RETURN TO R E S T R I C T E D

REPORTS DESK I R e pWITHIN | 1 uu i Report No.TO-158a

ONE WEEK

This report was prepared for use within the Bank. In making itavailable to others, the Bank assumes no responsibility to them forthe accuracy or completeness of the information contained herein.

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

JURUNJIRIM HYDROELECTRIC PROJECT

BRAZIL

January 9, 1958

Department of Technical Operations

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CURRENCY EQUIVALENTS

One US $ = 50 CruzeirosOne Cruzeiro = 2 cents (U.S.)US $ 1 million = 50,000,000 CruzeirosCruzeiros 1 million - US $ 20,000

JURUVIRIM HYDROECTRIC PRO JCT

BRAZIL

TABIE OF CONTEITS

PageSull I IIARY

I. INTRDUCITION 1

II. THE BCRR(7NT1M 1

Organization and Kanagement 1Project Financed by the Previous Bank Loan 2Pro grax for Development of the Paranapariema River 2Service Area 2Financial Position 2

III. TIER PR.OJECT P-iPOSED FOR TL1NA1,CITNG 3

Description 3Estimated Costs 3Arrangements for Construction 5Return on Additional Capital in Hydro over

Thermal Alternative 5Construction Schedule 5

IV. POUl-F HARIET 6

The Distributing Companies 6Sorocabana Railway 7Sao Paulo Light System 7

V. FINA1CIAL PROSPE]CTS 7

Capital ExDenditures and Sources of Funds 7Basis of 5stimates of Future Position 9Depreciation 10Profits 10Debt Service 10Dividend Policy 10Cash Position 11Pro-Forma Balance Sheets 11Debt/Equity Ratio 11Security 11Financial Position in Relation to Tariffs 11

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TABLE OF CONTEIJTS

Page

VI. ECOIO1'iIC JUSTIFICATION 12

VII. COINCLIWSIOIJS AND 1TOO11TINDATOLOS 13

List of Appendices

A. Long Range Program for Development of Paranapema River.B. Stock Subscription Statement.C. Condensed and Adjusted Balance Sheet as at December 31, 1956.D. Detailed Description of the Project and Breakdown of Foreign

Exchange Costs.E. Analysis of Return on Additional Capital in Hydro over

Thermal Alternative.F. Use of Power by the Five Private Utilities.G. Use of Pmrer by the Sorocabana Railway.H. USELPA Peak Capacity and Energy Production: Estirmated Supply

Available for Sao Paulo Light System.I. Estimate of Earnings, Source, Application and Availability of

Funds and Revenue Cover for Debt Service, 1957-1966.J. Regulation of Electricity Enterprises and Tariff Rates.K. Provision of Funds by the State of Sao Paulo.L. Condensed and Rounded Pro-forma Balance Sheets as at

December 1962, 1964 and 1966.

Chart shoxin- demand of energy on USEL.PA Systen.

MIap of Project in Preface

BRAZIL

JURUMIRIMGALTO HYDROELECTRIC PROJECT

Avore

( BRAZIL tPIRAJU

| tt ( l lTARARE 47ITARARE

JURU ~ ~ JRMRM 56.0 ________

_ X 2 4 4 ° z° 6 OKM 7

OURINHOS 404.00~ ~~~~~~~~~JUUIRM 680

ITUNNEL ~ 52 00M RM UCTO

ITARARE~~~~~~~~~~~~~~~~~~~~~~~~~~~O RIOP0AN

GRANDEMDCD 36850IBRD-399

JURUiIRIM HYDROELECTRIC PROJECT

BRAZIL

SURitLARY

This report covers an appraisal of a project for a hydroelectricplant to be built by Usinas Electricas do Paranapanema, S. A. (USNLLPA).

ii. In December 1953 the Bank made a loan of $10 million to USELPAto finance the foreign exchange costs of the Salto Grande hydroelectricplant, including transmission lines and expansion of the distribution sys-tems of five private utilities which were prospective customers. The projectis nearing completion and will begin to produce powxer in the spring of 1958.

iii. The present project, for which the Bank has been asked to considera loan to cover the foreign exchange costs, consists of a dam and hydraulicplant at Jurumirim, with installed capacity of 85,000 kJ, together withassociated transmission facilities. The project is scheduled to be corm-pleted by abc-t mid-1961.

iv. The project is estimated to cost $47.5 million equivalent, ofwhich the foreign exchange, inclusive of interest during construction, isabout $13.4 nillion equivalent.

v. The local currency costs are to be financed by capital subscrip-tions by the State of Sao Paulo, by a loan from the Banco Nacional doDesenvolvimento Economico (BNDE), a government agency, and to a minor extentfrom earnings.

vi. The project is technically sound and the estimated cost is reason-able. Power requirements in the market area served, including Sao Paulo,are more than sufficient to absorb the power output of the project.

vii. Financial forecasts show that the proposed borrower should be ina sound position and that debt service of the proposed loan would be ade-quately covered.

Yi'i. The project is suitable for a Bank loan of about $13.4 millionequivalent; a term of 20 years, including a grace period of about 4 years,would be appropriate.

JURUIERIMI HYDROELECTRIC PRQJECT

BRAZIL

I. INTRODUCTION

In December 1953 the Bank made a loan of $10 million to theUsinas Electricas do Paranapanena, S.A., (USELPA) to finance the foreignexchange costs of the construction of the Salto Grande hydroelectricproject on the Paranaoanema River. The Salto Grande project was the firststep in the develonment of the power potential of the Paranapanerma Riverin the coffee growing area of the central and western sections of theState of Sao Paulo. The Salto Grande project, having 60,000 Kw of in-stalled generating capacity and including transrission lines and expan-sion of the distribution systems of the five private utilities to besupplied from the plant, will begin to pro*ace power in the spring of1958 and will be fully in service by the end of that year.

2* The power requirements of the growing urban and agriculturalareas served by the project, including that of the electrified SorocabanaRailway, makes it advisable to proceed with the next project in the sequenceof developing the Paranapanema River. Accordingly, the Bank has beenasked to consider a new loan of $13.4 rmiillion equivalent to cover theforeign exchange costs of a dam and power station at Jurumirim with in-stalled capacity of 85,000 Kw and the necessary transmission lines to inter-connect this new plant with Salto Grande and with the Sao Paulo system.

3. This report covers an appraisal of the proposed project, ofUSELPA's ability to execute and manage the project and of the require-ments of the market to be served.

II. TIE BORRWER

4. As in the case of the previous Bank loan the Borrower would beUsinas Electricas do Paranapanema, S.A. (USELPA), which is one of the twoprincipal instruments of the State of Sao Paulo for power development.USELPA was organized in 1953 at the suggestion of the Bank, to take overthe Federal concession which had been granted in 1950 to the State ofSao Paulo to develop hydro power in the Rio Paranapanema region.

Organization and Management

5. USELPA is authorized to function as a public utility and isorganized accordingly. The organization is satisfactorily carrying outthe Salto Grande project and it should be capable of carrying both it and

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the proposed Jurumirim project to completion and of operating them whencompleted. It presently plans to sell its power wholesale to distribu-tors and a railroad.

Project Financed by the Previous Bank Loan

6. Construction of the Salto Grande project was started in 1952 andin December 1953 a Bank loan of $10 million was granted to aid in financingits construction. The project was designed and is being constructed bySERVJIX, a Brazilian engineering and construction firm. The first of thefour 15,000 1'Kw units will be placed in service in early 1958, and theentire proJect will be completed during that year. The remaining facili-ties included in the original loan and comprising the transmission systemsand the expansion of the distribution systems of the five private utilitieswhich will purchase USELPA Dower, are also to be ready for service during1958.

Program for Develo.pment of the Paranapaneva River

7. The Salto Grande project, with 60,000 Kw capacity, and the pro-posed Jurumirim project with 85,000 Kw of capacity are the first of eightprojects planned by USELPA for the development of more than 600,00co irw1/cpower potential of the Paranapanema River which, when exploited, shouldprovide about 5j billion kwh from a fall of some 280 meters in a stretchof the river of sons 315 kilometers. Data as to the several developmentsultimately planned are given in Appendix A.

Service Area

8. Power from the USELPA system wrill serve the rich and rapidly de-veloping coffee growing area, and its urban centers in the scith centralportion of the State of Sao Paulo. The area to be served is bounded ge-nerally by the Rio Grande, Parana, Paranapanema and Itarare rivers. Theelectrified Sorocabana Railroad, which will be a large consumer of USELPApower, connects this agricultural region with Sao Paulo. To the extent itis available, USELPA power will also supplement the supply for the in-dustrial metropolis of Sao Paulo.

Financial Position

9. As at December 31, 1956 the capitalization of the company was:

Share capital Cr$ 446.5 million 55%Long-term debt 11' 370.7 "1 45%

Total- Cr$ 817.2 million 100%

1/ Installed capacity is contemplated to be somewhat more than 1,000,000 Kw.

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10. The State of Sao Paulo held over 99.8% of the shares, The re-mainder were held by three directors and the five utilities which will besupplied with power. The details of shareholdings are given in Appendix B.Since December 31, 1956 the outstanding capital of Cr$ 222.9 million hasbeen paid in; the State owns all but Cr$ 1.2 million out of the total ofCr$ 669.4 million. The Balance Sheet as at December 31, 1956 is given inAppendix C.

III. THE PROJECT PROPOSE) FOR FINAMTCING

Description

11. The project consists of: a concrete dam at Jurumirim about55 meters height and having a length at the crest of about 400 meters; apower house located at the foot of the dam with installed capacity of85, 000 Kw; an outdoor transforner station and switchyard; and two trans-mission lines, one of 230 Kv capacity and 275 km in length providing aninterconnection with the Sao Paulo system at Pirituba, and another of132 Kv capacity and 28 Ion in length providing an interconnection withthe Salto Grande plant. (A detailed description of the project is in-cluded in Appendix D.)

12. The location of the dam in a narrow gorge of the ParanapanemaRiver at the end of a long stretch where the slope of the river is verygentle and the banks are lao provides a reservoir of very large capacity(7,210 km3 or 5.67 million acre feet) with a relatively low dam. (Seemap in preface.) The effect of this reservoir upstream from the SaltoGrande project will be to increase the average yearly power output ofthat station by some 66 million kwh, or about 18% of its former gene-ration.

Estimated Costs

13. The estimated cost of the Jurumirim project is as follows:

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Construction Cost Estimate

(in millions)

Local Foreigncurrency exchange Total costcosts costs expressed in:Cruzeiros Dollars Cruzeiros Dollars

Land, access roads, camps, andreservoir cleararnce 342.3 _ 342.3 6.8

Dam and diversion works 447.2 _ 447.2 8.9Power house and step-up transformerstation 147.2 - 147.2 2.9

Construction equipment 37.5 0.5 62.5 1.3Hydraulic,. electrical and mechanicalequipment 98.1 6.5 4413.1 8.3

Transmission lines and switchyards 10.5 4.o 308.5 6.2General administration 50.0 - 50.0 1.0Miscellaneous and contingencies 123.1 0.7 168.1 3.4

Sub-total 1353.9 11.7 1938.9 38.8

Interest during construction 348.9 1.7 433.9 8.7

Total 1702.8 13.4 2372.8 47.5

(Note: Exchange rate: US$ 1.00 = Cr.$ 50.00).

14. On the basis of the above estimate the cost per installed Kw,exclusive of transmission lines, for Jurumirim is $104 plus 18,450 cruzeiros,which is a reasonable capital cost.

15. The cost estimates for equipraent and materials to be purchasedby proceeds of the loan contain, in themselves, provision for freight andfor expenses at the site. The estimates are believed to be realistic.For the hydraulic and mechanical equipment estimates are based on thebids of the Escher Wyss Company on which a letter of intent has beenissued and, for the electrical equipment, on-bfi' rieceived on aninternational basis. Overall contingencies to cover omissions and

increases in the scope of work have been added in the amount of approxi-mately 7% of estimated foreign exchange costs and of 10% of estimatedlocal currency costs. No provision has been made for possible infla-tionary trends in the cruzeiro costs.

International Procurement of Equipment

16. The letter of intent for hydraulic equipment was issued toEscher lWyss before the Bank began investigating the project. Nine bidsfrom manufacturers in various countries had been received and the selectionwas based on a report and recommendation-of the consulting engineer. Sincethe Bank began its investigations tenders for the generators and otherelectrical equipment were requested on an international basis and elevenbids have been received.

Return on Additional Investment in Hydro over Thermal Alternative

17. The capital cost of the Jurumirim project would be approximately1,156 million cruzeiros more than the investment that would be requiredfor the construction of a thermo-electric plant of comparable capacity.The rate of return on this additional investment, based on the savingswhich are expected to be realized in operating costs of the hydro plant,would amount to approximately 15.3%. (See Appendix E*) The additionalinvestment in hydro power facilities appears well justified.

Arrangements for Construction

18. The contract for construction of Jurumirim has been nego-iatedas an extension of the existing contract between USELPA and ServisEngenharia Limitada (STERVIX) for Salto Grande. The unit prices forJurumirim are based on the latest experience on the works under construc-tion at Salto Grande and are subject to review each six months. Under itscontract SMRVIX acts as consulting engineer as well as general contractor,and is responsible for all phases of the project from prelixi-naay studiesto construction. A fina, IhIoura Abreu, consultants of Sao Paulo, checksthe designs of the concrete structures, the setting of forms and thepouring of concrete. The firm specializes in concrete structural workand is at present supervising similar work at Salto Grande. SERVIX issupervised by a team of USELPA engineers which will be supplemented byengineers now on the Salto Grande project. The team will probably besupplemented by a senior engineer with experience in construction ofhydroelectric projects of similar character.

Construction Schedule

19. Actual work on the project was begun in June 1956 and the schedulecontemplates that the first of the two generating units will be placed inservice at the end of December 1960 and the second unit placed in operationand the project completed by the end of April 1961.

20. Construction to date has been concentrated on such items aspreliminary works, access roads, shop and office building and quartersfor staff. I4ost of the construction equipnent has been purchased and

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is already at the dam site. No request was made to include the purchaseprice of this portion of the construction plant in the proposed loan which,however, does provide for the purchase of the balance of the equipment.

IV. THE POWER 1ARIRT

21. In general power is in short supply throughout the south centralregion of Brazil, which includes the market area, and the entire output ofthe Salto Grande and Jurumirim plants should be readily consumed. Powersales from the USELPA system will be made to: (1) the five small privateutility co:ipanies responsible for almost all distribution within the servicearea; (2) the Sorocabana Railway; (3) the small town of Tatui; and (h) theSao Paulo Light Company, a subsidiary of the Brazilian Traction, Light andPower Corapany. First priority will be given the small utilities and theRaihway. The excess over their needs will be made available to the SaoPaulo Light System whose supply is inadequate for the present and expecteddemand.

The Distributing Companies

22. The five private utilities distributing power in the area are:

(a) Empresa de Eletricidade do Vale do Paranapanema S.A.(b) Companhia Eletrica Caiua(c) Companhia Hidro-Eletrica do Paranapanema(d) Empresa Eletrica Londrina S.A.(e) Companhia Luz e Forca Santa Cruz

In 1956 the sum of the peak requirements of the five utilities was 31,000 Kwand the energy sold was 173.5 million kwh. Their aggregate generating capa-city is 35,120 Kw of which 5,880 Kw is diesel. Expansion of service ineach of the areas supplied by the companies has not been possible duringthe past four years because the available generating capacity, taking intoaccount the units out of service for maintenance and repair, did not permitany substantial increase in the peak load. For the five utilities as awhole the annual increase in use in the period from 1943 through 1952averages about 18%, while since 1952 the average annual increase was onlya little more than 5%. With the advent of an adequate supply of power in1958 this situation will be changed and because of the very large unsatis-fied demand combined with the very rapid grmoth of urban population in thearea, an increase in use of 17% annually can be expected for at least thenext nine years following. A table showing historical power use by thefive utilities from 1940 to date and a forecast of use through 1966 isattached as Appendix F. Beginning in 1958 it is expected that the fiveutilities will close down their expensive diesels, and use USELPA powerfor requirements in excess of that produced in their own hydro plants, andalso that the diesel generating plants in the area owned by private in-dustries, aggregating about 10,500 Kw, will be shut down in favor of themore economical purchased power from the utilities.

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23. The small town of Tatui which is using about 11 r,illion kwh in1957 will be another customer of the USELPA system. It has never expe-rienced a powier shortage and records show that power use during recentyears has shown a consistent increase of 10% annually. Forecast of futureuse in Tatui assumes a continuation of this trend.

Sorocabana Railway

24. Another important prospective customer of USELPA is the SorocabanaRailway which now obtains its power from the Sao Paulo Light system. Theelectrification of this railway started in 1945 in the Sao Paulo regionand is being extended as fast as pofer can be made available and the ne-cessary sub-stations built. Seven such sub-stations have been built inthe period fromr 1945 to 1955 and three others are planned to be readysuccessively in 1959, 1960 and 1961. Forecasts of sales to the Railroadhave been included in sales forecasts of USELPA power used in this reportbased on the expCcted consumption through these ten substations and witha continuation in the historic growth of 3.5% annually in traffic handjed.Details for the historic and the anticipated power use by the SorocabanaRailway are sha-m in Appendix G.

Sao Paulo _Tight Systern

25., According to present plans all e-cess energy in the USELIPA system,after satisfying the nesds of the above custoriiers, will be supplied theSao Paulo Light o-Jer a transmission line being provided as a part of theproject. kA analysis of the requirements of the Light shows that in factall the excess energy of the USELPA system will be needed. A table showingboth capacity and energy available to the Light from USELPA is showm inAppendix H.

26. The Light has notified USELPA by letter that it will purchase,at authorized rates, the power which USELPA can deliver to its system.

V. FINANCIAL PROSPECTS

Capital Expenditures and Sources of Funds

27. WIhile the Bank project deals only with Jurumirim, the Bank isnaturally concerned with the future prospects of USELPA, and since thecompany is planning to build the Itarare plant (due for completion by1963) in the ten-year period covered by the financial projections givenin Appendix I, it is thus necessary to talke this into account.

28. The construction expenditures, including interest paid on borrowedmoney during the construction period, in the years 1957 to 1963 inclusive,and the sources of the funds, are estimated to be:

PSillions of CruzeirosSaltoGrandeetc. Jurumirim Itarare Total

Share capital - Sao Paulo 367.8 778.7 1327.0 2473.5- Parana 400.0 4oo00

Own earnings 10.0 105.1 550.0 665.1Existing IBRD loan 29.3 29.3Proposed IBRD loan ($13.4 million) 670.0 670.0Future foreign loan($36.3 miiillion) 1815.0 1815.0Development Bank loans 518.0 695.0 1213.0

407.1 2071.8 4787.0 7265.9

29. The rate of exchange used for conversions between dollars andcruzeiros has been taken as Cr$ 50 to US$ 1, except for the drawing downin 1957 of the balance of the existing Bank loan and the correspondingincrease in fixed assets for which the official rate of Cr$ 18.82 has beenused. This exception arises from the fact that, as mentioned in Appendix J,dealing with tariff rates, the historic cost of that part of an investmentwhich has been financed by a foreign loan must be based on the rate ofexchange when the loan was granted.

30. The capital to be subscribed by the State of Sao Paulo is tocome from a special state tax of wyhich the proceeds are used solely forthe electrical development of the state. This tax is expected to yieldover Cr$ 800 million in 1957.

31. The State of Parana will subscribe Cr$ 400 million to assist inthe construction of Itarare and this agreement has been approved by theAssembly of the State of Parana and published as Resolution No. 22-56 ofSeptember 14, 1956.

32. The proposed Development Bank loan for Jurumirim of Cr$ 518million would be made by the Banco Nacional do Desenvolvimento Economico(ENDE), wrhich has been authorized by the Government to lend up to Cr$ 700million to USELPA. The m* ing of a loan on terms and conditions acceptableto the Bank will be a condition to the effectiveness of the Bank loan.

33. In Appendix K the machinery for the supply of state funds toUSELPA is discussed, and it is pointed out that, although the positionhas now improved, there have been difficulties in the past in obtainingfunds sufficiently promptly. This has made it impossible for USELPA tomaintain a steady flow of funds to the contractor, and work on the SaltoGrande project was on occasions slowed down as a result. Now, however,appropriate legal action has been taken to make funds available, and theState of Sao Paulo will conclude a Project Funds Agreermient with the Bankof a satisfactory nature.

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Basis of Estimates of Future Position

34. The staterment for the years 1957 to 1966 of estimated earnings,source, application and availability of funds and revenue cover for debtservice, which is attached as Appendix I, is b4sed on the company t s esti-mates. Those estimates have been revised to reflect variations in esti-mates of the construction schedule; the statement adopts somewhat highertariffs and a lower dividend rate. As a result of these factors the amountof local borrowing has been reduced.

35. In the projection the ElIDE loans have been assumed to bear interestat 9c' per annum, plus an initial commission of 1% on the net amount of theloan before taking into account this commission and interest during con-struction which are included in the loans, After a period of grace of 5years the loans are treated as amortized over 12 years by equal annual pay-ments of combined interest and capital. The company states that these arethe conditions on which it expects to obtain the loans,

36. The proposed Bank loan for Juruiiirim has, for purposes of calcu-lation, been taken as having an interest rate of 5-3/4% per annum and aterm of 20 years, including a brace period of about 4 years, amortizationby equal semi-annual paym-ents of comb' ed principal anid interest to beginin IIarch 1962 and end in INarch 1978.

37. The loan which USELPA envisages to meet the foreigi exchange costsof Itarare has been included on the basis used by the company, a 21-yearloan wTith a 5-year period of grace and an interest rate of 5-3/15.

38. The company is at present paying about Cr$ 50 for foreign exchangeand this rate has been used in the projection. No possible devaluationsin future years have been taken into account; there is in any case no wayof making a reasonable estimate.

39, Similarly, the local currency costs have been taken at present-dayprices with the inclusion of a reasonable contingency allowance but no pro-vision for rising price levels. This means, of course, that if prices inBrazil should rise substantially, the State Government would have to findmore cruzeiros or work would have to be postponed or slwed down. On theother hand the proceeds of the tax devoted to electrical expansion can beexpected to increase in periods of rising prices' and in the proposed loanagreement USELPA convenants that in the utilization of available funds itwill give priority to the Jurumirim project.

g/ Since this report was drafted, interest rates have changed, and it isnow possible that a loan would carry an interest rate of 5-5/8%. Sucha small change would not have a material effect on the projections.

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40. The projection has been taken to the end of 1966, but no con-struction expenditure is shown after 1963, the year in which it is expectedthat Itarare will be completed. Almost certainly new works would be underway in 1964-1966, and possibly before, but no informiation on amounts ortiming of such expenditures is available,

Depreciation

41. The cormDany will provide depreciation in accordance with the re-gulations of the Division of Waters; at present 5, per annum on a straightline bas-s, This is at least twice the normal annual provision for hydrosysteris.

Profits

42. Net operating revenues are expected to rise from Cr'p 93.9 millionin 1958 to Crt3 353.6 ril'lion in 1962 and Cr$j 788 million in 1964-1966.These fioures rceresent about a 7,%' return on net investment in 1958 and10,o in the other years. Met operating reverues would cover gross interestpayments (igoring credits for interest capitalized) at least 1.4 timeswrhile construction was going on, and 3.0 or more times after.

143. Net profits are expected to rise from about Cr6;P 73.6 million in1958 to Cr(: 239.9 million, Cr'i 517.1 million and Cr;i 542.1 million in1962, 1964 and 1966 respectively, giving earnings on total share capitalof about 5.5%, 7.1%, 14.6%o and 1,.14 in 1958, 1962, 1964 and 1966. It shouldbe noted, however, that in 1958 and particularly 1962 part of the sharecapital is financing wTork in progress; the returns on share capital re-presented by assets in operation would be 14.4% and 13.3% in 1958 and1962,

Debt Servics

144. Net operating revenues (before charging depreciation) should covertotal debt service at least l.o times in years up to 1962, and about 2.7times when the system becomes fully loaded in 1964 and subsequent years.These coverages are of debt service exclusive of that applicable to thepart of the Danl loan for the Salto Grande project used by the five utili-ties, for which they should reimburse USULLP. If the utilities were todefau-lt and leave USTJPA to bear this debt service, the effect would beminor, since only about Cr¢ 9 million (USa 180,000) are involved.

Dividends

45. Dividend payments are calculated, in accordance with USELPAtsintentions, on that part of the share capital which is represented byassets in operationc In the projection div-dends of 8,i have been included,rather than the 10§ tentatively shcwnm by LSELIAA

46. Althoug>h shareholders would not receive dividends on capital whileit is being used to finance work in progress, interest durirg constructionon that part financed from the company's o,,m resources is capital-zed whenan asset goes into operation and a credit made to a capital reserve.

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Cash Position

47. In view of the cash requirements for construction and workingcapital, no large accumulations of cash are expected until the years 1963to 1966 when the surplus in each year should average about Cr$ 466 millionand by the end of 1966 about Cr$ 1921 million should have been generated,in addition to worling capital. It is probable that most of these fundswould be used for new construction, and it should be noted that thesesurpluses could meet about half the cost of another plant having a costsimilar to Itarare.

Pro-forma Balance Sheets

48. In Appendix L are given the pro-forma Balance Sheets of USELPA atthe end of 1962 and 1964, the first years of full operation of, respectively,Jurumirim and Itarare, and at the end of 1966.

49. Total long-term debt expressed as a percentage of net fixed pro-perty (gross property less depreciation) should be about 49% in 1962 and46% in both 1964 and 1966. These ratios are satisfactory. Long-term debtis covered more than twice by net assets in the three years.

Debt/Equity Ratio

50. The ratios of long-term debt to eauity are expected to be 46/54,L0/60 and 35/65 in 1962, 196L and 1966 respectively. A limitation on debt,similar to that included in the Salto Grande Loan Agreement, which ineffect provides that long-term debt cannot exceed 50% of total capitaliza-tion, is included in the proposed loan agreeaent.

Security

51. The proposed loan agreement contains the usual negative pledgeclause providing that if any lien should be established on any of USELPA'sassets, the Bank loan would ipso facto be equally and rateably secured,but exempts from this provision any lien in favor of the Government whichis subordinate to the claims of the Bank and is created in connection withthe Government guarantee.

Financial Position in Relation to Tariffs

52. The permitted return, and consequently the revenues (from whichin turn tariff rates are derived) is based on an approved percentage onthe investment; the mechanism is set out in detail in Appendix J. Therevenues, which application of the procedures described in this appendix

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is expected to produce, would appear, in the case of USELPA, to permit thecompany to operate under sound financial conditions. The company hasagreed to take all steps to obtain such rates as will ensure its continuedoperation and expansion. The prospective wholesale customers have g;ivensatisfactory assurances that they will purchase UTSELPAIs energy at autho-rized rates.

VI. ECONOHIC JUSTIFICATION

53. The energy to be supplied by USELPA will produce three separatebut related benefits:

(1) The five utilities which will buy from the company serve a largearea chiefly devoted to the productioin of coffee and with suffi-cient power will be able to satisfy the needs of growers and pro-cessors and of the area generally.

(2) The Sorocabana Railroad, also to be supplied by the company, isone of the principal freight links between that producing regionand the industrial center of Sao Paulo, and as such fulfills theessential task oi' enabling coffee, in particular, to flow to thecity and thence to the Port of Santos for export. At the sametime the railroad affords a means of transport of equipment,supplies and manufactured goods to the producing regions.

(3) The energy not required for these purposes will be utilized bythe Sao Paulo Light, which supplies energy to the large andrapidly expanding industrial center of Sao Paulo.

.54. The output of USELPA will by 1962, the first year of full opera-tion of Jurumirim, be about 730 million kwh of which about 370 million kwhare expected to be absorbed by the five utilities and the railroad, wThichwill have first call on available energy. The Sao Paulo Light is expectedto take the balance available, which is not likely to exceed 360 millionkwh. Since the energy demand on the Light system by 1962 is expected toamount to nearly 10,000 million kwh, and a deficiency of supply would exist,there seens no possibility that Jurumirim energy cannot be sold.

55. A further advantage of the Jurunirim project is that it shouldproduce considerable savings of imported fuel. If the project were notimplemented, the energy required for the utilities and Sao Paulo Lightwould have to cone from theraal sources. If the extensions of electrifi-cation of the railroad were completed, the electrical energy requiredwould also probably have to come from thermal sources; if the programwere curtailed, an equivalent amount of energy would have to be producedby diesel-electric locomotives. Clearly the savings in fuel to be madepossible by the construction of Juruiirim will be of direct benefit tothe balance of payments position of Brazil.

_13-

56. From the point of view of the Brazilian internal economy alsothe Jurumirim project is fully justified. As shown in paragraph I7 andAppendix E, costs of production for hydro pawer to be produced from theJurumirim project are lower than for the thermal alternative by an amountsuch that the differential would produce a return of approximately 15,3%on the additional investment.

57. In view of the assured market for the production, the foreignexchange saving in the use of indigenous water resources, othenyise runningto waste, and the substantial return on the extra investment in hydro overthermal, the project appears to have adequate economic justification.

VII. CONCLUSIONS AND RECOURiNDATIONS

58. The project is sound and the estimated cost is reasonable.

59. Pot-er requirements in the market area served, including SaoPaulo, are more than sufficient to absorb the power output of the project.

60 F-Rnancial forecasts show that the proposed borrower should be ina sound financial position and that debt service of the proposed loan wouldbe adequately covered.

61. The project would be suitable as a basis for a loan of about$13.4 million, inclusive of interest during construction, for a periodof 20 years including a period of grace of approximately four years.

APFEIDIX A

LCNG RANGE PRCGRAMI FOR DEVELOPMENT OF PARANAP-tiIMMA RIVER

Preliminary data on present and proposed projects forthe development of the power resources of the Parana-panema River, Brazil.

AverageAverage flcw Average Average

Average level in meters head (cubic me- power outputProject Upstream Downstream (meters) ters/sec.) (kw) 1/ (mil. kwh)

Jurumirim 568.00 532.50 32.70 174 41,000 358

Piraju 532.50 474.00 58.0o 175 76,000 665

Itarare 474.00 398.00 73.00 244 139,000 1,220

Ourinhos 398.00 384.67 13.00 244 25,oco 219

Salto Grande 384.67 366.00 17.80 338 50O,000 437

Cinzas I 366.00 347.00 18.50 345 50,000 437

Cinzas II 347.co 328.00 18.50 410 57f000 5co

Capivara 328.00 288.00 38.00 736 190,000 1,660

Total 269.50 628,000 5,496

1/ Continuous power available based upon average water availability.Installed capacity is being planned in accordance with peak loadrequirements on the USELPA system.

APPENDIX B

USINAS ELETiRICAS DO PAkANAPANEHA S.A.

Stock Subscription Statementas at December 31. 1956

Initial Capital Increasing of Capital CR$. 250,000.000.0Number Number

of Subscribed of Paid in To be Paid

Shareholders Shares and Paid Shares Subscribed In Money In Assets on Call

The State of Sao Paulo 118,558 118,558,000.0 2,400 2,400,000.0 2,400,000.0

Departamento de Aguas eEnergia Eletrica 300,000 300,000,000.0 247,180 247,180,000.0 24,718,000.0 -- 222,462,000.0

Mario Lopes Leao 100 100,000.0 60 60ooo.0 6,000.0 54,000.0

Annando Avellanal Laydner 100 100,000.0 60 60,000.0 6,000.0 -- 54,000.0

Carlos Alberto de MesquitaPinheiro 100 100,000.0 60 60,ooo.0 6,ooo.o 54,ooo.0

Cia. Luz e Forca "Sta.Cruz" 100 100,000.0 60 60,000.0 6,000.0 -- 54,ooo.o

Empresa de EletricidadeVale do Paranapanema 100 100,000.0 60 60,000.0 6,000.0 -- 54,000.0

Fapresa "Eletrica Londrina" S.A. 100 100,000.0 60 60,000.0 6,ooo.o - 54,000.0

Cia. 'Eletrica Caiua" 100 100,000.0 -- -- - -

Cia. Hidro-Eletrica Paranapanema 100 100,000.0 60 60,000.0 6,000.0 -- 54,000.0

Total 419,358 419,358,000.0 250,000 250,000,000.0 24,760,000.0 2,400,000.0 222,840,000.0

APPENDIX C

USINAS ELETRICAS DO PARANAPANEIA S.A.

Condensed and Adjusted Balance Sheetas at December 31, 1956

(expressed in millions of Cruzeiros)

ASSETS

Capital assets 764.9Current assets 26.5Deferred exchange loss 249.4 2

1,040.8

LIABILITIES

Share Capital 446.5L'ser^-es and surplas 1.2

IBRD loan (u3$ 6.4 niJ.licn) 121.3 47Reserve for exchange loss 249.4 Z 370.7Advances re shares 120.0 /Current and ^'mher liabilities 102.4

1,040.8

Ratio of long-term debt to equity: 45/55

1/ This amount has been adjusted to show the amount drawn by USELPAfor its own use, and ignores drawings on behalf of the five utilitieswhic'n w-;ll take about $2 million out of the $P10 million loan.

2/ USELPA is carrying the IERD loan at the rate of exchange of CR$18.82to the dollar. It thus becomes necessary to make an adjustment forthe exchange losses which will arise when the loan is amortized at

an assumed rate of Cr.$50 to the dollar.

3/ Advances from State Bank of Sao Paulo; repaid in 1957 out of proceedsof share issue.

APPENDIX D

Detailed Description of the Jurimirim-'7 ric Projectand Breakdo-wn of Foreign Exchange Costs

The project consists of a dam across the Paranapanema River, a powerhouse located at the foot of the dam, an outdoor transformer station and switch-yard, and two transmission lines connecting the project to the nearby SaltoGrande project and. to the Sao Paulo Light System, The several components of theprojbot are described in detail below.

Dam

The concrete dam is of the gravity type with spillway and gates, bottomdischarge and water intake for the powver house. The dam is slightly convex,with total length of 401 meters at its crest and 55 meters ma2dXinum height.The 45 meter spillway is near the left bank and has three drum typg gates with12.5 x 8.0 meters opening, capable of a total discharge of 2,400 em per second.A gantry crane on rails is provided for handling stop-logs and intake gates.At about 200 m3ters from the left abutment of the main dam there is a depressionacross which an earth dam will be constructed having a length at about 460 metersand a maximum height of about 16 meters.

Power Station

The power house of semi-detached type will consist of a concrete build.ing equipped with lifting crane. The generating units will consist of twoidentical sets each composed of a vertical Kaplan turbine with normal ratingof 63,200 HP (metric) with a maximum of 70,100 HP, directly connected to athree-phase generator having a capacity of 42,500 kw (50,000 kva) with PeF. 0 04120 rpm, 60 cycles, A control room, maintenance shops and auxiliary servicesare included.

Electricity wrill be generated at a potential of 13.8 kv. Transformersare three single phase units, to step-up the voltage for transmission at 230 kv.

Itdrology

Spillways are designed to discharge 2,3h0 m /sec which is three timesthe maximum flood occuring during the 14-year period of record from 1939 to1952 inclusive.

The reservoir will have a total capacity 6f 7,2 av kit , or with thereserve storage for a safety margin deducted, of 6,530 k-of stoage at normalelevation of 568 meters above sea level, Of this amount 2,890 kIe will be livestorage, the Tmaximum draw-down being 8.3 meters (between levels of 5680G metersand 559.7 meters). The gross head on the turbines will thus vary from 26.7 and35,0 meters, the average head being 32.5 meters.

The 5erage useful regulated discharge, after deduction of all losses,will be 157 m /second.

For the 114 years embraced in the hydrological studies the annual genFerat.ing capacities would be:

M¢nimum *. *. . *** . 310 rmillion kwhNaximrm, ... . .3. .* .* * m38 0million kwhAverage *e. .* .. X* 358 million kwh

APPENDIX D - Page 2

Transmission Lines

Two transmission lines are included in the project, as follows:

1) a 230 kv single circuit line from Jurnmirim to connect withthe Sao Paulo Light System at Pirituba, a distance of 275 km.

2) a 132 kv single circuit line from Jurumirim to connect with theBarra Grande substation, a distance of 28 km,

Breakdown by Items of Foreign Exchange Costs of the Project (exclusive ofmnterest during construction)

Item Amount Expressed in US dollars

Construction Ecuipment 500,000

Hydraulic, Electrical and Mechanical Eouipient

Spillway, tainter gates and accessories 2305,00

Intake gates, trash racks, gantry crane andaccessories, penstocks 6i5,o000

Kaplan turbire, governors, shaft pipe liningand accessories 1,815,000

Electric generators and accessories 1,300,000

Control room eauipmellt, powerhouse,travelling crane 1,300,000

Transformers 400,000

Freight insurance, etc. 800,000

Erection and miscellaneous 100,000

Sub-total 6,1460o,000

Transmission Lines and Switchyards

Jurumirim-Pirituba transmission line,230 kv, 275 km 3,581,330

Pirituba switclayard 46,950

Jurumirim-Barra Grcnde transmissionline, 132 kv, 28 km 96,720

Bar-5a Grande switchyard 275,000

Sub-total 14,ooo,Oo

Miscellaneous and Contingencies 740,000

Grand Total $ 11,700,000

APPENDIX E

JURUMIRIM PR0JECT - BRAZIL

AnalYsis of Return on Additional Capital in Hydroovar Thermal Alternative

Installed capacity in kw 85,000Net Generation in million kwh 358 at 48% load factorCost of Hydro including transmission Cr.$ 2,373 millionCost of Steam including transmission Cr.$ 1,217 million lJAdditional investment Cr.$ 1,156

(expressed in millions of Cruzeiros)

Steam HYdrO

Depreciation 18.25 J 11.39 /Fuel 170.37 4/ -Other generation cost 23.112.1

Total 211.73 34.50

Operating saving on hydro Cr,0 177.23 millionAdditional Investment Cr.$ 1,156.00 million

Return on additional investment is thus 15.3%.

1/ Computation of present day cost of Piratininga:Cr.$ Million

Actual - U.S.$ 17.85 millionconverted at Cr41 50 892.5

- Cr.$ 416.35 milliondoubled to reflect price indices 832.7

Present day cost for 160,000 kw plant 1.725.2Present day cost 85 for 85,000 kw plant 916.5

160Add transmission 300.1

i.216.6

/ Depreciation thermal - 30 years life at 5% sinking fund basis is equivalentto 1.50% per annum.

/ Depreciation hydro - 50 years life at 5% sinking fund basis is equivalentto 0.48% per annum.

/ Assumed price, exclusive of taxes and duties, of $32 per metric ton,18,300 btu per lb. and heat consumption 12,000 btu per kwh.

5/ Cost for one 80,000 kw Piratininga unit.

W The tUELPA estimate is higher, and considered unduly conservative. Forthis comparison, the same figure as for steam has been used; however,experience shows that hydro costs are lower than for steam.

APPENDIX F

USE OF POWER BY THB FIVE PRIVATE UTILITIES /

Peak load and energy generated, actual 1940-56 inclusive, andestimated 1957-66 inclusive (includes Tat;ui requireinents for

the period 1958-66 inclusive)

(millions of kwh)

GeneratingMaximum Capacit-y

Peak Energy of five To be suppliedYear (kw) Consumed Utilities by USELPA

1940 6,150 o1941 7,550 _1942 8,020 -1943 9,568 34,01944 10,133 38.81945 11,234 42.01946 13,468 52.31947 14.,250 64.61948 16,330 74.51949 20,050 84.31950 21,340 101.61951 25,050 118.81952 27,450 140.21953 28,450 148.61954 30,650 156.31955 30,890 165.21956 30,996 173.5

1957 35,000 183.1 183.1 01958 65,000 / 226,2 / 16O 66.21959 77,000 263.8 160 103.81960 87,000 306.7 160 146.71961 96,000 359.1 160 199.11962 111,000 419.0 160 259.01963 126,000 489.0 160 329.01964 144,000 569.7 160 409.71965 165,000 665.2 160 505.21966 180,000 776.7 160 616.7

1/ The five utilities are:

Empresa do Eletricidad do vale do Paranapanema SACompanhia Eletrica CaiuaCompanhia Hidro-Eletrica do ParanapanemaEmpresa Eletrica Londrina SACompanhia Luz e Forca Santa Cruz

2 Includes Tatui, 1958-66

3/ Hydro only, thermal plants in reserve after 1957

APPENDIX G

USE OF POWER BY THE SOICABANA RAILWAY

Energy consumption:- actual 1946-56,estimated 1957-66 inclusive

Energy ConsumedYear (millions kwh)

194W6 12.41947 13.81948 19.21949 25.81950 2800195J. 313

1953 46 2195it 54,,21955 66 -31956 72e6

1957 75.1

1959 100.71560 109.81961 112.61962 116.51963 120.6

1965 124,81966 34.o

Energy for the years 1946-57 inclusive has been supplied by the-Sao Paulo Light system. The amounts shown for the years 1958-66inclusive are the estimated amounts required for the Varnhagensub-station and the sub-stations loceted west of Varnhagen andwhich are to be supplied by USELPA. To the extent additionalrecuirements of the Sorocabana are supplied by USELPA, a correspond-ing reduction mould be made in the surplus available for the lightfrom the USELPA system.

APPENDIX H

USELPA PEAK CAPACITY AND ENERGY PRODUCTION

Estimated Demand by USELPA Customers;Capacity and Energy Available for Sao Paulo Light System

Power in 1,000 kw Energy in millions kwhUSELPA Peak Total Consumed Sent toPeak Load Available Production Five Utilities Sao PauloPower M.et by for of Tatui and Light

Year Capacity USELPA 1/ Sao Paulo USELPA Railway System

1958 68 2! 32 36 186.0 153.5 32.51959 68 44 24 302.0 204.5 97.51960 68 54 14 360.0 256.5 103.51961 166 / 63 103 64o.0 311.7 328.31962 166 78 88 733o0 375.5 357.51963, 566 4/ 83 483 1,596.0 449.6 1,146,41964 566 111 455 1,883.0 534.5 1,348.51965 566 132 434 1,883.0 634.7 1,248.31966 566 147 419 1,883.0 750.7 1,132.3

1/ Net demand of Five Utilities, Tatui and Sorocabana Railway.

/ Salto Grande rated capacity 60 PMirJ; peaking capacity 68 m!x

3/ Jurumirim rated capacity 85 UT; peaking capacity 98 ?J.

' Assumes Itarare project of 400 I4W added to USELPA system.

ISSiINS UJYRIGAS DO0 PARAJPA( S .1.

Rst1mts of Ermiws Source. Aolictatton and Availability of londs,snd Revenue Cover for Debt Service

(sinressed in Millios of Cruneiros cxcent where othervise stated)

Tears endima December I1: }1 12al }

I. lnerom Sale

Millions of kwh sold 171 278 331 588 674 1,470 1,732 1,732 1,732Average price per kWh in centavos 90 90 90 90 90 80 80 80 80

II. Revenue Account

Revenaes from ale of energy 153.9 250.2 297.9 529.2 606.6 1,176.0 1,385.6 1,385.6 1,385.6

Operation. admsinistration and maintenance 20.4 20.4 20.4 45.9 45.9 102.0 102.0 102.0 102.0D.preai.tino 29.2 5e.4 58.4 113.1 167.8 287.9 408.0 408.o 408.0Taxes 10.4 17.1 21.9 17.0 39. 78.6 87.6 87.6 87.6

Net operating revenue 93.9 1S4.q 197.2 311.2 3,3.6 707.S 738.C 788.0 788.0

Income deductionsiInterast payable 41.1 39.9 135.2 186.3 221.8 246.0 256.9 244.2 230.4le charged to noa.trunti. 31.3 n71.0 117.1 126.4 120.9 149.9

9.8 18.9 18.1 59.9 100.9 96.1 256.9 244.2 230.4Lons on exchange 10.S '-1.0 11.S 12.1 12.8 1.4 14.0 14.8 1S.N

let income deductions 20.3 29.9 29.6 72.0 113.7 109.S 270.9 2S9.0 245.9

ote profit from operations 73.6 124.4 167.6 261.2 239.9 598.0 517.1 S29.0 S42.1

1II. Source of Funds

Hat operating revenue 93.9 154.3 197.2 333.2 353.6 707.5 788.0 780.0 788.0Add back Depreciation 29.2 58.4 88.4 113.1 167.8 287.9 408.0 408.W 408.0

Sub-total 123.1 212.7 ,28.6 446.1 521.4 995.4 1l196.0 1.196.0 1.1q6.0

Loans:IBD1 - Salto Grande 24.0 5.3IBP1 - Jurazirim 250.0 200.0 130.0 90.0Foreign Loan - Itarare 178.2 509.3 432.1 376.8 318.6BNDE - Jurumirim 190.0 207.0 99.0 22.0218D - Itarare 73.8 128.0 202.8 290.4

Sub-total 24.0 44s.3 689.0 866.3 746.c 667.2 318.6

Share capitol:Already subscribed 222.9New - State of Sao Paulo 328.3 324.1 455.0 461.0 476.7 340.0 7C.0Yev - State of Parna, 80.0 80.0 80.0 80.0 80.0

Sub-total 881.2 324.1 818.0 841.0 ss6.7 420.0 1l0.0

Total S7S.2 892.5 1406.7 1.662.9 1 749o 1 608.6 1 464.0 1 196.Q 1.196.0 1,196.0

IV. Application of Funds

Construction, eXcluSiTy of interest-Salto Grande 292.8 69.4Jurumirim 56.3 651.7 703.4 351.2 112.8Iterare 27.0 510.6 1,075.0 1,275.0 1,000.0 4?5.0Other '16.8

Sub-total 368.6 748.1 1.214.0 1.426.2 1 787.8 1 000.0 475.0

Repaynent of advancesCommission on Government guarantee

Debt Service:ISED - Salto Grande _ interest 18.4 19.8 18.9 18.1 17.1 16.1 15.0' 1 .1 12.9 11.7

- amortization 16.8 17.7 18.5 19.5 20.5 21.6 22.' 23.7 24.9IBRD - Jurumirit - interest 11.3 22.6 30.8 39-0 38.1 36.7 75.1 33.5 31.?

- amortization 25.2 26.7 28.3 29.9 31.7Poreign - Itarare - interest 17.6 34.3 57.1 76.8 9C.6 103.3 99.1 94.7

-amortization 71.? 75.8 80.3BNII - Jurunirim interest 10.0 27.0 39.0 45.3 46.6 44.4 41.9 39.2 36.3

- anortization 24.9 2'.1 29.6 32.3 35.210D5 - Itarare - interest 3.8 13.0 27.8 44.1 56.3 62.5 59.5 56.0

- mortization 4 9 34.8 37.6 41.0Sub-total 18.4 i7.9 107,6 15q.7 20s.8 2'2.4 11.4 443.8 443.5 443.8

Dividends 40.7 81.5 81.5 112.6 143.3 212.8 281.9 281.9 281.9

Provision for working capital 70.0 30.0 30.0 140.QTotal S74.0 890.1 1 403.1 1.661.4 1.736.2 1 S76.2 1 009.2 725.4 725.4 72S.4

V. Availability of Funds

Surplus for year 1.2 2.4 3.6 1.5 13.7 32.4 454.8 470.6 470.6 470.6Available at beginn,ing of year - 1.2 3.6 7.2 8.7 22.4 54.8 50o.6 1t0.2 1,450.8Available at end of year 1.2 3.6 7.2 _ .7 22.4 C4.8 509.6 9 I0.2 1 4S0.8 1 "'1.4

VI. Revenue Cover for flebt Service

Net opornting revenue before depreciation 123.1 212.7 255.6 446.3 521.4 995.4 1,196.0 1,196.0 1,196.0Totel long-term debt service 57.9 107.6 153.7 205.8 292.4 321.4 443.5 443.5 443.5

Number of times debt service covered 2.1 7.0 1.6 Z.2 1.8 .1 2,7 2.7 2.7

APPENDIY J

ISIKAS EIETRICAS DO PARF.APAkEMA 8 A.

Reeulation of Electricity Enterprises and Tariff Rates

The State of Sao Paulo electrification policy is governed by theState's Departamento de Aguas e Energia Eletrica (DAEE) and the StateElectrical Power Council.

The granting of concessions, the regulation of power enterprisesand the establishing of rules for accountirg and setting tariff rates arefunctions performed by the Federal Goverrnment. The two bodies which per-form these functions are the National Council of W4aters and ElectricalEnergy, which is to advise on and recommend policy to the Government, andthe Division of Waters of the National Department of Mineral Productionof the Ministry of Agriculture, which is to exercise the detailed controlof enterprises.

The legislation which governs these matters is contained in theWater Code published by Decree No. 24643 of July 10, 1934, supplemented byvarious laws and regulations. In particular Decree No. 28545 of August 24,1950, establishes a uniform system of accounts and Decree No. 41019 ofFebruary 26, 1957, establishes a number of important regulations concern-ing power companies. There is a Bill at present before the rationalAssembly which would make considerable changes in the method of settingtariff rates, and in particular would provide an increase in the returnon investment to 12' and authorize the writing up of fixed assets. Thisproposed departure from historic cost basis would involve the applicationof various coefficients calculated in accordance with cost of livingindices to assets acquired at different dates in the past with the inten-tion of arriving at realistic present-day values. It is by no meanscertain that this Bill will in fact become law, and Decree No. 41019 of1957 is considered to be an interim measure to liberalize the treatmentof power companies as far as can be done without new legislation.

After examining the application of the enterprise, tariff ratesare established for three-year periods by the Division of W4aters, but itis open both to the Division and to the electrical enterprise to agree ona revisiorn where appropriate during that period. Annual returns showingthe actual results are submitted to the Division of Waters and there isprovision in the accounting system for the recording in a separate accountof the amounts by which the actual returns exceed or fall short of thereturn authorized by law.

If the cost of fuel or of purchased energy varies, an enterpriseis entitled to make adjustments on a monthly basis by means of adding orsiubtracting a percentage to its invoices for energy so as to adjust forthe change in costs of fuel or energy. There is a further provision thatcertain ezohange losses or increased debt service (to which reference ismade below) may be adjusted every six months by percentage increases inbillings. Finally, increases in wages or social security payments entitlean enterprise to make a corresponding increase in the basic tariffs.

APPENDIX J - Page 2

The return permitted to an enterprise is based on the investment,Investment is calculated by taking the sum of:

assets in operation;cash up to amount of the depreciation reserve;an allowance for working capital equal to two months'

sales;warehouse stocks up to an amount to be agreed with

the Division of Waters.

From this total is deducted the accumulated depreciaticn.

There can be adjustments relating to reserves for reversion,amortization, or excess or deficiency of results over the permitted return.But as these reserves are normally balanced by funds of equal amount,these adjustments would not in the usual way occur.

Tariff rates are to be set so as to provide revenue equalto:

the permitted returr, now 10 of investment;operation,maintenance and administration;the cost of purchased energy;provision for depreciation;pro-vision for either a reversion or amortization reserve;certain debt service adjustments.

The provision for depreciation is set at 57c for hydro plants and 80/ forthermal plants. Decree No. 41019 does rot define which elements of propertyare subject to depreciation but it has been assumed by USELPA that some 10%of assets would not be subject to depreciation. It will be noted thatthese rates of depreciation are very much higher than those which the nor-mal lives of the assets would justify and it is supposed that the estab-lishing of such rates is an indirect means of enabling power companies toobtain a greater amount of internal cash generation for future expansion.No rulings are available to indicate the exact method of operating thereversion reserve, applicable where there would be compensation on rever-sion of the concession, or the amortization reserve, applicable in caseswhere there is no compensation.

The Decree specifies that in establishing the historic cost ofassets, those assets which have been financed by means of a foreign loanare for purposes of tariff computations to be taken at the rate of ex-charge in force at the time when the loan was granted. There is thereforea special provision that if, as a result of subsequent revaluation of thecruzeiro, cruzeiro debt service on such foreign loans is increased, theamount of the increase can be admitted as a charge in arriving at permittedrevenues. A similar regulation applies also to ircreases in debt servicearising in respect of loans from the National Development Bank which aresubject to escalation clauses.

APPENDIX J - Page 3

In estimating permitted revenues for purposes of this report,all factors have been taken into account with the exception that: a) noprovision for a reversion reserve has been made; b) no amount for cashhas been taken into account in computing in7esstment, because it is notpossible to estimate what amount of cash would in fact be in existencein the different years; and c) in the later years the investment reducesyear by year as a result of increasing accumulated depreciation whichwould in practice be offset to greater or lesser degree by new invest-ment. It may therefore be assumed that if the above factors were takenirto account the application of tariff regulations would probably pro-duce somewhat higher revenues than those actually show'n in the projec-tions.

Since the production of kilowatt hours, particularly when thefirst units of a plant are coming into operation, is not proportionateto the amount of investment involved, the average cost per kilowatt hourwould fluct.iate from year to year. A fixed rate has been adopted forthe years 1958 to 1962 inclusive which in total would produce the per-mitted return over that period, and a similar procedure has been followedfor the years 1963 to 1966.

The actual rates to be charged to the five utility companies,the Sorocabana railroad arid the Sao Paulo Light have not yet been estab-lished. It is understood that UEELPA intends to apply a basis of costof service taking into account the length of transmission line to eachdelivery point and that the tariffs are likely to be two-part, consistingof a demand charge per kw of power and an energy charge per kwh of energy.

APPENDIX K

USIVAS ELECTYICAS DO iAR-AbAFAIEMA S.A.

Provision of Funds by State of Sao Paulo

When at the end of 1953 the Bank made its loan to USELPA for theSalto Grande project, it was realized that the State of Sao Paulo wouldhave to provide all the local currency. Accordingly a Project Funds Agree-ment was entered into which set out various amounts to be paid to USELPAby the State on account of capital on or before certain dates, The Agree-ment also contained a general provision to the effect that the S%te of SaoPaulo would provide sufficient funds to enable the project to be carriedout.

As a result of rapidly rising price levels the capital subscribedproved insufficient and the State Assembly by Law Mo. 3081 of August 2, 1955,approved an increase of Cr4 250 million to bring the capital to CrP 669_3million.

On December 30, 1955, the State Assembly passed Law No. 3329creating an additional tax to be used for development approved under theElectrification Plan of the State. Since then the proceeds of the addi-tional tax have been deposited monthly in the State Bank of Sao Paulo forcredit to the account of the DAEE (State Department of IJaters and ElectricalEnergy) which now is the State agency responsible for subscribing to USELPA'scapital.

In spite of the availability of adequate funds derived from thetax, and although the Assembly had approved the capital increase, USELPAreceived up to December 31, 1956, only some Crt) 27 million from the State,leaving over Cr' 222 million unpaid. The company was forced to borrowfrom the State Bank, and had difficulty in financing its construction inthe second part of 1956.

The non-payment resulted from legal difficulties; the August 1955law only authorized subscription and it was not until the Assembly passed,on December 4, 1956, Law lo. 3617, which authorized both subscription andpayment, that the difficulty was resolved.

The position in 1957 has improved and the capital has now beenpaid in.

U7.LFA, however, needs more funds for Jurumirim and other con-struction, a-nd has already taken steps to obtaiu. more capital.

The company's shareholders have passed a resolution to increasethe capital to Cr:; 2,4D00 million. The State Assem:Oly, by Law No. 4393 ofNoverber 26, 1957, has apprvetd this increase and has authorized theExecutive to subscribe up to Cr$ 1,350 million and tD make paymentthrough the DAEE from the additional tax referred to above. The StateAssembly, by Law No. 4445 of December 17, 1957, has also authorized theExecutive to enter into a Project Funds Agreement with the Bank. Under

APPENDIY. K - Page 2

this Agreement the State will appropriate in the DAEE's budgets for1958 to 1961 such annual quotas as USELPA requires, up to a totalof Cr$ 1,340 million, and in the event that USELPA needs still morefunds to complete the project, will provide the funds necessary.

APEENDIX L

USINAS ELETMICAS DO PARAXIAPANEMA S.A.

Condensed and Rounded Pro-forra Falance Sheetsas at December 31, 1962, i96/A ,3nr 19i'6

(expressed in Millions of Cruzeiros)

_ 1962 19264 1966Cruz, CTuz.I Cruz,

A S S E T S

Capital assets 7,890.6 94.8 9,066.4 87.1 9,066.4 80.2Net current andother assets 248e9 3.0 1,174.3 1l>3 2,115.5 18.6

Deferred exchangeloss 191.5 2.2 641 1.6 133.8 1.2

8 31.0 100.0 10_ O4.8 100.0 11.315.7 1020.0

L I A B I L I T I E S

Share capital 3,374.5 40.5 3,524.5 33.9 3,524.5 31.1Capital reserve 485.5 5.8 1,036.4 10.0 1,036.4 9.2Other reserves andsurplus 4C7.8 4.9 1.028.2 9.9 1,535.5 13.5

4,267.8 51.2 5,589.1 53.8 6,096.4 53.8

Long-term debt 3,636.3 43.7 3,692.9 35.5 3,280.5 29.0Depreciationreserve 426 ,9 5.1 1,122.8 10.7 1,938.8 17.2

8,22].it3LQC0o¢3 ,0 0.,,240&- 100.0 I.I,415.7 100.0

Ratio of long-termdebt to equity 46/54 40/60 35/65

1400

BRAZIL1300 PROJECTION OF THE DEVELOPMENT OF u. .

THE DEMAND OF ENERGYFOR THE FIVE UTILITIES AND -:

1200 SOROCABANA RAILWAY AND TATUI TOWN oAND OF

1100 _ ENERGY GENERATION CAPACITY .OF THE USELPA SYSTEM

1000 __ D , ___

900 893

' 800

-J~~~~~~~~~~~~~~~O

-EXCESS TO B~~6 O O _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _:S O L D T A

500

z400

T- DEMAND OF THE

300

200

100

'51 `52 `53 `54 '55 '56 '57 '58 '59 '60 '61 '62 '63 '64 '65 '66YEAR

NOVEMBER 1957 IBRD-400