Document of

The World Bank

Report No. 4294

PROJECT COMPLETION REPORT

PORTUGAL: SIXTH POWER PROJECT(LOAN 1301-PO)

January 4, 1983

This report may not be published nor may it be quoted as representing the views of the World Bank.The World Bank does not accept responsibility for the accuracy or completeness of the report.

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FOR OFFICIAL USE ONLY

PROJECT COM?LETION REPORT

PORTUGAL: SIXTH POWER PROJECT(LOAN 1301-PO)

TABLE OF CONTENTS

Page No.

Preface .................. ............................................ i

Basic Data Sheet . ................ ... .. .... ............. ii

Highlights. . .. .. .. .. .. .............................................. *.................. . .. iv

I. Intou tio r....... d...... ct.............. 1

II. Project Identification, Preparation and Appraisal............. 2

I II. Impl ementat i on ...... ,................ 7

IV. Operating Performance............... .......................... 10

V. Financial Perf ormance. .. . a .......... O. . ..................... . 10

VI. Institutional Performancerf o r m a n ce..... ..... . 13

VII. Pro ject Justifications ti f i c a ti on................... . 15VIII. Bank's Performance . . 16

IX. Conclusions us.............. ......... 17

Attachments

1. Main Covenants of Loan Documents..... 18

2. Project Costs--Estimated and Actual Investments. 20

3. Disbursement Schedule--Actual vs. Appraisal Est.imate 21

4. Estimated (Appraisal) and Actual Sales of Electricity . .22

5. Income Statements for the Years Ending December 31, 1975-1979-- Appraisal Estimate vs. Actals.. 23

6. Balance Sheets as of December 31, 1975-1979--AppraisalEstimates vs. Actualcs. ...... . . ........ .. .. . . . ....... 24

7. Sources and Applications of Funds for the Years 1976-1979--Appraisal Estimates vs. Actuals........................... 25

8. Receivables for Electricity Supply to HV Consumers . .. 26

9. Rate of Return on Development Program 1976-1986............... 27

10. EDP's letter of November 3, 1982 commenting on the PCR. .. 28

This document has a restricted distribution and may be used by recipients only in the performance oftheir ofricial duties. Its contents may not otherwise be disclosed without World Bank authorization.

PORTUGAL: SIXTH POWER PROJECT(LOAN 1301-PO)

PREFACE

The Project consisted of the power subsector investment program ofElectricidade de Portugal (EDP) for the period 1976-78 for which Loan 1301-POof Us$36.0 million was made in September 1976. The Loan Agreement becameeffective in December 1976 and the loan, which has been fully-disbursed, wasclosed in December 1980. The Project Completion Report (PCR) was prepared bythe Europe, Middle East and North Africa Regional Office based on theappraisal report and other documents in the Bank's files, a completion reportprepared by EDP and the findings of a project completion mission which visited

Portugal in April 1981.

The PCR summarizes the main points of interest especially thedifficulties in handling the many unresolved questions concerning the powersector at appraisal, changes in project scope, some aspects of procurement andthe achievements under the project in regard to institution-building.

Following normal procedures, a draft copy of the report was sent tothe Borrower (EDP) and the Guarantor (Government) for their comments.Comments were received from EDP and they have been taken into account infinalizing the report. They are also reproduced as an attachment to thereport.

PORTUGAL SlXTH POWER PROJECT (LOAN 1301-PO)BASIC DATA SHEET

KEY PROJECT DATA

AppraisalEstimate Actual

Total Project Cost (US$ Million) 1,124.0 1,040.7Underrun () - 7% Under

Loan Amount (US$ Million) - 36.0Disbursed - 36.0Cancelled - -Repaid to -Outstanding to

Date Physical Components Completed - N.A.Proportion Completed by Above Date (%) - N.A.Proportion of Time Underrun or Overrun () - N.A.Economic Rate of Return (x) 8% 13%Financial Performance 1/Institutionai Performance - Excellent

Cumulative Estimated and Actual DisbursementsUS' ; Million)

As of June 30: 1977 1978 i979 1980 1981

(i) Appraisal Estimate 6.0 29.0 36.0 - -

(ii) Actual 0.1 1.3 12.7 31.1 36.0(ii) as % of (i) 2 4 35 86 100

OTHER PROJECT DATA

Original Actual orPlan Revisions Est. Actual

First Mention in Files or 'Timetable - 8- -74Government's Application - - 8- -74Negotiations 2-27-76 - 5-03-76Board Approval 4-13-76 - 6-24-76Loan Agreement Date 9-24-76 - 9-24-76Effecciveness Date 12-23-76 - 12-23-7bClosing Date 6-30-79 6-30-80 12-31-80Borrower Electricidade de Portugal-Empressa PublicaExecuting Agency otofFiscal Year of Borrower January 1 - December 31Follow-on Project Name Seventh Power Project

(Board Presentation: 2/83)

1/ Good through 1979 to poor in 1980 and 198L.

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Ml SION DATA

Month, No.of No. of Date ofYear Weeks Persons Manweeks Report

Identification 1/Preparation 2 1 2 1-75Preappraisal 1 1 1 6-75Appraisal 6 4 24 9-75

Total 9 6 27

Supervision I 12-76 1 1 1 12-76II 06-77 2 2 4 08-77III 10-77 1 1 1 11-77IV 06-78 1 2 2 08-78V 0D-79 1 1 1 07-79VI 11-79 1 1 1 12-79VIl 06-80 1 2 2 06-80VIII 12-80 I 1 1 01-81

Completion IX 04-81 1 2 2 12-81

10 13 15

COULITRY EXCHANGE RATES

Name of Currency (Abbreviation) Escudo (Esc.)Year:

Appraisal Year Average Exchange Rate: USt = Esc. 25Intervening Years. Average US$1>- Esc. 41.5Completion Year Average US$1. Esc. 53.2

I/ Froam previous lending program.

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PORTUGAL

SIXTH POWER PROJECT(LOAN 1301-PO)

HIGHLIGHTS

The project comprising the investment in the power sector (expansionof generation, transmission and distribution facilities) for the period1976-78 was intended to meet the forecast growth in electricity demand duringthis period and to maintain reliability of the power system. It also had asits objective the strengthening of the power sector through the establishmentand development of EDP as a sound and efficient utility. All the projectobjectives were fully achieved except for the self-financing objective.

The original investment program was altered (for justifiable reasons)and therefore it is difficult to make a meaningful comparison between actualand estimated costs and implementation time. Nevertheless, some componentstook longer than expected due to several factors, e.g., organizational changesin the utility, delays in procurement which arose partly from the Government'spolicy of encouraging local manufacture of equipment and the utility'sunfamiliarity with Bank procurement procedures (PCR paras 3.1.1-3.6.1).

Institutional perfonnance under the Loan was excellent except in thefinancial area. EDP has satisfactorily addressed all the problems it faced atits formation in 1976 and has developed into a very sound and efficientutility. It has introduced uniform policies and procedures in all areas suchas personnel management, finance and accounting, insurance, etc., in place ofthe diverse practices previously followed by the 15 merged companies. Tariffswhich had varied widely over the country have been rationalized and uniformtariffs have been introduced throughout EDP's area of operations. EDP alsosuccessfully mobilized adequate resources to implement the investment programfor 1976-78. However, the integration of municipal power distributionutilities with EDP has been slower than expected and about two-thirds of theoriginal 200 such utilities were still being operated by municipalities at theend of the Project period (PCR paras 5.8.1, 5.8.2, 6.1.1-6.4.2).

Largely because of adequate tariff increases, the financial resultsof the utility were satisfactory through 1979. Subsequently, however, thesevere drought conditions adversely affected the financial results--theutility's self-financing level in 1980 was only one-half the target of 30% andin 1981, its cash flow did not cover its debt service requirements.Collection of accounts receivable, particularly from large industries andother distribution utilities, is also becoming an increasing problem. Theseissues are addressed in the proposed Seventh Power Project (PCR paras5.3.1-5.7.1).

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Actual energy sales were slightly higher than the estimates (PCX para4.1.1). The recalculated incremental rate of return on the project is 13%compared to 8% estimated at appraisal (PCR para 7.1.1).

The Bank played a constructive role in the development of theBorrower and showed flexibility on matters such as re-allocation of loanproceeds, amendment to the financial covenant (PCR paras 8.1.1, 8.1.2).

PORTUGAL - PUWER VI

(Loan 1301-POR)

I. INTRODUCTION

Organization of the Electric Power Sector and Bank's Involvement

1.1.1 According to a 1944 law, all new geueration and transmissionfacilities were to be developed by companies formed with Government help.Accordingly, five companies were established between i945 and 1954, four forhydro and thermal generation and the fifth for nationwide transmission. TheGovernment owned considerable stock in these companies and had a major role indetermining the policies followea by each of them. The Government fixed therates for electricity supply, apportioned revenues, appointed about a third ofthe Directors and approved the appointment of the Chairmen and ChiefExecutives of all these companies. Thus the companies, though formallyprivate, had a quasi-public character.

1.1.2 During the period 1963-1966, the Bank made five power loans toPortugal totalling US$57.5 million, out of which three were for thermalgeneration and two for hydro electric generation. The details of these loansare as follows:

(a) Loan 362-PO (US$7.5 million; 1963) for a 210-MW hydro powerproject on the River Douro;

(b) Loan 363-PO (US$5 million; 1963) for a 50-MW steam turbogeneration uniit at a coal-fired station;

(c) Loan 412-PO (US$15 million; 1965) for the first stage (125MW) of the Carregado oil-fired station;

(d) Loan 452-PO (US$20 million; 1966) for a 180-MW hydro powerproject on the River Douro; and

(e) Loan 453-PO (US$10 million; 1966) for a second 125-MW unit atthe Carregado thermal station.

All the projects were successfully completed and are now in operation.

1.1.3 In order to remove certain shortcomings in the system being dividedamongst five companies and in line with the Bank's long-standingrecommendations during its association with the sector, the four generatingcompanies and the nationwide transmission company were merged into one companyin December 1969 (titled CPE in short) with 52% Government participation. Theabove position continued through April 15, 1975 at which time except for smallgenerating centers owned by 14 distribution companies (5% of the total) whichcarried out distribution at high and low tension in the areas covered by their

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concessions, CPE was solely responsible for generation and transmission ofpower, and for sale of electricity to the distribution companies, about 20power-intensive industries and some 200 municipalities which retailed powersupply at low tension in residential areas.

1.1.', The large number of enterprises operating in the sector inevitablycaused overlapping of networks and a wide diversity of rates and inhibitedcoordinated development of the sector. In order to promote such coordinateddevelopment, Government nationalized CPE and the 14 distribution companieswith effect from April 16, 1975. Under a subsequent law, based on therecommendations of a Reorganization Commission appointed by Government,Electricidade de Portugal (EDP) was established as a legal entity on July 1,1976, with headquarters in Lisbon and having a charter providing the legalframework for its operations.

1.1.5 In order to avoid any unnecessary disruption which would resultfrom the imposition of a completely new organizational structure on all theconstituent units, the nationalized enterprises continued in their early formand the only addition in EDP was of a central management organization withcentral staff departments for planning, engineering, finance, economics,personnel organization, legal, etc. All policies were formulated and majordecisions taken by this central management organization. EDP also startedfunctioning under the administrative control of a single ministry unlike inthe past when several government ministries and institutions regulated powersector development and operations, with a consequent lack of coordinatedplanning and development. Para 6.3.1 describes the subsequent organizationalchanges in EDP.

I.. PROJECT IDENTIFICATION, PREPARATION AND APPRAISAL

Project Origin

2.1.1 Following the Revolution of April 25, 1974, the Portugueseauthorities requested a resumption of Bank assistance, both technical andfinancial. The first request was made when the Minister of Foreign Affairspaid a visit to the Bank President in August 1974 and the second in October1974 during the Annual Meeting when a Portuguese delegation met with the BankPresident. The Bank proposed that one of the sectors best suited to thepurposes of renewing lending operations in Portugal would be the power sector,in view of the Bank's previous extended and satisfactory experience of thesector. Following an identification mission in January 1975, a "sector" loanwas identified as a suitable vehicle for the lending process and in accordancewith the July 1975 CPP Review decision, it was decided to mount an appraisalmission to appraise the power sector for a proposed "sector" loan ofapproximately USS30 million (subsequently raised to $36 million). A specialreason for choosing such a loan for the lending process was the advantage ofrelatively quick disbursement, an important consideration in view ofPortugal's serious financial plight. In the course of loan processing, theloan was appropriately treated as one for a time-slice of the sectoralinvestment program rather than as a pure sector loan.

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Project Preparation and Field Appraisal

2.2.1 The Bank Project was the power sector investment program for theperiod 1976-1978, the object of which was to provide the most economicalelectricity supply to meet the forecast growth in demand and to maintainrequired reliability of the power system. The past performance of the powersector in the planning; construction and operation of power facilities hadbeen satisfactory. The Project was prepared entirely by the Portuguese withthe exception of the proposed 670-MW nuclear power plant (the first in thecountry) which was planned to be completed in 1983. For the nuclear station,a group of expatriate consultants had been commissioned to prepare the designand was to be responsible for technical evaluation of the proposed equipment.All legal and licensing problems related to the nuclear plant had generallybeen resolved and all preparatory studies and investigations had also beencompleted. The main question the Government had to decide was whether theplant should be ordered in 1976 for commissioning in 1983 or whether it shouldbe deferred in favor of installing a further two 250-MW oil-fired units.Ultimately, the Government decided not to go ahead with the nuclear option(para 3.1.2). In respect of all other facilities, studies had already beenmade and design work already-undertaken by the Portuguese.

2.2.2 An appraisal mission visited Portugal in September-October 1975 andidentified many uncertainties and unresolved questions concerning the powersector, notably the following;

(a) Political Instabilitv. Although the mission did not observeany violent opposition to the new Government, which wasformed while it was in Portugal, press reports indicatedincreasing polarization between the political parties,accompanied by growing violence;

(b) Sector Organization. The future organization of the sectorhad yet to be settled. By the decree of April 1Q75, prior towhich some parts were already wholly or partly publiclyowned, the sector was taken to the first stage ofnationalization. Since that decree was issued, aReorganization Commission had been considering the futurestructure, organization and management of the nationalizedpart of the sector (which would contain more than 90O of thewhole power sector), and the question of compensation for theprevious owners. The conclusions of this commission wereexpected to be made known to Government by the end of October1975 and, if they were approved, as appeared likely, wereexpected to pass into law soon after. The Bank's attitude toa "sector" loan depended very greatly on the structure,authority and autonomy of the national power authority to beset up, and it was considered difficult to write a meaningfulappraisal report in the absence of positive legislationenshrining these aspects. The mission's impression of theReorganization Commission's proposals was that the finalinstitutional arrangements were likely to be acceptable tothe Bank;

(c) Sector Development Program. The sector development programwas subject to the Government's decision on the proposalssubmitted by CPE. Preliminary assessment by the mistion ofthese proposals indicated that the least-cost program wasthat requiring the ordering of the first nuclear station thefollowing year. Should Government reject this in favor ofthe oil-fired alternative, there could be problems regardingthe justification of the program;

(d) Items for Bank Financing. As a result of discussions withCPE and the distribution undertaking responsible forelectricity supply in Lisbon, the mission was able toidentify a provisional list of items in the proposeddevelopment program suitable for Bank financing. However, itwas not considered possible to agree on a final list untilthe Government had decided on the future program and the newnational power authority had come into operation; and

(e) Financing Plan. The new Government was unable to do morethan concentrate on immediate needs for finance and as afirst step proposed to develop the investment plan for 1976and to mobilize financial support for it. Longer-term plansand financial requirements were unlikely to be preparedbefore early 1976. No financing plan for the power sectordevelopment program had then been formulated, although forthe purpose of a sector loan a well defined financing planwas a prime necessity.

2.2.3 The issue was whether the processing of the loan should be delayeduntil the above uncertainties were resolved. The mission's view was that thiswould be undesirable, since it would weaken, if not eliminate, the Bank'sability to influence the formulation of sector policies. In the event, theBank decided to proceed with the loan processing accordingly, although thisnecessarily meant that until negotiations, the appraisal report would be basedon many speculative assumptions and the mission's judgement of the likelyoutcome of the uncertainties. Even the final loan documents reflected some ofthese uncertainties, especially in regard to the financial covenant. (Seepara 5.1.1 for a further discussion of this.)

Negotiations and Approval

2.3.1 No major issues delayed loan processing although EDP, the borrower,was established only after the Board approval. Negotiations took place in May1976. Board approval and loan signing followed successively in June 1976 andSeptember 1976. The key issues on which agreement was reached at negotiationsare discussed below.

(a) Revenue Covenant - The draft loan documents had provided forthe achievement of 30% self-financing for 1977 andthereafter. While agreeing that 30% self-financing could bea long-term objective, the Portuguese delegation at firstcould not agree to specific targets for the interim periodfor the following reasons;

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(i) the then existing political situation--only a new Governmentcoming to power (around July 1976) after the Presidentialelections could take vital decisions;

(ii) studies were under way regarding sectoral objectives;

(iii) Portugal was having a second consecutive dry year in 1976,making reasonable forecasts for the immediate futuredifficult; and

(iv) some phasing of the investment program was underconsideration.

Accordingly, the delegation stated that it could only formallyagree to the 10% self-financing level set by Government in 1966following the fourth and fifth power loans. However, in the end,it was agreed and recorded in a supplemental letter that beginningwith FY79 a satisfactory objective would be self-financing of atleast 30% of the average cost of the construction program for thecurrent and preceding years and that intermediate targets for 1977and 1978 towards the achievement of the long term objective wouldbe established before December 31, 1976.

(b) List of Goods - A list of goods (of about US382.5 millionequivalent) with a minimum estimated foreign exchange cost ofUS440 million equivalent was identified as suitable forprocurement through ICB. On the basis of this list of goods,a total loan of US436 million was proposed; and

(c) Debt Service Covenant - It was agreed to apply to theproposed loan the debt-equity ratio limitation of 2:1 used inthe 1966 loans instead of the then current debt servicecovenant requiring Bank's prior approval of borrowings if thedebt service ratio was not at least 1.5;1.

2.3.2 There were no special effectiveness conditions and the loan becameeffective on December 23, 1976.

2.3.3 Attachment I sets forth the major covenants of the Guarantee andLoan Agreements. Except in regard to the revenue covenant (see para 5.1.2),compliance with the covenants was satisfactory.

Projec t Description

2.4.1 The Project consisted of the power subsector investment program forthe period 1976-1978. The program originally included facilities underconstruction at January 1, 1976 or to be started prior to the end of 1978 andcomprised the following:

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(a) Generation

1,562 MW of hydropower plant1,740 MW of thermal plant

(b) Transmission

1,200 km of 400-kV lines950 km of 220-kV lines600 km of 150-kV lines140 km of 60-kV lines1,845 MVA of 400/220-kV substations1,350 MVA of 400/150-kV substations1,215 MVA of 220/150-kV substations3,420 MVA of 220/60-kV substations2,440 MVA of 150/60-kV substations255 MVA of 150/30-kV substations

(c) DistributionThe expansion of existing distribution networks and ruralelec trification

(d) Consuleants Services

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III. IMPLEMENTATION

Changes in Project Scope

3.1.1 The main changes in the program of expansion of generationfacilities were;

(a) deferral of construction of the first-nuclear power plantwhich was planned to be built near Lisbon;

(b) acceleration of construction of new hydropower projects; and

(c) decision to build base-load steam power plants using importedcoal.

3.1.2 The least cost studies had indicated in 1975 that the developmentprogram including the nuclear power plant (670 MW) had the lowest presentworth (up to a discount rate of 14%). Meanwhile, the prices of nuclearequipment and fuels had risen much faster than corresponding prices ofconventional steam power plants using either fuel oil or coal. There was alsomounting public reaction against nuclear energy, which had become a subject ofpolitical discussion. All this led to the decision of Government not to goahead with the first nuclear power plant. In order to meet the growth of-demand, ETP had decided to build a coal-fired power plant at Sines. Theimport of coal would diversify energy sources in the country and lessen thecountry's heavy dependence on imported crude oil. The coal-fired steam powerplant at Sines would be of 1,200-MW capacity (4 x 300 MW), the first unit tobe commissioned by the end of 1994, and the others following at intervals ofabout 11 months. A fourth unit at the Setubal steam station was added as asubstitute (together with the coal-fired plant) for the delayed nuclear powerplant, which was originally planned for commissioning in 1983.

3.1.3 Development of the hydropower potential has been accelerated byadding new hydropower projects. Alto Lindoso, Torrao and Sela with anaggregate capacity of 914 MW (1,298 GWh). The construction of multipurposeprojects such as Alqueva (300 MW) was postponed due to unresolved problemsinvolving other project users (agriculture, water supply, etc.).

3.1.4 Transmission and distribution facilities were completed without anymajor modification.

Implementation Schedule

3.2.1 In view of the nature of the Project, it is difficult to comparethe estimated implementation schedule with the actual one. There were somedelays in construction (e.g. Crestuma Project) mainly due to theorganizational changes in EDP. These problems were substantially resolvedover time.

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Reporting

3.3.1 EDP has consistently maintained a high standard of reporting, bothin timeliness and quality; in fact, it has been a model borrower in thisrespect.

Procurement

3.4.1 - Two main procurement problems arose during implementation of theProject:

(a) One problem arose from the Government's policy of encouraginglocal industry, under which EDP has been required to concludelong-term contracts with local manufacturers for the supplyof turbines, generators, and other hydromechanical andelectrical equipment for its-generating plants. Contractshave been signed between EDP, the local manufacturers andtheir licensors in other West European countries specifyingthe equipment to be manufactured in Portugal, setting up ofbase prices and their revisions, payment conditions,execution of contracts, quality control, etc. In pursuanceof this policy, Government decided to restrict bidding forthe turbo-generator for the Setubal 3 plant to the two localmanufacturers. Such restricted bidding made the goodsineligible for Bank financing, and the Bank agreed toreallocate the amount of the loan allocated to this equipment(US314 million, being 39% of the total loan) to othercategories (Crestuma hydropower project andtransmission/distribution) in order to enable EDP to utilizethe full amount of the loan.

(b) The second problem arose as a result of the decision ofGovernment and EDP to award the contract for the bulb unitsof the Crestuma hydropower plant (after ICB) to the nominallysecond lowest bidder in pursuance of Government's policy offostering specialization amongst local manufacturers. Thetwo lowest bidders were both Portuguese and the differencebetween their bids was not significant. Although the Bankinitially had reservations regarding the proposed contractaward, subsequently the Bank agreed, following a visit by aPortuguese delegation for this purpose, that if theevaluation showed only a minor difference in bid prices, thenEDP had the right to exercise its judgement in selectingeither one, taking into account non-quantifiable factors suchas compliance with the policy objective of Government. Thusthe contract was awarded as proposed to the localmanufacturer which, according to the Government directive,would be specializing in the manufacture of hydropowerequipment.

Costs

3.5.1 In view of the significant change in Project content (paras 3.1.1-3.1.3), no meaningful comparison of costs is possible. Attachment 2 gives acomparison of the estimated and actual costs of the Project.

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Disbursements

3.6.1 The original estimates of disbursements and the actualdisbursements are given in Attachment 3. Through June 1979, the disbursementswere only 35% of appraisal estimate but thereafter they picked up fast in FY1980 and 1981, leaving only *0.4 million equivalent undisbursed as of December31, 1980. This amount was disbursed in early February 1981, i.e., after theloan was closed on December 31, 1980; the withdrawal application had beenreceived here before loan closing. The main reasons for the slowdisbursements through mid-1979 were:

(a) EDP's slow organizational changes during the initial periodof EDP's life when all the constituent units had to beintegrated into EDP;

(b) Project revisions;

(c) exclusion of the Setubal station plant from Bank financingowing to restricted procurement, the consequent decision toreallocate $14 million of the loan and changes in the List ofGoods;

(d) design changes in the Crestuma Hydro Power Plant (main itemfor Bank financing);

(e) slow procurement action initially by EDP owing tounfamiliarity with Bank procedures;

(f) methods of payment in awarded contracts; and

(g) frequent political changes in the country.

Performance of Consultants, Contractors and Suppliers

3.7.1 There was no major problem related to the performance ofconsultants, contractors and suppliers.

Environmental Impact

3.8.1 The State Commission on Environment on which all the technicalministries are represented is responsible for ensuring that environmentalfactors are taken into account before projects, including power projects, areapproved. Apart from the general responsibility of the Commission, variousother State agencies have specific responsibilities for environmentalprotection. Construction of hydroelectric power plants is subject to a strictlicensing procedure which requires consideration of environmental factorsbefore construction is authorized. In the case of steam power plants,appropriate emission standards are enforced. By careful planning,transmission facilities are not allowed to mar sceutic beauty. With all thesearrangements, no specific covenant for environmental protection was considerednecessary. The Project has been executed ensuring appropriate attention toenvironmental aspects in designs and standards.

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IV. OPERATING PERFORMANCE

4.1.1 The object of the physical facilities of the Project, namely toprovide the most economical electricity supply to meet the forecast growth indemand, was fully achieved. Attachment 4 gives the forecast and actual salesof EDP for 1975-1980 broken down into four categories (industry, transport,agriculture, and domestic and others). It will be seen that the actual saleswere 3-9% above the appraisal estimates. The deviation is well within theacceptable range considering the unsettled conditions of 1975 when theforecast was made.

V. FINANCIAL PERFORMANCE

Revenue Covenant

5.1.1 The revenue covenant under the loan requires EDP to provide frominternally generated funds after.the payment of dividends to Government asurplus to finance a reasonable proportion of its average constructionrequirements (average of previous and current years). Under a supplementalletter, it was further agreed that beginning with 1979 a satisfactoryobjective would be self-financing of at least 30% of its average constructionrequirements and that o.bjectives would be established by Government for EDPfor the interim period of 1977 and 1978 with a view to causing EDP toprogressively achieve the 30% level of self-financing for 1979 andthereafter. However, for both 1977 and 1978, no specific level ofself-financing was prescribed since EDP and Government had, by their tariffaction in 1976, 1977 and 1978 (see para 5.4.1), already demonstrated theirdesire to ensure the financial viability of ED?.

5.1.2 Government reported in June 1977 that the money market conditionsfor the last three years had prevented the issue of bonds by EDP and otherpublic sector institutions and that financing institutions were more preparedto refinance short-term debt (maturity less than seven years) than to enterinto very long-term lending. Therefore, EDP had to resort more and more toshort-term borrowing which would be refinanced on maturity. In view of this,EDP and Government proposed that "periodic repayments of long-term debt" forpurposes of computing the self-financing level under Section 5.02 of the LoanAgreement be restricted to 7% (corresponding to 15 years'.maturity, areasonable period) of the outstanding long-term debt at the beginning of theyear if other repayments of loans with amortization periods of up to six yearswere offset by new borrowings. This was considered a reasonable request andwas accepted by the Bank.

1977 and 1978 Operating Results

5.2.1 EDP's tariffs were raised, with Government approval, an average 25%from June 1976, a further 25% from February 1977 and 50% from May 1978. Thesetariff increases enabled EDP to achieve a self-financing level of 12% in 1977and 25% in 1978.

1979 Operating Results

5.3.1 With exceptionally good hydrological conditions and theimplementation of an average 25% tariff increase from mid-November 1979 and afurther levy of a fuel adjustment charge of 0.125 Esc per kWh to compensateEDP for the increase in fuel oil price from Esc 4,000/ton to Esc 5,000/tonfrom September 1979 (the effect of the fuel adjustment charge was to raise theaverage rate about 8%), EDP's internal cash generation in 1979 was 37% (therewere no dividend payments in the year).

1980 Operating Results

5.4.1 Contrary to expectations, the new Government formed after thegeneral elections of December 1979 took action; (i) to raise the fuel oilprice from Esc 5,000 to Esc 7,000 per ton effective January 31, 1980 and topermit EDP to levy a fuel adjustment charge effective January 31, 1980 raisingthe price of electricity 8.5% in 1980; and (ii) to raise EDP's tariffs furtherby an average of 18% effective January 31, 1980. (The overall increase in theprice of electricity was therefore 26.5% from January 31, 1980). However,because of an exceptionally severe drought in 1980 (continuing into 1981),EDP's cash generation in 1980 was only 15%. This is because EDP's fuel

adjustment charge is designed to recover cost increases assuming normalhydrological conditions and therefore the large increase in fuel charges

caused by the excessive thermal generation went unrecovered. Given thedruught and the fact that further tariff increases in 1980 were unlikely withelections due in late 1980, the Bank accepted the low level of cash generationas satisfactory performance under the covenant, especlally because of the pastreadiness of Government and EDP to raise tariffs every year to keep up withinflation as shown by the following:

Average Amount of Tariff Increase Date of Increase(including fuel adjustment)

25% June 197625% February 197750% May 197833% November 197926.5% January 1980

Estimates for 1981

5.5.1 Effective December 31, 1980, the new Government which came to powerafter the elections of October 1980 raised EDP's tariffs by an average of20%. The severe drought conditions continued in 1981 with the result thatdespite the above tariff increase, EDP's net cash generation was about minus38% in 1981, although it would have achieved 23% cash generation if averagehydrological conditions had prevailed. In fact, EDP was not able to meet itsoperating expenditure and debt obligations in 1981. The issue of EDP'snon-compliance with the financial covenant in 1981 is being addressed underthe proposed Seventh Power Project.

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5.6.1 EDP's income statements, balance sheets and funds statements for1975-1979 are given in Attachments 5, 6 and 7.

Collection of Receivables

5.7.1 There was one matter which was not a probiem at appraisal, butwhich became a serious one after some time, and this was the problem ofcollection of receivables for the supply of electricity mainly rrom HVconsumers, particularly municipalities. The outstandings in respect of HVconsumers amounted to 6.2 months' billing as of December 31, 1979, 7.3months' billings as of June 30, 1980 and 7.2 months' billings as of December31, 1980 (Attachment 8). The probiem regarding small private industries isbeing tackled effectively through threats of disconnection although thestrategy is not so effective in the case of large private industries. In thecase of municipalities, both EDP and Government are unable to enforce paymentfor legal and political reasons with the result that their outstandingsamounted to 13.3 months' billings as of June 30, 1980. The outstandings ofmunicipalities as of December 31, 1980 were 38% more than those at June 30,1980. In the past, both the President of EDP and the Secretary of State forEnergy and Industry in Government have acknowledged the seriousness of theproblem and agreed that quicker integration of the power facilities of theremaining municipalities with EDP was the best solution to it. However, withthe present unhurried pace of integration, the problem could be with EDP for along time unless corrective measures are taken. In the meantime, EDP isresorting to additional short-term borrowings to meet the problem of cashshortage created by the default on the part of the HV consumers. The Bank hasbrought the matter repeatedly to the notice of Government and EDP. In view ofits seriousness and the fact that the problem has aggravated over time, theissue is being handled under the proposed Seventh Power Project as a highpriority issue.

Tariffs

5.8.1 The rates charged to distribution networks (about a third of totalenergy supplied in 1974) remained almost unaltered during 1966-1974 andincreases took place only for large consumers directly supplied from thesystem. At the time of formation of EDP, medium and low voltage rates variedwidely throughout the country, the ratio of the highest to the lowest domesticrates being as .high as 3:1. In late 1976, the Reorganization Commission andGovernment were already studying the question of rationalization ofelectricity rates in the country.

5.8.2 Under section 5.05 of the Loan Agreement, EDP agreed to take allsteps necessary to obtain from Government approval of an adequate revisedstructure of its rates for electricity supply which shall take into accountthe marginal costs of supply and to implement such revised rate structure notlater than December 31, 1977. Government also agreed to take all actionnecessary to enable EDP to commence implementation of such a revised ratestructure not later than December 31, 1977. Accordingly, after studies ofexisting tariffs and marginal costs, Government implemented a revised tariffstructure based on marginal costs effective February 1, 1977 for the whole

- 13 -

country i.e. not only for EDP but also for other agencies engaged indistribution activities. For EDP there was an average 25% increase (a littlemore in domestic tariffs and a little less in industry). However, althoughthe new structure was to provide Portugal with uniform tariffs throughout thecountry, actually many municipalities (notably the Porto municipality) choseto levy lower tariffs and still have tariffs much below EDP's low voltagetariffs in Lisbon.

Accounts, Insurance etc.

5.9.1 For a discussion of these, see Attachment 1.

VI, INSTITUTIONAL PERPORMANCE

Problems at EDP's Formation

6.1.1 At its formation in July 1976, EDP had to address itself to a largenumber of problems, some of which arose out of the need to apply uniformpolicies and procedures in entities hitherto following diverse practices.These problems were mainly:

(a) organizing itself to function as an autonomous entity;

(b) rationalization of tariffs which varied widely-over thecountry;

(c) application of coimmion personnel policies and wages andsalaries;

(d) unification of finance and accounting systems;

(e) phased integration of about 200 municipal power distributionunits; and

(f) perhaps most important of all, setting up a satisfactoryfinancing plan to cover the development program.

Management and Organizational Effectiveness

6.2.1 It is a measure of EDP's strength as an organization and of thequality of its management that almost all the problems facing EDP during theunsettled times of 1975 and 1976 have been solved or are in the process ofbeing solved in an orderly manner. EDP and its management have grown instrength over the years and EDP has developed into a utility comparable inefficiency to those in the developed countries.

- 14 -

Reorganization of EDP

6.3.1 When EDP was formed in July 1976 after the nationalization andmerger of 15 companies, each company was retained substantially unchanged soas to cause minimum dislocation. The first phase of reorganization comprisingthe establishment of a headquarters office responsible for policies, directionand central management with staff departments, and regional officesresponsible for decentralized operational activities was completed by January1977. EDP has several directorates, one responsible for generation anddistribution equipment and another for the generation and transmission systemand many regional offices responsible for distribution activities. EDP is anextremely well managed entity and changes, when necessary, are effectedsmoothly and painlessly. Through sound management, EDP has been relativelyinsulated from the unsettled conditions arising in the country from time totime. It is now proposed to regroup distribution activities in each region,with distribution centers to be established in each region covering specificareas. The final delineation of the jurisdiction of these distributioncenters will depend on the integration of the remaining distributionfacilities in the country with EDP. The emphasis in all past and futurereorganization is decentralization of management to facilitate speedydecision-making.

Personnel Policies

6.3.2 One important problem for the sector following its nationalizationand the formation of EDP was the large variety of salary scales and terms ofservice applicable to the nationalized entities and the need to unify themprogressively within a reasonable period. In place of the plethora of salaryscales that existed in the 15 different enterprises having different criteriafor each salary group, 18 salary groups were established into which each andevery worker of a total of over 13,000 was fitted. A Workers Agreement alsocamne into effect in 1978 representing an important step in the progresstowards better and uniform working conditions.

Thtegration of Municipal Undertakings

6.4.1 One of the institutional problems at appraisal was that ofintegration of municipal undertakings with EDP. According to Decree Law205-G/75 of April 16, 1975 under which Government natinalized the 15 powercompanies which were later amalgamated to form EDP in July 1976, all assets ofthe municipal power-generating and distribution enterprises and other powerenterprises would be transferred to the new entity (EDP). This is still thelaw of the country although every Government, whatever its politicalcomplexion, has been somewhat lethargic in implementing it. At the time ofits formation, EDP was responsible for about a third of the distributionsubsector in the country, the remaining distribution activities being theresponsibility of some 200 municipalities, the largest being Porto with130,000 consumers. It was then hoped that all the municipal undertakingswould be integrated with EDP within two years and with this in view, a specialcommittee was set up in EDP to make recommendations for a phased integration

- 15 -

of the undertakings with EDP. (No covenant on this matter was provided in theloan agreement in view of the uncertainties surrounding the issue at the timeof appraisal.) However, the program of integration was much delayed owing topolitical and other opposition in the country and the first phase covering 56muncipalities and 0.3 million consumers was implemented only in M4ay/October1979. Since then, the power assets of several more municipalities andfederations of municipalities have been integrated with EDPO About 40% of alldistribution activities in the country is still (December 1981) with about 130municipalities. Porto which was expected to be one of the first to beintegrated would now probably be one of the last. Both EDP and Governmentwish to complete the integration quickly (although some dissenting opinionscould be heard now and then) mainly for the following reasons:

(a) Some municipalities, notably Porto, keep their tariffs lower thanthose of EDP and below the levels permitted by Government.Therefore, unification of tariffs in the country, which is anobjective of Government for the power sector, is not possiblewithout complete integration of municipal undertakings with EDP;

(b) at present, owing to technical reasons e.g. the number of points atwhich supply is being given to municipalities and the voltage levelat which certain consumers in municipal areas require supply, bothEDP and municipalities serve consumers in the same area, therebycreating considerable confusion; and

(c) it would minimize, if not entirely eliminate, EDP's receivablesproblem.

Although the need for integration is acknowledged Ln most circles ofGovernment, the matter is being handled as a delicate issue, without anydeadline for the completion of integration, because of political and otheropposition and the vested interests of municipalities. The matter is beingaddressed under the proposed Seventh Power Project.

6.4.2 The fact that so many municipal undertakings have been smoothlyintegrated with EDP since 1976, doubling its distribution activities and inthe process, solving such attendant problems as unification of salaries andoperational systems and procedures, attests to EDP's organizational strengthand its ability to handle thorny issues in a systematic manner.

VII. PROJECT JUSTIFICATION

Return on Investment

7.1.1 Since the Project represents a part of the power subsectordevelopment program and includes various components, it would be appropriateto calculate the rate of return on the development program for the period1976-86 by comparing the costs and benefits. Actual costs and benefits up to

- 16 -

1980 have been adjusted to that base year using the appropriate pricedeflators. Costs over the remaining life of the program's physical facilitieshave been re-estimated using 1980 base cost data and basic assumptions asstated in the SAR. New forecasts of benefits have been made using the latestavailable information. The revised rate of return is at least 13% (Attachment8) which compares favorably with the SAR's rate of 8%, which was based on thetariff increases used in the SAR's financial projections (25% in 1977, 15% in1978 and 15% in 1979). The actual tariff increases that were implemented inorder to achieve EDP's financial objectives were substantially higher (50% in1978, 33% in 1979 and 26.5% in 1980).

VIII. BANK'S PERFORMANCE

8.1.1 The Bank has played a constructive role in the development of EDPas a strong utility. Through discussions and advice, the Bank has contributedto the evolution of EDP's legal and organizational structure, helped developits planning methodology and procurement practices, and by focusing on thecentral issues, helped its development on sound lines. Perhaps most importantof all, the Bank demonstrated by its presence in the sector at a critical timeand by its association with the emerging EDP its confidence in EDP's abilityto overcome its many problems and to establish itself as a sound utility. TheBank's reassuring presence in the sector also had a catalytic effect inattracting other creditors, e.g., the European Investment Bank, to invest inEDP's capital expansion program and thus helped ensure the success of thatprogram.

8.1.2 The Bank maintained excellent relations throughout with Governmentand ED? and showed flexibility on all reasonable proposals made by them.Examples of such flexibility are. reallocation of 39% of the loan amountingto USgl4 million in the situation caused by the Government's decision to haverestricted bidding for the equipment for which the amount was originallyallocated; and the Bank's agreement to amend the revenue covenant to providefor a change in the computation of the debt service.

8.1.3 The Bank identified the right issues at appraisal and providedappropriate covenants to ensure action. However, the major problem of EDP'sinability to collect its bills from municipalities was not foreseen atappraisal by the. Bank, nor could this have been foreseen since the problemarose more because of political pressures than of anything else.

SupDervision

8.2.1 The Bank's supervision work was effective; there was continuity ofBank staff from appraisal through project completion, and supervision missionswere mounted at regular intervals.

- 17 -

IX. CONCLUSIONS

9.1.1 This was a highly successful lending operation. Thanks toexcellent maTnagement, EDP achieved all the objectives set at appraisal exceptfor the self-financing objective. Although the self-financing target wasexceeded in 1979, only half the target was achieved in 1980 on account of asevere drought. In 1981, the position was very unsatisfactory -1 for EDPcould not meet its debt obligations from cash flow.

Lessons to be Learned

9.2.1 There are three lessons to be learned from this lending operation:

(a) A strong management can guide a utility successfully throughdifficult times and solve even thorny issues in a systematicmanner. It can also to some extent insulate a utility from theunsettled conditions in the country.

(b) Even a good utility is often unable to perform well under adverseexogenous conditions such as drought. Instead of focussing onindividual years, it would be worthwhile for the Bank in such casesto focus on a utility's performance over a number of years takentogether. It may also be more appropriate to assess a utility'sperformance against broad management objectives, setting financialgoals in the context of such broad corporate objectives.

(c) Greater attention should be given to familiarizing borrowers withthe Bank's procurement procedures in the early stages of projectappraisal.

1/ EDP's comments: "In 1981, even worse drought conditions adversely affectedthe financial position, to an extent that requires reformulation of correctivemechanisms to face this type of events. The matter is being addressed by theGovernment and EDP and in being handled under the proposed Seventh PowerProject."

- 19 - Attachment 1Page 1 of 2

PORTUGAL

SIXTH POWER PROJECT (LOAN 1301-PO)

EDP

Main Covenants of Loan Documents

Sectionof Loan Substance of CovenantAgreement Action Required to be Taken Extent of Compliance

4.05 The insurance policies of the various Complied with in 1979 and continued there-entities which were merged to form after. In March 1977 EDP commenced aEDP on July 1, 1976 differed from study of existing insurance policies andeach other. EDP was therefore practices of the various integrated enti-required to formulate and apply by ties with a view to formulating a uniformJuly 1, 1977, to all its operational insurance policy for the whole of EDP.units, a uniform insurance policy Based on this study, the Board of Direc-for each type of risk consistent tors of EDP approved a uniform insurancewith sound public utility practices. policy in the beginning of 1979 and the

policy was implemented during 1979. Theinsurance covers all the normal riskssuch as fire, theft, boiler explosion,damage to, and breakdown of, machinery,third party insurance for automobiles,workmen's compensation for injuries onduty etc. For purposes of insurance,assets are revalued using indicesestablished by the Ministry of Finance.

4.06 EDP shall assemble by December 31, Some of the nationalized companies were1977 a comprehensive set of key already using some technical indicators.indicators to monitor its technical After a uniform accounting system wasand financial performance. established, beginning with the 1979

accounts, a comprehensive set of perfor-mance indicators was prepared, which arebeing used to monitor performance.

5.01(b) The financial and accounting systems Complied with from the accounts forof the entities which were merged to 1979, In February 1977, Governmentform EDP were different from each established a uniform accounting planother. Unification of these systems for all sectors. This had to bebeing urgent, EDP was required to adapted to the requirements of thedevelop, and to implement not later electricity sector with appropriatethan January 1, 1978, uniform classification of-all assets. Such afinancial and accounting systems plan was approved by EDP in March 1978and procedures in all its operational and by Government also in due course.units and to keep the Bank informed The plan was applied to the accountsabout the progress of implementation. for 1978 pending Government approval.

- 20 -

Attachment 1Page 2 of 2

Sectionof Loan Substance of CovenantAgreement Action Required to be Taken Extent of Compliance

5.01(b) The accounts for 1978 were prepared(Cont'd) using historical costs of the companies

integrated to form EDP (not valued on auniform basis). However, the assetswere revalued as of the end of 1978on a uniform basis for the purpose ofpreparing the 1979 accounts.

5.02 EDP to achieve a self-financing Complied with for 1979 but not forand level of 30% from 1979 (inter- 1980 and 1981 (see paras 5.3.1, 5.4.1Supple- mediate targets to be fixed for and 5.5.1.)mentary 1977 and 1978).Letter

5.03 Commencing January 1, 1977 EDP Complied with.to provide for depreciation onits assets using methods andrates satisfactory to the Bank.

5.05 EDP to obtain from Government, Complied with. The revised tariffapproval of a revised tariff structure based on marginal costs wasstructure based on marginal implemented effective February 1,costs and to implement the 1977.structure not later thanDecember 31, 1977.

5.06 EDP to submit to the Bank audited There have been substantial delays inaccounts for the year within 4 the receipt of audited accounts. Datesmonths of the end of the year. of audit reports are given below.

Accounts for - 1977 - December 12, 1978- 1978 - December 31, 1979- 1979 -(November 30, 1980

( (unrevalued)(February 16, 1981( (revalued)

- 1980 - October 22, 1981

The delays haveoccurred because ofunification of accounts amongst theconstituent units of EDP, the introduc-tion of a new accounting system and the

December 1981 revaluation of assets.

- 21 - Attachment 2

PORTUGAL

SIXTH POWER PROJECT (LOAN 1301-PO)

EDP

Prolect Costs

Estimated and Actual Investments

"Time Slice" 1976-1978

(Esc. million Equivalent)

Appraisal Estimate Actual

Generation

Hydro 4,928 9,726Conventional 4,289 9,793Nuclear 2,610 84-1

Subtotal 11,827 19,603

Transmission 3,737 4,889

Distribution 4,128 4,695

Rural Electrification 1,227 2/

Consultants Services 242 250 31

Contingencies:Physical 2,116Price 4,818

Total 28,095 29,437

1/ Only studies.2/ Included in distribution.3/ Foreign costs US$2.55 million, localcosts estimated.

December 1981

- 22 - Attachment 3

PORTUGAL

SIXTH POWER PROJECT (LOAN 1301-PO)

EDP

Disbursement Schedule - Actual vs. Appraisal Estimate(Million US$ Equivalent)

Bank Fiscal Year Appraisal Actual as % ofand Quarter Ending Estimate Actual Appraisal Estimate

1977December 31, 1976 6 0March 31, 1977 10 - 0June 30, 1977 13 0.1 0.1

1978September 30, 1977 17 0.1 1.1December 31, 1977 22 0.4 1.8March 31, 1978 26 0.9 3.5June 30, 1978 29 1.3 4.5

1979September 30, 1978 33 2.6 7.9December 31, 1978 36 4.3 11.9March 31, 1979 - 8.1 22.5June 30, 1979 - 12.7 35.3

1980September 30, 1979 - 16.3 45.3December 31, 1979 - 23.1 64.2March 31, 1980 - 25.8 71.7June 30, 1980 - 31.1 86.4

1981September 30, 1980 - 33.6 93.3December 31, 1980 - 35.6 98.9

December 1981

sTfl PAEUJ FSnifr (UWr 15011pot

RDP

zatiated (Aprtell ead ActAl 9.1.. o Electrlcty

1975 _ 9w 6 IUff 197t 19?8 i97 App,-f.2E irp~~ Appraisal App"eialApril

Caumer Catngor eSatite Aacttl Deviation stte ACtun 0r,tsttma SatinS Acml Certut sttlina tetl Omdnt tite A l i t m- -79r - -- T7 -r rrm9 -T- _

lImtfl 5,ff60 6,zg.S + a8 6131 6,W30.o + 5 6,783 7,6812 * 13 7,. 8,417.2 + il 8,01? 9.,? 15 8.61. %7.]3 9

7--P 24 *0 30*.7 * 1?n 25 31i.8 * 26 265 317.3 + 20 2a0 wl.8 * 11 3 338.0 + 13 355 78.0 7

hrimulture 50 51.6 + 3 55 50.2 - 9 66 59.6 - 10 n 61.8 - 20 91 f1.A -22 107 91.3 -15

let,tlc & Odor 2 . 55 2.28B 10 L26* 2.741.2 * 24W 2.7150 2 5 -63. 6 36 .a 6L ti5

TILL 8.i0 8,719.14 3 9,070 9.53.0 + 5 9,9g6 10762.1 * 8 W,8a9 11u770.6 * e a*871 12.937.7 * 9 32,908 13.733.1 + 6 -

Dcc.br ISSI

- - -5- - - - - - - - - - - - n -~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~1

PORTllGAI.

SIXTHI POWER PROJECT (LOAN 1301-PO)

F.LECTRICIDADE DE PORTllfAL - EMpRESSA PUB!lICA

Income Statements for the Years Fnding December 31, 1975-1979 Appraisal Fstimates vs. Actuals

(Millions of Esc.)

1975-------- ------- 1976------- -------- 1977…------- ------- 19879--------

Appraisal Appraisal Appraisal Appraisal Appraisal

Estimate Actual Estimate Actual Estimate Actual Estimate Actual Estimate Actual

f:eneration and Import - (tWh 9,88( 10,089 10,57(0 lO,0QC 11,7201 17,342 12,850 13.476 14,001) 14.1137

System l.osses and Free Supplies - tWh 1,36n 1,340 1,5(0 1,345 1,756 1,580 1,951 1,705 2,126 1,H99

Sales - CWh R,S2tl R,749 9,070 9,517 9,964 10,762 10,899 11,771 11,874 12,938

Average Revenuie kWh Fsc. 0.628 0.629 0.707 0.709 0.970- 0.900 1.116 1.217 1.283 1.52h

Operating RevenuesRevenue from Electricity Sales 5,351 5,449 6,411 6,765 4.665 9,685 12.163 14,265 15,234 19,737

Other Reventes 127 346 100 521 155 667 170 1,516 170 2,24h

Total Revenues 5,47R 5,845 h,511 7,286 9,820 10.352 12,333 15,781 15,404 21,983

Operating ExpensesFuel 1,259 1,26( 1,857 176H8 1,152 1,373 1,293 2,308 1,740) 4,343

Cost of Power Purchased 19R 161) 1,449 1,42tl lO5 4 110 575 11( 844

Salaries and Wages 1,794 1,h5t) 2,207 2,178 2,284 2,8h2 2,477 3,S34 2.7h5 4,661

Materials 17') 1'1) 242 133 230 187 244 301 272 3813

Services and reneral Adminiqtration 145 466 41h h62 1701 1,022 514 1,324 531 1,h411

Depreciation 973 970 1,tl85 1,(50 1,291 1,366 1,541 I,995 1,762 4,671

Taxes 251 260t 396, 107 415 140 441 142 4810 179

Total Operating lxpenses 5,199 5,112 7,722 788 S,R147 6,954 6,h20 10,179 i,hhO 1h,721

Nvt Operating Income 279 711 (1,211) (2) 3,973 3,398 5,711 S,h(02 7,744 5,262

Other Incame 61 140 3 121 40 1h7 40 375 4t l,hb

Cross Iicome 341) 773 (1,172) 121 4,011 3,S6S 5,753 5,477 7,784 6,q23

less: Interest and )tlier Financial Charges (8113) (820) (1,2R4) (1,726) (1,580) (2 142) (1 976) (3,788) (2,171) (S,1(44)

N.-t Income (4Qi(7) (2,1,5,) (1,60S) 2.433 1,423 3,777 2,189 5,611 1,H74

Appropriation of Net IncomeIhividends to tovernment - - - - 63() - 7(1 160

Balance toi Retained Earnings (4Q()) (47) (2,4S6) (1,803 ) 18 4,p 451 4-Thtal (4W0) (47) (2,456) (1,605) 2,433 1,423 ,777 ,I 5l6i1 1,H74

n

Iii. tnhcr 19HI1

(?SSi1')

PORTLGAL

Buil P111K P20011 (IO"n 1301-To)

EtP

Balance Stheets as of December 31 197-197 Aprisal Estimates vs. Actuals)

P-A1i-Ac pria Acum rSFmi rriiiug Appr 978a ARUT XPaiiActual

Assets,

Fixed Assets In Service 33,635 31.530 38,175 35,29~4 141,355 14i,056 52,420 148,988 59,1489 11.4,619less: Accumulated Depreciation "3 ' 860 fn2,lM %83 (10 1 (nn1 3) ?5) ('1-) (4 8) (4

Net Fixed MAssta In Service 2282.61o)03661

Work in Progress 7- 9,0 ______ 172 ___

Other long-Tess Assetsa1 200 10011 1 __7_

ou.r. 1.1 1.1 I ISO 960 1 554 1. 2.394 1~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~110 7 80r123 .7Total Other long-Term Assets T6 T66t66 Aj1i 1,Ao' 6i 1,750 25f7lA3

Current Assets 16019- MCash 2146 1,350 143 1,168 68 46e 37 1,652 105 i,6314RaefiveLblesi 2,237 2,850 2,250 3,8714 2,9140 6,955 3.352 8,852 14,117 114,638Ibterflal, 980 1,150 1,050 1,370 1,150 1,885 1,260 2,928 1,370 14,483Prepaid Expenses - - - - - -lt2

Totail Current Assets 3,463 5,350 TYq.,1W 5ir;ii T 13Thermal Support iNad - - -2,696 -1 775 Toa ses'H W'eU 3:1 § ~ W3E-(oQ

Capital and Liablities

Capital- Commono Stock 8,715 8,722 8,715 16,000 8,715 1.6,oo0 8,715 16,ooo 8,715 16,o00 -Government EquitY Contributions - -800 800 2,200 1,800 4,000 2,700 14,300 3,800

-Other Government Barticipation 45 52 726 680 1 0 rfir -t- 60o Yeaerves 1,8B37 6,150 1,837 222 1,837 1,397 1,837 2,88 1,837 4,836Retailned Earnings 883 (536) (1.5731 75 230 66 3,307 7n 8,158 (827)Zeerve for revaluation ____ ______ ______D

Lag-er DbtTotal Capital Reserves and Surplus 1551 1iZ?4 15,369 17.W 1-962 45.76159-31 1,1

Existing loaws (through 1975) 21,0140 20,500 19,780 18,71 18,030 18,013 16,010 14,717 13,850 101,980N1ew loans - local - Bonds - 100 - 1,650 - 2,600 - 3,700 -

- Bank loens - -2,370 2,67,3 5,580 10,123 8,260 19,902 16,250 29,897- Thlermal Support Fund - - 2,590 2,316 2,360 2,100 i,86o 1,879 1,360 1,618- Other lns- - 1,070 - 1,390 i ,68o - 1,920 -

- Foreign - IBlD Low - - 150) 2,687 550) 3,3146 900) 8,1140 875) 1,054- EBIble)h - - 550) 950) 1,000) I,000 I-other Loans - - - 1610) 1.74o) 3,1460)- Suppliers Credits - - 130 ) __ ~ ) _ _66o I 1,2140

Total Long-Term De-bt rI2Y p:35 ?7TrW -26,36 31,4650 -3T3,52 34,F7-10 11T38 4,5 7~jLess: Debt Pus Within the YeaLr (1 260) jA-900) LJ2980 4a,1) (2 520) im§-) (92.10) (4 655) {3& ) (,96

Net Long-Term Debt ti-;7F ___6o 25_36 ,2r.,5Other Long-Tara Liabilities 9- liee .1CurrenLt Liabilities

Accounts DEj,able, Accrues Taxes, Interest & Others T30 3,814 790 2,068 820 2,545 900 3,226 1,000 4,o4oShort-Tern florrovings -- - 14,142 - 3,827 - 1,968 - 2,2914Debt Due Within One Year 1,260 1,900 1,980 .2,101 2,520 3,989 2,910 4, 655 3,050 4,986Provision for Dividend Payments to Goversnment -- - - 630 - 700 - 760

Total Current Liabilities 1T90 5,724 '7Y705 5311 3,7 0314,510 I8§1490 T~

TOTAL CAPITAL AND LIABILXTIKB T7.B5 39,100 1It1I" 50,496 PE5531 W7E 76-77,05 V149U1

December 1981

PORTUGAL

SIXTH POWER PROJECT (LOAN 1301-PO)

EDP

E-LECTRICIDADE DE PORTUGAL - EMPRESA PUBLICA

Sources and Applications of Funds for the Years 1976-1979 Appraisal Estimates vs. Actuals(Millions of Esc.)

…--1976 1977 1978 1979 …Appraisal Appraisal Appraisal AppraisalEstimate Actual Estimate Actual Estimate Actual Estimate Actual

Sources of FundsInternal Cash GenerationGross Income (1,172) 121 4,013 3,565 5,753 5,977 7,784 6,923Depreciation 1,085 1,050 1,541 1,995 1,762 4,671Total Internal Cash Generation (87) 1,171 5,304 4,931 7,294 7,972 9,546 11,594

Long-Term BorrowingsLocal Loans - Bonds 700 - 950 - 950 - 1,100 -

- Bank Loans 2,370 2,673 3,210 7,450 2,680 9,779 8,145 9,995 1- Thermal Support Fund 2,590 2,316 - - - - -- Other Loans 1,070 - 320 - 290 - 310 -

Foreign Loans - IBRD Loan 150) 2,687 400) 659 350) 4,794 -) 6,914- EIB Loan 550) - 400) - 50) - -)

- Other Loans -) - 610) - 1,130) - 1,720) -- Supplier's Credits 130) - 230) - 300) - 580) -

Total Long-Term Borrowings 7,560 7,676 6,120 8,109 5,750 14,573 11,855 16,909

Government Equity Contributions 800 800 1,400 1,000 1,800 900 300 1,100Other Government Participation 1,510 262 1,090 485 1,920 1,690 - 1,010Other Sources 180 2,032 (785) 2,291 (411) 2,007 (843) 5,067Total Sources 9,963 11,941 13,129 16,816 16,353 27,142 20,858 35,680

Applications of FundsConstruction Requirements 7,389 7,410 9,519 9,360 11,187 13,281 15,015 17,566Debt Service - Amortization 1,260 1,173 1,980 1,783 2,520 3,846 2,910 5,350

- Interest 1,284 1,736 1,580 2,758 1,976 4,174 2,173 5,049Total Debt Service 2,544 2,909 3,560 4,541 4,496 8,020 5,083 10,399Dividend Payments to Government - - - - 630 - 700 -Other Requirements 30 1,622 50 2,915 40 5,841 60 7,715Total Applications 9,963 11,941 13,129 16,816 16,353 27,142 20,858 35,680

Internal Cash Generation as % of AverageConstruction Costs - - 21 12 21 25 29 37 >

December 1981

(255P) -

- 27 -

Attachment 8

PORTUGAL

SIXTH POWER PROJECT (LOAN 1301-PO)

EDP

Receivables for Electricity Supply to HV Consumers(Millions of Contos)

As of Dec. 31/79 As of June 30/80 As of Dec. 31/80More than More than More than2 mos old Total 2 mos old Total 2 mos old Total

Municipalities 5.79 6.87 8.17 9.49 11.55 13.12

Private Distribution Cos. 0.39 0.48 0.47 0.59 0.53 0.67

Public Adm. Offices 0.04 0.12 0.11 0.20 0.13 0.25

Private Industries 1.35 2.73 2.21 4.15 2.90 4.88

State Enterprises 0.33 0.82 0.57 1.33 0.81 1.50

Total 7.90 11.02 11.53 15.76 15.92 20.47-= _-__

(6.2 mos' (7.3 mos' (7.2 mos'billings) billings) billings)

December 1981

PORTUGAL

SIXTH POWER PROJECT (LOAN i301-PO)

EDP

Rate of Return on Development Program 1976-1986(Esc. Millions)

Capital Cost O&M Fuel Cost Total Costs Benefits Net Benefits 1/

Year --1980 Base- 1980 Base 1980 Base 1980 Base

1976 13,609 138 8,539 17,286 1,268 -16,018

1977 14,684 856 149 15,689 2,656 -13,033

1978 15,715 1,614 816 18,145 4,648 -13,497

1979 15,752 2,037 1,828 19,617 6,909 -12,708

1980 18,933 4,389 10,225 33,547 12,509 -21,038

1981 31,211 5,854 16,576 53,641 18,893 -34,748

1982 41,968 8,272 13,576 63,816 32,679 -31,137

1983 40,550 10,671 17,281 68,502 44,096 -24,406

1984 34,832 13,146 19,754 67,732 58,263 - 9,469

1985 26,569 16,019 21,341 63,929 74,037 10,108 X

1986 20,564 19,340 22,282 62,186 89,963 27,777

1987-2004 - 19,340 22,282 41,622 89,963 48,341

2005 1/ -34,298 19,340 22,282 7,324 89,963 82,639

Rate of Return = 13.35%

1/ Actual project cost and benefits adjusted to the base year.

2/ Negative costs in 2005 arise from attribution of residual valuesof program plants at that date. rt

rt

OD

December 1981

- 29 -

Attachment 10Page 1

X ?Electricidade de PortugalEDP/Empresa Publica

Conmelko de Os4"cla

Av. JosO Maliho. Lt. A. 13. 6.* 1000 UsboaAparfado 4205 150S Lisboa CodexTolegramas EDP CG Teoex 16550 EDP CO PToldfone 73 32 73

Mr Shiv S. KapurDirectorOperations Evaluation DepartmentThe World Bank1818 H Street, N.W., Washington, D.C.20433 U.S.A.

Sus referincia Sua comunicaCho de Nos5s refordncia Date 'sG

52.2.1 ~15 C

Assunto

Dear Mr Kapur

Thank you very much for your letter of September 23, 1982 and the

Notes: attached draft report.

The report is a gratifying account of EDP's management and staff

endeavours over the first few years of the company.

We have already offered the Completion Missionour imput to the re

port. However, we would like to take this opportunity to comment the wording of

the introductory paragraph of the conclusions and to add one clarification and

one correction.

Para. 5.4.1 The clarification concerns paragraph 5.4.1: all tariff increases in

has been clude the effect of fuel price adjustments. The reason for the misleading presenamended

tation results from simultaneous decisions regarding changes in fuel prices and

tariff adjust,ents in all cases except in January 1980.

Para. 5.8.1 The energy supplied to distribution networks has decreased from 32.3%

has been in 1976 to 27.3% in 1980, as a result of integration of municipal distribution seramended

vices and different demand growth within EDP's and other distributers areas. The a

verage share of sales to distribution networks is well belo' the figure mentioned

on paragraph 5.8.1. The 95% relate to EDP's share in generation.

Para. 9.1.1 The qualification of the financial position of EDP, in 1981, as disas

a ended trous (paragraph 9.1.1.) seems excessive. We believe the following statement to be

more appropriate:

- 30 -

Attachment 10Page 2

Electricidade de PortugalEDP/Empresa Publica

Destinat&rio Nossa refer6ncia Oata Pag

World Bank -;2 3 5 4 2

. .1./.

These comments In 1981, even worse drought conditions adversely affect the financial

have been position, to an extent that requ.ires reformulation of corrective mechanisms to face

a foot- this type of events. The matter is being addressed by the Government and EDP and is

note9 1n 1 being handled under the proposed Seventh Power Project.

Sincerely yours

Electr oidado C: PorttgalEDP,/Empr,?u Publica

CgnsetFs .2' ,r4nchp

Ricado da .ruzl FIlPU{AamsIfIlFdU