RtTURN TO EPORTS DESK RESTRICTED At t6 WITHIN Report No TO-537b vtONE WEEK This report was prepared for use within the Bank and its affiliated organizations They do not accept responsibility for its accuracy or completeness The report may not be published nor may it be quoted as representing their views INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION BRAZIL COMPANHIA FOR(;A E LUZ DO PARANA Appraisal of the Transmission and Distribution Project December 1, 1966 Projects Department CURRENCY EQUIVALENTS US $1 = Cr $2,220 Cr $1 = 0 45 mills Cr $ billion = US $450, 450 MEASURE EQUIVALENT One mile = 1 609 kilometers BRAZ IL APPRAISAL OF THE TRANSMISSION AND DISTRIBUTION PROJECT COMPANHIA FORCA E LUZ DO PARANA TABLE CF CONTENTS Page No. SUJAYTI1 I. INTRODUCTION 1 II HOLDING COMPANY ORGANIZATION 2 III. THE BORROWER 3 IV. THE POWER MARKET 4 V. THE PROJECT 5 Estimated Cost 6 VI. STATUS CF ENGINEERING AND CONSTRUCTION 8 VII. PROCUREMENT AND DISBURSEMENTS 8 VIII. FINANCIAL ASPECTS 10 Tariffs 10 Financial Position 13 Past Earnings Record 16 Proposed Financing Plan 16 Estimated Future Earnings 18 Future Financial Position 19 IX. CONCLUSIONS 20 ANNEXES 1. Centrals Eletricas Brasileiras S.A. (Eletrobras) 2. Generation and Sales of Energy 3. Estimated Cost of Project 4. Actual and Estimated Income Statements 1961-70 5. Estimated Sources and Applications of Funds Statements 1966-70 6. Actual and Estimated Balance Sheets 1961-70 NAP This report is based on the findings of a mission in November-December 1965 to Brazil, composed of Messrs. Donald King and Ferd Rydell of the Bank. BRAZIL APPRAISAL OF THE TRANaIISSION AND DISTRIBUTION PROJECT COMPANHIA FORCA E LUZ DO PARANA (CFLP) / SUMMARY i. Companhia Forca e Luz do Parana (CFLP) has applied to the Bank for a loan of US$8 1 million equivalent to help finance the rehabilitatlon and expansion of its transmission and distributlon system, excluding interest during construction. The project is estimated to cost U$15 3 million equivalent. II. The project consists of the rehabilitation and expansion of the transmission and distribution system for the three-year period 1966- 68 2/ Rehabilitation of the present system represents about 25 percent of the total cost. The remaining costs are allocated to the construction of 125 km of 220 kv transmission lines, 37 km of 66 kv circuit, instal- lation of 80 MVA of primary substation capacity, installation of one 16.5 MW generator im the existing Guaricana hydroelectric station, and expan- sion of the dlstribution system. ill. CFLP is one of ten companies acquired from the American & Foreign Power Company (AMFORP) In 1964 by Centrals Eletricas Brasileiras (Eletrobras), an autonomous agency of the Brazillan Government Eletro- bras has retained the same management arrangements that were in effect under AMFORP's ownership CFLP's operations are satisfactorily managed and it should be capable of supervising construction of the project Iv. The proceeds of the loan would be used to finance the cost of equipment, materials and supplies procured under international competitive bidding, and the foreign currency cost of engineering services. Awards would be made after international competitive bidding with participation by qualified domestic suppliers who would be granted a 15 percent pre- ference Satisfactory arrangements have been made for Eletrobras to pro- vide the balance of funds required to finance CFLP's program v New federal decrees issued late in 1964 allowed for the first time the periodic revaluation of assets for tariff-making purposes Tariffs were increased in 1965 and in June and November 1966 following the revaluation of assets. Arrangements have been made in connection with the proposed loan to ensure that satisfactory tariffs will be obtained in the future by CFLP. VI. The project is suitable for a Bank loan of US$8 1 million equiva- lent for a term of 20 years including a grace period of 5 years 1/ This report is one of four essentially similar appraisal reports covering proposed Bank loans to four distribution companies in Brazil The companies are under common ownership and as a result a consider- able amount of the text is common to each report Paragraphs and Annexes which are identical or substantially similar have been identi- fled with an asterisk (*) throughout the four reports, which are sub- mitted as a group 2/ See Introduction, paragraphs 3 and '. for remarks concerning phasing of progrdm. BRAZIL APPRAISAL OF THE TRANSNISSION AND DISTRIBUTION PROJECT COIiPANHIA FOPQA E LUZ DO PARANA (CFLP) 1/ I. INTRODUCTION *1. Centrais Eletricas Brasileiras S.A. (Eletrobras) an autonomous agency of the Federal Government, purchased ten electric utility companies in Brazil from the American and Foreign Power Company (AMFORP) in Novemoer 1964. The systems were then in urgent need of rehaoilitation and expansion and a five-year program covering the period 1966-70 was prepared im order to supply existing and prospective demand. In response to the request of Eletrobras the Bank has agreed to consider loans aggregating the equiva- lent of approximately US$60 million to assist financing of the expansion program over a period constituting three years of the five-year expansion program. In accordance with the Bank's preference to lend directly to the operating entity carrying out the project it is proposed to make separate loans to four of the largest of the companies, located in the south central region where Bank-financed power generation projects are concentrated. 2. This appraisal report covers the proposed loan of the equivalent of US$8.1 million to one of the four companies, Cia. Forga e Luz do Parana (CFLP), which operates in the State of Parana. The proposed loan would provide funds for about 53 percent of the estimated cost of US$15.3 million equivalent of the expansion program of the company for the three-year period 1966-68 and would represent about 47 percent of the estimated cost of the five-year program. About 60 percent of the proposed loan would be expended on the distribution system and the remainder on the high voltage system. Interest during construction would not be included in the loan since the project consists predominantly of distribution facilities which would become revenue bearing shortly after installation. CFLP and the other three companies to which proposed loans would be made have not been the recipients of previous loans from the Bank. *3. This report is based on the findings of a mission to Brazil in November-December 1965, composed of I;lessrs. D. King and F. Rydell of the Bank. A long delay was experienced subsequently in negotiating several issues with the Government of Brazil and the loan is only now submitted to the Executive Directors for this reason. The long interval which has 1/ This report is one of four essentially similar appraisal reports covering proposed Bank loans to four distribution companies in Brazil. The companies are under common ownership and as a result a considerable amount of the text is common to each report. Paragraphs and Annexes which are identical or substantially similar have been identified with an asterisk (*) throughout the four reports, which are submitted as a group. - 2 - elapsed has to some extent outdated the report, which is based on the expansion program for the three year period 1966-68. The complete re- casting of the program at this stage would result in considerable further delay in presenting the loan and to avoid this the appraisal is presented substantially as prepared on the basis of the mission's original findings. It is considered that this is justified by the circumstances. *4. The project, as described hereafter, consists predominantly of a distribution system expansion, the implementation of which is some fhat flexible in that retardation of the program over a period can, up to a point, be compensated by a subsequent acceleration. As noted in paragraph 30 a review must be made each year of the program proposed for the next year as a condition of disbursement and proper application of the loan funds will be assured in any event. The financial statements are outdated for similar reasons but there has been no adverse change in the financial condition of CFLP and the statements are therefore considered to be a fair representation of the present and future financial position of the company. II. HOLDING COMPANY ORGANIZATION *5 Centrais Eletricas Brasileiras S.A. (Eletrobras), the owner of CFLP, is an autonomous agency established by the Federal Government in 1961 to carry out studies and to finance, construct and operate electric power works. It is a holding company which controls the operation of the federal utilities. It administers public funds to expand the federal power systems, assist with the expansion of other electric utilities in need of financing, and finance power facilities in under-developed areas. Eletrobras commenced operations in June 1962 and has become the most important single force in the development of the electric utility industry. Additional information concerning Eletrobras is given in Annex 1. *6. On November 12, 1964 an agreement was concluded between Eletrobras and AMFORiP whereby the Brazilian properties of the latter were acquired by Eletrobras. In summary, for US$135 million Eletrobras purchased from AMFORP the controlling stock and the short-term notes, amounting to UtS$64 million, of the ten companies, becoming the majority shareholder of each company. Payment is to be made over a period of 45 years. *7. Prior to the acquisition of the companies by Eletrobras their operating control in Brazil had been exercised by Companhia Auxiliar de Empresas Eletricas Brasileiras (CAEEB), a management company established in 1957 by AMFORP. Eletrobras, which acquired control of CAEEB when it purchased the companies, has retained this arrangement CAEEB maintains its headquarters in Rio de Janeiro where it employs a staff of 250 The admLnistration department supervises the operations of the associated companies, provdes procurement services for foreign purchases and sets labor and wage policy. The engineering department supervises planning and the capital budgets of the companies, prepares specifications, sets technical standards and orients other phases of the operations from a -3 - technical standpoint. The finance department supervises the accounting activities of the companies, negotiates loans, makes rate studies and prepares rate applications and supervises the operating budgets. *8. The organizational structure of CAEEB, instituted by AMFO.P, has remained intact. However, it is understaffed as a result of the conditions described in paragraph 13. With the planned increase in staff to meet normal requirements, the organization should be fully competent to provide effective management supervision of the companies. It would find it difficult, however, to coordinate and direct the proposed expansion program in addition to supervising the operation of the companies, and 2t therefore plans to make extensive use of the services of consultants in this connection, as noted in paragraph 32. III. THE BORROWER 9. CFLP supplies the city of Curitiba and environs, with a popu- lation of 400,000, in the State of Parana. In 1965 the demand was 60,000 kw and energy sales were 245 million kwh. The company owns generating stations with an aggregate capacity of 50 MW, of which 10 W is thermal. It will be necessary for it to purchase power to supply the bulk of the growth in the future (paragraph 21). The company has a 66 kv transmission system linking Curitiba with the generating stations, 50 ICU distant. 10. At present CFLP has approximately 480 km of primary distribution circuit, 1,000 km of secondary distribution circuit and 55 MVA of distribution transformer capacity. Power is stepped down to the primary distribution voltage of 13.8 kv at a number of substations and then dilstributed over a 127/220 volt secondary network. In the center of the city where there are a number of large buildings, the distribution system is underground. 11. CFLP was established in 1928. Approximately 90 percent of the common stock is owfned by Eletrobras, with the remainming 10 percent held by the public. It is administered by a five-man Board of Directors electea for a term of three years. The present Board zook office in AYarch 1965 and all of the members have had long service with the company or CAEEB. The President of CAEEB serves as President of CFLP, the operating company, which is managed by an Executive Director, who is a member of the Board. Major policies are set by CAEEB but the management of the company is responsible for the day-to-day administration. 12. CFLP employs a total staff of 350 including 200 in the operating division, 80 in the accounting division, 14 in the engineering division and 7 in the purchasing division. The CFLP organizational structure, instituted by AMFORP, is satisfactory. *13. Prior to their acquisition by Eletrobras, the AMFORP companies were in difficult financial straits due to the Government policy toward investor-owned utilities. This resulted in the companies' inability to obtain rate increases during the recent period of rapid inflation. The maintenance and expansion programs of the companies were severely limited by the shortage of funds In addlition, a considerable number of the staff left their employ and there is now a shortage, particularly engineering and supervisory, in the companies. During the next two years CFLP plans to increase its staff by about a total of 100, including engineers and technicians. In view of the scale of utility expansion in Brazil, however, some difficulty may be experienced in obtaining a sufficient number of engineers. *14. In the past, major substation and transmission engineering was carried out by CAEEB. Distribution planning was carried out by the CFLP engineering staff according to standards established by CAEEB. These arrangements will continue although due to staff shortages it will be necessary to employ consulting engineers to assist with much of the design work during the expansion program (paragraph 32). The policy of the company is to employ contractors for construction work. *15. Due to lack of funds, expansion of the power system facilities necessary to satisfactorily supply the increasing load has not been possible in recent years and the reserve capacity which normally would be maintained in accordance with sound utility practice has been utilized to meet the increasing load. When the reserve capacity was fully employed, equipment was then overloaded in order to meet further growth. This has resulted in unsatisfactory operating conditions including low voltage and service interruptions. ^16. The shortage of funds also forced the company to limit maintenance. As the result of this and the abnormal operating conditions the useful life of some distribution equipment, particularly transformers, may have been shortened. iReplacement of a considerable number of transformers which have become overloaded or obsolete would be necessary as part of the expansion program. IV. THE POWER MAR ET 17. Adequate records have been kept by CFLP concer ning power sales which in 1965 amounted to 245 milli on kwh, with a peak demand of 59 Ni. Residential service accounted for 38 percent, commercial 23 percent, industrial 21 percent, and miscellaneous 18 percent of total sales. The rate of growith has been about 8 percent annually during the past ten years. 18. The city of Curitiba is the commercial, marketing and industrial center of the State of Parana, one of the richer states in the country and an important area of coffee and other agricultural production. At the end of 1964 CFLP had about 98,000 customers with an average annual consumption of 2,700 kwh per customer. - 5 - 19. The power market has been studied by the company's consultants, Cia. Internacional de Engenharia e Construcoes (CIECO), a Brazilian affiliate of the Interinational Engineering Company of San Francisco. It is estimated that by 1970 the number of customers would increase to 130,000 with an average annual consumption per customer of about 3,000 kwh, and total annual sales of 380 million kwh, representing an average annual growth of nearly 9 percent. The forecast of demand appears reasonable. 20. Until 1962 the company's entire sales of electricity had been supplied from its own generating capacity. Beginning Ln 1963 it was necessary for the company to purchase power and in 1964 purchases amounted to about 7 percent of total requirements. Future load growth would be supplied by additional purchases which by 1970 should approach 50 percent of total requirements. 21. The company purchases power at present from Companhia Paranaense de Energia Eletrica (COPEL), the state utility in Parana. In 1965/66 this is being supplemented by purchases from UTELFA, a small joint federal-private generating company in the State. In 1967 the CFLP sjstem is to be connected by a transmission line with the thermal plant of the Sociedade Termoeletrica de Capivarl (SOTELCA), a joint federal-state company in the State of Santa Catarina, from which it would obtain the entire requirements for purchased power in 1968-69. These arrangements are the subject of an agreement of July 20, 1965, between Eletrobras, CFLP, COPEL and SOTELCA. In 1970 the hydroelectric plant of Eletrica Capivari-Cachoeira S.A., owned jointly by COPEL and Eletrobras, should be completed at which time CFLP would, subject to arrangements to be made, obtain from it most of the requirements for purchased power. Annex 2 tabulates the past record and forecast of generation, purchases ana sales for the periods 1961-65 and 1966-70 respectively. 22. Power system losses, expressed as a percentage of total generation plus purchased power, have increased for several years reflecting overloading of distribution facilities. The estimate of future losses (Annex 2) forecasts them at somewhat higher levels in anticipation of the additional transmission losses which would result from the purchase of power from the distant thermal and hydroelectric stations (paragraph 21), notwithstanding the gradual reduction in distribution losses which would be achieved as the result of the distribution expansion program. For the purpose of estimating expenses on a conservative basis, it has been assumed that losses would still approximate 19 percent by 1970. However, as set forth in the consultants' report, it is expected that substantially lower losses uould be achieved by that thme if the expansion program is carried out as planned. V. THE PROJECT 23. The project comprises the rehabilitation and expansion of the transmission and distribution system and the installation of an additional generator in an existing plant, during the three-year period 1966-68. - 6 - About 25 percent of the expenditure will be required to rehabilitate the existing system and increase its capacity to satisfactorily supply the present load. The remainder would provide for expansion of the system commensurate with the increase in load anticipated for the three-year period. The high voltage portion would anvolve the construction of 125 Ian of 220 sv transmission line, to link Curitiba with SOTELCA (paragraph 21), 37 km of 66 kv circult, and the installation of 80 MVA of primary substation capacity. The addition to the generating plant would comprise the installation of a single 16.5 MW generator in the Guaricana hydro- electric station to complete the plant, which was commissioned in 1958 ana has a present capacity of 22.5 IW, together wizth the associated transformer, switchgear and controls. 24. At the primary distribution level of 13 8 kv the work would comprise the installation of additional primary feeders and the rebuilding of some of the existing feeders. For the secondary network operating at 127/220 volts the program would provide for the connection and supply of approximately 13,000 new customers, the installation of additional distribution transformer capacity, and the reinforcement of secondary network feeders to relieve overload on existing facilities. The program would include the installation of about 30,000 kva of distribution trans- formers, associated switchgear and ancillary equipment, including the installation of about 23,000 meters. A substantial amount of the ex- penditure would be allocated to improvement and expansion of the under- ground system (paragraph 10). Estimated Cost 25. The estimated cost of the project is given below. A more detailed estimate is given in Annex 3. Bank Local Financing Financing Total (Thousands US$ Equiv.) Transaission 2,000 1,260 3,260 High-voltage Substations 900 160 1,060 Distribution 2,780 3,700 6,480 General Equipment, including additional Generator and Metering 1,520 780 2,300 Engineering Services 120 430 550 Contingencies 780 870 1,650 TOTAL 8,100 7,200 15,300 PERCENT OF TOTAL 53%0 47% - 7 - *926. The proposed loan amount would be used to finance equipment, materials and supplies procured under international competitive bidding, including domestic suppliers, and the foreign currency cost of engineering services. It would not be used to finance the cost of labor, of wood and concrete supports, of a large amount of hardware and of such materials as cement, which would not reasonably be obtained outside Brazil, and which, therefore, would not be procured under international bidding *27. Brazil produces most of the items of equipment and materials to be financed by the proposed loan. It is difficult to assess the com- petitive position of Brazilian industry and to estimate the proportion of the Bank financed goods which might be purchased in Brazil. However, from the information which is available 50 percent of the loan might be used for local purchases. *28. The cost estimates were prepared by CIECO and CFLP assisted by an experienced Brazilian engineering firm. CIECO, with the assistance of the International Engineering Company assigned prices on the basis of information available concerning international pricing of the equipment and materials. These same prices were used in computing the cost of the programs of tlxie other three companies to which it is proposed to make loans, thus assur±ng uniformity. A contingency allowance of approximately 11 percent has bocrx included for the Bank financed component of the project. This is to provide for some increase in the cost of equipment and materials whlich would be subject to increase as the result of changes, particularly copper. In addition, it is intended to make allowance for increases in costs lwnich in some cases may result to the borrower from the purchase of Brazilian goods under the 15 percent preference formula described in paragraph 33. *29. The local currency cost estimate was prepared in US$ equivalent, as is customary in Brazil, where the rate of inflation has been high, to provide a reasonably firm basis for comparison with actual costs as they are incurred. Increased local costs due to inflation are expected to be offset by periodic tariff adjustments permitted by law. *30. The total estimated cost was prepared by extending to all the areas covered by this program the detailed cost estimates made for typical installations and areas. In view of the method it would be necessary for the company to make detailed studles of the system expansion and prepare detailed cost estimates each year as the program progresses. It has been agreed that these studies and estimates in respect of the program for a particular year would be submitted in a form satisfactory to the Bank as a condition of further disbursement in respect to goods purchased during that year. *31. The expansion of the distribution system would be continued after 1968. Provision has been made in the Estimated Source and Application of Funds, 1966-70 (Annex 5), for this and for other capital improvements, including buildmings and transportation equipment. - 8 - VI. STATUS OF ENGINEERING AND CONSTRUCTION i32. As noted in paragraph 28, CIECO supervised the preparation of the cost estimates and would generally supervise and coordinate the project. Detailed planing, and design of the transmission and large substation work would be undertaken by CIECO and CAEEB. Distribution planning and design would be undertaken by CFLP and by a local experienced Brazilian engineering firm. Supervision of construction would be provided by CFLP. Virtually all construction, both transmission and distribution, will be carried out by experienced Brazilian construction firms. Assurances have been received that CAEEB and CFLP would continue to employ consulting engineering firms satisfactory to the Bank. VII. PROCUAEMENT AND DISBURSEMENTS *33. As noted previously, the equipment and materials which would be financed by the proposed Bank loan (paragraph 26) would be purchased under international competitive bidaang, including Brazilian suppliers. The method of comparing foreign and domestic bids, which follows that agreed between the Government and Bank in connection with previous power loans, is quoted in part as follows- "The Borrower intends to invite firms producing goods in Brazil to participate in the international competitive bidding. In the case of goods produced in Brazil the Borrower may award the order to the lowest Brazilian bidder offering satisfactory terms and conditions, provided that his offered price does not exceed the offered price of the lowest acceptable foreign bidder by more than 15 percen+. Comparison of bids will be made without taking into account customs or other similar duties. For firms in Brazil, the delivery price will comprise the F.O.B. plant cost plus freight, insurance and other delivery costs to Curitiba. For non-Brazilian firms, the delivery price will be based on the C.I.F. landed cost, port of entry, before customs duties, plus inland freigrit, insurance and other delivery costs to Curitiba. For reasons of economy, orders may be placed jointly on behalf of the Borrower and any of the other three companies which are the recipient of Bank loans. In such cases comparison of bids will take into account the fact that part of the order will be delivered at Curitiba and the other part or parts at the delivery place provided for each of the other companies. As the 15 percent preference allowed firms in Brazil is in lieu of customs duties, the 15 percent will be added to the C.I.F. landed cost (excluding customs duties) of the non-Brazilian goods, before inland freight, insurance and other costs In the case of bids composed of both cruzeiros and foreign currency the cruzeiro portion thereof will be dealt with as a Brazilian bid and the foreign exchange portion as a non-Brazilian bid. - 9 - "For comparison purposes all bids after evaluation will be converted into curzeiros at the Bid Comparison Rate of Exchange. The Bid Comparison Rate of Exchange is understood to be the dollar selling rate of the Banco Central da Republica do Brasil plus the exchange surtax (but not to exceed 30 percent), if any, prevailing at the date on which bids are closed. It is further understood that the Bank will, on its own initiative, or at the request of the Borrower or Guarantor, reconsider and, if necessary, revise the Bid Comparison Rate of Exchange, whenever there should be a substantial change in the Brazilian exchange system which would, in the judgment of the Bank, render such rate unsuitable for bid comparison purposes. "The Guarantor will take all such measures as shall be necessary in order to facilitate the importation, free from all legal and admini- strative limitations or restrictions, of goods purchased outside Brazil in accordance with the provisions hereof and of the Loan .kCreement." In the latter part of 1965 the Government eliminated the exchange surtax and established a new Banco Central buying rate of CR$2220 = US$1. At the present time, therefore, local and foreign bids would be compared as described in detail above using a bid comparison rate of exchange of approximately C.$2220 = US$1 and allowing a 15 percent preference for local bidders. *34. CIECO would prepare specifications and evaluate bids and would provide overall coordination of procurement services for both foreign and locally purchased goods to assure that the timing and quantities of goods purchased would be in accordance with construction progress. CMl2'B would provide purchasing services for the procurement of goods obtained with Bank funds. CFLP would be responsible for procurement of local goods. *35. Under this arrangement CFLP's Bank financed goods would be grouped with those of the other three companies which are the recipients of proposed Bank loans, so that in most instances a single order would be placed to obtain the price advantage of larger orders. However, invoicing and delivery would be made directly to the respective companies in accordance with the allotments specified. - 10 - VIII FINANiCIAL ASPECTS Tariffs * 36 The regulations governing power operations and tariffs are con- tained in the Water Code of 1934 and subsequent amendments and decrees, including in particular a decree dated February 26, 1957, and three decrees dated November 4, 1964 Prior to 1964, tariffs were based on the use of historic values of investment and became increasingly unrealistic as inflation developed, causing many utilities to incur operating losses for several consecutive years The 1964 decrees reflected a major change in Government policies by allowing utilities to revalue their investment, and thus making it possible for utilities to apply for tariffs which would yield adequate returns * 37 Under the existing regulations, tariffs are reviewed and approved by the Waters Division every three years or at shorter intervals, at the initiative of the Waters Division or the utility Utilities are permitted to apply for tariffs which would yield revenues covering (a) operating costs, (b) straight-line depreciation of gross fixed assets in operation, exclud- ing land and land rights, at annual rates of up to 8 percent for thermal plants and up to 5 percent for all other facilities including hydro plants, but with no minimum in either case, (c) a reversion provision of up to 3 percent, or an amortization provision of up to 5 percent, on the total gross fixed assets in operation, also without minima, and (d) a return of 10 percent on the remunerable investment Remunerable investment is defined as gross plant in service (excluding assets acquired through con- tributions in aid of construction) less depreciation and reversion or amortization reserves, plus reversion or amortization funds and an allowance for working capital consisting of operating inventories, the equivalent of two months billing, and cash (up to the value of the reserve for depreciation balance) excluding cash representing contributions in aid of construction Shortfalls in achieving the return of 10 percent in the three-3ear tariff period may be recovered, in principle, in the subsequent three-year period Another provision in the regulations, however, permits tariff adjustments fcr recovering shortfalls to be made at more frequent intervals * 38 Between tariff revisions, the following surcharges may be added by the utilities on their current tariffs without permission of the Waters Division (a) monthly, for compulsory increases in wages, social benefits, cost of fuel and purchased power, and (b) semi-annually, for increases in foreign debt service due to changes in the foreign exchange rate * 39 Tariff adjustments for the revaluation of the balance sheets accounts can be made as often as economic correction factors (coefficients), showing the variations in the purchasing power of the currency, are pub- lished by the National Economic Council The coefficients are issued annually about two months after the end of each year for tne use of industry in general They are applied by utilities to up-date the values of plant in service, depreciation and amortization or reversion reserves, and certain - 11 - local currency loans from the National De-elopment Bank and/or Eletrobras Foreign currency components of the book value of fixed assets are converted into local currency at the rate of exchange in effect at the time the assets are acquired Foreign debts are revalued on the basis of the current rate of exchange The amount by which the revaluation of fixed assets exceeds the revaluation of reserves and loans is set aside as a revaluation reserve which is subject to a 5 percent tax * 40 In addition to the tariffs, two surcharges are being levied on the consumer's electric bill by the Federal Government to help finance pow,er expansion in the country In the case of the distribution companies reviewed in connection with appraisals for Bank loans, the combiration of these surcharges have amounted to between 40 percent and 50 percent of the average tariff in 1965 The proceeds of one of these surcharges, the "sole" tax which was created in 1954, are allocated among the Federal, State and Municipal authorities This tax, the rate of which varies according to classeo of consumers, is presently based on an average price per kwh compated peri- odically by the National Council of Water and Electric Energy Arother surclarge, similarly computed and assessed, is the "compulsory loan", intro- duced in NIovember 1962 and which is to terminate in 1968 The proceeds go to Eletrobras which in turn invests such funds in various power projects in the form of loans or share capital Eletrobras issues to the consumers, for the amount of the "compulsory loans" paid, deot certificates carrying an interest rate of 12 percent and redeemable in 10 years A third surcharge, which is a social security tax, is 8 percent of the tariff ~ 41 The implementation of the revaluation provision was not entirely satisfactory during the initial year, 1965, due not only to the understand- able complexities involved with the transition, but also to the permissive character of several important provisions of the new regulations Revalu- ation was not then compulsory, the legislation provided for maximum rates of depreciation and amortization but no minimum rates were prescribed and recovery of shortfalls in earnings at intervals and for periods shorter than three years was only optional In addition, there was uncertainty among utilities in regard to interpretation of certain provisions of the regula- tions and long delays were experienced in a number of instances before tariffs were actually adjusted to reflect revaluation of assets * 42 The Bank was particularly concerned with two possible consequences of the permissive character of the regulations Different tariff policies could be followed which in the case of interconnected utilities, might well lead to conflicting principles being used in calculating the apparent cost of important blocks of power and could result in important economic decisions being based on erroneous assumptions Ulhile efforts were being made by Government to implement sound and, in certain instances, relatively high tariffs, there existed the possibility that, in compliance with the same regulations, utilities might be allowed to revert in the future to inadequate tariff levels * 43 These questions were brought to the attention of the Government early in 1966 It was suggested that regulations should be tightened to ensure that a minimum and uniform level of tariff performance be required - 12 - from all utLlities in the future. The Government indicated that it was aware of this problem and was planning to continue improving the implementa- tion of the regulations. It was not prepared at the time to propose correct- ing legislation to Congress. Pending such legislation, however, it was suggested that the Bank should define in a more detailed and specific rate covenant than those in the agreements for earlier power loans, the minimum level of financial performance it expected utilities to achieve, and that the Government would support extension of this type of rate covenant to as many other utllities as possible, through Eletrobras. * 44. Duramg the negotiations for the four Distribution Loans, however, the representalives of the Brazlllan Government obJected that the detalled covenants proposed might conflict with Brazllian law. Pending clarification of this point, negotiatlons were suspended. Conversations continued and the Government informed the Bank recently that legislation had been enacted by Congress which will (1) make the revaluation of utilities' assets com- pulsory, a measure which alleviates much of the Bank's concern, (2) reduce by one half the level of electrification taxes and (3) extend the surcharge on compulsory loans to 1973, provide for their annual revaluatlon, interest at 6 percent and a 20 year term. * 45. Negotiations between the Government and the Bank over the question of tariffs finally resulted im the following (1) The Government, CFLP and the other Distribution Companies agreed to a covenant under which (a) as provided by the Brazilian legis- lation, tariffs will be set so as to produce revenues at a level consistent with sound financial and public utility practices, using straight-line depreciation which shall be not less than that based on the useful lives of depreciable assets in operation, and (b) as permitted by the Brazilian legislation, assets wlll be re- valued and tariffs wlll be correspondingly adjusted at least once every calendar year. (2) A change in legislation which shall adversely affect the setting of tariffs at the level stated above, shall be an event of default. (3) In a letter to CFLP and the other Distribution Companies the Bank will define the standard which it would use to analyse a change in legislation for the purpose of (2) above. This standard shall be whether revenues from the sale of electricity are sufficient to (a) cover all of the Borrower's operating expenses, including straight-line depreciation of gross revalued fixed assets in opera- tion, at rates based on the useful lives of assets and (b) produce a reasonable annual rate of return on the revalued average net fixed assets in operation (which under presently foreseeable con- ditions would be of the order of 10%). g 46. In the course of 1966, the assets of CFLP have been revalued twice, to reflect the official cost indlces at December 31, 1964 and 1965. Corresponding tariff adjustments were made in June and November. The tariffs - 13 - introduced in June were calculated to provide inter alia for depreciation charges at 5 percent, reversion charges at 3 percent and a 10 percent return on the remunerable investment Details of the November adJustment are not yet available Financial Position * 47 CFLP's financial statements for 1965 were audited by Boucinhas & Compos, Certified Public Accountants The accoulnting methods followed and the auditing arrangements are satisfactory In connection with t'he proposed loan, CFLP should agree to continue to employ auditors satisfactory to tne Bank and to submit certified annual financial statements with the auditor's report * 48 The estimated financial position of CFLP as of December 31, 1965 is presented in the following statement and in Annex 6 Two balance sheets have been shown in the following statement to indicate the effect of the revaluation which will be recorded in 1966 The first balance sheet reflects the value of the assets, capital and liabilities based on the revaluation made in April 1965, which applied the 1964 coefficient The second balance sheet shows the result of revaluation based on the 1965 coefficient of 1 27. - 14 - COMPANHIA FORCA E LUZ DO PARANA BALANCE SHEET DECEMBER 31, 1965 (in millions of Cruzeiros) ACTUAL ESTIMATE Based on 1964 Revalued Coefficient and Based on Foreign Exchange 1965 Coefficient Rate of and Foreign Ex- ASSETS Cr$1850 to US$1 change Rate of Cr$2220 to US$1 Increase Fixed Assets Gross plant in service 32,265 40,709 8,444 Less depreciation reserve 4.548 5 620 1,072 Net plant in service 27,717 7,372 Work in progress 222 222 - Total Fixed Assets 27,939 35,731 7,372 Investments 95 95 - Net Deferred Charges 324 324 _ Current Assets 2,941 2,941 - Total Assets 31,299 38,671 7,372 CAPITAL AND LIABILITIES Capital Share capital 10,850 10,850 - Surplus 587 587 _ Reserves Reversion reserve 322 322 _ Legal reserve 83 83 - Contingencies and miscellaneous reserves 44 44 - Revaluation reserve 2,342 6,848 4.506 Total Capital 14,228 18,734 4,506 Contributions in Aid of Construction 361 361 Long-Term Debt Export/Import Bank loan 4-1/2% - 1953-77 4,026 4,831 805 Eletrobras loan (former AMFORP debts) 9,902 11,882 1,980 Eletrobras - other loans 445 445 - Total Long-Term Debt 14,373 17,158 2,785 Current Liabilities Current creditors and accruals 1,392 1,392 Cash dividends payable 542 542 Long-term debt due within one year 403 _ 484 81 Total Current liabl1ities 2,337 2,418 81 Total Capital and Liabi2 t.es 31,299 38,671 7,372 Debt/Equity Ratio 51/49 46/52 - 15 - 49 CFLP's revaluation of April 1965, increased net plant in service by about Cr$11,700 million The estimated revaluation that will be re- corded in 1966, based on the 1965 coefficient, will increase the net plant in operation by about Cr$7,400 million to a total value of Cr$35,089 mil- lion at December 31, 1965 50 Estimated share capital outstanding at December 31, 1965 is Cr$10,850 million After CFLP revalues its accounts based on the 1965 co- efficient, the revaluation reserve will be increased to Cr$6,848 million In accordance with current regulations this reserve must be disposed of DV an equivalent stock distribution Thus in 1966 the share capital will be increased from Cr$10,850 million to about Cr$17,700 million without taking into account new equity investments 51 An Export/Import Bank loan amounting to US$4 3 million was made in 1953 to finance a 4 MWI turbo-generator in the existing Chamine Hydro- electric Plant, tainter gates at the Vossoroca Dam, six 1 1W diesels for the Capanema Station, two 5 M5W hjdro unLts for the Guaricana Stat..on and expan- sion of the transmission and distribution systems CFLP revalued this loan in accordance with the rates of exchange prevailing in 1963 and 1964 In April 1965, it was again revalued based on the rate of exchange of Cr$1,850 to US$1 and this value is reflected in the first balance sheet above In November 1965, the rate of exchange was increased to Cr$2,220 to US$1 at whlch rate the value of the Export/Import Bank loan outstanding at December 31, 1965 is shown in the second statement above The Export/Import Bank loan was originally made to CFLP and the guarantor was the Brazilian Electric Power Company (BEPCO), a wholly owned subsidiary of AMEORP On March 18, 1965, an agreement was executed between the Export/Import Bank and the Brazilian Government, whereby new notes were exchanged for the notes issued under the original loan agreement and the guarantor was changed from BEPCO to the Brazilian Government * 52 At the time of the sale of the AIFORP companies to the Brazilian Government, Eletrobras not only acquired the capital stock of the compa- nies but also about US$64 million in debts owed by the companies to ANIFORP These debts were represented by 8 percent demand notes but the companies always considered such notes as long-term indebtedness The purchase and sale agreement specified that service on these notes would be paid to Eletrobras, which in turn would use the proceeds for payments on the purchase price to AMFORP The companies therefore will revalue these notes periodi- cally in accordance with the prevailing foreign exchange rate At the time of the Bank's appraisal mission in November 1965, no definite arrangements had been made for the operating companies to repay these notes to Eletrobras Fixed terms have now been established for these notes as follows (1) inter- est rate 13 percent, (2) amortization payments to commence in 1968 (Eletro- bras' amortization payments to AMFORP also commence in 1968), and (3) amortization period of 25 years These terms were used in connection with the financial projections in this report 53 The other loans from Eletrobras, amounting to Cr$445 million, represent funds advanced to cover capital expenditures and working capital requirements since the date of acquisition of CFLP by Eletrobras For - 16 - purposes of this report it has been assumed that these funds will carry the same terms as those mentionea in the preceding paragraph except that amorti- zation payments will start in 1970 Past Earnings Record 54 Income Statements for the years 1961 through 1964 are shown in Annex 4 Until early in 1965 CFLP's tariffs were based on historic costs of its remunerable investment Althougn tariff increases were made in tie past, increasing the average revenue per kwh from Cr$1 50 in 1961 to Cr$13 55 in 1964, they did not keep pace with the rapid inflation Durirg the period from 1961 through 1964 operating results were exceptionally poor, with operating losses occurring in three of the four years, culminating with an operating loss of Cr$554 million in 1964 55 Operations were substantially improved in 1965 Increased tariffs based on the revaluation applying the 1963 coefficient increased the average revenue per kwh from Cr$13 55 in 1964 to Cr$31 95 in 1965 Operating income is estimated at about Cr$2 8 billion after deducting charges for depreci- ation, reversion and exchange losses. Excluding income and revaluation taxes this would represent an 11 6 percent rate of return on the net fixed assets in operation at the end of the year, assuming the assets were valued on the basis of the 1964 coefficient However, if the assets had beer valued in accordance with the 1965 coefficient, if depreciation had been recorded at 4 percent and if no charges had been made for reversion and ex- change losses, the rate of return would have been only 7 9 percent This rate of return reflects the facts that tariffs were computed on 1963 values and that they had not become effective until about mid-1965 Proposed Financing Plan 56 A forecast of sources and applications of funds for the period 1966-1970 is shown in Annex 5 and summarized in the table belour During the first three years of this period, CFLP would carry out the IBRD transmission and distribution project as described in paragraphs 23 and 24, which is estimated to cost Cr$33,970 million excluding interest during construction After the completion of the Bank's project CFLP intends to carry out a con- tinuous expansion program to meet the estimated annual increase in demand for power The forecast for this program for 1969 and 1970 indicates a cost of Cr$4,400 million for the two-year period Capital expenditures in addi- tion to the programs described above and totalling about Cr$5,900 million, are expected to be incurred throughout the 1966-1970 period (see paragraph 31) 57. CFLP's fund requirements for the five-year period are expected to total Cr$47,650 million Capital expenditure requirements would total about Cr$45,000 million, including Cr$745 million for interest during construction About Cr$2,600 million would be required for additional working capital based on the assumption that CFLP would maintain a current ratio of at least 1 to 1 through 1970 58 Comments on the sources of funds follow the summary table shown on the next page - 17 - COMPANHIA FORCA E LUZ DO PARANA SUIMIRY OF SOURCES AND APPLICATIONS OF FUNDS FOR THE FERrOD 1966THRDGH 1970 Amount (Millions of Cruzeiros) Percent Applications of Funds Construction Expenditures IBRD Distribution Program 33,970 71.3 Subsequent Normal Expansion 4,400 9.2 Other Capital Expenditures 5 900 12.4 92.*9 Interest Charged to Construction 765 106 Total Construction Costs 45,ol5 94.5 Net Additions to Working Capital 2,635 5-5 Total Requirements 47,650 100.0 Sources of Funds Internal Cash Generation 34,957 Less Amortization of Debt 3,857 Interest Charged to Operations 11,283 Cash Dividends 8,925 Total Deductions 24,o65 Net Internal Cash Generation 10,892 22.9 Additional Share Capital 17,980 37.7 Proposed IBRD loan 17,98o 37.7 Other Resources 1,098 2.3 Total Available Funds 47,950 100.6 Surplus Cash 300 o.6 Available Funds to Meet Requirements h7,650 100.0 - 18 - 59 During this period the estimated net internal cash generation would total Cr$10,892 million after payment of debt service and dividends, or about 23 percent of the fund iequirements 60 Under the present financial plan, share capital will be issued during the period 1966 through 1970 for a total amount equal to that of the proposed Bank loan of Cr$17,980 million (US$8 1 million), or about 38 percent of the fund requirements The Cruzeiro amount of the share capital contri- butions would be increased to match any increase in the Cruzeiro amount of the Bank loan due to devaluation of the currency During negotiations Eletrobras agreed that it will subscribe to the new shares in relation to its holdings (at present 89 percent), and will also purchase all new shares not taken up by the minority shareholders 61 The proposed Bank loan of US$8 1 million is assumed to have a term of 20 years, including a 5 year grace period with an interest rate of 6 percent Interest during construction has not been included in the loan 62 Other resources amounting to Cr$1,100 million, consisting prima- rily of contributions in aid of construction, represents 2 percent of the total requirements 63 Under the proposed financial plan, it is estimated that by the end of 1970, the total available funds would exceed fund requirements by about Cr$300 million or less than 1 percent. During negotiations it was agreed that in the event of a shortage of funds cash dividends would not be paid, and furthermore, that Eletrobras would contribute all additional funds necessary for completing the 1966-1970 expansion program Estimated Future Earnings 64 The financial forecast for the five-year period, 1966 through 1970, is based on the assumption that the Borrower achieves the required earnings as specified in the tariff covenant included in the proposed Loan and Guarantee Agreements, 1 e , a 10 percent return on the revalued average net fixed assets in operation (see paragraph 44) Foreign exchange expend- itures and sources of funds have been cast in terms of the official exchange rate as of December 31, 1965, of Cr$2,220 to US$1 As far as local currency is concerned, normal increases in operating costs due to expanded operations have been considered but no provision has been made for the loss of value of the Cruzeiro after 1965 as most of the effects will have been provided for under the tariff arrangements and adjustments for inflation mentioned in paragraph 38 Depreciation has been computed at a 4 percent rate and no charges have been shown for reversion Kwh sales have been projected in accordance with the load forecast as shown in paragraph 19 and Annex 2 65 The projections show that operating revenues would increase from Cr$7,828 million in 1965 to Cr$19,695 million in 1970 or an increase of about 152 percent Operating income is expected to increase from about Cr$2,800 million in 1965 to about Cr$6,000 million in 1970 Because of revaluations based on the 1964 and 1965 coefficients it is expected that the average price per kwh would increase from Cr$31 95 in 1965 to Cr$45 41 in - 19 - 1966 The average price per kwh should increase during the next two years reacning a maximum of Cr$55 07 in 1968 and then decrease in the following two years to Cr$51 83 in 1970 The increase in average price per kwh in 1967 and 1968 is attributed to the fact that during these years increases in plant facilities will be proportionately much greater than the steady annual increase in demand for power As the expansion program subsequently tapers off and as the sales continue to increase, the average price per kwh will decline with operating revenues still producing a 10 percent return on the average net fixed assets 66 Operating income would cover interest charges, including capital- ized interest, 1 5 times in 1966, and this coverage would increase annlaJly reaching 2 2 times in 1970 Annual debt service would be covered by internal cash generation 1 9 times in 1966 and increase to 2 5 times in 1970 as shown in the Source and Application of Funds Statements, Annex 5 These ample coverages reflect the large proportion of equity funds in the proposed financing plan Since the proposed Bank loan has a five-year grace period, the first semi-annual amortization payment is not due until August 1971, and the first full year's debt service will not occur until 1972 It is esti- mated, however, that interest coverage would be 2 5 times and 2 8 times in 1971 and 1972 respectively Debt service coverage is expected to be 2 7 times and 2 6 times in 1971 and 1972 respectively 67 On the basis of the proposed tariff increases and estinated load growth, all the former AM4FORP companies expect to realize substantial oper- ating profits and should be in a position to resume payment of dividends Eletrobras and CAEEB have therefore proposed a schedule of dividend pay- ments for the future The proposal includes dividend payments startilng in 1966 in accordance with the following schedule Proposed Schedule of Dividends Year Dividend Rate 1966 3% 1967 6% 1968 8% 1969 10% 1970 10% 68 CFLP declared a 5 percent dividend in 1965 and it has therefore been assumed that a 5 percent dividend would be declared in 1966 Based on the forecast of opeiating results as shown in Annex 4, and the availability of funds as shown in Annex 5, it is expected that CFLP will produce saffi- clent operating income to declare annual cash dividends corresponding to the rates proposed in the above schedule for the three year period 1967-1969 The forecast shows, however, that because of the available earned surplus balance, dividends must be limited to 8 percent in 1970 - 20 - Future Financial Position 69 Annex 6 shows forecast balance sheets as of December 31, 1965 through 1970 During the period under review, CFLP's net fixed assets Ln operation are expected to increase from Cr$35,089 million to Cr$66,427 mil- lion, or by about 89 percent Its fully revalued long-term debt of Cr$17,642 million at December 31, 1965 is expected to reach its maxlmum level of Cr$32,734 million by 1969 and decrease to about Cr$31,765 mill.on in 1970 * 70 In order to maintain a satisfactory flnancial position throughout the future it was agreed during negotiations to include a debt limitation covenant in the Loan documents This covenant requires that CFLP's long- term debt outstanding at the end of any given year be limited to a maximum of two-thirds of the total fixed assets Such debt includes actual debt drawdowns rather than the amount of the loan contracts, the current 12-month portion of such debt carried in the books as cui-rent liabilities and any short-term loans not incurred in the ordinary course of busiress 71 Annex 6 shows that CFLP could keep within this limitation as the percentage of its fully revalued long-term debt to net revalued fixed assets including work in progress is about 50 percent during the four-year period, 1965-1968, and then decreases to 48 percent and 47 percent in 1969 and 1970 respectively This assumes that CFLP will continue to revalue its investment to reflect the true value of both its fixed assets and long-term loans IX CONCLUSIONS * 72 The project, consisting of transmission and distribution expan- sion, is technically and economically sound * 73 The arrangements for engineering, procurement, and construction are satisfactory CFLP is capable of carrying out the project with the assistance of CAEEB and the consultants, and of operating the facilities thereafter * 74 Funds necessary to complete the project, in addition to those made available by the proposed Bank loan, are to be provided by Eletrobras * 75 Under the Brazilian tariff regulations which permit power companies to earn a 10% return on revalued assets, CFLP should be able to achieve and maintain a strong financial condition 76 The project would be suitable for a Bank loan of US$8 1 million equivalent for a term of 20 years, including a 5 year grace period December 1, 1966 ANNEX 1 CENTRAIS ELETRICAS BRASILE_RAS S A (ELETROBRAS) * 1 Centrals Eletricas Brasileiras S A (Eletrobras) was formed in 1961 by the Federal Government pursuant to legislation enacted by Congress that year and commenced operations in June 1962 following approval of its By-Laws by Government decree It is administered by a President and Board of Directors, appointed for a term of three years by the Government * 2 It is empowered to carry out power development studies, to finance, construct and operate electric power generating plants and transmission lines and directly or through subsidiaries to take such actions as are necessary to initiate the supply of electric power in the event of actual or prospective shortages * 3 Eletrobras has developed along lines leading to two main functions It is the holding company owning the major interest in electric power utilities of the Federal Government. These include the former AMFORP companies, FURNAS (Central Eletrica de Furnas S A ) and CHESF (Companhia Hidro Eletrica do Sao Francisco) It also ad- ministers public funds for the expansion of federal power systems, for the expansion of non-federal utilities in appropriate cases and to initiate power development programs in underdeveloped areas of the country * 4 Eletrobras obtains funds from several sources, the most impor- tant of which are the Sole Tax and the Compulsory Loan levied on electric- ity consumer accounts The former is a direct tax and the rates per kwh consumed are fixed percentages of the "tfiscal rate" which is an aver- age overall rate per kwh sold throughout the entire country Since August 1966 the percentages are 5 percent for rural consumers, 171˝ percent for residential and industrial consumers and 20 percent for all other con- sumers * 5 Commencing in July 1965 electricity consumers were required to purchase obligations of Eletrobras in amounts equal to the Sole Tax Since August 1966 the terms of such obligations are 6 percent interest and a 20 year maturity These obligations will also be revalued each year based on the annual coefficients published by the National Economic Council and interest and redemption payments will be made on such values * 6 Eletrobras receives 40 percent of the proceeds of the Sole Tax and the entire proceeds of the Compulsory Loan Other sources of revenue include the receipts from a percentage of federal excise tax collections and custom assessments, interest on earnings, the proceeds of bond issues and Government allocations * 7 Eletrobras finances power projects by subscribing to capital shares and through the medium of long-term debt and short-term loans The funds available for investment in 1965 were estimated at Cr$144,000 million (US$65 million) In view of the ad valorem nature of the Sole Tax and Compulsory Loan, the funds available should increase each year as the result of increasing sales and higher tariffs BRAZIL AP°RAISAL OF TRANSAISSIOI\ A1qD DIYTRIBUTION PROJECT COMPANHIA FORCA E LUZ DO PARANA (CFLP) Generation and Sales cf Energy - Past Record and Forecast Millions KWH ACTUAL FORECAST 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 GENERXTION & PURCHASES Existing Generation 236 239 244 267 272 265 230 230 250 250 Power Purchases 18 21 28 60 138 170 180 220 TOTAL 236 239 262 288 300 325 368 400 430 470 SALES Sales 203 203 223 240 245 270 300 325 350 380 Losses 33 36 39 48 55 55 68 75 80 90 TOTAL 236 239 262 288 300 325 368 400 430 470 November 17, 1966 ANNEX 3 BRAZIL APPRAISAL OF TRANSMISSION AND DISTRIBUTION PROJECT COMPANHIA FORCA E LUZ DO PARANA (CFLP) Estimated Cost of the Project Bank Local Total Financing Financing Cost TRANSMISSION (Thousands US$ Equivalent) Equipment and materials 2,000 1,080 3,080 Labor and Transport 180 180 Engineering Services 30 140 170 Total 2,030 1,400 3,430 SUBSTATIONS Equipment and Materials 900 50 950 Labor and Transport 110 110 Engineering Services 20 50 70 Total 920 210 1,130 DISTRIBUTION Distribution Transformers 700 700 Distribution Vaults 650 650 Conductor 1,800 1,800 Concrete and Wood Poles 350 350 Other EquLpment & Materials 280 100 380 Labor and Transport 2,600 2,600 Engineering Services 70 2h0 310 Total 2,850 3,940 6,790 OTHER EQUIPMENT Additional Generator 770 770 Meters 500 50 550 Conmmunication Equipment 90 90 Other Equlpment 160 400 560 Labor and Transport 330 330 Total 1,520 780 2,300 CONTINGENC ES 780 870 1,650 GRAND TOTAL L_100 7,200 15_300 November 18, 1966 BRAZIL COMPANHIA FORCA E LUZ DO PARAA ACTUAL AND ESTIMATED INCCME STATEMENTS (in millions of Cruzeiros) Actual Estimate V Year Ending December 31 1961 1962 1963 196 1965 1966 1967 I960i 1969 1970 Units sold - million kwh 203 202 223 240 245 270 300 325 350 380 Average price per kwh (in Cruzeiros) 1 50 2 57 6 29 13 55 31 95 45 41 49 4o 55 07 53 52 51 83 Operating Revenues Saleof energy 305 519 1,402 3,252 7,828 12,2r2 14,821 17,898 18,732 19,695 Operating Expenses Purchased power 219 5k2 1,540 3,210 5,796 7,140 6,300 6,160 Operations and maintenance 223 443 934 1,405 2,128 3,833 3,116 3,376 3,585 3,805 Depreciation 24 24 33 101 576 1,676 1,924 2,407 2,901 3,241 Reversion 322 Revaluation and incane taxes 12 2 425 771 255 281 363 460 Loss on foreign exchange 46 224 232 1,756 40 Total operating expenses 305 691 1,418 3,806 5,031 9,490 11,091 13,204 13,149 13,666 Operating Income or (Loss) - (172) (16) (554) 2,797 2,772 3,730 4,694 5,583 6,029 Net Other Income or (Expense) 100 6 2 23 (95) 10 10 10 10 10 Gross Income or (Loss) before Interest 100 (166) (14) (531) 2,702 2,782 3,740 4,704 5,593 6,039 Interest Charges Export/Import Bank loan 46 61 83 178 235 233 211 181 169 147 Eletrobras loan (former AMFORP debt) 103 160 207 614 1,274 1,544 1,544 1,530 1,467 1,405 Eletrobras - other loans 58 58 58 58 57 Other loans 8 12 12 6 Proposed IBRD loan 35 386 767 1,o4l 1,079 Total interest charges 149 229 302 80k 1,515 1,870 2,199 2,536 2,735 2,688 Less interest charged to construction 5 1 18 260 34° 127 Net interest charges 144 229 302 804 1,514 1,852 1,939 2,196 2,608 2,688 Net Income (or Loss) (44) (395) (316) (1,335) 1,188 930 1,801 2,5o8 2,985 3,351 Less Provision for legal reserve 59 47 90 125 149 168 Cash dividends declared 542 955 1,542 2,416 3,470 2,854 Add Income adjustments of prior years 447 Application of net revaluation to prevlous year's deficit 101 Balance to Surplus (k4) (395) 131 (1,234) 587 (72) 169 (33) (634) 329 Rate of return (operating income excluding revaluation and income taxes to average net fixed assets in operation 10% 10% 10% 10% 10% Times total interest charges covered by operating income 1 5 1 7 1 9 2 0 2 2 1/ Estimates are based on a constant exchange rate of Cr$2,220 to US$1 November 8. 1966 ANNFX S BRAzIL COtPANHIA PAULTSTA De FORCA E LUZ ESTIMATED SOURCE AND APPLICATION OF FUNDS STATEMENTS V/ (in milliona of Cruzeiroe) Summary Year Ending December 31 1966 1967 1968 1969 1970 1966-1970 SOURCES OF FUNDS Internal Cash Oeneration Operating incame 15,959 22,224 30,285 37,871 41,545 147,89L Depreciation 9,265 11,045 14,975 18,943 21,556 75,784 Total internal cash generation 25,224 33,269 45.260 56,814 63,101 223,665 Borrowings USAID loan 21,460 16,800 2,460 4,Q710 Proposed IBRD loan 6,660 31,080 33,300 19,980 91,020 Total borrowings 28,120 47.880 35.760 19,980 131,760 Equity Investments 19,000 50,000 4L0,000 41,000 25,000 175,000 Contributions in Aid of Construction 1.512 1.800 2,000 2,100 2,200 9,612 Other Inccme 50 50 50 50 50 250 Total Source of Funds 73.906 132.999 123.070 119,944 __ 90.351 5I0,270 APPLICATION S OF FUNDS Construction Expenditures (excluding interest charged to construction) IBRD tranamission and distribution project 11,,670 70,150 76,120 47,080 208,020 Peixoto project 25,100 25,200 6,400 56,700 Subsequent normal expansion 2b,200 37,400 61,600 Other construction 13.200 4,400 2,200 19,80C Total construction expenditures 52.970 99.750 84.720 71,280 37,400 36,120 Debt Service Amortization Export/Import Bank loans 4,103 4,103 4,103 4,103 4,103 20,515 U S AID loan 2,628 2,628 2,628 7 884 Eletrobras loan (former AM)ORP debt) 1,918 1,91e 1,918 5,754 Eletrobras - other loans 39 39 Other loans 343 343 Total amortization 4,446 4,103 8,649 8,649 8,688 34,535 Intereat Export/Import Bank loans 2,194 2,003 1,812 1,618 1,L27 9,054 U S AID loan 799 J*933 2,463 2,493 2,350 10,038 Eletrobras loan (former AMFORP debt) 6,232 6,234 6,171 5,923 5,672 30,234 Eletrobras - Other loans 250 250 250 250 247 1,247 Other loans 35 35 Proposed IBRD loan 402 1,590 3.400 5,181 5,.61 16.036 Total interest 9,916 12.0;0 14,.096 15.465 15,157 66.644 Total debt service 14,,362 16,113 22,745 24,114 23,845 101,179 Dividends 2,982 3.587 10,174 16.765 25,057 58,565 Increase in Working Capital 3,499 11,133 6.591 8.331 b.3$9 33.913 Total Application of Funds 73,813 130.583 124.230 120,90 90.661 539,777 Surplus cash 93 2,416 (1,160) (546) (310) 293 Balance at b,giuing of yer 93 2,509 1,349 803 Balance at end of year 93 2,509 1,349 03 493 Times annual debt service covered by internal cash generation 18 2 1 2 0 2 4 2 6 eetimates are based on a constant rate of exchange of Cr*2220 to US$i Noymber 10, 1966 BRAZIL COMPAW!IA PORCA E LIZ DO PARANA ACTUAL AND ESTYXATED BALANCE SHEETS (in millions of Cruzeiros) Actual Estimate 1/ J_ Decmber 31 1961 1962 1963 1964 1965 _/ 1965 2/ 1966 1967 1968 1969 1970 ASSETS Fixed Assets Fixed assets in operation 1 589 1 622 4 61b 18 340 32 265 40 709 43070 53 154 67 199 77,873 84 196 Less reserve for depreciation 235 258 652 2 372 4 548 5 620 7,296 9,220 11 627 14,528 17 769 Net fixed assets in operation 1 354 1 364 3 989 15 968 27 717 35 089 35 77b b3 931. 55 572 63 345 66 427 Work in progresa 18 22 1 4 222 222 2 139 7.91,5 6,100 4,573 1 750 Total fixed assets 1 372 1 386 3 990 15 972 27 939 35 311 37 913 51 879 61 672 67 918 68 177 Investents 14 19 32 99 95 95 95 95 95 95 95 het Deferred Charges 90 32 196 144 324 324 324 324 324 324 324 Current ssets 85 121 245 11497 2941 29941 32411 449b 5668 7031 7076 Additional Assets 670 683 502 182 300 Total Assets 1,561 1 558 4 763 17,712 31,299 38,671 42,243 57,475 68,261 75,550 75,972 CAPITAL AND LIABILITIES Capital Flie cqiptal 310 310 310 10 850 10 850 10 850 19 098 25 698 30 198 34 698 35 678 Surplua (deficit) 163 (232) (101) (1 335) 587 587 515 684 651 17 346 Reserves Reversion reserve 322 322 322 322 322 322 322 Legal reserve 21 24 24 21A 83 83 130 220 345 494 662 Revaluation reserve 294 2,342 6 818 Contingencies and miscellaneous reserves 11 f10 227 933 44 44 44 b4 44 41 41 Total capital 508 212 460 10,766 14,228 18,734 20,109 26,968 31,560 35,575 37 052 Contribution in Aid of Construction 22 1. 96 173 361 361 519 749 959 1,179 1,.09 Lan Teru Debt *5Urtpeart Bkn lomn 305 283 1 210 11.84 1.026 1.831 41347 3863 3379 2 895 2411 Uetrobras loan (former AMFORP debt) 447 469 1 978 2 571 9 902 11 882 11 882 11 406 10 930 10 454 9 978 Eletrobras - other loans 145 4b5 b45 4b5 45 436 418 Other loms 39 52 20 Proposed IBRD loan 1,780 9,550 15,320 17 980 17 628 Total long-term debt 791 80b 3,238 b,055 14,373 17,158 18,454 25,264 30,07b 31,765 30 435 Current Liabilities 95i treditors and accruals 172 316 748 2 478 1 392 1 392 1 692 1 992 2 292 2 592 2892 Cash ditidends paable 542 542 955 1 542 2 416 3,170 2 851 Long-tenm debt due within one year 68 185 221 240 1O3 484 1b8 960 960 969 1,330 Total current liabilities 240 501 969 2,718 2,337 2,418 3,131 4,494 5,668 7,031 7,076 Total Capital and Liabllities 1,561 1,558 4,763 17,712 31 299 38,671 42,243 57,475 68,261 75,550 75,972 Assets Test Percentage of long-term debt including long-term debt due ithin one year to total fixed assets So O% 50 S% 5o 5% 50 3% 48 2% 46 6% 1/ Estimates are based on a omnstant exchange rate of Cr$2 220 to US$1 7/ Based on 1961 coefficient values 2/ Based on 1965 coefficient values November 8 1966 BRAZIL TRANSMISSION AND DISTRIBUTION PROJECT 4 f S ) Companoho Fo Coo e L do Po ono ( CFL P) tC , or {CS,MCI { STATE OF PARANA -,too} COEE) _> C. Mtc rw E LUtzs -2 DO PAANA/A v ~~~ ~~~~,0 ---- ( 5 ---- --NORTE PONTAjG!OSSA C COMPRIDO C I T Y OF CA PANE MA CURD TOBA C LARGO 89 \\ X~~~~~S QUITERIA\ _ { \ \ ~~~~~~~~~~~~~S~UL I~~~~~~~~~~~~~~~~~~~~~~~~~~~MN J \ nCH~~~~~~~~~~~~~IAMINE GUARICANA J HYDRO PLANT HYDRO-PLANT \ - ~~~~~~~~~CFLP tran3ml3310n line. NOT Th 60 kV I op J r n …Other transmisslon lines (ae not. ( I ,, 0~ i d r o sd CURlITIBA to b cot t d Project tran...ssion lines by COPEL th 1966 70 p. d \O Power plants O E.I.ti.g sab.tatioso * Pr.jtct s botatlon ..pasal... JOINVILLE (Co ectoon to SOiteco) MAY i96O IBRD 1716R