Ij Lr'I N I T~ 1 IRESTRICTED|Prc,PTq DEK 1 i D & TODE5!4bWITH1IN I ~~~~~~~~~~~~~~~~~~~~~~~~~~~~I jE12IIID

Wli-H~~ ~ I I L ONE WEEKJ IEPDRiT48XK

This report was prepared for use within the Bcink and its affiliated organizations.They do not accept responsibility for its accuracy or completeness. The report maynot be published nor may it be quoted as representing their views.

L . I

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

INTERNATIONAL DEVELOPMENT ASSOCIATION

CENTRAIS ELETRICAS DE MINAS GERAIS S. A.

JAGUARA HYDROELECTRIC PROJECT

BRAZIL

February i 5,r 1966A

-rjet Deparn-nent-

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

CURRENCY EQUIVALENTS

1u. S. $1 = Cr. $2z20cr. $1 = 0. 4I ..Ar.ilCr. $1 brillion = us $450,450

TABLE OF CONTENTS

Page No.

,S9mary

I Introduction 1

II The Borrower 1

III Power Market and Power Supply 2

IV The Project 4

V Procurement and Disbursement 6

VI Financial Aspects 8Tariffs 8Financial Position 12Past Earnings Record 15Proposed Financing Plan 15Estimated Future Earnings 18Future Financial Position 19

VII Conclusions 20

ANNEXES

1. Cemig - Generating Facilities2. Cemig - Summary of Operations, 1959-19643. Goods and Services to be Financed by the Proposed LoanL. Bar Chart Reflecting Cemig's Current Tariff and Taxes

and Average Consumers' Contribution to Plant Expansion5. Balance Sheets as of December 31, 1963-19746. Income Statements, 196 3-197LL7. Sources and Applications of Funds, 1966-1974

MAP

This report is based on the findings of a mission in September-October 1965to Brazil composed of Messrs. Ralph L. Bloor and John Bruen.

BRA ZEL

JAGUARA HYDROELECTRIC PROJECT

5 iThMil ?

i. Centrais Eletricas de Minas Gerais S.A. (Cemig) has applied tc theB3n"k for a loan of US$T 9 r,.;'lior, e tval'wlt, n TT1.8 millin for ;n=

terest during construction, to help fLnance the Jaguara hydroelectric project.The proe4- is est,,.te to cost -,A9 4mllo -qiaet -cludn 7T2!terest - -- -4 -4---

during construction on the proposed Bank loan.

ii. The Jaguara project consists of a dam and powerhouse with an in-staCLLLed capacity of 03. 400 'LUV dIU UI-Uns1m:Lssbon, l) L.U1O L) L;ULtIUC UV i .g

transmission systems.

iii. ,Cemig, a corporation contro:Lled by the State of Minas Gerais,reCeived Bank Loan No. (0-BR in 1953 oI US$7*. milloln tGo assisT, in the con-struction of the 48 MW Itutinga hydroelectric project. Cemig's operationsare well managed and from past experience Cemig would be capable of satis-factorily supervising construction of the project.

iv. The proceeds of the proposed loan would be used mainly to financethe foreign currency costs of the civ:Ll works contract and the purchase ofequipment for the project which would be supplied partly by foreign and partlyby local suppliers, Awards would be made after international competitivebidding with participation by qualified domestic suppliers who would begranted a ]5 percent preference. Satisfactory arrangements have been madeto provide the balamce of funds required to finance Cemig's program.

v. lTariffs were increased substantially early in 1965 following newdecrees issued late in 1964 and which allowed for the first time the periodicrevaluation of assets for tariff-making purposes. However, due to certainshortcomings of the regulations and a3lso the high level of electrificationtaxes on consumers, utilities have not been able to achieve fully the per-mitted rate of return on the true value of their assets. The establishmentof consistent and effective tariff policies and the changes in the level, ofelectrification taxes are important questions which will be taken up withthe Federal Goverrnment without delay in the context of the power sector as awhole, rather than in connection with this particular project. Separateprovisional agreements covering this i)ro1iect have been obtained to coverthese shortcomings.,

vi. l'he project would be suitable for a Bank loan of US$49 millionequivalent for a term of 25 vears including a grace period of five and one-half years,

BRA ZIIL

THE JAGUARA HYDROELECTRIC PROJECT

I. INTRODUCTION

1. Centrais Eletricas de Minas Gerais S.A. (Cemig), a power utilityowned principally by the State of Minas Gerais, has applied to the Bank fora loan of US$49 miullion equivalent, :Lncluding US$6.8 million for interestduring construction, to help finance the Jaguara hydroelectric project. Thetotal cost is estimated at US$90 mil-lion equivalent, including interest duringconstruction. The project would be situated on the Rio Grande 370 kan westof Belo Horizonte, the State capital and the princiral load center of Cemig,and would consist of a rockfill type dam and a powerhouse with an installedcapacity of hOO MNW with one transmission line direct to Belo Horizonte andanother connectingr with the existing transmission system serving Sao Pauloand Rio de Janeiro.

2. The Bank made a l nan ton tcenig (No 70-FR) of T5.qt7.A millinn in 1951to assist in the construction of the 48 MW Itutinga hydroelectric project.Since 1953 rpmng has finnnred its xpan.sion prograi withonh wink a st.nnce.The Jaguara project is of high priority in an integrated program of powerexpann.rion forY- +the se+th>en-ral region of Brazil, This program was preparedunder a United Nations Special Fund grant for which the Bank is the executing

3. >.LLt report is b-ase on U±JV f.^'-A.g of a BJWar.j.k .sso consisJJ g

of Messrs. Ralph I,. Bloor and John Bruen, which visited Brazil in September-Octob'er 31"6i'5

II. THE BORROWER

4. Cemig was organized in 1952 for the purpose of formulating and ex-pedditlng a public power expansion program for the State. IT is at presenltserving nearly all of the principal towns and industries in the State cmd therem-na-inder will be soon connected to its system. It has been granted a federallicense to build the Jaguara hydroelectric project as a part of its con-tiuI ing expansion program.

5. Total share capital, composed of common and preferrea shares, asof July 31, 1965 was Cr$70 billion (US$38 million). In addition to theprincipal State onership of 65.6 percent, shares are owned as follows::15.5 percent by Centrais Eletricas Brasileiras S.A. (Eletrobras), a FederalGovernment-owned limited liability company charged with carrying out anational electrification plan; and the remaining 18.9 percent by some 35,000shareholders including municipalities, industrial consumers, insurancecompanies, banks, and individuals.

6. Cemig operates under a Board of Directors consisting of sevenmembers including bankers, lawyers, and other prominent citizens of thfe Statewho determine general management policies and approve budgets and majo:r con-tracts. There is also an executive group consisting of a President and five

members with extensive utility experience who carry out the decisions of theBoard of Directors and manage the company in accord with the laws of theState. One of this group is in charge of an Engineering and ConstructionDepartment with 185 employees including d5 engineers; another is in chargeof generation with 610 employees; and a third is in charge of distributionwith 640 employees. The company regularly employs foreign consultants toimprove its practices and to assist in carrying out its expansion progrnms.With these, it is fully capable of constructing and operating the proposedproject.

7. Cemig owns and operates 12 hydro and five diesel generating plantswith a total capacity of 528 MW (see Annex 1 for details); and a transmissionsystem composed of lines totalling 3 600 km in length and operating at voltagelevels of 275, 138, 69 and 34.5-kv. The Cemig system is interconnected at138-kv with the Peixoto hydroelectric plant on the Rio Grande owned byEletrobras and a 345-kv interconnection between the city of Belo Horizonteand the Furnas systems is now complete, although not yet operating. Cemigalso owns and operates distributing systems in 157 localities serving some146,000 customers.

8. Cemhi has rights to q0 nercent of thp outnut of thp Furnas 900 MWhydroelectric project on the Rio Grande owned by Central Eletrica de FurnasS.A. (Furnas). a subsidiary of FP1 trobras. Cemiv has had no need to exercisethis right up to the present time, but it is now negotiating with FurnaS fora sale Pq ot-ntrant norvring its estiated needs for purc-hased power for thethree-year period 1L966-1968. It is expected that the terms of the contracti.rill be ae UpOl h March, 1966.~A * The s- gngof this c eonta n 1g

provisions satisfactory to the Bank would be a condition of effectivenessfor the proposed loan.

III. POWER MARKET AND POWER SUPPLY

9. Cemig's rnarket area is the State of Minas Gerais, measuring roughlyAnn I-, Ron 1-s Th'e n.o.-thems h-1'f is barrer. ar.d ------ l setld +h-- -. te south-.w 1 ',~J' IlAl.% III& , JL uLL. VIIL IAJ. J. .L.A 0L'Q.L ± -I .LLJAJ. UkJO. -.J4 U V-1 1-

half is rich in minerals and contains many relatively new heavy industries.Jr &ACXV JVWLLI sL haJJ.Uv.e 4A V J.L C .LpO U Lt LVas J years, aver\agr.g 20 .p UtLV

annually, and about 80 percent of its output is used in industry. The rateof gro"wh r-opped to abo-u 12 percent in 1964 . due to sluggish buusirness con-ditions in Brazil. In that year Cemig sold 1,885 million kwh with a maximumdermand of 359 Mw. (See arinex 2 for iurt]ner detaiis.)

0.V Tle market for electric power iLn soutr-central Brazil kwhich-i Uincludesprincipally the southern half of Minas Gerais and the States of Sao Paulo,Rio de Janeiro and Guanabara) has been under intensive study over the pasttwo years by Canambra, a consortium of three Canadian and United States engin-eering finns. Tne study is financed in part by the united Nations SpeciLal Fundand the Bank has served as executing agency. The market study has been com-pleted and Cemig has used the results as a partial basis for a forecast ofsales over the next ten years. Since Cemig has a regular program of expandingthe territory it serves outside the area studied by Canambra, provision hasalso been made in the forecast for these added loads. Predicted sales forthe next ten years are as follows:

-3-

Millions of kwh

1965 20251966 24241967 28651968 33541969 38961970 44971971 51631972 59001973 67171974 7622

The forecast is reasonable assuming an upturn in business conditions in Brazil.There have recently been some signs of this.

11. Cemig has always purchased small amounts of power to supplement itsown generation0 The largest amount was 39 million kwh in 1964. Beginning in1968 it w:ill have to make substantial purchases from Furnas rising to about1400 million kwh in 1970 before the Jaguara project comes into operation.Jaguara would be able to meet the load growth for about one year and there-after purchases of nower would rise again to 2h00 million kwh in 197L, whichwou].d be available from the Furnas and Estreito projects of the F_rnas company.Cemig wouLd exnect to cnmplete the nnnst¶Iloinn nf additional genemntiripplants in 1975.

12. As Cemig purchases larger and larger amounts of power and cornstr-uctsgepnerating plants which will be further from. its market area, it will beincreasingly important for the south-central transmission grid to which lti9 connected to be operated as an integrated sytem to provide reliableelectric energy at; the lowest possibLe costs. A recent decree has givenMe e+robras, sormt e n +

1-aUtho.w4ity W.1ch LS to lbe useA for th,i- -A,Hose; 44, t

drafting of pooling agreements among the large generating entities has beenstarte%d .I The Guo v e rn r,ent ha.I CLs agrueed lt4hCL itU W-w. t'11 eVn.Lc2.r,g Utheset acti_vi.L.tieswith a view to assuring a well coordinated system by 1970.

Expansion Program

13. Cemig's plan for expansion over the next nine years closely followsthe recox4r,endations of the Cana.bra group which has worked out a px u -um ofadditional generation and primary transmission to 1975 for the entire south-central region. IThe generating project of highest priority in the Caniaumbraprogram is the Estreito hydroelectric project, now under construction byFu-rnas and the Jaguara project has the second highest priority. The C'emigprogram also includes the installation of two 65 MW (Nos. 5 & 6) units in theexisting Tres Marias plant and the construction of additional plants ort theRio Grande below Jaguara. The total estimated cost of these facilities, in-cluding Jaguara, over the next nine years is US$171 million. Cemig estimatesthat 5,00( km of high voltage transmission lines to carry the increasedcamounts ofi energy and to reach new areas of the State will also be requLiredat an estimated cost of US$63 million. Distribution systems to serve 500,000new consumers and 300 new towns are planned at an estimated cost of US$72million. Cemig haLs also embarked on a rural electrification program orn whichit expects to spend US$14 million. The total cost of the nine-year programis therefore US$320 million. The program is reasonable.

IV. THE PROJECT L

14. The Jagaara project will be situated on the Rio Grande, 370 km westof Belo Horizonte, where the river forms the boundary between tne States ofMinas Gerais and Sao Paulo (see Map). The project will be the fourth in acascade development of the river which includes the existing Furnas project,the existing Peixoto plant of Eletrobras and the Estreito project now underconstruction. A1L of the plants are greatly benefited by the large flow regu-lating reservoir iat Furnas, the upstream project.

15. The Jagaara project would consist,of a rockfill dam 325 m. long and40 m. high with a volume of about 800,000 m), a concrete intake structure andpowerhouse, a concrete spillway structure with tainter gates, and transmissionfacilities to Belo Horizonte and the Estreito project.

16. The powerhouse would be designed to contain six units of which fourwould be installe,d initially. The units would have a capacity of 100 11W eachwith Francis type turbines to operate under a head of 45 meters. The amnualenergy output of the Project has been calculated at 2.4 billion kwh underconditions corresponding to the driest period of record. Transmissionfacilities will o]perate at 345-kv. The transmission line to Belo Horizontewill be 3,65 km long. At that point, a 450 MVA substation, designed for opera-tion at voltages of 345/138 and 13.8-kv, will be built. The transmissiLonline to Estreito will be 25 km long and a section bay will be installed atthe Estreito substation to form an interconnection with the Estreito trans-mission system which serves Sao Paulo, Rio de Janeiro and environs.

17. The preLiminary planning of the project was done by Canambra. Afterits high priorit-y had been established by this work, CeGi rig employed Electro-watt of Switzerland, working in conjunction with two Brazilian firms, -o carrynuit compeen inpvestJ+igdAtins of the site and to prepare the de-tailerd nlans ani

specificationse IThese consulting engineering firms will provide constructionsu1pervisio. anrd the Ceia,, org7nimaton iS fl y capahle of operating thle pro-ject upon completion.

18. The site should have a minimum of foundation_problem F floo(dhazards will beOa'*., 0,a,4 AA -TTFiIhazrdsTwrlnbee 1-aTwr on" a-^^--,f Of thle reEg.aiti- .provded bsy-+e Furna slreservoir. Rockfill for the dam will be available from the tail race exca-v -t i Th.ese circu.staces OL A. LILLiL.Ln-ze thLe risxk of delays ind overrt ns IIin cost. Plans and specifications for the civil works contract are nearlycv..pleted a7nd it s,hould be possilble to have a contracitor begin work in Apri;1966. Completion of the project could then be accomplished in early 1971.

19. The estimated cost of the project including interest during con-struction on the Bank loar, is US$90 million equivalent. The followirng break-down between local and foreign costs is based on the expected outcome ofinternational bidding with Brazilian suppliers participating.

ForeignLoc Tlxchlage

Cost Cost Total Costus niqu±v. uS$'S

(millions)Jaguara Plant

Land, Damages, Relocations 2.20 --- 2.20Concrete Structures 10.77 3.78 14.55Rockfill Dam 4.39 1.72 6.11Gates, Stoplogs, Trashracks 1.73 0.54 2.27Turbines, Generators 1.22 10.93 12.15Electrical. Equipment 1.74 4.22 5.96Miscellaneous Equipment 0.73 0.67 1.4oCamp, Overhead Costs 7.85 --- 7.85

Sub-l'otal 30.63 21.86 52.49

Engineering 0.97 0.50 1.47Contingenc:ies 4.11 2.92 7.03

Total. Jaguara. Plant 35.71 25.28 60.99

Transmission Facilities

Jaguara tc) Belo Horizonte 6.26 3.12 9.38Jaguara to Estreit.o 0.b1 0.21 o.62Estreito Jnterconnection Bay 0.18 0.14 0.32Belo Horizonte Substation 3.33 5.02 8.3 3Static Condensers 0.35 1.19 1.54

Sub-l'otal 10.53 9.68 20.21

Contingencies 1.04 0.96 2.00

Total Transmission Facilities 11.57 10.64 22.21

Total. Project Cost 47.28 35.92 83.20

Interest dluring Construction onPrOPosed Bank loan A-ri

T(YAT MA.ThPT' (- rA P 0. r

r0Phe l -l-renc,r cj .a+e " -e * n TTJS$ mli4ivinl nn+

as is customary in Brazil, where the rate of inflation has been high, toprovdide a reasonably* firr. basis . O- r cI.a or.n with a a cItA Losts as they

are incurred. Increased local costs due to inflation are difficult to pre-U.LU LJLLuJ areL exp iecteU U U4 Vbe =w 1JJ o.ffOs.t 1,AJ s VL4n COM 41J.1g-1

internal resources brought about by periodic tariff adjustments to coverrevaluuation ar.u cost .Ucreass, whicUa are peuLvituted by law to take acuokuitof the continuous inflation.

21. The cost estimates were prepared by Cemig which has experiencedengineering and purchasing personnenl The contingency nllowances inclivde17 percent on civil works items and 10 percent on other items. This allowanceshnnIi ti be nmrle P forvr t.hi s orknt,. whii -h rirn-m.ie to hauo " A1t-i-,T cgood

foundations and will be protected from flood difficulties. The cost per kilo-Wat+ iS 9 US$165, not ucd; trrnsmissior., u ,nregard to the

higher energy capability of the project, is very attractive.

V. PROCUREIENT AND DISBURSEMENT

22. The proposed loan is intended to be disbursed against the followingpr4.c;pMIal. goods and serv-Lces -to bue proc-ared on- thile buasis oil JMI.atoacompetitive bidding (see Annex 3 for details):

(a) the cost of all permanent equipment for the project;

(b) construction equipment; and

(c) other direct or indirect foreign exchange components of thecost of the main civil works contract (except as otherwiseprovided in paragraph 28).

23. Local firms would compete for many of the contracts covering per-manent materials and equipment and the proposed loan funds would be availablefor payments to them, The amount of the loan which would be required forpayments to local firms cannot be determined with accuracy, since it dependson the outcome of international competitive bidding, but from previous exper-ience, it is presently estimated at about US$6 million for materials aundequipment.

24. The Government and the Ban.k have agreed on procurement procedureswhich are quoted in part as follows:

"The Borrower intends to invite firms producing goods in Brazil toparticipate in the international competitive bidding. In the case ofgoods produced in Brazil, the Blorrower may award the order to the lowestBrazilian bidder offering satisfactory terms and conditions; providedthat his offered price does not, exceed the offered price of the lowestacceptable foreign bidder by more than 15%. Comparison of bids willbe made for goods delivered at Project site and without taking intoaccount customs duties. For firms in Brazil, the delivery at the siteprice will comprise the F.O.B. plant cost plus freight, insurance andother costs to the Project site. For non-Brazilian firms, the deliveryprice will be based on the C,I.Fo landed cost, port of entry, beforecustoms duties, plus inland freight, insurance and other costs to theProject site. As the 15% preference allowed firms in Brazil is inlieu of customs duties, the 15 will be added to the C.I.F. landed cost(excluding customs duties) of the non-Brazilian goods, before inlandfreieht. insurance and nther cos5ts. Tn the case of bids comnosed ofboth Cruzeiros and foreign currency the cruzeiro portion thereof willbe dLealt with as a Prnzili n hid andi the foreign Pxchange portion as anon-Brazilian bid.

I.7- 7 -

"For comparison purposes all bids after evaluation will be convertedinto cruzeiros at the Bid Comparison - Rate OI Exc'nange. The Bid Comn-parison Rate of Exchange is understood to be the commercial bankdollar selling rate plus the exchange surtax (but not to exceed 30/0)if any, prevailing at the date on which bids are closed. It is furtherunderstood that the Bank will, at the request of the Guarantor or theBorrower, reconsider and, if necessary, revise the basis for compu-tingthe Bid Comparison Rate of Exchange, whenever there should be a sub-stantial change in the Brazilian exchange system which would, in thejudgment of the Bank, render such rate unsuitable for bid comparisonpurposes.

"The Borrower will, in the case of civil works contracts, requireforeign bidders to associate themselves with an experienced local firm.For bid comparison purposes the foreign component of such bids willbe converted to cruzeiros at the rate of exchange mentioned above, butit is understood that the 15% preference will not be allowed.

"The Guarantor will take all such measures as shall be necessary iaorder to facilitate the importation by the Borrower free from all 'Legaland administrative limitations cr restrictions of goods purchasedoutside Brazil in accordance with the provisions of the Loan Agreement..."

In a recent action, the Government has eliminated the exchange surtax and hasestablished a new Banco do Brasil buying rate of Cr$2220 = US$1 (to becoTmea new Cr$2.22 during 1966), which has caused the commercial bank dollarselling rate to be set at annroximatrLv the same level. At the present time.therefore, local and foreign bids would be compared as described in detailabove using a bid comparison rntp of exrhange of approximatePy Crt22220US$1 and allowing a 15 percent preference for local bidders.

25. Imports into Brazil are habitually accompanied by time-consuminginveRti gaions ineo +-he need for and the legality of the import. As a publicutility, Cemig has certain privileges as regards imports and furthermore hasacqUiri considerahle skhll in expedi.ting the procureme-nt of import licen+eAs a result, it has become normal for Cemig and other public utilities toimnnort. toonr.sriitl+,on niii npmin. and tur.n it over to +he C_Vi 1 woirkse contrator;

and to impqrt all materials and equipment not available in Brazil for trans-mSi nczc on fWrnMl ;+ Q,C onrQ +1_rh +t%- -er. +0 7D-tf;1 4 . _"+n+oe wn~+i on

on f~vii+A ad tun, them ove to Br_U_ia contrator- o erect-on.These procedures have led to the successful completion of a number of large

4 na n ,nc,n.,1 an-+S c.Ve-, 41 A-ou, -k, 4 ~ n 4-4- --- At -1ls,' -4 th, - ,rJobs at rewo.al cost ever. thoug thereI is goodV reason, to believe theymay not be the most efficient means of contracting for civil works and trans-

OA1 __ 4 U OTt W - A ,

±±.t;A7 4.JCaLW IW.io OuL,D U UO L W U UVV.L..LLILC;1iU U,LId.LU I.UL±ULL.UJ.UL1 WUU�." Li

improved if contractors could freely move construction equipment into and

so desired without excessive delays. The Government acknowledges that theremaay be aduVatages r,o doing so. However, it nas pointed out that thie ieicsar-ychanges in import regulations would affect many Government departments andtheir effect on many related Government policies and Brazilian industry wouldhave to be given careful study before the Government could commit itself tothe necessary changes. it has agreed to commence the necessary studies so

as to be in a position, in the course of about one year, to discuss with theBarink WhittU'ev soill[ ULUiges CO-±U Ube m[adeUU J- - reguia.±uLs wich.Lu WoU-LL Ube

beneficial in connection with future Bank loans (exclusive of Estreito IIand distribution loans now under consideration). In the meantime, the Govern-ment has requested that the Bank continue to accept the procurement methodswnich it has accepted in connection with several previous loans.

27. These procurement methods will provide international competitionon a very large percentage of the goods and services to be covered by theproposed loan, and the Government's request for time to study the impact onits economy of the proposed changes in its import regulations is consideredreasonable.

28. The Bank has accepted the requirement of Cemig that a foreign bidderfor the civil works contract must associate himself with an experienced localconstruction contractor since experience has shown that a foreign contractor,not already established in Brazil, would be likely to encounter difficultiesunder the ecuia, Brazilian economic conditions. It is intended to comparelocal bids for te civil works contract with combination local and foreignbids by ccnverting the cruzeiro portion of such bids at the bid comparisonrate of exchange mentioned above, but; to allow no preference for local bidders.Combination foreign and local bidders for the civil works contract are likelyto have larger foreign currency requirements in their bids than local bidderssince in the former case foreign currency may be required to cover a portionof the profit and services and a foreign bidder may require more equipmentto be purchased by Cemig since he carmot bring his own equipment into thecountry. Because all bids may not be on the same basis, the value of con-struction equipment to be provided by Cemig to the contractor will be takeninto account in the bid comnarisons. The estimated foreign currency rEquire-ment for the civil works contract an(i for construction equipment, amountingto US$7.5 million. as shown in Annrx 3, is based on an assumed combinationforeign and local contractor. If the contract is awarded to a local ccntractorwith foreign currrncy rev rman+.q lie9q +han -+hPes estnmates, it. is proposedthat any balance which cannot be disbursed against direct or indirect foreigncurrency requiremr-nts woild be mnde availahble for disbursement against localcosts of the contract.

VT. FTNTAMUTCrAT- AvPr.T.'

T' .ff~

90. T 'en M,1 n+i^ns f^. power oper n snAd tariffs are con-

tained in the Water Code of 1934 and subsequent amendments and decrees, in-n ,4 4,," sr- 4 -n, - A~ ---- ,e A.,4- -.A 9nn,,' - 4 1 Oi~7 ,n"A +1k na An'acluding -s aric LL4al W. l d _u6, 195 a three __L-- dec-re e! s

dated November 4, 1964. Prior to 1964L, tariffs were based on the use ofVi,s4toric vralues- of' investr,er.t which ;,esu 'ted ir. -- 4.dq,t reu. on ir.=&A L~U.L ~ Lu'LU S 01 UNLV EMI4IL 7LU W .11M.M..L~ J_ULLI.JLLAC 'JUt. _

vestment and deterioration of the earnings of utilities, due to the rapidrate of inflation in recUtl years. LT-he -L6h decrees reflected a m,taJor chn,gein Government policies by allowing ultilities to revalue their investment, andth-us making it possible for utilities to apply ariffs -which would -yiedadequate returns.

-9-

30e Under the existing regulations, tariffs are reviewed and approvedby the Waters Division every three years to yield revenues which cover(a) operating costs; (b) straight-line depreciation of revalued gross p:Lantin service at annual rates prescribed by the Wlaters Division, up to 8 percentfor thermal plants and up to 5 percent for all other facilities includinghydro plants; (c) amortization of the total investment of the concession ofup to 5 percent; and (d) a cumulative, return of 10 percent on the revaluedremunerable investment. Remunerable investment is defined as gross plant inservice (excluding assets acquired through contributions in aid of construc-tion) less depreciation and amortization reserves plus an allowance for work-ing capital consisting of operating inventories, the equivalent of two monthsbilling, and cash excluding cash balances of contributions in aid of con-struction, reversion or amortization funds. Any shortfall in achieving thecumulative return of 10 percent in the three-year period may be recovered inthe subsequent three-year period. However, the law permits recovery of short-falls in a given year by a tariff adjustment over the succeeding twelve monthperiodo

31. Automatic adJustments of tariffs to allow for inflation in the formof surcharges on the original three-year tariff are permitted (a) month:ly,for comDulsorv increases in wages, social benefits, cost of fuel and purchasedpower and (b) semi-annually, for increases in foreign debt service due lochanees in the foreign exchange rate.

32. Tariff adjustments for the revaluation of the balance sheet accountscan be made as often as economic correction factors based on cost of livingidices are mhl4 imehdel hy +he Natlonnl EGRenei,mi ne (micil. Revalua-tion, however;is not compulsory. The factors are issued annually about two months afterthe en. nf pnnh yar, for +the ue of 4nAdt+.r in gancMt"l. - Th awre P nnnli^tdby utilities to up-date the values of plant in service, depreciation andaimiortizatjn or reversxon reserves, and certair local currenc loans fromthe National Development Bank and/or Eletrobras. Foreign currency componentsOf the book value of f4' -A- aset .- e cor.verted 4-4to loca'cerc a+v l;he

rate of exchange in effect at the time the assets are acquired. ForeiglAoh+.e ow wotrvls1AA n_ +h, hA-4. _- 4.h- -s_ n4_+- ^-P P^"n-le" n.%r 'knaoM Thot a _r_valed on t b v vaswIws of the crnt rate o- foign e e e

amount by which the revaluation of fixed assets exceeds the revaluation ofresenlres Ma oa-r.s is seA+ aside as a re v a.`4.on resenve wahi, a -u 4ec+t toa 5 percent tax,

33. In additlon to the tariff regulations, which permit relativel'y highWC"-J.-L.O Vr4L%Q VUJL V. I1J.~LOOJ.LW LJ.~L6L UV JL-t:.J.M..LA14 dJLU CUJ.LZ LQL.LVL11 .LC.IVO;P UJA

Federal Government levies heavy taxes as a surcharge on the consumer's1; &JL.L.L, LU LIJto.LJJ .L.L1L.Upit pUwer txpansidAon1 LLUIn L UVUi L1wrJY 1e p

of the "sQLe" tax which was created in 1954 are allocated among the Federal,State, and Mfunicipa authorities. TXhis x has been s-ubsequently increaseddue to infLation and is presently based on a percentage of an average monthlyrate per 'v' estab:.Lihed by the National Council of water and Electric Enlergy.There is also a second tax originally intended as a "compulsory" loan, wihichwas placed in effect beginning November 1962 and wnich is to terminate Ln1968. The proceeds of this tax go to Eletrobras, which is supposed to issueto the consumers for the amount of the "compulsory tax" paid, deot cert:Lficates,redeemable in 10 yfears at an interest of 12 percent. However, arrangements

- 10 -

are far from completed f'or the consumer to obtain such certificates. The rateof this tanX is the sare as the sole tax and the proceeds can also hb distri-buted to the States by Eletrobras in the form of loans or share capital.Th.e combination of these taxes amouznts to between 4O percent and IJ5 Percentof the consumer's t;otal electric bill, in the case of Cemig.

3l. The implementation of the revaluation provisions has not beenentire.ly satisfacto,ry Uduring the1~- :L nit:i a 1 year du e t o t. 1ae under s tand-ablecomplexities involved with the transition, but also to serious shortcomingscf the ntew ragulations . hevaluation is only- perm issive aiiu thie corresponc.gtariff adjuastments are, in most cases, obtained with delay. A suitableprocedure has been lackidn lfor comparing at year-end the actual and perrmittedi'eturns on the investment, and the three-year basis used for determiningtariffs and recovering past shortfalls in earnings, has been inadequate.Exces,sive charges are still permitted for depreciation and also for reversion(or amortization), a reserve which in ef'ect duplicates the depreciatiornreserve; and the high level at which both charges are maintained constitutesan expedient against inflation which in effect duplicates the principle ofrevaluation. In a number of cases the present high electrification taxes havealso hanpered the achievement of the maximum rates of return permitted underthe present rate legislation.

35. One consequence of the present tariff regulations is that a utilitywould not normally be able to achieve fully and currently the permitted returnon the up t;o date vralue of its assets, as long as the rresent inflationaryconditions persist. Serious consequences may also resul-t from the permissivecharacter of the re!valuation principle, and the consequent arount of' discretionleft to the aviaters Division and the utilities in agreeing on tarif'fs onundervalued assets. In 1965 a whole range of tariff policies were used byutilities; while Pu.rnas and Uselpa, bound by recent agreements with the Bank,were able to obtain tariffs reflecting, revaluation of assets through 1964,most utilities, including Cemig, applied tarif'fs reflecting revaluation through1963. As the rate of inf'lation in 196h was 74 percent, Cemig's assets asrevalued were increased to only about half of their true value. Depreciationcharges at 5 percent straightline were permitted for all utilities, regardlessof the respective useful lives of their assets; and while Cemig was allowedto provide for 5 percent amortization, most utilities charged 3 percent. Thislatter question takes on considerable importance if it is realized that underpresent cornditions the amortization charge is deducted from the asset valuationas though it were depreciation. In effect, therefore, the present systemof calculating the rate base for tariff purposes leads to depreciating t'hebasic assets in periods of the order of ten years. Different applications ofthe present regulations, when reflected in the apparent Dower costs of i:nter-connected utilities, may well cause distortions in the relative costs ofimportant blocks of power especially in the south central system and, as aconsequence, cause important economic decisions to be based on misleadingassumotions.

- -1 -

36. The Government is aware of these problems but so f'ar its actionhas been ll_ teA to a study of + + t-i ff ++In n+d then nrenYpartn

of a new schedule of depreciation rates based on the useful lives of the,V,arious cl.1asses o:F assets.TIn connrction -th 4the propose -1E> --- 1

the Government has agreed that the problem of devising new policies govrerningUlhe determuinati.on oi' the le[vel of -rosss rrevnues re Lquired bLiy utilite,

and the related question of electrification taxes, deserve immediatestudy and early action. As this problem affects th'e wnole of the utility

industry ;and there is evidence of' the Governmentta willingness to reso:Lve it,it was not considered practical or necessary to require more specificaction as a condition f'or the proposed loan to Cemig.

37. Pending results of the general action contemplated above, theMinister of Mines and Energy and Cemig have agreed that in order to followreasonable standards for the determination of future tariffs, Cemigwould, beginning in 1966, revalue its lixed assets as often as permittedby the issuance of official cost indices, charge depreciation at ratescommensurate with the useful life of assets, and elimlinate amortizationcharges altogether.

38. A covenant has been included in both the Guarantee and Loan Agree-ments to the effect that (a) Cemig will maintain tariffs at least sufficientto provide for a rminimum annual 10 percent return on its revalued net f'ixedassets in operation at the end of each calendar year after operating expensesincLuding normal depreciation charges of not less than 3 percent of theaverage revalued gross fixed assets in operation but excluding amortizationcharges, ('b) Cemig will revalue its ftixed assets in operation as often asperrmitted by the issuance of official cost indices but at least once ayear, (c) Cemig will promptly obtain any necessary automatic adjustment toits tariffs as out;lined in paragraph 31, and (d) Cemig will recover anydeficiency in achieving the annual 10 percent return over a 12 month periodstarting not later than seven months after the close of the calendar year.

39. Cemig's tariffs were more than doubled from an average of Cr't6.76per kwh in 1964 to Cr$15.20 per kwh early in 1965, and taxes were automa-tically increased in the same proportion. Annex 4 shows the price paid forpower by the maior categories. including taxes. and the large nercentageof the consumer's bill which is used for plant investments.

40. In 1968 Cemig will begin to purchase power from Furnas which isone of the few utilities in Brazil which has taken full advantage of the newtariff regulations. Its tariffs were increased approximately four timesabove their 1964 level and currently exceed Cemig's tariff by about Cr$;8.8per kwh. Under the regulations, Cemig could pass on such a dif'ference toits consumers, but fears that by doing so it would imnede the growth of'its market.

- 12 -

L41. This problem was discussed with representatives of Cemig, Furnas,and the Minister of lvines and Energy. Furnas and the Government were a:lsoadvised of the possible depletion of Furnas& remunerable investment and thedeterioration of its rate of return that would result from using highdepreciation and amortization rates for an extended period of time. Pendingresults of the act-Lons contemplated in paragraph 36. it was agreed inprinciple that, starting 1968, Furnas would lower its depreciation rate from

nereent to a normrl rnte of denreciation estimated to be 2-1/2 percent, andeliminate its 5 percent amortization ent:irely. The reason for the delay ist,wofold: (2) it. is the PFederal Cover:nm t is desLre that. Furnas generatEmost of its local funds for its expansion during the next two-year periedrather than borrow or receive equity -ontributions from letrcbhras; (b) Gemigwill not begin takiLng large amounts of power from Furnas until 1968 (seeara r- a- )J .

Finan.ci.l:O Position.

L2O CemigIs financial statements are audited by Arthr- Andersen ard Co.The accounting methods followed and the auditing arrangements are satisfiactoryexcert that starting 4--L- f'iscal - -ndin Dece 1, 166 the statem.ents

should be on a consolidated basis to include Eletrificacao Rural de MiinasCGera.Ls ( \ ItLLg) whichl iLs a subsidiar-y uo UCe,igt. In coninectiuAon wit tIeLI pro-

posed loan, Cenig has agreed to continue to employ auditors satisfactory toUtIe [3riK adIiU tuo s-ubLit, certiVfiUed consolidated arinual ILiL..L.J stateiments

L-3. l'eI Ii±U L.ULlal proje tions have been maxi ua'indu atu t,2L 0 ou

UStl in this report.. Normal increases in operating costs due to expandedoperations hlave Ueen considered and it is assumed that most o the eiulecusof any decreases in the purchasing power of' the Cruzeiro will have beenprovided for unaer existing tariff regulations and adjustments for inflationmentioned in paragraph 31.

4h. Balance sheets as of December 31, 1963, 1964 and 1965, the latterestimated on the basis of data available in October 1965, are shown in Annex 5.The balance sheet as of the end of 1964 is shown after revaluation based onl9o6 cost indices. In order to bring Cemigis 1965 balance sheet values to anequivalent of Cr$2,220 to US 11 it was necessary to f'ully revalue its 196,1hfigures using tne 1964 official cost indices plus a revaluation adjustmentfor 1965 based on estimated cost indices for 1965. Actual official 1965 costindices will not be issued until about 14arch 1966.

45. Cemig's partially revalued balance sheet for 196)4 and its estimatedfully revalued 1965 balance sheet are shown as follows:

- 2.3 -

C'.5NTPA T T.FTRT (.21 1 l,4T MLS' fRl ATS S.A.

Actual 19614 and WIstimated 1965Balance Sheets

(in B" .1io nsIof Cru; ze i;r o_S

Asof Dece-m,ber -I 16 '4,tC!

Based on 1963 Based on EstimatodA07 CCos c'.. ces T 1965r Cost4

uU U -i.7Lut) uuou _LjU LUt'..

FiLAed' Asset.sGross Plant in Service 91.69 239.9Le ss - Deprepiatlion Reserve 4.13 12.2

Net Plait in Service 227.70work in rrogress 15.88 13.28

Toltal Fixed Asset;s 103.14 2h0.9dInvestments 2.03 2.414Current Assets 18.05 25.85

Total Asset's 123.52 269.27

LIABILITIES

EquityCapital Stock including advances 69.93 106.37Contributions in Aid of Construction 1.36 1.63_Leagal Reserve .30 .8_Surplus .04 .17Revaluation REeserve 12.57 65.77'Amortization Reserve - 3.9L.Government Grants 13.90 25.07

Total Equity 98.10 203.77

Long-Term DebtI13RD Loan 5%, 1957-74 2.60 8.35Ex-Im Bank Loans 5% 1961-74,

5.75% 1963-68 1.92 15.53IADB Loan 5.75% 1962-76 2.22 10.08BTDE Loam 9.5% 1.963-73 .03 .0bEletrobras Loans 12% 1964-74

7% 1964-71 1.83 1.53Suppliers Credits 6% 1959-67 3.55 8.05AID LoCas 5.75% 1965-86

5.51; 1965-85 - 3.25Total Loans, 1T.1 7'

Current Liabilities 10.27 18.62

Toltal Liabilities 123.52 269.27'

- lb -

46. Cemig's partial revaluation of its 1964 balance sheet increasedits net plant to Cr$87.56 billion or a little more than half of its truevalue. When fully revalued through 1965 it will increase to Cr$227.70 billionor 2.6 times.

h7. Investments in associated companies are primarily in Furnas, withholdings of approximately 4.6 percent of Furnas' stock outstanding. Theyalso include holdings of annroximatelv 55 nercent of the Eletrificacao Ruralde Minas Gerais (Ermig)*, a subsidiary formed in 1962 to handle the develop-ment of rural elentrification in the State; and small holdings in the CentraisEletricas de Urubapunga, a company formed in 1961 to construct and operateplants on the Parnna River.

48.L c o1*kf"n sa cp4+al ascf Deembern' 'Al 1964 was (r'4j hbillinrShares were issued for capital advances early in 1965 increasing Cemig'sshar"e capital to !"5r77 b;,114n.Th ;+iui osarsn..ghreYD s

4 .e~ + PI hVP 4 , _A ,+,- v+ W-~j

holders as of July 31, 1965 is as shown below:

Common Preferred TotalCr'JL 'l'4) ----- ' Cr

Thousand % Thousand % Thousand __

State of 'Minas-%I. On -,~ , , r'O I-, a I-r' ~,-Q n I £r' £

Ele-trobras 5,4260,72 12.6 5,426,372 20.1 10,8520,744 15.5

-1 I… / - - -

Tota's 145,.UUU,UUU ±LUU.U eI',UUU,UUU LUU.U (U,UUU,UUU IUU.U

Both Common and P-referred shares have a par value of one thousand Cruzeiros.Preferred shares are entitled to a minimum dividend of 8 percent per year ofpar value and also participate in any profits remaining after a maximurn of8 percent on the Common shares have been distributed. The effect of fulllyrevaluing the balamce sheet accounts through 1965 and the additional advancesand stock dividendis declared on 1965 earnings will increase Cemig's sharecapital to Cr$L06.37 billion and the Revaluation Reserve to Cr$6 5.77 b:illion.The regulations require that the Reserve be converted into share capitalwithin four months after the revaluationl is completed in 1966.

49. Long-term debt which had been partially revalued in 1964 to Cr$15.15bil:Lion will increase when fully revalued through 1965 to Cr$46.87 billionor about 3.1 times to reflect the true cost of outstanding debt. Cr$44.09bilLion equivalent or 94 percent is in foreign loans.

50. During ]L965 Cemig had entered into additional foreign loan agree-ments with U.S.* AID, the Inter-American Development Bank, Kreditanstalt FurWiederaufbau and three suppliers to finance their continuous system expansionprogram (see paragraph 60).

* Cemig's investrnent in Ermig as of December 31, 1964 was about Cr$0.24billion.

-15 -

xl. Part OI tlhe existing uebt is secured uy mortgages on spec±±icplant facilities which have been approved by the Bank in accordance withlSection 5.05 of Loan 76-BR. Mortgages on the Salto Grande Plant, the TresMarias plant and the Barreiro Substation were granted to BNDE as guarantorof foreign currency contracts between uemig and tne Swiss Bank Corporation,Siemens Schuckertwerke A.G. and International General Electric. The totalvalue of these contracts has been reduced by amortization from US$10.35mnillion equivalent originally, to US$2.77 million as of October 31, 1965.Another mortgage, on the Piau plant, guarantees a local currency loan fromthe Banco do Brasil S.A. of Cr$.O5 billion originally, reduced to Cr$.01billion as of October 31, 1965. The above contracts will all terminate byDecember 1967. The other debts of Cemig, including the debts incurred in1965, are not secuLred.

Past Earnings Record

52. Income 'Statements for 1963 and 1964 are shown in Annex 6. Untilearly in 1965 Cemig's tariffs were based on historic costs of its remunerableinvestment' Although tariff increases were made in the past, they did notkeep pace with the rapid inflation. Expressed in U.S. mills per kwh by con-verting Cemig's tariffs at the free rates of exchange then in effect, tariffsactually cleclined from 6.11 mills per kwh in 1960 to h.52 mills Per kwh in1964. Cemig has experienced an unusual load growth with its kwh sales in-creasing 2.5 times during the past five years (see Annex 2). This helped toslor down the deterioration of its earnings in the period preceding the changein Goverrnment tariff nolicies in latet 196h. Tariffs were increased in early1965 to an average of about 8.2 mills per kwh (based on an exchange rate ofCr$1,850 to US 1 '. The rate of repturn based nn fully revalued remunerableinvestment at the end of 1965 is shown as 3.7 percent. This, however, isafter dediieting nbArges for awnxchnncra Mffay-o na- otio n Anti amontizatinnof 5 percent. If instead of these clharges, only depreciation of 3 percent ofthe flly revaluec investme-t had be-.ln sed the ret-. world be nbout 6b per-cent. Pursuant to the arrangements imder the proposed loan, Cemig wil]. beable to recover the 4. pre.v As4fferntial in- he, return in the 12b mor4.th

, -- M c- - . ~ 5..- ~ . 4.4.& .- 0.VJ. ..L WL 4.1 VUAJ USi .44..ni.n

period beginning no later than July :L966.

Proposed Financingi Plan

53. A forecast of Sources and Applications of Funds for the periodI OA6-1071. 4 -clus,v iS -h-l r -U- -A--- 7. r-4- the- -4-ya --rdthrugI (4 MC LL.VW i- 0L O..LiW.L.L 3.LL .IL.LL. V LJL~L-.L6 L1Ltt~ O..UyU~L p. .-LUL I. OU S

1971, Cemig would carry out the Jaguara project expected to be completed in&19 I c iL, VJ1UL±L LIJt; s,yOUtemIi %AJd.L1,iUI1j WaL'u a bgir,±LI nJL 1969U UJ W Ul ULwlotr-uction of

new plants to meet its load requirements in 1975.

54. Cemig's requirements for the six-year construction period of theUJaguaara proJecttJb Do be L .LLUa1eU Uy[ b[LP DaJnLk would toTai. aVoub -r$4>1>' U±±.L±Lion

Capital expenditure requirements would total about Cr$466 billion, of whichu- _. - 0 1 n _d- O- I- .- , - . v . I . I . A ^ - , - - -- _ _-C_ about Cr$.18 billion would be for the Jaguara project; Cr$221 Dillion 'Lor

system expansion, including rural expansion estimated to be about Cr$2 0bi lion; and Cr`62 bi lion for the initial expenditures for future plants.It is expected that about Cr$18 billion will be required for interest diuringconstruction; and Cr$7 billion for additional working capital.

- 16 -

55. The following is a summary of these requirements, and the sourcesfrom which they are expected to be met:

Required Funds 1966-1971 Period Percent(Billions of Cruzeiros)

Jaguara Project 183.59 37.4System Expansion 221.02 L5.0Future Plants 61.62 12.6

Sub-Total 466.23 95.0

Interest Charged to Construction 17.78 3.6Total Construction Costs 484.01

Additions to :Aorking Capital 6.93 1.4

Total Requirements h90.94 100.0

Available Funds

Internal Cash Generation 269.03

Net Debt, Service 96.42Cash Dirlndend )t|1K

Net Internal Cash Generation 128.51 26.2

Federal Grants 29.58 6.oS h Wr-m G api- I-.20' *1 I -

BorrowiringsIE3RD Proposed Loan - Jaguara 108.80 22.2Eletrobras Proposed Loan - Jaguara 22.20 1.5Foreign Loans for Plant Expansion 27.34 5.6Local I.oans for P-la 2 xpans`on 3.7n .7Future Foreign Loan for F'uture Plants 37.87 7.7

Total Loans 200.00 4C.7

T'otal Funds 512.29

lNet Increase in Cash 21.35 (L3)

Riequired Finds 490.9)4 100.0

56. During this period the estinrated net cash generated internally v-ouldtotal Cr.'t128.51 billion, after payment of debt service and cash dividends,or about 26 percent of the requirements,

- 17 -

57. it is expected that Cr..$29.5 8 billion, or 6 percent of the reauire-ments will be in the form of Federal grants from the iiinistry of i1inesand Energy and other Federal sources.

58. It is expected that the existing shareholders will contribute newshare capital totaling Cr.l-54.20 bi'lion, or about 31.4 percent of therequirements, in proportions related to their present holdings oi' Cemig shares.Contributions by the State of Mlinas Gerais would be trom proceeds of a Statesales tax dated October 16, 1964, earmarked for electrification and fromthe State's portion of the proceeds of the Federal tax on power consumption.Although no difficulty is expected in raising the share capital, undertakingshave been obtained from the State and Federal Government covering the pro-vision of funds for the project (see paragraphs 63 and 6L).

59. The proposed Bank loan of Cr.0$108.80 billion, or U.S.Lt%9 millionequivalent, would be 22.2 percent of the requirements. It is assumed to havea term of' 25 yearE, including a 51 -year grace period with an interest rateof 6 percent. Other borrowings to finance the Jaguara Droiect would includean iBletrobras loan of Cr.$22.20 billion to have a term of 12 years, includinga two-year grace neriod with interest at 12 nercent. This loan would amountto 4.5 percent of the requirements and is one of the means which is used bythe .tate to ohtai.n additional nroceeds of the Feirnl tax on pnwer consiimnti on.Cemig carn also issue stock to Eletrobras to obtain such funds, but it prefersto kepn theiR nnmhr of s toI Eleptrobhra sl. a 'taiot. 16 npercepnt. of its r~nit_qlstructure,

60. Cr.;31.l3 billion has already been obtained, mostly from foreignsources, tuo finance sys+em expansion (see paragra h 50) Ad the outstandingloan balanices available represent about 6.3 percent of the requirements.Thl,e de-tc,s aI, shvwr; blvw

'3alances

AvailableILL UUL1

Revaluation Interest Term GraceFor i',,g) O1_LrenL -LU1Rn A I-das Years

US ATnD Dee -o1p 7-ent 2Inter-American Development Bank 8.00 5-3/4 15 2±IlterU-,.eric J D1 J-'Ve±vlUopj1L, Dark ].5U a-3/4 114 4

Suppliers Credits 1.38 6 6AreditUnstalt, xulr Wvi ederaufbau 6.99 5 21 H

Sub-l'otal 73T

Local Currency

US AID 3.60 5.5 20 2Eletrobras .19 12 10

Sub-l'otal Th79Total 31.13

61. A future foreign loan for new plants of Cr$66.05 billion equivalentunder terms somewhat similar to the proposed Bank loan is expected to beobtained in 1970 with Cr$37.87 billion to be drawn during the 1970-71 construc-tion period and the balance of Cr$28.18 billion to be drawn in the 1972--74period. The portion of the loan to be drawn during 1970-71 would be 7.'7 percentof the requirements of the period covered by the construction of the Jag'uaraproject.

62. Under the terms of its Charter, Cemig is obliged to distributeits profits each year after the necessary amortizations of its debt and appro-priation of legal reserves have been made. Under State law, the portion ofthe State's share of the net profits are to be reinvested in Cemig's plantexpansion. It has been assumed in Annex 6 that approxirately 61 percent; ofCemigls annual net profits after legal reserves and small amounts of unappro-priated surplus will be reinvested.

63. In order to assure that Uemig will be able to obtain the necessaryfunds to complete the expansion orogram, the State has agreed in the ProjectAgreement that it will continue to follovw the requirements of existing Statelaws which reouire the State to reinvest its nprtion nf Cemig's net profltsin Cemig's expansion program, contribute new money by purchases of additlionalshnres nnd annunl anpproprin-ritnn fr-m the State's res^nrre= Under exi4ti_nglaw, the State guarantees a minimum dividend of 6 percent to private share-holders. The State shall also transfer to Cemig all funds appropriated bythe Federal Government and paid to the State for the purpose of carrying out

6A. T'he Federal rGovern-me-nt- has agreed that CeA,g -wll obtain fromEletrobras, prior to effectiveness of the proposed loan (a) a loan ofr-e, o , A 4-1 - l_ A_ -., 4 -. ._ 1-- -1 - - .-_1t .. A U- A. -1 __4 --- I 4_ - 1_4-_ A-

-S "C c. Ul L' CUiliOUlIk OL. VV[LLL,I W U.LU Ut-- -LA l LLLL 'U I I i : a a UJDL ILF 'JV

inflation and (b) a firm understanding to purchase such amounts of Cemig'snew share c apital as will be required to Umaintain its pa ticipatlon in ,em ig'stotal paid-in capital at a level of not less than 16 percent.

Estimated F'uture Earnings

65. Consolidated forecast Income Statements for the period 1965 through1974 are shown in Annex 6. It has been assumed that Cemig will maintainl tariffsto achieve a 10 percent return on its revalued remunerable investment asdefined in paragraph 30, after charging straight-line depreciation at 3 percent,but no amortization. Kwh sales have been projected on the basis of the loadrequirements forecast outlined in paragraph 10.

66. Cemigis load growth from 1968 through 1974 will be me t by powerpurchased from Furnas. This will constitute a large portion of its operatingexpenses. The cost of the power has been projected on the basis on Furnas'present tariff structure. The Annex shows the increases Cemig would have tomake in its own tariffs in order to maintain a 10 percent return on itsinvestment. If Firnas lowers its tariffs in 1968 as has been agreed to in

- 19 -

principle (see paragraph !1l), Cemig would be able to achieve these resulvtswith scmewhat lower tariffs. Cemig will enter into a contract with Furnascovering purchases of power during the years 1966-1967 and will be in a positionto renegotiate a contract for 1968 and thereafter. It is proposed to secureagreements between the Bank and Furnas concerning the level of its tariffs in1968 during negotiations for a Bank loan for which it has applied.

67. Net operating income after taxes would cover total interest, includingcapitalized interest, b.51 times in 1966 declining to 3.26 times in 1969 andrising to a maximun of 5.70 times by 197h. Total debt service would be covered2.11 tirmes in 1966 and decline to 2.0b times in 1967 and rise to a maximum of4.43 times by 197h. These ample coverages reflect the large proportion ofequi-ty in the proposed financing plan and are very satisiactory.

68. Cemig will be able to allocate 5 percent of its net profits to legalreserves and declare dividends of at least 8 percent on both Common and Pre-arTed stock, the value of which is maintained through revaluation of the!

balance sheet accounts. This is above the mnimum reouirements of its Charter,and should be sufficient to attract private capital.

Future Financial Position

69. Annex 5 shows forecast consolidated balance sheets as of December 31,1966 through 197)'- nliring the period lnder review, P Cemig's total iixed assetsare expected to increase from Cr$240 billion to CrM833 billion, or about fourtimes. Its fully ~revTud long-term I- b ofr47 billion is ex, o+.rincrease to Cr~l90 billion by 1973 and thien decrease to Crtl79 billion in 1974.Due to the State's obligation of reinvestment of its dividends and continuedparticipation in the purchase of new share capital, Cemig's long-term debt islow in relati on to iL ty.

70. rTh_ ark Loan Agr-eer,env Mo. inc-ues a L limitation covenant

which limitls consol]idated long-term debt to an amount equivalent to the totalof its con.solidated capital and surplus. A debt limitation covenant baEedon Cemig's revalued net fixed assets would be more appropriate and easier toapplyr as a rmeans of" Teas-uring CenIaig s anriual f inanci al posl-tion. [le c,unsoli-dated debt to acquire plant facilities outstanding at the end of any given year,would bie J1±ue'u 'tu a irmwax'unm oi- two-thirds of the consolidated net revaluedfixed assets including revalued work in progress. Such debt would includeacbuaal debt drawdowns ratner than tne amount of the loan contracts, the current12-month portion of such debt carried in the books as current liabilities andany short term loans incurred to finance plant expansion. This debt limi-tation has been included in the Loan Agreement and replaces Sections 5.0and 5.10 of Loan Agreement No. 76-.BR.

71. Annex 5 shows that Cemig could keep well within t}lis limitationas its percentage of its fully revalued long-term debt to total revalued fixedassets in 1965 is 23.6 percent increasing to 31.2 percent in 1970 and reducingto 22.9 percent in 1974. This assumes that Cemig will continue to revalue itsinvestment to reflect the true value of both its fixed assets and long-term loans.

- 20 -

TI?T fl nl,TfT TTCV,gnTC'VX.L. * UUAU.JLUUJUiML

72. The projsecti, consist-ing of the Jaguara -ydroelectric pl-ant aLdtransmission lines, is technically and econom.ically sound. Its estimatedcost and proposed construction scneaule are reasonaDle (paragrapns 19 and 21).

73. Tne Borrower, Cemig, a corporation controlled by the State of iiinasGerais, has been in existence since :1952 and has demonstrated its ability toplan, execute and operate its facilities efficiently (paragraph 6).

74. The large transmission grid to which Cem-ig is connected will requireintegrated operatiLon to secure reliability of supply and the most economicalproduction of electric energy. The Government has agreed to encourage thefirst steps in thiLs direction which are now being taken with a view toassuring well-coordinated operation lby 1970 (paragraph 12).

75. Import procedures in BraziL have the effect of interfering with themost; efficient methods of contracting for the construction of plants such asJaguara. The Government has agreed to make a study of this with a viewr toimproving the situation in connection with future projects (paragraphs 27and 28).

76. Cemig operates under tariff regulations amended at the end oi 1964to allow periodic revaluation of assets for tariff-making purposes. Due tocertain shortcominigs of these regulations, and also to the present high levelof electrification taxes on consumers, a utility may not be able to achievefully the permitted return on the up-to-date value of its assets; and differ-ent utilities could follow substantially different tariff policies. Suchdifferences may well cause distortions in the relative costs of importantblocks of power in the South Central qvstpm. as a consequence. cause importanteconomic decisions; to be based on misleading assumptions. The Government isaware of these nrohl Pimn hut sn far i-t aG-.iti-n has hben limitpd to a study ofthe tariff structures and the preparation of a new schedule of depreciationrates base nn the iiufiil lives of t.he -rm-ios classes of assets. Tn r:nn-

nection with the proposed loan, however, the Government has agreed that; theproblem of devising new policies governing +he determ.nation of the levelof gross revenues required by utilities, and the related question of electri-f'i ':~ti nn taxes, deserveimm.edlate study a.d early action sthis problemaffects the whole of the utility industry and there is evidence of the Govern-ment' s willngess to resolve it it was not considered practical or necessaryto require more specific action as a condition for the proposed loan to Cemig.Separate provisiorndl ---,4,a4,r,-w,,ent- -- a

4a.

4 -c lar contplate.d i-n

'...jJ ''VI~JJC~.. ~L ''J V~'.J VL ..L LL~ .LQ F P.V U' CXL V .1.0 LAJ V J1I _L0.U~A ~paragraph 77 to cover these shortcomings, pending results of the actiormenationed above.

- 21 -

77. Agreements have been reached wvLth the Government, Cemig, or the'tate of 'linas Gerais as follows:

(i) A sales contract satisi'actory to the Bank covering thepurchase of Furnas' power by Cemig will be completed as acondition of effectiveness for the proposed loan (paragraphs 8and 66).

(ii) The Government and Cemig have agreed to a tarif'f covenant whichwould provide fcr a minimum annual 10 percent return on Cemig'srevalued fixed assets in operation at the end of each calendaryear, as revalued once a year, after adequate depreciationcharges of at lest 3 percent. They have also agreed thatautomatic adjustments outlined in paragraph 31 will be madeand any shortfall in achieving the return in one year will berecovered over a twelve month period beginning not later than7 months after the end of the calendar year (paragraph 38).

(iii) Cemig has agreed to continue to employ auditcrs satisfactory*to the Rank and to su_bmit vninuallv certified consnlidatedfinancial statements (paragraph 42).

(iv) Cemig has agreed not to incur any debt which would increase its

-fixed assets. Short-term debts that might be incurred forpref-inancing expansi on woulld be included in the indebtednessso limited (paragraph 70).

(v) Satisfactory arrangements have been made with the State of HlinasGeai d.JJand tUhe F'edAe r a dL GovernmIenJt w- WLIth regard LIciL.IU to L1P U VJ..U IA

of funds to ccmplete the exoansion program (paragraphs 63 and 6L).

79. The project would be suitable for a Bank loan of US$h9 millioneUYulvalent for a term of 25 years, including a grace period of five and oune-half years.

FebuLary 2', 1966

ANNEX 1

CEMIG

GENERATING FACGLITIES

1965Hydro Installed

or Date of CapacityPlant Diesel Comnissioning fin

Tres Marias H 1962 260.0Salto Grande H 1956 l04.0Itutinga H 1955 48.6Camargos H 1960 L45.0Piau H 1955 19.0Gafanhoto H 1952 12.9Trongueiras H 1955 8.4CaJuru H 1959 7.2Pai Joaquim H 1960 6.7Montes Claros n 19q5 5.5Ilheus H 1957 2.oTeofilo ( tnni n 1961 1.7Five smaller plants H&D 1955-61 3.9An 1 H 196) 2.1

TrYP AT 527.

February 25, 1966

,BRAZII

CENTRAJS FELETRICA' DE MINFAS SERAIS S.A-

CEKIG

SUVOMARY OF OPERATIONS - 1959-1664

1959 1960 1961 1962 196.3 19614

Load data - kwh (000,000 omitted)Gafsanhoto 36-3 59.7 80.5 38. o 42.8Itutinga 194L ..5 205.8 201.8 206.3 146.49 165.8Salto Grande 474.8 556.6 512.9 484.4 421.0 535.6Camargos 38.9 167.0 172.6 136.9 155.6Piau 82.0 85.5 91.0 100.0 90.2 84. oCajuru 14-3 27.6 24.8 19.0 11.4 24'14Tronqueiras 12. 4 114.3 17.1 19.8 21.9 27.5Tres Marias 369.2 923.14 958. 7Others 23,1 27.5 75.1 77.3 68.9 74.4

Hydro GeneratiorL 837.14 IL,015.8 1,170.1 1,493.9 1,859.14 2,o69.1Thermal Generation 13..8 8.9 7.6 13.7 17.6 10.7Purchased Power 3.0 12.5 13.7 15.8 19.,4 38.9Total Energy Requirement 854.2 1,037.3 1,191.3 1,523.5 1,896. 14 2,118.7

Consumptioni date. (000,000 omitted)Resident:Lal 19.1 28.6 52.9 60.7 71.2 84.4CommercialL 10.,1 13.5 24.4 29.3 33-0 38.1IndastriaL 575.2 758.9 892.3 1,071.5 1,250.5 1,3145.3Rural 1.,5 1.8 2.7 3.3 3.6 4.oPubAlic Au-thor.ites 19.5 26.0 26.7 25.9 27.2 28.1Public Illumination 2.9 3.7 6.7 8.6 11.4 15.4Public Service Companies 10.,5 11.7 11.7 9.3 11.7 10.5Other Electric Utilities 125.2 97.8 66.5 173.0 218.0 358.3Intierdepartmrental 44.1 3.4 1.4 .9 .3 .6

Energy Sales to Custoamers 768.,l 945.5 1,085.3 1,382.5 1,627.0 l,884.7

Internal Consumption (000,000 oiritted) 2.14 2.4 2.8 2.6 3.0 3.1Transmission & listribution Losses 83.7 89.4 103.2 138.3 266.4 230.9Total 8514.2 1,037.3 1,191.3 1,523.5 1,896.4 !,118.7

MIxim= Desuwd - kw :154,800 177,100 215,40j 2744,310 328,135 359,4h8

Load Factor - % 63.,0 66.7 63.1 63.4 66.o 67.1

Annual Rate of Growth 21.5 14.9 27.8 24.5 11.8

February 25, 1966

ANNEX 3

C;OOLDS TU%itr MEnv ICESnrTI Tr 0A ATF,xCDB TEPOOE _ s

a) Jaguara Power Plant

1. Engineering consulting work and fieldconstructi.on supervision 500

2. Construction equipment, spares and supplies 1,9003. Provision for payment to the civil works

contractor 5,6004. 4 x 150,000 HP Francis turbines with

accessory equipment 5,4125. 4 x 112,000 kVA generators and accessories 5,5206. 2 x 112,000 kVA transformer bank and switchyard 3,6527. Swritchyard equipment (breakers, switches, etc.) 1,8048. Miscellaneous power plant equipment 1,5449. Equipment of the spillway, intake and draft

tubes 2, 493

Sub-Total a) 28, 42 5

b) Transmission Lines

(JaguELra to Ncrte Substation and Jaguara to Estreito)

1.0. Aluminum and coonerweld ingots and steel cables 2.1731.1. Galvanized steel structures 3,15512. Thsulators, hardware and mriscellaneous 745

*S,ih-Tr*.n b) 6O-73

13 1'A x r 0 1 - 37 5I4) 38A 3.8 4 A Ar sini>e phrasetransformers 1,980

1h. Breakers, switches, nrstrer.t transfor ers 2,365t15. Synchronous condensers and reactors 2,024

miscellaneous 146

Sub-Total c) 6,515

ANNEX 3Page 2

Cost in US$1,000

d) System Power Factor Correction

Static condensers 150,000 kVAr and accessories(breakers and instrument transformers)

Sub-Total d) 1,187

Grand Total 42 , 200

17. Interest during construction 6,800

TOTAL 49,000

F e bu--y 25, 1966)A

CE NTRAlS E.LETIRICAS DE MINA', GERAIS S.A.COMPOSIrIOP OF THE AVERAGE TOTAL PRICE OF POWER SUBJECT TO TAXATION INTHIE CEMIG GROUP PER Cl-ASS OF CON'SUMIER

5'3.104

46. 140

45 CO '

:COMPULSORYTAX '7 ~~~~~~~~~~~~~~~ ~AVERAGE

~~~~~~~XiY/ ae / ~~~~~~~~~~CONSUMER T

fF ,SOLE /7// | FINANCING FUTUREC TAX EX PANS 10 N

0:. SOCIAL SECURLTY OU-JTA 2 268 . . 28.019- L l ....... ........ . _ _r l OT-I PS' R PRT ,'N OF . .n mu NT 'CiLLIT,EI. * * * S , | ,._.LEF A N D ;,VFLll'MPI. Y F ILl. Fu iuRE

I !5 X TEL;FF ;| a |>i t 0 tif | S~ ~~~ + ; TA< IMR|al zs EX'CION *1a:

S' -.LE AND T E

. . . F . . r, :OL E A.D

.:*. *. . i * .* . . | E. N " r F. CN _ _ _ |u I R _ _ _ __......... -

AVE RAGE:

PjE ~ ~ ~ ~ ~ ~ ~ (R TB D2i XF ,,R P

-~~~~~~~~~-

:AS C CEtj,:E

C )_ _ __ _ _RESIDENTIAL COMMERCIAL INDUSTRIAL TOTAL

REFERENCE: CEMIG tbilling for August 1965. Zzm

_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ (3 R ) i3 R B RDBR D -22 8 6

-hAZIL

C::hTRAI- Y-:Li`TIC-1 DE MICA i C.T C IG.A.

BALANCE iHEET 1963 - 1974(in ElLlionsl of Criruseirso) Exchange Rate Cr92,220 - U.:i.$l

1966A:fter

RevrluaticnUsing After1963 devalUation

As of Decesber 31, 1963 Factors 19U5i 1965 1?66 1967 1968 1i69 1970 1 971 1972 1973 1976---- Ac:,aL------- ------------------------------------------ iat-------- --Eseimated------------------------------------------------------

ASSETS

Fixetd AssetsGross Plant in Service 12.29 91.69 L99.95 239.94 285.22 325.11 359.9h 389.51 485.75 579.55 699.8C 783.23 886.11Less - Depreciation Reserve .92 4.13 10.20 12.26 20.64 30.20 LO.78 52.24 66.52 83.56 ]0461.3 127.15 153.20Net Plant, in Service 11.37 H d9.75 7337 29 -595 6 i-65o 2

Work in Progress 7.68 15.88 11.07 13.28 1705! 81.03 142.67 185.32 176.72 157.68 114.87 116.82 100.58

Total Fixed Assets 19.05 103.44 200.82 260.98 302.12 375.94 461.83 525;.59 595.95 653.67 710.5L 772.90 833.69

Investmsrets in Associated Companies 1.15 2.03 2.03 2.64 2.44 2.6o 2.6b 2.44 2.64 2.46 2.U, 2.66 2.66

Cun-ent AsletsCash 1.37 6.33 9.82 11,78 20.26 16.08 8.71 9.67 21.36 33.13 44.0: 61.70 35.88Inventories 2.33 3.10 3.10 3,.72 3.86 3.96 4.20 6.664 .68 4.92 5.16 5.60 5.64Accounts ReceivaLble .87 2.06 2.06 2.47 2.95 3.63 5.10 6.40 7.60 8.20 9.60 12.00 12.80Other Assets i.68 6.56 6.56 7.88 7.88 7.88 7.88 7.88 7.88 7.88 7.88 7.88 7.88

Total Cwurent Assets 6.25 18.05 2L.54 25.85 34.93 31.35 25.89 28.39 41.50 56.13 66.65 66.98 62.20

TotaL Assets 26.45 123.52 224.39 269,.27 339.49 409.73 690.16 556.42 639.89 710.24 779.63 8162.32 898.13

LIAMr LITIES

CapitaL Sitock Including Advances 1l.37 69.93 88.66 106.37 201.60 236.05 277.94 320.71 370.97 424.25 679.45 536.99 599.C5Contribution in Aid of Construction .53 1.36 1,,36 1.63 1.63 1.63 1.63 1.63 1.63 1.63 1.63 1.63 1.63laigal Reserve .21 .30 .69 .83 1.80 2.83 6.02 ; .34 7.0E 8.93 11.-36 1.04 16. E9

S1rplus .03 .06 .16 .17 .21 1.00 1.65 I.47 1.5E 2.86 .70 .31 .31Revaluation Reserve - 12.57 54.81 65.77 .48 .68 .68 .48 .6e .68 .46 .48 .48Amsortization Reserve - 3.28 3,94 3.96 3.96 3.94 3.96 3.9L 3.94 3.96 3.94 3.54Gcr,ern.ent Grants 3.19 13.90 20.89 25.07 32.37 35.57 44.37 47.97 51.31 54.65 57.97 61.29 63.51

Total Equity 18.33 98.,10 169.81 203.78 262.03 285.50 334.03 381..56 636.95 496.72 555.51 6i6.68 685.9-

LongoTezm DebtExisting reigni Loans 2.71 13.29 36.74 66.09 52.33 4E.79 43.02 36 .'86 30.731 24.91 20.08 L7.57 15.06Existing Local Loans .74 1,86 2.32 2.78 5.56 6.83 6.10 3.60 2.7b 2.10 1.50 1.09 .68Eletrobras Loan - Proposed - Jagusra - - - - 3.34 7.78 14.44 L.-66 12.22 10.00 7.78 5.56 3. 3IEADi Loan - ProFosed - Jaguara - - - - 11.80 33.35 65.18 89.96 107.08 1(3.88 100.69 96.90 93.11IILDB Loar - .. -- 3.90 7.33 6.67 6.05 5.35 4.69 'a,.3 3.37 2.71Futture Foreign Loan - Proposed - - - - - - - - 16.22 37.87 56.09 66.05 66.?5

Total Loans 3.65 15.15 39.06 46.87 74.93 102.06 133.61 150.65 174.36 153.65 i89.97 19o.56 179.33

Currant LiiLbilitiesCIrrent ?ortionof Long-Tern Debt 1.78 3.91 8.28 9.93 10.4

69.91 9.38 9.76 1:.3? 12.56 11.70 9.35 11.ul

Dividends Payable .74 1.43 2.53 3.04 6.42 6.59 7.69 8.82 11.56 ]1.88 16.80 15.06 16.13Other 2.15 4.93 6.71 5.65 5.65 5.65 5.65 5.65 5.6, 5.65 5.65 5.65 5. 65

Total Current Liabilities 4.67 10.27 15.52 18.62 22.53 22.15 22.72 2u.23 79.5 30.0? 31, 15 33.1C 33.1i

Total Liab2lities 26.45 123.52 226.39 269.27 339.49 409.73 490.16 556.L2 639.89 7L(.7L 7729.63 842.32 898.:3

Assets Test rercentage ot Long-Tesmi Debtto Total FiAed Assets including Revlsued'lork in Progress - .. 23.6% 23.61 28.3% 2pt.P% 30.4 30.51 31.21 30.7 25.15 2-.9t 22.9;

Fechange Hate Cr.$l,O5C U.s.il

Fesa ucry 25, 1966

BRAZIL

CENTRAIS ELETRICAS DE MINAS GERAIS S.A.

INCOKE STA3-EMENT 1963 - 1974TBiDions of CruzeiroaF Exchange Rate Cr.92,220 - U.S.$1

Year Ending flece=ber 31, 1963 1964 ]965 1966 1967 1968 15'69 1970 1971 1972 1973 1974-A-tual--- - -------- --------------------- Estiiaated----------------------------------------------

EwH' Sales - In MiLLions 1,627 1,885 2,025 2,1424 2,865 3,354 3,896 h,497 5,163 5,900 6,717 7,622AveraLge per iM (Cruzeiroa) 4.00 6. 76 14.30 18.50 18223 21.23 2 23.99 20.45 23.4 25.46 24.13t"r!os rtOerting 6nonc 0.48 12 .7T 28.96 44,.84 52.22 71.2) 90.25 107.89 105.59 1318.29 171.14 183.93

CC6T OF OPERATICtS

tp3rating: Expensee 2.13 3.82 6.50 8.83 9.865 10.86 11.94 13.85 14.44 15.90 17.50 19.23Tacces .04 .17 1.00 4.202/ 4.822/ 4.20 3.60 4.32 5.16 6.36 6084 7.56Exchange Difference 2.61 5,62 6,9C/ - - - - - - . _0oat of kurchaaed Powr .01 - - .12 2.16 16.25 31.86 36.:20 21.67* :37.74 61.26 62.21Amortization Expense - - 3.28 - - - - - - - -Depreciation Expewse .16 .22 3.30 8,40 9.56 10.58 11.46 14.28 17.04 20.57 23.02 26.05

Total Operating Eipenas 4.95 9.83 20.17 21.55 26.40 41.89 58.86 68.65 58.31 80.57 108.62 115.05

NET DPERATING INCOME 1.53 2.91 8.79 23.29 25.82 29.32 3:1.39 39.24 47.28 57.72 62.52 68.88

Otlrer Inc -e - - .02 .02 .02 .02 .02 .03 .04s .04 .04 .04Nonm-OperaLting Income .14 .32 .17 .20 .21 .20 .20 .20 .21 .20 .21 .21

INCOME DE|DCTICKS

Total 3nterest Paid .69 2.11 1.65 5.16 6.96 8.67 9.6

4 10.82 12.14 12.37 12.16 12.09lAss Intereat Capitalized (.36) r.73) (;40) (1.02) (l.57) (2.95) (2.36) (6.20) (1.68) (2.68) (3.30) -

Interest Expenae .33 I.38 1.25 4.14 5.39 5.72 5.28 14.62 10.46 9.69 8.86 12.C9Other Deductions .14 .20 - - - - - - - - _

let Profit 1.20 l.65 7.73 19.37 20.66 23.82 26.33 34.85 37.07' 48.27 53,.91 57.C0

AllDcated To:L_gaL Reaerve - 5% .06 .09 .39 .97 1.03 1.19 1.32 1.74 1.8', 2.4L 2.70 2.c85Other Debits or Credits to Profitand Loeis .05 (.09) - - - - - - - - - -

Divridend Declared in Cash .30 .52 2.53 6.42 6.59 7.69 8.82 11.54 11.88 16.80 1E.o6 16.;13Stock Divridends to State Governent .81 1.12 4.71 11.94 12.25 14.29 16.37 21.46 22.08 31.20 331.54 38.t6Surplus Unapprepriatedi (.02) .01 .10 .04 .79 .65 (.18) .11 1. 26 (2.14) (.39) -

Rate of return based on Full RevaluedRe;nnerable Insestment (Year End)after taxes - 3.1% 3.7% 10% 10% 10% 10% 1l0% 10% 10% 1o% 10%

Rate of return before revaluationof Remumeirable Investmnent 9.43% 12.8% - - - - -

V Foreignx exchange expense consists of amortization of Cr$.L..48 and interest expense Df Cr,$1.6

1. ?;

2/ Includes revaluation tax. a..

* Jaguar& plant is expected to be placed in seriice and the purchase of power from Purnas will be cut back durirng this year.

NOTE: 1963 exchange rate Cr.9475 . U.S.$l1964 exchagre rate Cr.,;

620 = U.S.$1

1965' exchange rate Cr.$1,850 - U.S. $1

February 25, 1966

AN417

BRAZIL

CENTRAIS ELEIRICAS DE IHINES GERMIS S.A.

SOURCES ANID APPLICATIONS OF FUNlDS 1966-19714(ii, Bil1ions -o7 u*r--T Exchange Rate Cr.$2,22O U.S.$l

1966 1967 1968 1969 1970 1971 1972 1973 1974 Total-SOUIXE OF FUNDS

Internal. Cash GenerationNet Oera~.tingg in'ome aft.r t...esl 23.29 25.82 29.32 31.39 39.24 147.28 57.72 62.52 68.88 385.141Amortization - - - ---- -

Depreciation 8.1.0 9.56 10.58 11.146 114.28 17.01 20.57 23.02 26.05 1140.96Non Opierating Income .20 .a .20 .20) .20 .21 .20 .21 .21 1.81,Other Income .02 .02 .02 O02 .03 o04 4 .04 o.01 . .271

lotal 3.1 35.61 140.12 I8l 53.75 61.7 7.3 857 51 28.57

BorrowinlasExisting Foreign Loans 114.59 14.76 - - - - - 19.)5;Existing Local Currency Loans 3.79 - - - ----- 3.79Eletrobras Loan - Jaguara 14.141 6.66 8.88 2.22 ----- 22.20IBRD Propoled Loant - jag-ar 118 15 '8 17 18.8g. --- 10F.F,IADB Loan 3.90 14.09 --- - 7.99Future Foreign Loans - Proposed - - -- 16.22 21.65 18.22 9.96 66.05

Tote]. 35.52 __37.06 140.71 7l 350 215 18.22 9.96-

Federal-3ranta 7.30 7.20 14.80 3.6o 3.314 3.314 3.32 3.32 2.22 38.1414

Share C-oOtta 18.00 22.20 27-0 26zL( 28480 31 20 24=30 2LO0 2 1i .00 226.20

Total Sourceso of Funds 95.73 102.07 113.23 100.07 120.95 120.76 121.07 123.07 121.140 1,021.35

AFPLICATION ODF FUNDS

Adiditions to Plant (Excluding CaplteLlioed Interest)Jag-era Pl-nt (Fo... i .Currancy) 11.10 19.98 28.86 20.L42 13.32 - - -- 93.6EJaguara Plant (Local. Currency) 13.32 23.31 31.08 11.10 8.88 2.22 --- 89.91Systmc Expansion (Foreign Currenicy) 14.27 14.75 - - - - -- 19.02System Expansion (Local Currency) 29.83 33.77 33.58 28.21, 38.814 37.714 35.52 37.714 11.140 319.66Future Plants (Foreign Cu,rrency) - - - - 15.514 19.98 15.514 6.66 . 57.72Future Plants (Local Ctorrency) -- - 11.10 1.86 13.31k 2?.70 37.68l 142.214 129.72

Total Construction, Expencditu~res 68. 52 81.81 93.52 7.414 73.0 74.76 820 86.61

DEBT SERVICE

Interest

Existinig Local Loans, .77 .61 .53 .14 .14o .32 .25 .21 .17 3.73Eletrobras Loan.- Jaguara .29 1.22 2.01 2.02 1.77 1.52 1.28 1.03 .79 11.93IBRD Proposed Loan .70 1.57 2.95 14.31 5.53 6.53 6.142 6.23 6.03 10.30IADP Loan .21 .146 .16 .141 .37 .314 .30 .26 .23 3.01lFuture Foreign Loan - P'roposed - - - - .67 1.68 2.68 3.30 3.96122

Total Interest 5.16 6.96 8.b7 - -77i 10.82 121 537 12.16 1205 7___

AnortiationExistinLg Foreign Loans 8.147 8.35 6.30 5.77 6.18 6.11 5.82 14. 83 2.51 514.314Existing Local. Loaans 1.1,6 1.01 .73 .73 .70 .66 .614 .6o .141 6.914Eletrohras Loan - Jaguarer- 1.10 2.22 2.22 2.22 2.22 2.22 2.22 2.22 16.64IBRD Proposed Lowa - - - - 1.72 3.20 3.39 3.59 11.90IADB Loan, - - .66 .66 .66 .66 .66 .66 .66 14.62

Total. A,oortlszatior, 9.93 10.146 9.91 9.I..7 Il,HP 12.514 11.70 9.39 7

Total Debt Service 15.09 17.142 18.58 19.02 20.58 23.51 214.91 23.86 21.148 181.9,5

CLhDividends Paid 3.014 6.142 6.59 7.69 8.82 11.514 11.88 16.80 18.06 90.814

Additions to Workinig Capital .60 .60 1.91 1.514 1.144 .814 1.614 2.614 1.014 12.25

TVotal Expenditures 87.25 106.25 120.60 99.11 109.28 108.97 113.19 125.38 127.22 997.21

Net Cash Accrual or (Deficit) 8.18 (14.18) (7.37) .96 1.1.67 11.79 10.88 (2.31) (5.82) 2. 10

Cash Balance at Beginning of Year 11.78 20.26 16.08 8.71 9.67 21.314 33.13 144.01 141.70-

Cash Blolance at End of Year 20.26 16.08 8.71 9.67 __ 21.314 33.13 141.0 1i41.70 35.88

Times Annual Debt Service Covered byInternal Cash Generation 2.11 2.014 2.1.6 2.26 2.61 2.75 3.15 3.60 14.143

Tines Total Interest Covered by NetOperating Income (After Taxea) 1.51 3.71 3.38 3.26 3.63 3.89 14.67 5.114 5.70

N=-4x Cr.$u.93, billion wae incurred in 1965 on tile jaguara Project or aboot U.S.$500,000 equiva1ent at the exchange rate In effect of Cr.$1,850 --U.S.$l.

February 25, 1966

S) TDJTH C I'T RAL ER Z1 ,.-' L /l

Hydroelectric Plants M I N A C G E R A I SiProposed Jaguara Transmission 345Kv. () IPurnas Transmission System,- existing or under construction 345Kv- rRE -r\\MARIA S

- Other Transmission Lines (230Kv. and under) (\exising) ,

>/~ .'

Rio Grande '' 'e>' r

Be,o Horizonte o 0

MOVE:MBER 1965 IBRD 1441I I'

o ITU~~~~~~~~~~~~~~~~~~~~~~~~~rlNGAI

A, Aroraqu~~~~~~,

0. ~ ~ ~ ~ ~ ~ ~

41*

0 100 :200 300 KM

NOVE:MBER 1965 IBRD 1441 R1l