APPENDIX 4

RETURN TO0 T.O. 27 b

RE:PORTS D5ESK RESTRICTED

WITHINiONE WEEK

This report is restricted to use within the Bank.

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

TECHNICAL REPORT

ON THE

TROMBAY THERMAL POWER PROJECT

INDIA

November 12, 1954

Department Of Technical Operations

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CURRENCY EQUIVALENTS

(rounded figures)

One U.S. $ = 4.8 Rupees

One Rupee = 21 Cents

$ 1 Million m Rs. 4,800,000

Rs. I Million $210,000

One Anna = 1/16 Rupee = 1.3 Cents

Appraisal of Trombay Power Project - India

Page

I. Summary 1

II. Introduction 2

III. The Bombay Electrical System 2

IV. The Power Market 3

V. Description of the Project 4

VI. Estimated Costs 6

VII.. Construction and Expenditure Schedules 7

VIII.. Method of Financing 8

IX. Indian Electricity Supply Act of 1948 8

X. Power Costs and Selling Price 9

XI. The Tata Power Companies 10

XII. Estimated Financial Results of the Project 12

XIII. Security 3$

XIV. Conclusions and Recommendations 15

j --;w ? < ILC i Y .. ;JJ - INDIA

I. SUiLhARY

1. This report coversan appraisal of the Trombay Power Project,submitted by three Tata power companies through the Government of India, asa basis for a loan.

2. The project consists of a thermal power plant to be located inthe Bombay area. Thie plant will consist of two similar units with a combinedmaximum generating capacity of 125,000 kw. Some additional transmission faci-lities and substat-ons are included in the project. The plant will burn prin-cipally waste products from an adjacent oil refinery as fuel.

3. The total estimated cost of the project is about Rs. 132 million(c.27.5 million U.S.). The foreign exchange requirements of the project, in-cluding comrmitment charges and interest during construction are estimated atabout Rs. 78 million (416.2 million). Local currency expenditures amount toabout Rs. 54 million (41l.3 million). The imported equipment will probablybe supplied by Germany, Switzerland, United Kingdom, France, Canada and theUnited States.

4. Construction of the first unit is under way and it is expected tobe in commercial operation by October 1956. The second unit is scheduled toGO into operation in June 1957 and the entire project should be completed byDecember 1957.

5. A power study of the Bombay area was made early this year by theBank, and the conclusions reached were forwarded to the Government of India.The results of this study are shown graphically in Annex III. The immediateneed for this plant was established and even with the availability of thisincreased capacity, a shortage of pokier in the Bombay area will again be ex-perienced before additional hydro facilities can be brought into operation.

6. The borrowers will be The Tata Hydro-Electric Power Supply Co.,Ltd., The Andhra Valley Power Supply Co. Ltd., and The Tata Power CompanyLtd. Thaese companies have a long record of successful operation and are allin a good fi. ancial condition. NIanagement and staff of the companies arecompetent and capable of executing and operating the proposed projects. Theloan will be guaranteed by the Government of India.

7. Thie companies' plan is to finance the project with an IERD loanof the equivalent of Rs. 78 million, an issue oi share capital of Rs. 30million, rupee borrowings, possibly fur-ther issuance of share capital, andretained earnings.

8. The introduction of a larger amount of thermal power will neces-sitate an increase in tariif rates of about 35% over the 1953/54 rates throughthe years 1956/57. The rates in later years will be gradually reduced.

9. The companies have, in general, followed a policy of setting tariffrates as high as permitted by the law, and thus have obtained earnings whichhave enabled them to pay preference and ordinary dividends at adequate rates.T hi s1icy of obtaining maxinum rates will be continued and, even after allow-ing ior an expected revision of the method of computing permitted return, thecompanies should still be able to show satisfactory financial results.

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10. It is recommended that a loan of $16.2 million be granted for thisproject. Based on the useful lifc of the equipment, the loan should bc for atarm of 20 years. Considering the construction schedule and the general cashposition of the conpanies, a grace period of about h years on anortizationpayments would be reasonable.

II. INTWRDUeTfnN

11. The Government of India, on February 5, 1953, submitted an appli-cation for a loan to the lata Hydro-Electric Group for the foreign currencyrequirements for the construction of a 125,000 kw thermal power plant, con-sisting of two uni.s, to be located at Trombay, near Bombay. After receiving,during the spring and summer of 1953, the necessary information from the Tatacompanies, the Bank made an appraisal of the project. the study was finishedin August 1953, but no further progress was made because at that time it wasnot certain that the Bombay State Government would approve the installationof, two 62,500 kw units. A revised application for a loan on a project ofone unit was received on i4ovember 9, 1953, and at the same time the Bank wasasked to consider the financing of the Koyna Hydroelectric Project for theState of Borm-bay. The Government also requested that a power study be madeof the Bombay area.

12. A Bank representative visited India early in 1954 to make the powerstudy, which was submitted to the Government of India in June of this year.The report showed the necessity for the installation of two units at Trombayand on September 15, 19541, the Government of India changed the applicationto again cover two units at Trornbay.

13. This report is based on data presented by the Tata Power Companiesincludinc, engineering studies by Ebasco Services, and on information obtainedby Bank representatives from officials of the companies and the Central andS tate Governments.

1a. The information on the physical features of thle project, the costestimates, the methods of financing the project, and the expected financialresults, is reasonably firm.

III. THE bEi0}Y EUCORiCAL SYSTEW

15. The development of the power industry in the Bombay area wasstarted by Tata in 1915. The first plant, Khopoli (61,500 kt,w), which isowned by The lata iiydro-Electric Coiiipany (1iHYdro'l), started operation in1915; the second plant, Bhivpari (72,000 kw), owned by 'The L.ndhra ValleyPower Com,1pany ("Andhra"), started in 1922; and the third plant, Bhira(132,000 kw), owned by The 'Tata Power Company ("Power"), was completed in1927. The total hydro capacity at the present time amounts to about 265,500kw. The runners of the Khopoli units are now being replaced to give an ad-ditiona2 7,500 kcj, which will increase the total Tata generating capacityby the end oi 1955 to 273,000 kw.

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16. The Bombay electric system, which originally contained only the Tatahydro installations, now includes a thermal station at Chola jointly owned bythe Central Railway and the Bombay otate Governnment. The original installa-tion of 40,000 kw was completed in 1929 by the Railway, and a later additionof 24,000 kw is in operation. The addition has not yet been formally acceptedbecause of various deficiencies. This generating equipment is tied into theTata transmission system..at. the Kalyan receiving station through two 1-3/4mile transmission lines. The Railway and Tata have a power interchange agree-ment, effective until 1960. At present, Tata is supplying power to the rail-way during system peak periods and receiving power during the rest of the day.The Central Railway intends to install an additional generating-unit of 18,000kw and has submitted specifications to manufacturers for bids. £his additionalunit will bring the total installed capacity owned by the Ziailway to 82,000kw. The W4estern Railway, which has no generating facilities, receives powerfrom the Chola Plant over the Tata traasmission system and pays Tata a. fixedamount for transmitting the power.

17. The Bonbay State Govermnent has constructed a new coal burning powerplant of 54,000 kw adjoining Chola. All power generated will be supplied tothe Tata system. The plant was- scheduled for full commereial operation inJune, 1953, but due to defective boiler design, the first unit did not go intocommercial operation until April 1954. The last unit is sche-duled for com-mercial operation in hlarch 1955.

18. While the Central hailway owns the transmission facLities forserving its own system, Zata owns all other transmission facilities,. includingthe 110 kv transmission lines from their hydroelectric.plants as well as thesubstations for transforming the voltage from 110 kv down to the consumerefdistribution voltage. Tata sells power wholesale so all low voltage distri-bution facilities are owned by the customers. A map of the area showing thelocation of the power stations and transmission facilities is shown in AnnexIV.

IV. SHE POll."ER IikRI-T

19. The operations of the Tata power companies are entirely in the. Stateof Bombay, which in 1951 had a population of 36,000,000. This representsabout 10% of India's total population. Pbout 31; of all factory eiploymentand 31J4 of all power generation in India is in Bombay State.

20. The following comiparative data shDw the advanced degree of develop-ment relative to the rest of India in the area served by this electric system:

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Per Capita Consumption of iblectricity*

(KWH in 1951)

Ill Bombay Area ServedIndia State by System

Residential 1.64 3.48 27.00Commercial .92 2.65 23.00Industrial 9.94 37.42 50.00Public Lighting .19 .31 .90Irrigation .56 .09 .00

13.25 43.95 100.90

*Figures obtained from 5tate and Central GovernmentStatis tics

21. The principal industry in the state is cotton textiles and eventhough the number of cotton mills operating in the state is only 46% of thenational total, they account for 57% of the cotton mill employment and about70% of the looms.

22. The area supplied by Tata in Bombay city and its environs is oneof the major centers of light industry and its natural advantages have ledto its rapid growth. Tata supplies power wholesale to nine utilities, in-cluding the Bombay Ulectric Supply and Tranz-port Uadertaking,the Bombay Su-burban Electric Supply Company, the Poona Electric Supply Company, all largeindustries using more than 500,000 kwh annually, and the Railways.

23. A power study of the area was completed by the Bank in June 1954and the Government of India was advised of the results of the investigations.The expected loads and available capacity are shown graphically on the chartincluded as hnnex III. The projection of the power demand shows the need fortwo units in the frombay plant and that even then restrictions will have tobe enforced between 1960 and 1962, the time at which it is expected that theKoyna Fydro-Llectric Plant, to be constructed by the otate Government, willbegin operations. Severe restrictions and load staggering have been in ef-fect since 1949, which have retarded the economic development of the area.

V. DLSCRIP1ZON CF THE P--F.JECT

24. The project consists of a thermal generating station, transmissionfacilities and a receiving substation. The thermal generating station willbe located on the northeast shore of Bombay harbor and will have a totalmaximum generating capacity of 125,000 kw consisting of two identical 50cycle turbo-generators, each supplied with steam from a 600,000 lbs/hr steamgenerator. The plant is designed to operate with steam at 1,250 PSI pressureand 950'- F. temperature. The condenser cooling water will be obtained fromBombay harbor and treated to inhibit marine growth. Boiler feed water will beobtained from the Bombay municipal water system.

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25. The boilers are designed to burn fuel oil, hot pitch, refinery gasor pulverized coal. The powerhouse site is adjacent to the Ltandard VacuumOil refinery which has recently been completed and is in operation. Oil, gasand pitch will be available as fuel from the refinery. A sufficient supplyof oil and gas is assured, and since these are the most economical fuels, nocoal handling equipment will be installed at this time. However, designs forthese facilities will be completed and space will be reserved for thleir laterinstallation, should it become advisable.

26. The transformers and switchyard at Trombay will include two 80,000KVA, 13.8/110 kv, and three 10,000/16,600 KVA, 110/22 kv three-phase trans-formers. High-voltage switchgear will be located outdoors near the uowerstation and auxiliary low-voltage switchgear will be indoors.

27. The project will include the following trasnmLissicn facilities:about 3.5 miles of 110 kv double circuit steel tower transmission lines and4.5 miles of double circuit 110 kv underground cable, from Trombay to Bombay;about 3 miles of two circuit 110 kv transmission lines to tie the Trombay sub-station into the existing high voltage transmission system; a new receivingstation at Carnac with two 80,000 kva 110/23.1/11.5 kv three phase transformersone 25,000 kva sinchronous condenser and a switchyard including oil circuitbreakers and controls. The 1'arnac receivin; station will improve the presentsupply conditions and provide additional capacity for the bombay area.

28. ibasco Services, Inc. Oi i4ew York City are the engineers and con-tractors and the engineerinE is proceeding according to construction require-ments. This firm -will also provide a team for testing and starting the plant,for training operating personnel, and for putting t1he station in full opera-tion. Ebasco has appointed their construction manager, who is at the site ardhas direct charge of constructing the project, under the administrative super-vision of fata.

29. The caliber of the operating personnel in the existing plants isvery high and training under the supervision of' Ebasco during the initialoperation should qualify the men as permanent operators.

30. at the present ti,e the ratio of thermal generating capacity tohydro is less than one to three, thle minimum considered necessary to stabilizethe Bombay electrical system. WvJith the completion of Trombay, the ratio willbe increased so that there will be a satisfactory ratio even with the com-pletion of the first stage of the Koyna Project. The bank considers this pru-dent in view of the length of the hydro transmission lines and the possibilityof a recurrence of a dry year like 1951 when it was necessary to impose dras-tic restrictions on the use of power.

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VI. _STT1iTED COSTS

31. The total cost of the project, based on Ebasco estimates andbroken down into foreign exchange and local currency components, is as fol-lows:

Non-Rupee Rupee Total -Expenditures Expenditures Projectb1,000 equiv Rs. 1,000 Rs. 1,000 equiv.

Land, Building and Sitefacilities 157 17,396 18,150

Boiler P-lant Lquipment 4,519 5,146 26,837Turbine-Generator Units 2,068 10,579 20,505Accessory Electrical and PowerPlant zquipment & Supplies 877 2,018 6,228

Trombay Substation 1,005 1,200 6,024Ocean Freight, insurance andDuties 1,340 3,847 10,279

Transmission Lines and CarnacSubstation 1,409 5,132 11,895

Design zngineerin-, Construc-tion Pianagement and Toolsand Services 2,610 5,618 18,1h6

C'missions and Contingencies 900 3,064 7,384

Sub-Total 14,585 54,000 125,448Comlitment Charges and In-terest During Constructionto June 30, 19471/ 1,315 200 6,500

Total 16,200 5h,200 132,048

lotal in Rupees 77,848 54,200 132,048

Total in equivalent .,1 U.S. 16,200 11,300 27,500

32. The principal equipment for the first unit has been ordered andoptions are being exercised for the ~,urchase of the principal equipment forthe second unit. Bids were received on an international basis and this pro-cedure will be continued for the purchase of the balance of the equiprment.It is esti..iated that the goods and services to be obtained fromn Germany willcost the equivalent of about U.S. $6.25 million; those from U.S. </4 7 million;t. ose from England the equivalent of 2.0 million; and it is expected thatthe balance of the goods will be obtained from France, Switzerland and Canada.Up to October 15th, awards equivalent to is. 28.8 million (O.S. ,6 million)had been made for equipment and services.

2/ Only actual commitment charges and interest payable are included.

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33. On the basis of the power plant cost estimates, the cost per kw ofinstalled capacity will amount to the equivalent of q184, which is consideredreasonable in comparison with similar projects. The estimates are reasonablyfirm as they are based on actual orders placed and bids received. For thesame reason, delivery dates can be forecast with reasonable accuracy.

34. The investment required in distribution facilities to utilize theadditional power to be provided by the Trombay station will be made bv thedistributing companies. As the distributors have continued to expand andrehabilitate their distribution facilities in spite of the shortage of powver,it will not be necessary for them to spend any large amounts of money. Thesecompanies will have more than adequate funds to carry out the required expan-sion program.

VII. CONSTRTUCTON i,ND EXiNMTURE SCHEDULES

35. The first unit, construction of which was started in 1953, isscheduled to go into commercial operation by October 1956. The erectionof the second unit will start in hviarch 1955 and it will be put in op rationin June 1957. The entire project, including the transmission system, shouldbe completed before December of 1957.

36. Tlhe progress to date of the project has been satisfactory. Theengineerin;p and construction of the project have been timed to meet the deli-very of equipment. Water lines are being installed, land graded, roads con-structed, drainage facilities are underway and the office and service buildingis being constructed.

37. Expenditures of foreign exchange and local currency are expected tobe made according to the following schedule:

Years Foreign Exchange Local Expenditures Totalending Expenditures expressed Expressed in nxpressed inJune 30 9.million Rs. million Rs million Rs million

1954 1.10 5.3 2.8 8.11955 4.60 22.1 25.2 47.31956 7.33 35.2 18.5 53.71957 2.57 12.4 7.2 19.51958 .60 2.8 .5 3.4

16.20 77.8 54.2 132.0

Mote: The fiscal year of the companies runs from July 1 to June 30

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VIII. IL1THOD OF FIZIANCIiIG

38. The companies plan to cover the foreign exchange requirements ofthe project by means of a loan from the Bank.

39. The greater part of the local currency financing has been providedby the issue of Rs. 30 million of new share capital; 75% has been paid inalready; the balance will be called in January 1955. The remainder of thelocal currency needs of the companies will be met by borrowing and from re-tained earnings.

40. In the companiest cash projection the sources of finance areshown as follows:

IBRD loan Rs. 77.8 million

New Share Capital 30.0 "

Local Borrowings 10.0 It

Gompanies' own htesources 14.2 i

LtS. 132.0 million

41. The IBrD loan would, according to these figures, cover about 59%of the total estimated cost of the project.

42. The companies propose to borrow in the first instance from banks,and have assurances from these banks that they will advance the amountsneeded. Subsequently, these borrowings would be replaced by debentures orbe repaid out of the proceeds of an issue of shares.

43. The companies should have no problem in financing a part of theproject from their own resources.

IK. INMiIi ZLECTRICITY SLCPLY ACT OF 1948

44. Before the passage of the zlectricity (Supply) Act of 19148, thelicenses to establish and operate electrical undertakings in India weregranted by the -~)taze Governments under the Ilectricity Supply Act of 1910.The 1948 Act provides for the establishment of a Central 6lectricity authorityby the Central Government to establish policy, act as arbitrator, carry outinvestigations and provide reports. The act also provides for the establish-mtent OI State zlectricity Boards by the 5tate Covernments, which are respon-sible for carrying out the provisions of the act. The Eoards are charged

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with the general duty of promoting the coordinated development of the genera-tion, supply and distribution of electricity within their respective statesin the most efficient and economical manner possible.

45. Section 57 of the Aet deals specifically with the mandatory finan-cial principles to be followed by a licensee engaged in the utility field,regardless of the existence of a State Board. i. licensee must adjust ratesfor the sale of electricity by periodic revision so that the "Clear Profit" inany one year shall not, as far as possible, exceed the amount of "reasonablereturn", which is established at present, as 5/0 of the "Capital Base". "Capi-tal Base" is defined as the original cost of works and works in progress plusthe average value of stores and workin- capital, less depreciation of theassets according to a schedule which specifically states the maximum rates.

46. "Clear Profits" is defined, accordirig to the presently effectiveAct, as income derived from sale of energy, rentals and other general utilityreceipts less normal operatinC expenses, taxes, depreciation and interest onlong term borrowings. The !.ct provides for automatic action in variation oftariff rates but subject to retroactive review by the Electricity Boards.

47. The bombay State Government has not established a State ElectricityBoard as provided for b the hct, but has been authorized by the CentralGovernment, on an annual basis, the right to grant licenses under the 1910Act. It was under this right that the State Government extended the Tata'sfranchise until 1975 and granted the license to construct the Trornbay Flant.

48. The Government of india has recently published and circulated adraft bill which is designed to change certain features oi the present Act.The mnost important chan,es are: (1) interest on lon- term borrowinEs wouldno long-er be analowable charge in arrivinv at "Clear I rofit", (2) it -wouldbe mandatory for State Governments to establish btaQe Llectricity Eoards im-mrediately, and (3) the reasonable rabe of return would be established as 2%above the current bank rate, with a minimumu rate of return of $%. ;The pre-sent bank rate is 31b, which on the proposed basis would give a rate of re-turn on the "Capital Ease" of 5if.

X. PO4ER rOSTS UsE S,LLh G PIUCE

49. The performance ot the a ombay Plant will be in line with modernpractice, using coiiiparable fuels. Avera,e production costs per kilowatthour at the plant will vary between 0.38 annas and 0.45 annas (4.9 and 5.9U... rndls), dependlng on the type of iuel used and t-se quantity of powergenerated.

50. The plant will normally use as fuel waste gases and hot pitch ob-tained from the adjacent refiniery of Standard-Vacuum. Fuel oil will be usedonly when tl-e refinery is shut do,n or a shortage of the waste productsexists. An agreement has been reached and a letter of intent issued by Tata

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to Standard-Vacuum (dated Cctober, 1954), which indicates a base price ofBunker oil at about 90 rupees ($19 U.S.) per long ton. The contract will beopen ended with a provision for cancellation by either party on two yearsnotice. The refinery gas and hot pitch, however, which will be the princi-pal fuels used, would cost respectively 22-% and 40% less than oil on a BTUbasis. The average cost of fuel from the refineries for the projected loadson the Trombay plant is calculated to be 25 annas (33 cents U.S.) permillion BTU.

51. The average cost of power per kilowatt hour in the Tata system hasbeen low due to the low cost of hydro power which comprised most of the sup-ply. With the addition of thermal generating units at Chola in the period1953 to 1955, the average cost of power in the system will be substantiallyincreased. Thereafter costs will fluctuate. The entry into service of eachnew thermal generating unit will increase costs, but this effect will besomewhat offset as the load grows to take up the total production of theunit. Estimates prepared by Tata and the Bank show that the average costsper kwh of all power delivered to the transmission system will vary between.27 and .36 annas (3.5 and 4.7 U.S. mils) during the period 1954/69. Inthis report it has been assumed that the Koyna Hydroelectric project of theBombay State Government will come into operation in 1962 and that power fromKoyna would be delivered to the Tata system at a price of .4 annas per kwh.It is believed that this price, although quoted to Tata by the government,is low, based on information available on the Koyna project at this time.

52. Rates in effect prior to May 1951 for wholesale power sold by theTata system averaged .38 annas (5.1 U.S. mils) per kwh. All rates wereincreased 121% in Niay 1953 and an additional thermal surcharge of 15% wasimposed in April 1954. Further increases are contemplated to allow forincreased costs for power generation from thermal plants. It is expectedthat thie average selling price of power in the Tata system will vary between.53 annas and .60 annas (6.9 and 7.8 b.S. mils) during the period 1954/67.

53. The wholesale rates on the Tata system are, as far as is known,the lowest in India. Thle increase in costs occasioned by the introductionof a larger percentage of thermally generated energy will lead to an increasein tariffs amounting to a maximum of about 35% of 1953/54 rates. The rateswould still be low and compare favorably with those of similar systemsthroughout the world.

XI. THE TATA POI.0ER COMPANIES

54. The Tata power companies are a group composed of The Tata Hydro-Electric Power Supply Co., Ltd., formed in 1910, The Andhra Valley PowerSupply Co., Ltd., fonned in 1916, and Thle Tata Power Co.., Ltd., formed in1919. These companies are privately owned separate entities but operate as

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a group under the direction of the same managing agents, the Tata Hydro-Electric Agencies, Ltd. They form a part of the Tata association of enter-prises which have substantial financial resources, an excellent creditrating, outstanding managerial ability and a long and successful history ofoperations in many different industrial and other fields in India. Thethree companies had developed the potentials of their hydroelectric resourcesto an economic maximum before 1942. Since then, capital expenditures havebeen confined to the improvement, modernization and minor expansion ofgenerating plants, and the enlarging of transmission facilities, Part ofthe properties composing the Tata system, principally the hydro plants, areowned by the companies individuaJly; other parts of the system} principallythe transmission lines and substations) are owned jointly in the ratio 2,3, and 5 for Hydro, Andhra and Power respectively.

55. In 1939, the Tata Companies (Hydro, Andhra, and Power) enteredinto a reciprocal agreement to define the sphere of the operations of eachparty, to promote cooperation between them and to preserve and protect theinterests of the three companies. This wras necessary because of the commonareas of supply and joint contracts for the sale of power. This agreementwas modified in September, 1954. As a result of this modification, all billswill be payable to the Tata Power Company and this company will pay for alloutside energy purchased. The Tata Power Company will calculate the averagenet unit rate for energy sold and allocate revenue more or less accordingto the basic annual capacities of the three companies.

56. Balance Sheets of these companies and a combined balance sheet asat June 30, 1954, are given in Annex I. It will be noted that the financialposition of each of the companies is sound. One of the companies, Hydro,has no debenture liabilities. Andhra has Rs. 9.8 million of 4% 1959 deben-tures outstanding, Power, Rs. 4.8 million of h? 1951/55 debentures andRs. 25 million of h% 1965/70 debentures. In the case of Andhra, the ratiobetween funded debt and equity is 20 to 80 and in the case of Power, theratio is 30 to 70.

57. Dividends have always been maintained on the preference shares onwhich the rate is 7% or 7 %, according to the issue. Since the last war,dividends on the ordinary shares have varied between 6.8% (in 1945) and7.5%.

58. The three Tata companies have separate Boards of Directors.Mvir. J.R.D. Tata is Chairman of each Board; the other members, who in somecases sit on more than one board, are all representatives of the leadingindustrial and banking interests in India. Mr. J.R.D. Tata is also Chairmanof the Board of the managing agency, Tata Hydro-Electric Agencies Ltd.Last year ilr. J. D. Choksi, who for a number of years had managed the agency,resigned to become a senior director of the Tata interests. He remains onthe Board of Directors, ho-wever, and h1r. K. C. Bakhle, who was formerlyDeputy Managing Director, has assumed his position. The Tata power companies

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renewed their contract with the managing agents in April of 1952 for atwenty year period from July 1951, when the old agreement expired. Themanaging agents' charges amount to about 5% on gross revenues, which is areasonable figure for this type of operation.

59. The Government of India has agreed to guarantee the loan. TheGovernment has also agreed to enable the companies to purchase the necessaryforeign exchanfe to permit them to pay principal and interest on the loan.The Government will have the right to appoint one director to the Board ofDirectors of each company during the life of the loan. The Government willenter into an agreement with the Tata companies providing that, in case ofpayment by the Governrent under its guarantee, it would succeed to the rightsof the person to whom the payment had been made. The companies have pro-posed that they should be joint borrowers and that they will be jointly andseverally responsible for the entire loan, although among themselves thecompanies propose to participate in the ratio of 2,3 and 5 for Hydro, Andhraand Power respectively.

60. On November 19, 1953, the Bombay State Government granted to theTata Power Companies (Hydro, Andhra and Power), under the Indian 1zlectricitySupply Act of 1910, a license to construct the Trombay rhermal Power Plant.The license was for two units, one for installation immediately and thesecond when, after consultation with the State Government, it had beendecided that the power requirements in the area required it. In September,195h, the State Government authorized the installation of the second unit.This license contains provisions with respect to the operation of the thermalplant if energy becomes available from any hydroelectric generating stationbelonging to the Government. at the same time, the Government granted anextension of the power companies' licenses to purchase and sell electricityin the Bombay area. In that extension, the Government postponed until 1975its right under certain options to purchase the hydroelectric plants.

XII. ESTIMATED FINANCIAL RESULTS

61. In 1952/53 and 1953/54 the companies' "clear profit" on a combinedbasis and after charging debenture interest was almost as great as the"reasonable retur;.." As pointed out in Section IX, it seems likely that infuture interest on long term borrowings can no longer be a charge in arriv-ing at clear profits.

62. In making their estimates for the years 1954/55 onwards thecompanies have assumed that interest on long term borrowings would not be anadmissible charge in arriving at "clear profits," but at the same time have,to be conservative, assumed that their tariff rates would be set at a figurewhich would secure a return on "capital base" of only 5,/, instead of the5g% which seems likely to be allowed. A statement, based on the companies,

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assumptions, showing estimated revenue, sources and application of funds,available funds and revenue available to cover debt service has been pre-pared and is attached as Annex II. The statement reflects the combinedposition of the three compianies up to June 1967. Estimates for later yearshave not been given. This is because the load forecasts show that newgenerating capacity will be needed by 1970, which would probably mean thatconstruction work on a plant or plants, and extensionis to the tranismissionsystem, wculd have to be started by 1967, but details of the nature andcost of these additiois cannot at present be estimated. The companies,liquidity position, as shown in the statement, would by 1967 be such as torequire some action, but without knowledge of the expenditures to be madeafter that date it is impossible to make a realistic forecast of financialdevelopments after 1967. (This point is further discussed in paragraph 71).

63. in the estimates the proposed Bank loan has been assumed to havea term of 20 years with a grace period to October 1958 (last amortizationpayment October, 1974) and an interest rate of 4-3/4%. Full dividend pay-ments on the preference shares, and 7b% dividends on the ordinary shares,have been assumed.

64. No provision has been made for the redemption of existing deben-tures, which would require payments of Es. 4.8 million in 1954/55 and Rs.9.8 million in 1958/59, since the copanies plan to extend or refinance theseobligations w.len due. In the case of the debentures falling due in 1954/55,the companies are confident, on the basis of their discussion with the Govern-ment and the principal debenture holders, that the term of the debentureswill be extended. The Bank is of the opinion that the companies can extendor refinance these obliwations when they fall due.

65. It will be noted that the co.panies plan substantial outlays forsystem improvement and expansion, not only in subsequent years, but alsowhile the Trombay project is being eXecuted. These outlays are justified.

66. Th-e companies' projection of moverrents of cash shows expectedshort-term borrowings between the fiscal years 1955/56 and 1963/64 of Rs.25 million. The companies have stated that they have received from theirbankers assurances with respect to such borrowings. At least Rs. 20 millionol these borrowings are expected to be repaid out of the proceeds of issuesof shares, or of long-term debentures, or by a combination of these methods.lTne balance (up to a limit of Rs. 5 million) will probably remain as con-tinually renewed short-term borrowings. In Annex II the whole amount ofRs. 25 million is treated as borrowings, bearing interest at 5% per annum.No redemption is provided for the debentures because it can reasonably beassumed that these would be long-term.

Estimated Earnings

67. The annual net profits, after taxes, frorm 1958 (when the plantwould be in full operation) to 1967 would average about Rs. 10 million,tuhich would amount to a return on share capital of sliEjhtly less than 8%.

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Cash Position

68. The statement shows that cash availabilities would drop from thelevel of kis. 33 million at June 1954 to Rs. 9.7 million in 1956, then riseto about Rs. 20 million by 1961 and remain around that figure for the restof the years shown in the statement.

Financial Position

69. A pro-forma balance sheet of the combined position of the threecompanies as of June 30, 1958 is as follows:

Nillions of RupeesAssetsPlant and equipment, less depreciation 274.6Current assets 40.3

314.9

LiabilitiesCapital and ,,eserve 164.9Loan from IBRD 77.8Debentures 39.6Local borrouings 10.0Current Liabilities 22.6

314.9

Current assets would be about 1.8 times current liabilities. Total loans,including the IBED loan, would be covered by total assets about 2.5 times.l/The ratio of long-term debt (including local borrowings) to equity would beabout 44 to 56.

Debt Service

70. In 1958/59, the first year of full debt service on the proposedIBRD loan, total debt service would be covered about 2.6 times by net operat-ing revenue before depreciation, a coverage which would gradually diminishto 2.3 times by 1966/67. 2/

Position After 1967

71. For the reasons stated in paragraplh 62, it is not possible to make arealistic oJeetion of the companiesI financial development from 1966/67 up to1974/75, the year in which the last part of the IBRD loan wouLd be repaid.However, the financial and business ability of the companies has been amplydemonstrated in the past and it is reasonable to assume that they will, duringthose eight years,continue to be in a sound financial position.

1/ All references, both here and later, to cover on the IBRD loan or debtservice should be taken as referring to cover on the rupee equivalentat L.8 rupees to the dollar.

2/ This would result from capital base being reduced by depreciation,causing permitted return, and consequently net revenue, to becomesmaller.

- 15 -

XIII. SECURITY

72. Two of the Tata companies have secured long-term debt outstanding:

a) Andhra

i) A 4% issue of first mortgage debentures amounting toRs. 9.8 million. The debentures are repayable in 1959.

b) Power

i) A 4% issue of first mortgage debentures amounting toRs. 4.8 million. The debentures are repayable by 1955.

ii) A 4% issue of second mortgage debentures amounting toRs. 25 millionh The debentures are repayable in theyears 1965/1970.

73. The security for these debentures constitutes charges on all assetsof the issuing company, which would include the company's share in the newTrombay plant.

74. A Bank loan would be secured by a deed of trust constituting afirst mortgage on the Trombay license and plant, the underground cable andoverhead transmission lines, and the Carnac receiving station, and by af'loating charge on the other physical assets appertaining to these properties.The trustees would be Baring Brothers of London. The borrowers have agreednot to create, without the approval of the Bank, any further mortgage orcharge on any of their properties or assets in excess of (1) Rs. 20 millionfor the sole purpose of financing or refinancing the original cost of theproject, and (2) Rs. 5 million outstanding at any time in short term borrow-ings from banks. The creation of a mortgage on the Trombay plant will makeit necessary to amend the existing debenture deeds so as to subordinatetheir liens to the lien of the Bank's mortgage and charge and the Tatacompanies are taking the necessary steps to obtain the agreement of thedebenture holders and the loan would not become effective until the Bank'ssecurity has been created.

XIV. CONCLUSIONS AND RECO1MMNDATIONS

75. The Trombay Project is sound.

76. The three companies, which would be the borrowers, are competentto execute and operate the proposed project; they are each in a strongfinancial position, and, as a group, are financially able to carry out theproject.

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77. The project is considered suitable for a Bank loan equivalent to16.2 million, which represents the entire foreign exchange requirements ofthe project. A term of twenty years, representing the useful life of theequipment, appears appropriate; the construction schedule and the companiestcash position require a four year grace period on amortization payments.

78. A Bank loan would be secured by a deed of trust constituting afirst mortgage on the Tromibay license and plant, the cable and overheadtransmission lines and the Carnac receiving station, and by a floatingcharge on the other physical assets appertaining to these properties.

ANN7X I

TATA C01MPANIES

Position as at June 30, 1954

Hydro Andhra Power Combined

ASSFTS (in millions of Rupees)

Plant and Equipment 44.7 57.3 110.1 212.1Inventories 1.6 1.4 3.9 6.9Advances and Book Debts 3.4 4.4 8.0 15.8Cash, Investments, etc. 6.6 12.7 13.7 33.0

Total Assets 56.3 75.8 135.7 267.8

L1I' IL ITIT'S

Capital, Issued and SubscribedPreference 8.9 4.9 8.7 22.5Ordinary 22,5 28.1 47.7 98.3

31.4 33.0 56.4 120.8General Reserves, etc. 6.1 4.8 1h.0 24.9Depreciation Fund 13.6 20.4 25.9 59.9Debentures - - 9.8 29.8 39.6

Current Liabilities 5.2 7.8 9.6 22.6

Total Liabilities 56.3 75.8 135.7 267.8

ANNU II

TEE TATA COCUPNS

STATEMENT OF REVUBU. SOURCE AND APPLICATION OF FDNDS AVAILABLE FWDS. AND RBVENOE COVER FOR DEBT SERVICEON A COhBID BASIS

(Uxpressed in thoumands of Rupees except where otherwise stated)

Yeara ending June 30 15 15 156 1? 1958 1S59 1960 1961 1962 1963 1964 1965 1966 1967(Actual)

I Revenue Account

Revenue from sales of power 31,000 40,100 49,300 55,700 52,800 56,100 59,200 62,600 64,400 61,600 65,200 72,900 75,400 77,100Other revenue 1.800 1,700 1.600 1.800 1.800 1.700 1,.600 1.700 1.700 1,700 1,700 l, l;OO170Ot tal revenue 32 so, 41,2ec 5D 9C0 57,500 54,1600 57,-0 ,60 100 64,J 0,100 63,300 66,900 74,O 77,lGO 7B,0Operating and adminiatrative expenes 13,100 21,600 26,900 33,500 28,000 30,100 32,100 34,400 35 500 32,000 35,900 43,1400 45,8eo 47,700Depr.ciation 3 100 3,300 3.14oo 3,0 7,30 ).0 400 007.500 7 ,500) 75oo 700 7,1400 7.140 7.10

RNt operating etc revenue 16600O 16 9W0 20,600 20,500 19,300 -140 21,3 2- 7 4°° 7 5° 23,BOO 23,700 23,4B0 23,940 74,100Interest 1,600 1,6W0 1,6CO 1,60C 5000 5,700 5 700 5,500 5400 5,500 5 .500 5,400 5,200 5.OCO

Net profit before taxes 15,000 13t5,30 19,000 1e,900 4 ,3 00 114,700 15,600 1600 17,60 0,300 4S ,2W0 1S,400 18,700 19,000Taxes 14,800 5,100 6,100 ,0 3,800 14,'700w ,800 6,800 700 810 ,00 8300 M.5O 8.600Net profit after taxes 4 80 e1O 10

Share capital 120,900 128,400 128,400 128,400 128,400 128,400 128,400 128,400 128,400 128,400 128,400 128,400 128,400 128,400Percentage on share Lapital of&

NRt profit before taxation 12.4 11.9 14.8 14.7 11.1 11.4 12.1 13.2 13.7 14.2 14.2 14.3 14.6 14.8NRt profit after taxation 8.4 7.9 10.0 10.7 8.2 7.8 7.6 7.9 7.9 7.9 7.9 7.9 7.9 8.0

II Source of Funda

Net operating eto revenue 16,600 16,900 20,600 20,500 19,300 20,400 21,300 22,400 23,100 23,800 23,700 23,800 23,900 24,000Add back depreciation 3,1C0 3,300 3,400 3,500 7,300 7,300 7.4W 7,500 7,500 7.500 7,300 7,400 7 400 7.1lo

19,700 Z0,2C0 234,000 24,W0 26,6D 27,7W 27,7C)0 29,900 30,600 3, 31,03i 3i,2eo 3i,3ao 31,1DD

Soles of asoeta 100 100 100 100

Share capital 22,500 7,500

Local borrowings 5,000 5,000 5,000 5,000 5,000

lbRD loan 27.400 35.200 12,hOO 2.8W4,20 55 100 6420 41 50 2;9 4 27,700 2S,cC00 34,900 30,600 36,400 3b,0C0 3120 31,400 31,1W

III Application of Funda

Capital expenditurest

Trombay - foreign currency 5,300 22,100 35,200 12,400 2,800- local currency 2,800 25.200 18.500 7.200 500kg100 47,300 53,7C0 619600 3,300

Other 1.500 5,900 4.800 2.600 2,8 5,600 3,600 5,900 7,000 8,9W 5,7,900 900 55o 5,4009,6D 5.3,200 SiS 22,200 6,100 5. -9 ;,g itr 3,6 'sOS 90 5 ,700 1,90 5,50 5400

Debt Service:

Debentures - interest 1,600 1,600 1,600 1,600 1,600 1,600 1,60o 1,600 1,600 1,600 1,600 1,600 1,600 1,600Local borrowings - intereset 500 500 50 600 700 900 1.100 1,200 1.200 1,200

160 1601,600 1,600 2,4Le 2,r O0 2,10 2,2;O 2,300 2,50 70 2 0 vD ZS

IBRD - interest 2,900 3,600 3,6o0 3,300 3,200 3,000 2,800 2,600 2,400 2,200mortization 3,200 3.300 3,500 3.7°° 3,800 4,100 _4,200 4,500 4,600

2.900 6goo 6,9 .00 6 , 900 6 800 6,9Cf 6,c00 6,900 6 vOOTotal debt service 1,600 1,600 1,600 1,600 5,000 S,90 9 ,000)U 9,000 9,200 9,3CO 9,o00 9,600 9,700

Taxes 4,800 5,100 6,100 5,100 3,800 4,700 5,800 6,800 7,500 8,100 8,000 8,300 8,500 8,600

Dividends 7,300 8,100 8,400 9,600 9,600 9,600 9,6C0 9.600 9.6C0 9.600 9.6D0 9.6CD 9.600 9,6eo23s300 6S 000 74 600 38,500 24 500 2S,SC0 28,00D 3I 300 33 300 35. A90 32 9D 2.9 A4: 333D 3,00

IV. Available FuE

Surplus or shortage for year 18,900 -12,900 -10,400 3,000 4,900 -1,100 800 3,600 -2,700 500 3,100 1,800 -1,900 -2,100Available at beginning of year 14,100 33,080 20,100 9,7 00 12,00 17,600 16,500 17,300 20,900 18,200 18,700 21,800 23,600 21,700Available at end of year 33,000 20,100 9,700 12,700 17,600 16,500 17,300 20,900 18,200 18,700 21,800 23,600 .700 19,600

V. Relation of Revenue to Debt Service

Net operating revnue beforedepreciation but after taxes 14,900 15,100 17,900 18,900 22,800 23,000 22,900 23,100 23,100 23,200 23,000 22,900 22,800 22,500

Total debt service 1,600 1,600 1,60o 1,600 5,000 8,900 9,000 9,000 9,200 9,300 9,600 9,600 9,700 9,600

Number of tines debt service covered 9.3 9.4 11.2 11.8 4.6 2.6 2.5 2.5 2.5 2.5 2.4 2.4 2.3 2.3

M W! K __ __ F 1 __ I ~ __ 1 1 ! __ A ANNEX Mn

r_ __ __ _ __ ___ __ __ __ ___ .____. .______ Z__ Totol instolle Hydro Copocity_ ______

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