis showed adequateearnings for HED and ETP, as discussed in paragraphs 60 and 84. TheGovernment and the two companies have agreed to incorporate these principlesinto a rate covenant. The Government is now carrying out a general reviewof its tariff system for the entire country, in part to implement itsundertakings under the rate covenant. The new tariff system is expectedto come into force early in 1964. The Government has agreed to provide thenecessary 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 primarysystem, was formed in 1953 to develop the hydro electric resources of theDouro River and some of its tributaries. The Company is well staffed andfully capable of designing, constructing and operating the project.

28. The Douro River originates in Spain, then becomes the internationalborder between Spain and Portugal for a stretch called the InternationalDouro, and eventually turns into Portuguese territory for the rest of itscourse. 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 ofwater, power exchange, navigation on the navigable part of the river andtechnical cooperation as well as the apportionment of the InternationalDouro for hydro power uses. Spanish and Portuguese authorities arecooperating in the implementation of the Agreement and in the operation of

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existing plants on the respective national sections of the river as wellas on the International Douro.

29. HED's early planning was aimed at developing Portugal's stretchof the International Douro. A three stage development was selected.Picote, with three 60 MW units, began operations in 1958 and Miranda, withthree 52 MI units in 1960. Construction of the third, Bemposta, began in1960 and will be completed in 1964. All are run-of-river installationswith only weekly pondage.

The Project

30. Bemposta, which will have a capacity of 210 MW, is the last andfarthest downstream of the three hydro developments on Portugal's stretchof 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-gatecentral spillway. The lower center part of the dam is hollow to reduce thevolume of concrete. The gross head developed will be 69 meters. The powerintake on the right abutment will be connected by short penstocks with threeturbines) 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 aswitchyard on the right abutment. The average annual energy production willbe 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 andstaffed with over 100 engineers and technicians. Individual consultants areengaged to review particular problems but the company generally does allengineering design and supervision of construction with its own forces.Design is based on excellent hydrological records and thorough geologicalinvestigations.

33. HED secures competitive international bidding before awardingmajor contracts. Procedures are generally satisfactory; bid evaluationsare 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 contractsalready awarded.

Cost Estimate

35. Total cost including interest during construction is estimated atEsc. 1,010 million ($35 million). This is equivalent to $116 per kilowattinstalled, a low cost for hydro capacity. Approximately Esc. 500 millionhad been spent through 1962. The proposed loan would finance Esc. 216

2/ The ratio of lsable energy to theoretical maximum energy that couldbe generated by total capacity operated 100% of the time.

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million ($7.5 million) of the remaining construction costs of aboutEsc. 510 million, including some expenditures made during 1963. Contin-gencies of about 14 percent, which should prove ample, are included in theestimate of remaining construction costs. The estimate is shown in Annex 3.

Schedule of Construction

36. Construction of Bemposta is well advanced. The first of thethree 70 MW units should be in operation early in 1964, the second by themiddle of the year and the last by the end of the year.

Financial Aspects

37. Audit: The financial statements of HED are certified by itssuoervisory committee as required by law and its statutes. The supervisorycommittee, however, is not required to, and does not oarry out a completeaudit of the accounts. The company has agreed to retain independentaccountants for this purpose.

38. Present Financial Position: Condensed balance sheets for thefiscal years ended December 31, 1959 through 1962 are shown in Annex 4.As of December 31, 1962, fixed assets in service, the Picote and Mirandaplants, totalled Esc. 1,580 million ($55 million) at historic cost; con-struction work in progress, mostly on the Bemposta project, was Esc. 670million (423 million); net current assets were about Esc. 58 million($2 million).

39. Reserves in lieu of depreciation, for equipment renewals andinvestment redemption, totalled Esc. 60 million ($2 million). To evaluateHEDts financial position in terms of returns on investment, a calculationwas made of the depreciation which would have been charged over HED's4 years of operation, had the standard straightline method been followedat an assumed rate of 2 percent annually. On this basis, reserves ofabout Esc. 88 million ($3 million) would have accrued, leaving net fixedassets in service of about Esc. 1,492 million ($52 million) as shown inAnnex 4.

40. The December 31, 1962 capitalization, broken down by main sourcesof funds, was as follows (in millions of Escudos):

Share Long & medium Advances andSources Capital Debentures term loans credits Total

Social securityinstitutions 419.6 278.9 - _ 69g.5National Develop-ment Bank 130.6 - 222.5 216.7 569.8National SavingsBank - 215.0 - 215.0Public 329.8 281.4 - - 611.2Commercial 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)

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41. The capitalization, excluding insignificant reserves and surplus,was Esc. 2,185 million, of which paid-in share capital was Esc. 880 millionand 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, isrepresented by 880,000 shares with a par value of Esc. 1,000. The sharesare nominative (registered) or bearer shares. Two-thirds must be in the nameof Portuguese nationals. About 48 percent of the shares were owned bysocial security institutions, 15 percent by the National Development Bankand the balance, or 37 percent, by private investors.

43. About Esc. 560 million of unsecured, 5 percent 30 year debentureswere outstanding under eight series issued locally between 1955 and 1960.A ninth series of otherwise similar 25 year debentures, totalling Esc. 110million, was issued earlier this year bringing the total to Esc. 670 million.Including the last issue, almost 60 percent of debentures outstanding areheld by social security institutions, the balance by the public.

44. HED's other borrowings totalled Esc. 745 million with interestaveraging 5 to 5j percent, as detailed in Annex 5. All borrowings are inlocal currency except for $3.15 million (Esc. 90 million), the proceeds offoreign medium term borrowings relent by the IJational Development Bank.All were raised from two Government controlled institutions, the NationalDevelopment Bank and the National Savings Bank, except for three to sixmonth short term credits from commercial banks, totalling about Esc. 90million.

45. Most borrowings were for short or medium terms, regularly renewedon maturity. Of the total Esc. 745 million borrowings mentioned above,Esc. 307.5 million were three to six months advances and credits andEsc. 215 million were National Savings Bank one year loans subject to renewalwithout limit for additional periods of one year. The balance consisted ofthe $3.15 million (Esc. 90 million) loan already referred to, which isrepayable in three equal annual tranches starting 1964, and of three 20 yearloans, totalling Esc. 132.5 million, from the National Development Bank.

46. Part of the Esc. 307.5 million advances and credits were fundedthis 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 millionbalance of advances and credits, the Esc. 215 million one year loans fromthe National Savings Bank (since reduced to Esc. 209 million), and Esc. 66.2million of short term credits incurred in connection with the take over ofthe Tavora project as described in paragraph 49. Funding would be by a sharecapital issue of Esc. 200 million and by 15 year loans totalling Esc. 362.5million, to be obtained from the National Savings Bank and the NationalDevelopment Bank. These long term resources would exceed the amounts to befunded by some Esc. 90 million, which would be applied to the financing ofHED's current expansion.

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47. After the above funding has taken place, HED's capitalizationwould be entirely in share capital, debentures and long term loans exceptfor: (a) the Esc. 90 million medium term loan, described in paragraph 45;(b) Esc. 73.8 million of medium term loans and advances incurred inconnection 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 itemincludes, in addition to short term facilities to be repaid within thsyear, two loans obtained from US commercial banks with the guarantee of aprivate local bank (The Banco Pinto y Sotto Mayor); one loan is for$4 million (Esc. 114.5 million), interest at 7 percent, repayable in fourequal annual tranches starting 1964; the other is for $2.5 million (Esc. 71.6million), interest at 6.3 percent, due next year. The comnany indicatedthat the above loans, totalling Esc. 349.9 million, would be funded as theymature over the next four years; Esc. 204 million in 1964, Esc. 58.6 millioneach in 1965 and 1966 and Esc. 28.7 million in 1967. With respect to futureborrowings, including those necessary to fund the above loans as they mature,HED has agreed to borrow on terms reasonably related to future earningcapacity and to limit short term prefinancing of expansion to amounts thatcould reasonably be expected to be repaid on maturity out of the proceedsof share capital issues, long term borrowing or earnings.

48. The Tavora Project: In December 1962, HED took over managementof the Tavora project from Hidro Electrica Portuguesa (HEP), a privateutility of the secondary system. The purchase by HED, on Government instruc-tions and already contemplated in its concession, will be finalized withina few months. No cash is involved as HED will take over the liabilitiesand issue shares to HEP for the balance of the purchase price.

49. Construction work in progress at the time of take over wasestimated at Esc. 359 million ($12.5 million) financed in a 42/58 ratioof share capital of Esc. 150 million ($5.2 million) and debt, Esc. 209million ($7.3 million). The debt consisted of Esc. 69 million of 20 to25 year debentures and Esc. 140 million of short term loans and credits, ofwhich Esc. 66.2 million would be funded this year and Esc. 73.8 millionnext year, as already indicated.

50. Past Farnings: A summary of actual income statements for thefiscal years 1959 through 1962 is shown in Annex 6, along with a proformaadjustement of net income and returns for 2 percent straightline depreci-ation (paragraph 39). The adjusted returns for the four years, respectively4.1, 6.8, 5.3 and 5 .* percent were somewhat low, considering the averagecost 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 ofoperation, through 1960 and at 6 percent for fiscal years 1961 and 1962.Dividend payments may be deferred until the specific assets for whichshares were issued are in service. But, starting 1960, HED used a provisionin the law and its statutes allowing payment of a preferential 4 percent"interest" on new shares, for a maximum period of three years.

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52. Financing Plan: A forecast of sources and applications of fundsfor the five years through 1967 is given in Annex 7. This forecast assumedthat in addition to the current program, HED would start construction ofthe 180 MW Carrapatelo project in 1965 for completion in 1970.

53. In the three year period through 1965, during which the Bempostaand Tavora projects would be completed, capital exrenditures, includinginterest during construction, are expected to total about Esc. 947.1 million.Funding existing short term advances and loans would require Esc. 582.7million 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 capitalduring the period, would bring the three years' requirements to aboutEsc. 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 17.7Tavora 198.1 22.0 36.0 256.1 8.9Studies etc. 9.0 7.0 7.0 23.0 .8Carrapatelo 158.0 158.0 5.5

520.6 205.5 221.0 947.1 32.9Funding 582.7 204.0 (58.6 845.3 29.4Cash 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 tooperations 43.5 72.4 102.0 217.9 7.6amortization of longterm debt 18.3 3.6.4 52.1 106.8 3.7dividends 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 forexpansion 24.1 53.0 30.0 107.1 3.7Share 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 7.5Debentures 110.0 - - 110.0 3.8National Develop-ment Bank 142.5 - 142.5 5.0National Savings Bank 220.0 - - 220.0 7.6

(Cont'd.)

- 12 -

1963 1964 2 1965 Total 3 years

(Debt Cont'd.)Banco Pinto y SottoMayor 186.1 - - 186.1 6.5New 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 interestchargeable to operations, amortization of existing debt and cash dividendsassumed at 8 percent) and Esc. 400 million from share capital issues. Thecompany has already taken the necessary steps to place an issue of Esc. 200million in the near future and prior to effectiveness of the proposed Bankloan, as indicated in paragraph 46.

56. The borrowingscontemplated would total Esc. 1,343.6 million orabout 73 percent of the period's requirements. However, in view of thelarge amounts of short term debts to be funded, the net increase in debtduring the period would be less than Esc. 500 million, as compared withthe Esc. 507 million to be financed from HED's own resources as indicatedabove.

57. The proposed Bank loan of $7.5 million (Esc. 216 million) isassumed to carry interest at 5-z percent and a term of 25 years, includinga two year grace period.

58. The other borrowings would include: (a) the Esc. 110 milliondebenture issue already realized; (b) two loans, totalling Esc. 186.1million, already obtained from Banco Pinto y Sotto Mayor, and (c) two 15year loans, totalling Esc. 362.5 million, which would be obtained prior toeffectiveness of the proposed Bank loan from the National Savings Bank andthe National Development Bank,at an assumed interest rate of 7 percent.About Esc. 469 million would still be needed to complete the period'srequirements, 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 necessaryto carry out the project should HED be unable to raise these funds fromthe normal sources of financing.

60. Estimated Future Earnings and Financial Position: Forecast incomestatements for the five years through 1967 are shown in Annex 6. The returnon average net fixed assets in operation, adjusted for 2 percent straight-line depreciation, would increase from an estimated 6.6 percent in 1963 to8.1 percent in 1964, reflecting increased power revenues. After a smallsetback to 7.3 percent in 1965, returns would increase to 8.6 Percent in1966 and 1967 respectively.

- 13 -

61. As shown in Annex 7, net income, after deduction of the provisionsfor renewals and redemption, would cover total interest charges 1.2 and2.0 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 timesin 1963 and 1.7 times thereafter by internal cash generation. Starting 1965,internal cash generation would be sufficient to cover all debt servicepayments, including maturities to be funded. Coverages would increase from1.3 in 1965 to 1.5 times in 1967. These coveragqs are adequate.

62. Forecast balance sheets as of December 31, 1963 through 1967 areshown in Annex 4. These indicate a ratio of debt to capitalizationimproving from 59 percent in 1962 to about 54 percent by 1967. HED hasagreed to a covenant limiting its long term indebtedness to a maximum oftwice 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 constructplants for firming-up the hydro capacity of the primary system in criticallydry 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 finalexpansion 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 overheadconveyor systems. The first unit was completed in 1959. A second identicalunit is now under construction, with completion expected later this year.

64. The installation of the third unit, which would be partiallyfinanced by the proposed loan, would complete the station. Future largescale thermal plant construction is planned by ETP in the south near themain load centers and forecasts below are based on this expectation. Thenew plant will be fired by imported oil due to the scarcity of indigenousfuels.

The ProJect

65. The project would consist of the addition of the third 50 MW unitin the Tapada do Outeiro Station. It would have similar characteristics asthe first two units. Basic features include pulverized coal fired boilerswith a capacity of 210 tons of steam per hour and turbines operating at apressure of 1,200 p.s.i. and a temperature of 9680F. The project wouldalso include the feasibility study for the new thermal plant to be builtin the Lisbon area.

66. ETP supervised the installation of the first two units withoutconsulting assistance. The work was divided into two major packages, theboiler and accessories and turbo-generator and accessories. Proposals fordesign, fabrication and erection were invited based on specificationsprepared 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 necessaryinterconnecting and related drawings, specifications for miscellaneousitems and, in general, all engineering, coordinating and supervisingfunctions required to complete the job.

67. The procedures outlined above would be followed for the thirdunit. The installation would present no new problems, being identical inall important aspects to the installations already made. In these circum-stances, the procedures proposed by ETP are acceptable. The Government andETP have agreed to international competitive bidding with a formula whichdefines the preference to be granted to Portuguese industry in evaluatingbids and which will be included in the bid invitations. A margin ofprotection for articles manufactured in Portugal of up to 15 percentwill be allowed, in lieu of the custom duties normally applicable which inmost cases are considerably higher.

68. The installation of the third unit is expected to cost aboutEsc. 258 million ($9 million) including interest during construction ofabout Esc. 18 million ($0.6 million). The estimate is based on secondunit costs with ample contingencies added. The proposed loan would financeabout Esc. 140 million ($4.85 million), or about 54 percent. The estimateis shown in Annex 8. The loan would also include $150,000 for engineeringstudies for the planned Lisbon thermal plant.

69. Fabrication and erection should require about 30 months after majorcontracts are awarded. Bids would be invited during the last quarter of1963 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 (seeparagraph 37).

71. Present Financial Position: Condensed balance sheets for thefiscal 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 wereEsc. 313.0 million ($10.9 million); construction work in progress wasEsc. 107 million ($3.7 million); current assets were Esc. 133 million($4.6 million), about four times the current liabilities, of Esc. 32million ($1.1 million). Current assets included coal inventories for aboutEsc. 75 million ($2.6 million). These large inventories accumulated ascoal supplies purchased on a long term contract exceeded ETP's requirementsduring the first few years of operation. Based on the existing contract andthe forecast increases in generation of expanded facilities, the increasein coal inventories should stop this year. During 1965 and 1966 they wouldbe reduced to a reasonable level, about half of the present one. Reservesfor equipment renewals and investment redemption totalled about Esc. 20million, as compared with the estimated Esc. 36 million depreciation reserve,which would have accrued over ETP's 4 years of operation, had straightlinedepreciation 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 or62 percent as follows (in millions):

Escudos $ eauiv.

Sbare capital: 185,000 shares at Esc. 1,000 par 185.0 6.4Reserves and surplus 4.3 .2

189.3 6.6Debt5 percent, 25 year, unsecured debentures 172.2 6.0National Development Bank loan, 6 percent, 20 years 25.0 .9National Savings Bank loan 100.0 3.4Banks, 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 16.2Other primary grid companies 26.0 14.1

Sub-total: primary grid 56.0 30.3

Other power companies 19.4 10.5Mining Companies 7.1 3.8

National Development Bank 43.3 23.4Social Security Institutions 50.0 27.0

Sub-total financial institutions 93.3 50.4Public 9.2 5.0

185.0 100.0

74. The Esc. 25 million National Development Bank loan of July 1961was 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 about7 percent and the term of the loan at least 15 years, as assumed in thisreport. The balance of ETP's debt is in short term bank loans and a smallamount of suppliers' credits.

- 16 -

75. Past Earnings: A summary of ETP's actual income statements forfiscal years 1960, 1961 and 1962 is shown in Annex 10, along with a pro-forma adjustment for 3.33 percent straightline depreciation. The adjustedreturns on average net fixed assets in operation were low, about 5 percentin 1960 and 1961 and 4.5 percent in 1962. The Company started paying5 percent dividends in 1960. Statutory 4 percent interest is paid on newshare capital on the same basis as already described for HED (paragraph 51).

76. Financing Plan: A forecast of sources and application of fundsfor the six years through 1968 is given in Annex 11. The program includescompletion of the Tapada do Outeiro station and the planned construction ofa new thermal station in the South, starting next year with an initial125 M unit (paragraph 64).

77. In the four years through 1966 ETP's requirements would totalEsc. 946 million, of which Esc. 367 million for capital expendituresincluding capitalized interest on the current program (including the Bankproject) and Esc. 579 million for expenditures on the new station, asfollows (in millions):

1963 196 1965 1966 Total 4 .rears------ Escudos - Escudos $ equiv.

Tapada do Outeiro Unit 2 98.3 25,4 123.7 4.3Tapada do Outeiro Unit 3 37.8 63.9 71.2 70.4 243.3 8.5New Station Unit 1 105.2 146.4 1S2,1 433.7 15.1New 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 itsrequirements from its own resources and sales of new shares, and about53 percent from borrowings, as shown in the following table (in millions):

1963 1 1966 Total_& ears---- Escudos----- Escudos j e.uiv. Percent

Internal cashgeneration 29.5 74.7 82.3 110.0 296.5 10.3

less; interest 9.1 19.1 18.7 18.4 65.3 2.3amortization 19.1 12.0 6.4 6.7 44.2 1.5dividends 12.0 12.0 20.0 26.0 70.0 2.4

40.2 43.1 45.1 51.1 179.5 6.2Net cash availablefor expansion (10.7) 31.6 37.2 58.9 117.0 4.1 12.4

Decrease of workingcapital 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 30.6Sub-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 15.2National SavingsBank 40.0 40.0 1.4 4.2New StationUnit 1 loans 51.0 83.0 102.0 236.0 8.2 24.9

New StationUnit 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 wouldrepresent about 20 percent of additions to plant. About Esc. 35.5 millionwould be provided from the planned reduction of coal inventories mentionedearlier.

80. New share capital would be issued for about Esc. 290 million, or30.6 percent of requirements. Only about Esc. 130 million would be requiredin connection with the current program. The balance would be needed forthe new plant. ETP has agreed to place an issue of Esc. 65 million in thenear future, prior to effectiveness of the proposed Bank loan.

81, The proposed Bank loan of $5 million is assumed to carry interestat 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 onlyEsc. 40 million, are needed in connection with the current program. ETPhas agreed to raise this amount prior to effectiveness of the proposed Bankloan. Interest at 7 percent and a term of 15 years were assumed. Futureloans 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 necessaryto carry out the project, should the company be unable to obtain them fromthe normal sources.

84. Estimated Future Earnings and Financial Position: Forecast incomestatements for the six years through 1968 are shown in Annex 10. Theyindicate satisfactory returns on average net fixed assets in operation,adjusted for 3.33 percent straightline depreciation. The returns wouldincrease from 7 percent in 1963 to 15.2 percent in 1964 and a maximum of15.4 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 thereturns mostly reflect variations in ETP's expansion program, due to theprooosed method for determining power revenues, based on annual financial

- 18 -

charges, including dividends, and a surolus to cover 10 percont of expansionrequirements (see paragraph 25). Considering this method, and the Drospectsfor further expansion of ETP beyond 1968, returns will probably be maintainedat about their 1968 level in future years.

85. As shown in Annex 11, starting 1964 net income in each year wouldbe about twice the interest charges of the same year; internal cash generationwould cover total debt service charges at least 1.9 times and up to 2.3 timesduring the period through 1968.

86. The ratio of debt, excluding current portion, to capitalization isexpected to decrease from 62 percent in 1962 to 56 percent in 1968, as shownin Annex 9.

87. ETP has agreed to the same covenants as HED with respect tolimitation of short and long term indebtedness (see paragraphs 47 and 62).

IX. CONCLUSIONS

88. The proposed projects are necessary to meet the expected increasein power demand. They are technically sound. The cost estimates arereasonable.

89. The managements of the two proposed borrowers are experienced andthe companies are well qualified to execute and operate the projects withoutoutside assistance,

90. The Government has prepared a satisfactory plan for increasing therevenues of the two companies effective January 1, 1964. On this basis bothcompanies 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 atwo year grace period, and of

- $5 million to ETP, for a 20 year term, including afour year grace period,

Jctober 18, 1963

ANINEX 1

Electrie Energy Production in Portugal(Millions of K4H-rounded)

Priniry- Percentage byYear 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 annualincrease 1951-1961 13.2% 25.2%

2/ Years of low rainfall. The non-permanent market was -curtailed inboth 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)

DollarEscudos 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 ConsolidatedFiscal 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 3,205.2Less: 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,O02.6Work 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 4,122.4i?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 1,700.0Eeserves 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

DebtLong and mcdium trrm

Proposed I:s;D l oan 150.0 216.0 213.7 208.9 203.9Debentures 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 °4.0 316.5 434.3 319.0 276.9 234.0 220.2BTationl. Savinos Bank 200.0 215.0 6.0 221.0 220.0 209.2 198.1 186.4 174.3Banco Pinto y Sotto Mayor lS6.1 85.9 57.3 28.7Future 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 3,205.2Less: 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 debtsincurred '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 annuallyment Bank 2/28/56 40.0 33.6 4% 5 to 20 years 1959-76 negative pledge

National Develop- semi annuallyment Bank 9/1/59 20.0 18.9 4%' 20 years 1962-78 negative pledge

National Develop- semi annuallyment Bank 4/20/60 80.0 80.0 6% 5 to 20 years 1963-80 negative pledge

National Develop- 3 equal paymentsment Bank 7/27/62 90.0 . 90.0 7% 2 to 4 years 1964-5-6

National Savings pledge ofBank 9/7/61 200.0 195.0 4%0 1 to ? years / Not specified revenues

National SavingsBank 1962 20.0 20.0 Same conditions as above but contract not finalized

Total loans 450.0 437.5

Advances PurposeNational 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 storesTotal 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 operationsOperating expenses 6.3 7.0 9.0 12.7 18.8 30.5 38.2 40.0 43.8Taxes 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 18.3Investment 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 90.9 112.3 198.6 250.2 284.3 303.6Other 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 94.8 102.9 111.0 117.4 128.1less: 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 profitReserves 2.5 2.8 4.0 8.6 2.4Dividends and interest on new shares 15.0 29.0 55.8 42.4 66.4 98.4 106.4. 114.4 124.8Amortization in excess of depreciation 6.8 19.8 29.9 39.5Contribution 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 58.1 100.2 118.0 128.3 228.2 282.5 316.6 335.9deduct: 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 TotalFiscal years ending December 31: 1963 1964 1965 3 years 1966 1967 5 years

SCUiLIEs OF FUNDS

Internal cash generationNet income before interest 112.3 198.6 250.2 561.1 284.3 303.6 1,149.0Depreciation 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

DebtPropesed IBRD Loan 150.0 66.0 216.0 216.0Debentures 110.0 110.0 110.0National Savings Bank 220.0 220.0 220.0National Development Bank 142.5 142.5 142.5Banco Pinto and Sotto Mayor one year 71.6 71.6 71.6Banco Pinto and Sotto Mayor medium term 114.5 114.5 114.5Future 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 plantBemposta 279.0 148.0 20.0 447.0 447.0Tavora 185.3 22.0 36.0 243.3 243.3Equipment, studies etc. 5.0 5.0 5.0 15.0 55.0 25.0 95.0Carrapatelo - 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

InterestProposed IBRD Loan .5 10.2 11.8 22.5 11.7 11.5 45.7Debentures 36.7 36.2 35.7 108.6 34.9 34.2 177.7National Development Bank 27.3 23.9 19.1 70.3 16.1 14.3 100.7National Savings Bank 8.8 8.6 8.2 25.6 7.7 7.3 40.6Future Loans 5.2 13.5 30.2 48.9 42.4 58.0 149.3Other 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

AmortizationProposed IBEO Loan 2.3 2.3 4.8 5.0 12.1Debentures 7.8 11.2 14.7 33.7 15.5 16.3 65.5National Development Bank 4.5 11.5 12.1 28.1 12.9 13.8 54.8National Savings Bank 6.0 10.8 11.1 27.9 11.7 12.1 51.7Future 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

FundingNational Development Bank 217.5 30.0 30.0 277.5 30.0 307.5National Savings Bank 209.0 209.0 209.0Commercial Banks 90.0 90.0 90.0Tavora 66.2 73.8 140.0 140.0Banco 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 42.9Cumulative surplus 4.4 38.9 58.3 58.3 75.3 118.2 118.2

Number of times interest covered bynet income 1.2 2.0 2.3 2.5 2.4

Number of times interest and amortizationcovered 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)

DollarsEscudos 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 100.0 140.0 140.0 140.0 140.0 134.9 129.5National 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 1.0Proposed IBBD loan 25.5 53.0 91.0 144.0 138.5 132.7Future 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 tlinedepr2ciation 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 operationsuiael and other variable costs 6.4 9.2 20.4 54.8 33.4 42.6 81.9 187.3 225.2General expenses 3.4 3.0 4.2 3.1 4.1 4.3 4.9 5.5 8.1Main4anenance and repairs .3 .6 .8 .7 1.3 1.6 2.1 10.1 12.7Administration and taxes 3.4 3.7 5.9 4.3 5.3 5.4 6.4 7.3 10.3Equip,i,ent renlacement 4.7 4.7 4.9 7.6 14.3 14.3 18.0 28.2 34.8Investment 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 62.0less: 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 profitReserves .7 .8 .6Dividends and interest on new shares 12.0 12.0 12.0 12.0 20.0 26.0 32.0 38.0 49.6Contribution to expansion 20.0 22.0 40.0 43.0 31.0Balance 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 82.3 110.0 137.9 163.6deduct: 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 87.8 100.3 115.00

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 TotalFiscal Year endinr December 31: 1963 1964 1965 1966 4 years 1967 1968 6 years

SOU CES OF FUNDS

Internal cash generationNet incone before interest 21.1 59.1 66.7 90.4 237.3 107.1 125.5 469.9Depreciation 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

BorrowingsProposed TBRD Loan 25.5 27.5 38.0 53.0 144.0 144.0National Savings Bank 40.0 40.0 40.0Future 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 90.0 282.0Unit 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 plantTapada 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 1 100.0 138.0 170.0 408.0 205.0 613.0Unit 2 140.0 140.0 180.0 150.0 470.0Unit 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

InterestDeb'entures 8.6 8.5 8.2 8.0 33.3 7.8 7.5 48.6National Savings Bank 9.1 9.1 9.1 9.1 36.4 9.1 8.8 54.3National Development Bank 1.5 1.5 1.4 1.3 5.7 1.3 1.2 8.2Proposed IND Loan .5 3.0 4.5 7.0 15.0 7.9 7.6 30.5Local loans: Tdo Units 2 and 3 1.0 1.0 1.0 3.0 3.0Future 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 22.0Unit 3 4.4 4.4

20.7 26.4 31.3 41.4 119.8 50.1 59.9 229.8

AmortizationDebentures 3.0 4.2 4.5 4.7 16.4 4.9 5.2 26.5National Savings Bank 5.1 5.4 10.5National Development Bank .8 .9 .9 1.0 3.6 1.0 1.1 5.7Proposed IBID loan 5.5 5.8 11.3Local loans: Tdo Units 2 and 3Future loan: New Station Unit 1 9.3 9.3Banks' 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) 18.7Cash 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 internalcash generation - 1.9 2.2 2.3 2.0 1.9

VILA NO VA, PSEViaonodo SAAODCastelo CANAt7A

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IBRD Projects

Bela

OCTOBER 1963 - BRD- 1138R1