Japan - Kuzuryu Hydroelectric Project

RESTRICTED Noport No. TO-456a This roport was prepared for uso within the Bank and its ac1liated organizations. They do not accopt responsibility for itg accuracy or completenegs. The report may not be published nor may it be quotod as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION APPRAISAL OF THE KUZURYU HYDROELECTRIC PROJECT ELECTRIC POWER DEVELOPMENT COMPANY JAPAN Decembaz 30, 1964 Department of Technical Operationo  CURRENCY EQUIVALENTS US $1 = 360 Yen 1 Yen .278 US cents 1 million Yen = US $2, 778  APPRAISAL OF T' KUZURYU HYDROELECTRIC PROJECT ELECMIC POWER DEVEILOPMFNT COMPANY JAPAN TABLE OF CONTENTS Page No. SUm ARY i I. INTRODUCTION 1 II THE COMPANY 1 III. THE POWER MARKET 3 IV. THE PROJECT 4 Description of the Project 4 Present Status S Construction Schedules 6 Estimated Cost of the Project 7 Unit Investment and Generation Costs 8 V. FINANCIAL ASPECTS 8 Tariffs 8 Present Financial Situation 9 Past Earnings Record 1D Proposed Financing Plan 11 Estimated Future Financial Position 12 VI. CONCLUSIONS 13 ANNEXES 1 - Installed Capacity, Annual Sales, Construction Expenditure and Number of Employees 2 - Construction Schedule for Nagano Station 3 - Construction Schedule for Yugami Station 4 - Estimated Generation Costs 5- Balance Sheets 1962-1969 6 - Long-term Debt as of March 31, 1964 7 - Income Statements 1962-1969 8 - Sources and Applications of Funds 1962-1969 MAP 1 - Power Regions of Japan MAP 2 - Kuzuryu Hydroelectric Project  APPRAISAL OF THE KUZUTJIYU HYDROELECTRIC PROJECT ELECTRIC POIWER DEVEIOPMENT COMPANY JAPAN SUMMARY i. eThe Electric Power Development Company (EPDC) has asked the Bank to consider a loan of US$25 million to finance part of the construction cost of the proposed Kuzuryu Hydroelectric Project on the main island of Japan. The total construction cost of the Project is estimated at US$86 million. ii. The Project will consist of a 220-MW pumped-storage power station with the associated 128-meter rockfill dam and a 54-MW1 conventional-type station, It is the major part of a three-station development plan worked out jointly by EPDC and the private Hokuriku Electric Power Company, which will build the third station (48 MWN) and will absorb all the output of the three stations. The main purpose of the plan is to supply the needed peak- ing capacity for the central regional power system, to which both companies are interconnected. iii. Taking the three stations together the investment cost will be US$318 per kw installed capacity. The average generation cost of the combined output will be 1.3 U.S. cents per kwh. These figures are reasonable. iv. EPDC is a government corporation with the main responsibility of developing special power sources; it supplies power in buli; to the private power companies. The proposed Project will be a part of its expansion progra' which is designed to add about two million kw of generating capacity by 19.70 to its present total of 2.5 million kw. The Project is technically and eco- nomically sound. EPDC is adequately staffed to execute the work. v. EPDC's financial situation is characterized by a high debt capitali ization; the debt/equity ratio is at present 84/16. EPDC's earnings have been maintained at a level resulting in a return on its net fixed assets in operation slightly higher than 6%, which has at times not been sufficient to provide adequate cash generation to nieet the high debt service requirements in years with concentrated bond maturities. However, since the Government has been the main source of finance, subscribing almost all the share capital and contributing the major portion of loan funds, this situation has not been serious and funds were made available when required. The financing of EPDC's expansion program can, therefore, be considered assured. vi. The Project is considered suitable for a US$25 million loan with a term of 25 years including a grace period of four years,  APPRAISAL OF THE KUZURYU HYDROELECTRIC PROJECT ELECTRIC PO,ER DEVELOPI'INT COIMPANY JAPAN I. INTRODUCTION 1. This report covers the appraisal of the Kuzuryu Hydroelectric Project on Honshu, the main island of Japan, to be constructed by the Electric Power Development Company, Ltd. (EPDC). It is based on informa- tion supplied by the Company and on the findings of an appraisal mission which visited Japan in June and July 1964. 2. The Project consists mainly of a 128-meter rockfill dam serving a 220-MW pumped-storage station and of a 54-NW conventional-type hydro- electric station dowmstream. 3. The total construction cost of the Project is estimated at y 31 billion or an equivalent of US$86 million. The Bank has been requested to consider a loan of US$25 million to assist in financing the Project. II. THE COMPANY 4. Electric power for puiblic use in Japan is mainly supplied by nine private power companies. However, there is one Government corporation, EPDC, which builds special power projects and sells the output in bulk to the private companies in whose service areas the projects lie. 5. EPDC was established in 1952 under the Electric Power Development Prornotion Law with the principal responsibility of undertaking hydroelectric power projects of special nature - large-scale, difficult or requiring special considerations in respect to utilization of natural resources. Under special conditions it may also develop thermal and nuclear power. With the approval of the Government, EPDC may also act as an ongineering consult- ant for power developments outside Japan, 6. All power projects undertaken by EPDC are included in the overall regional program prepared in cooperation with the interconnected electric utilities in the particular power region concerned (Japan is divided into four power regions or pools, called "Wide Areas" as shown in Map 1). This program is submitted to the Electric Power Development Coordination Council of the cabinet for final approval and inclusion in the country's "Fundamental Power Development Program". The Council is the highest Government authority on electric power, being headed by the Prime IMinister and composed of the ministers of five relevant ministries, the Director of the Economic Plannir.g Agency and specially appointed persons. 7. In the 12 years of its corporate existence, EPDC has built, and is now operating (as of March 31, 1964), 30 hydro stations with an installed capacity of 2,300 111 and a 150-IX thermal station, or a total of 2,450 MW.  -2- This capacity comes to about 10% of the combined capacity of the nine private companies, while the energy output, sold to eight of them, amounts to only 5%, because EPDC's hydro plants are designed mainly for peaking duty and work on lower plant factors than the base-load thermal plants of the private com- panies, 8. Besides generating stations, EPDC has also built several high volt- age transmission lines to connect its power stations to private companies' power systems. At present there are about 1,800 circuit-miles of transmission lines, mostly operating at 275 kv, 9. At present there are nine hydro projects under construction by EPDC with a total installed capacity of 917 MW. While most of EPDC's expansion in the past was directed toward the development of hydro power, the Govern- ment, with a view to helping the depressed coal industry, recently instructed the Company to develop thermal facilities utilizing domestic coal. This fuel which is of relatively low quality can only be utilized effectively in large thermal plants; it has however proved economically unattractive to the private power companies. In addition to the one existing plant, EPDC has at the mo- ment three thermal stations under construction with a total installed capacity of 765 MU. EPDC's long-range plans foresee the addition of about 338 MW of additional hydro capacity for which approval is still pending; total capacity for 1970 is estimated at 4,500 M4 (see Annex 1). EPDC's construction program forms an integral part of the overall development plan for the Japanese power industry and has thus, over the years, contributed to an improvement in power supply which should for the coming years result in a margin of supply capa- bility of about 7%. 10. The Company's capital is almost entirely contributed by the Govern- ment. For financing construction programs in recent years it has mainly relied on loans from Government sources and bond issues. In 1958 the Bank extended, througlh the Japan Development Bank, a loan of US$10 million (220-JA) for constructing the Miboro Power Project. 11. Operation of EPDC is under general supervision of the Ministry of International Trade and Industry, whose approval must be obtained in major matters such as development programs, power supply to private utilities, bulk tariffs, issuance of new shares, borrowings, etc. 1?. The Company has developed a large and competent technical staff to meet the needs of its large hydroelectric programs of the past decade. Becavlse work on hydro projects will decrease and that on thermal stations will in- crease, efforts are being made by the management to maintain a satisfactory level of staff utilization by expanding overseas consulting activities, by releasing civil engineers to other Government agencies for railway and dam construction and by training part of the mechancial and electrical staff for thermal projects. 13. A statistical summary showing operational data and construction expenditures of EPDC since its establishment in 1952 through 1970 is shown in Annex 1.  - 3 - III. THE POWER MARKET 14. EPDC does not engage in the distribution of power. It sells its production in bulk to the private power companies in whose areas EPDCts projects are located. Since output of the proposed Project will be supplied to the central region, the justification for the construction of the Project requires a review of the supply-demand situation for the entire region. 15. The central region consists of the service territories of three of the private power companies: Kansai, Chubu and Hokuriku. This has been the region of Japan where the fastest economic growth has taken place in the post-war period, with large industrial centers such as Osaka and Nagoya. From the view point of power consumption, the region represents about 40% of the nationts total, having grown from 23.6 billion kwh consumption in 1958 to 48.1 billion kwh in 1963. This is an average annual increase of mXore than 15%, which is substantially in excess of the already high rate of in- crease for Japan as a whole. 16. Because of the rapidly increasing demands for power in the postwar period, Japan has had difficulty meeting its requirements and until the late fifties had not been able to completely eliminate a chronic shortage of power. In recent years, however, demand has been met although it has been possible only slowly and partially to provide for reasonable amountsof reserve capacity. In order to achieve security of supply with a minimum investment, detailed regional planning with inter-company arrangements to reduce spare capacity requirements has been followed for some years. Such planning has been based on well-conducted semi-annual surveys of demand and supply for the various regions and has yielded sizable operating and economic improvements. 17. The most recent semi-annual survey shows that energy demand in the central region is forecast to increase to 80.9 billion kwh in 1968, with an average annual growth rate of 10.9% from 1963 to 1968. The corresponding increase in the combined peak demand is expected to result by 1968 in a total of 15.8 million kw, corresponding to an average annual increase during the period of 12.2%. The inherent slight decrease in load factor is in line with the trend verified during the last few years and results from the fact that during the long period of shortage the load factor had been pushed to abnormally high levels by restrictions. For this reason, provision of adequate peaking facilities has become an important aspect of current power programs. 18. Although the forecast rates of growth appear high, the experience of the last decade would show that if broad economic trends of the Japanese economy do not undergo drastic changes, it is more likely that these esti- mates may be revealed to be low. As the Kuzuryu Project forms part of the coordinated program to meet combined demands in 1968, and in view of the competence with which Japanese power authorities are managing the continuous adaptation of programming to actual requirements, there can be no question about its justification. 19. As to the economic reidityof the choice of the Kuzuryu Projects as a component of the overall capacity expansion program, the following consider- ations apply.  - 4 - 20. This Project will form part of an interconnected system whose totaj. generating capacity will reach about 17 million kw by the time of commis- sioning. The Project is one of many system additions to be completed by that date, aggregating about 7.5 million kw. Of this total 5.6 million kw is represented by large capacity, base-load thermal units: this is a continilaticn of the pattern of development of the Japanese power industry which, since the early 1950's, has consisted largely of high efficiency thermal facilities. In this frameof reference it would not be meaningful to attempt an assessment of the economic justification of the proposed peaking facility by comparing it writh a hypothetical thermal plant of equivalent capacity. 21. For a number of years the problem of providing suitable peaking facilities for large systems with a predominance of base-load thermal capacity has been encountered in many of the developed countries. Much work has been done in the economic, engineering and equipment development fields to find the most suitable solutions. The complexity of these systems is such that meaning- ful comparisons of alternatives require the determination of complete alter- native system models for analysis by computer. The pumped-storage plant has gained general recognition as one of the most desirable among such solutions. It provides some of the features of greatest operational value, such as great ease and flexibility of control and indirect operational improvements in the utilization of base-load thermal units. 22. The desirability of this type of installation is enhanced in Japan by the limited number of old, simpler, small capacity thermal units capable of conversion to peaking duty. This situation reflects the history of the power industry!s development in Japan, where most of the capacity was run-of- river hydro until the early fifties, so that the large aggregate thermal capacity now in operation is made up mainly of large size, high efficiency recent units not suited for peaking service. 23. A review of the detailed design and operating features of the Kuzuryu Project has shown that it compares favorably from the standpoint of initial cost, generation cost and plant factor with comparable installations in similar operating circumstances in advanced power systems elsewhere. IV. THE PROJECT Description of the Project 24. The overall development plan for the Kuzuryu River will consist of three stations: Nagano, Yugami and Nishikadohara No. 3 (see NIap 2). The first two stations will be constructed by EPDC and their entire output will be sold to the Hokuriku Electric Power Company. They constitute the Project for the proposed loan. The third one will be built by Hokuriku. 25. The key installation in the plan, the Nagano Station, will be a combined seasonal storage and pumped-storage project. A rockfill dam, with a sloping impervious earth core, 128 meters in height and 6.3 million cubic meters in volume, will be constructed on the Kuzuryu River. It will create  - 5 - a reservoir of an effective storage capacity of 223 million cubic meters, of which 190 million will be used to regulate the seasonal flow for power generation and 33 million will be assigned to the Government for typhoon flood control. To augment the water supply the run-off of the Itoshiro River will be diverted into the Nagano reservoir through a system of dams and tunnels. The reservoir will be capable of storing and conserving the spring run-off from melting snow and the summer run-off from typhoons to replenish the low flow during the dry winter period. Through this regulation the Nagano reservoir will release water at a relatively uniform rate throughout the year for power generation not only at Nagano Station but also at other down- stream stations. 26. An underground powerhouse will be built near the dam with two 110-MW reversible pump-turbine units operating under a maximum head of 96 5 meters. These units will operate as turbines at maximum capacity for several hours during the peak load period to supply peaking power to the system. Water will be discharged into the Washi Pond,a regulating pond immediately downstream. Roughly one-half of the water will pass down the river for further utilization in downstream stations. The remaining half will be stored in the pond to be pumped up to the Nagano Reservoir during the off-peak hours of the night utilizing energy from the base-load thermal stations of the system. 27. The Yugami Project will consist of the Washi rockfill dam, 4405 meters high, forming the above-mentioned regulating pond with a storage capacity of 5.6 million cubic meters, pressure tunnels of 6 km and a power- house with one generating unit of 54 MW capacity operating under a maximum head of 119 meters. In addition a small dam at the downstream Itoshiro River will divert available water together with the water from the Washi Pond through the tunnel to the powerhouse. 28. The Nishikadrhara No. 3 Station will have a layout similar to Yugami, and will comprise a 27-meter concrete dam forming a small pond, a 4.5-km tunnel and a 48-MW single-unit powerhouse, operating under a maximum head of 99.3 meters. 29. The ponds at both Yugami and Nishikadahara No. 3 will each have adequate regulating capacity to assure daily continuous operation and maxi- mum output during the peak hours. 30. All three stations will be connected by short transmission lines of 275 kv and 154 kv to the Hskuriku and Kansai systems, which, in turn, are interconnected with the Chubu system to form the central regional system. 31. The engineering for the three stations has been done by EPDC's own staff and is sound. Together they will contribute a maximum of 322 MW of peaking capability and a combined energy output of 863 million kwh in the average year to the regional system.  - 6 - 32, Six existing downlstream lbdro stations (five belonging to Hokuriku and one to Kansai) will be affected by the proposed development (see Map 2). For Hokuriku, output of three old plants will be reduced and that of two recent installations will be increased. The combined economic effect is negligible. On the other hand, the relatively new Kansai plant will receive a substantial gain in annual output as a result of the Nagano reservoir regu- lation. For this, Kansai will pay EPDC on an annual basis. 330 The Government will make a contribution of Y 1,740 million towards the construction cost to compensate for the extra expenditure due to extending the height of the dam by four meters to obtain the additional storage capacity for flood control purpose. The compensation agreed upon with the Government is reasonable. Present Status 34. Investigations and studies of the overall development plan were initiated by EPDC and Hokuriku in 1959. The plan was approved by the Govern- ment in 1961. At present the civil engineering designs for the Nagano and Yugami Stations are nearly completed. Civil works contracts are to be let to Japanese contractors on the basis of domestic competitive bidding and EPDC staff will supervise the construction. Part of the needed construction equipment will be furnished by EPDC out of its own equipment pool. EPDC engineers have experience in designing similar work and Japanese contractors are competent in this field. Thorough explorations have been made and no major geological problems have been found. The electrical and mechancial equipment for the Project will be procured on the basis of international com- petitive bidding. Construction Schedules 35. EPDC is committed to Hokuriku to complete the Nagano and Yugami Stations in the fiscal year 1967/68, Construction schedules are therefore worked out to commission the first Nagano unit by November 1967 and the second by December 1967 in order to meet system needs during the winter of 1967-68. 36. Construction work of Nagano Station has been estimated to take a total of about three and a half years, The controlling factor would be the main rockfill dam with a volume of 6.3 million cubic meters. The schedule for this dam would call for an average placement rate of 370,000 cubic meters per month for 17 working months (excluding the winter months during which outdoor work has to be suspended) which is realistic. 37. Yugami Station is a simpler project and would take only two and a half years to complete. 38. For details of the construction schedules for both stations see Annexes 2 and 3.  - 7 Estimated Cost of the Project 39. The total investment cost of the Project is estimated at i 33,302 million, including interest during construction, broken down as follows: Nagano Y,,gaani Total --(millions of Yen_------ Preliminary Work 304 69 373 Land Acquisition and Compensation 5,529 392 5,921 Access Road and Housing 440 405 845 Construction Equipment 1,804 60 1,864 Construction Facilities 727 295 1,022 Main Dam and Reservoir h;,963 1,134 6,097 Diversion Dams and Waterways 992 300 1,292 Main Intake and Penstocks 831 2,020 2,851 Powerhouse and Tailrace 989 101 1,090 Mechanical and Electrical Equipment h,199 1,023 5,222 Sub-total 20,778 5,799 26,577 Contingencies 3,795 819 4,614 Engineering, Construction Supervision and Overhead 2,001 542 2,543 Sub-total 26,574 7,160 33,734 Less: Contribution oy Ministry of Construction for Flood Control 1,740 - 1,743 Less: Residual Value of Construction Equipment and Facilities 855 124 979 Total Construction Cost 23,979 7,036 31,015 ($66.6 mill.) ($19.5 mill.) ($86.1 mill.) Interest During Construction 1,910 377 2,287 Total Investment Cost 25,889 7,413 33,302 ($71.9 mill.) ($20.6 mill.) ($92.5 mill.) The estimate is based on recent EPDC experience in constructing similar pro- jects. Land acquisition and property compensation, usually a major problem in Japaxnese reservoir projects, has proceeded smocthly and the estimated figures for this item are not expected to be exceeded, Allowances for contingencies are roughly- 18% of the direct construction cost for ilagano and 14g for Yugari and should be adequate. This estiar,te is reasonable. 40. The proposed Bank loan of $25 million would finance the major equip- ment purchases for the two stations and a portion of the civil works expendi- tures for the Nagano diversion works and the Yugami Station. The contracts financed would be awarded on the basis of competitive bidding as described in paragraph 34.  - 8- Unit Investment and Generation Costs 41. In economic evaluation, the three stations should be considered together. Investment cost of Nishikadohara No. 3 is estimated by Hokuriku at -Y 4,458 million. Thus the total overall investment will be Y 37,760 mil- lion. After deducting compensation payment for downstream benefits, the net investment will be Y 36,920 million or US$103 million. On this basis invest- ment cost will be US$318 per kw installed capacity. This is reasonable when compared with costs of similar projects in Japan. 42. The overall efficiency of the pumped-storage operation at Nagano is estimated to be 67%, in other words, 3 kwh of off-peak thermal energy will be required to produce 2 kwh of on-peak hydro energy. The cost of this thermal energy for pumping will be mainly the fuel cost and has been taken as Y 1.90 per kwh. On this basis, the average generation cost of the combined output of three stations is estimated at Y 4.80 or 13 U.S. mills per kwh (see Annex 4). In view of the substantial contribution to the supply of peaking power, this cost is reasonable. V. FINANCIAL ASPECTS Tariffs 43. The wholesale tariff of electricity for each of EPDC1s systems is established in a separate power contract between EPDC and the purchaser, the basic agreement on which is already reached in the planning stage of a project. Under the provisions of the Electric Power Development Promotion Law, EPDC has to submit the proposed tariffs to the Ministry of International Trade and Industry (MITI) which in turn bases its final decision on the find- ings of the Electric Power Development Coordination Council (see paragraph 6) of which the minister of MITI is an ex-officio member. 44. The tariff is determined in accordance with an officially recognized method which allows for a fair rate of return on investments in addition to covering operating and maintenance costs as well as straight-line depreciation. EPDC has been allowed a 6% return on all its investments except for its thermal plant where the return was set at about 4.5% because of the higher operating cost resulting from the use of low-grade domestic coal as required by a Government policy (see paragraph 9). 45. The contracts for the supply of power are renewed annually in line with the described method. The only five-year contract (Tadami System) pro- vides for the possibility of a review if significant changes in cost occur during the contract period. The price per kwh of energy sold by EPDC's principal plants or groups of plants ranged from Y 2.62 (7.3 U.S. mills) to y 5.97 (16.6 U.S. mills) in the fiscal year ending March 31, 1964, the average was Y 4.51 (12.5 U.S. mills). The differences in price reflect mainly the extent to which EPDC invested in transmission lines and substations to sell its power to the private power companies. In addition to its income from power sales EPDC receives revenues from the private companies who use its  - 9 - transmissioin facilities to transmit their own power; the charges for these power wheeling operations represent the cost allocation of the total invest- ment in proportion to the utilization of EPDC's transmission lines by the private companies. Capitalized downstream benefits are separated from EPDC's investments and from tariff computations; they are settled on the basis of fixed annual payments. 46. These arrangements relate to the individual systems of EPDC and to other specific aspects of its operation. In order to assure the adequacy of the resulting over-all earnings level for EPDC it was agreed at the time of the last loan (220-JA) that EPDC would maintain tariffs that would produce revenues sufficient to cover its operating costs (including taxes and proper provisions for maintenance and depreciation) and to provide "a reasonable return upon the proper value of the total assets employed in its business". The minimum return was defined to be 6% after the fiscal year ending March 31, 1961. EPDC has complied with this commitment. The same rate covenant has been coaatinued for the proposed loan (see also paragraph 60). Present Financial Situation 47. EPDCts balance sheet as at March 31, 1964 is shown in Annex 5. Total fixed assets of about g 407 billion are shown at cost; due to their comparatively recent construction this represents a realistic valuation. After deducting the cumulative depreciation reserve of * 43 billion, total net fixed assets amounted to Y 364 billion (US$1,010 million). In addition to its fixed assets EPDC includes an item "investments and funds" amounting to * 17.7 billion in its balance sheet, consisting mainly of capitalized downstream benefits of X 14.8 billion and an investment of Y 2 billion in the Japan Atomic Power Company. 48. EPDCts capitalization as of March 31, 1964 can be summarized as follows: In Billions of Yen In % Equity Share capital 60.10 Reserves .79 Earned surplus .11 Total Equity 61.00 16% Long-term debt: IBRD Loan 220-JA, 5-3/4%, 1959-1983 3.60 Other long-term debt 320.12 Total long-term debt 323.72 84% Total capitalization 384.72 100%  - 10 - 49. EPDC's authorized share capital amounts to * 100 billion of which Y 60.1 billion were issued. The Government holds Y 60 billion of this amount, the remainder of Y 100 million is held by the private power companies. No new shares have been issued during the last four years. 50. A breakdown of the various issues of long-term debt outstanding is given in Annex 6. Borrowings from Government sources amounted to about 85% of the total debt. By far the largest portion was 30-year loans at 6ff% from the Trust Fund Bureau which is the Government depositary of the reserves of the state postal savings and life insurance systems and the recipient of short-term cash investments from various ministries. The 15-year loan from the Industrial Investment Special Account represents the receipts from a bond issue in New York for the Miboro project for which also the last IBRD Loan 220-JA was made available through the Japan Development Bank. The other loans were made from U.S. counterpart funds and miscellaneous funds available through various commercial banks. The 11 domestic seven-year bond issues at an interest rate of 7% represent about 14% of total debt, the eight issues without government guarantee being sold at a discount of 1/4 of 1%. The bond is,ues are secured by a general mortgage while the rest of the long-term debt is unsecured. The average interest payable on the total debt outstanding as of March 31, 1964, would be about 6.3%. 51. The high debt capitalization is the most significanb feature of EPDC's financial situation. Before the last IBRD loan was made in 1958 the debt/equity ratio was 72/28; it has since increased to 84/16. This trend is significant and indicates that the Government continued to finance the company's heavy construction expenditures through loans and bond issues on which it receives up to 7% interest, rather than through equity contributions on which no dividends are paid. This capitalization makes EPDC completely dependent on the continued availability of government loan funds. The Govern- ment as owner and principal lender firmly controls and determines EPDC's annual financing plans which in addition have to be approved by the National Diet. There is little likelihood that this pattern would basically change in the near future. Past Earnings Record 52. Income statements for the three fiscal years ending March 31, 1964 are shown in Annex 7. Net income before interest and extraordinary depreciation increased from * 14.8 billion in the fiscal year ending 1962 to g 18.4 billion in 1963/64, resulting in an average return on net fixed assets in operation of slightly more than 6%. This is in agreement with EPDC's commitment under the Rate Covenant of the last loan 220-JA (see paragraph 46) which established 6% as a minimum return. 53. For tariff purposes depreciation is calculated on a straight-line basis at about 2B% which is adequate. In addition for puirposes of income tax calculation, EPDC was allowed by the Government to write-down its taxable profit by charging any excess over and above a negligible net profit figure to extraordinary depreciation. lIhile this contributed to the slow growth of EPDC's equity, it helped t3 improve its internal cash generation.  - 11 - 54. Despite these additional depreciation accruals EPDC's internal cash generation of I 70.2 billion for the last three years was barely adequate to meet the debt service requirements totaling X 69.7 billion. All other fi- nancial requirements had to be met from borrowings amounting to X 106.5 billion, This situation highlights the special role which is assigned to EPDC within the Japanese power industry. EPDC does not have the responsibility to meet continuous load requirements of a marlket. Its purpose is defined in the law, "to increase the supply of electric power by promptly executing development works and others tllat the Government assigns to the company"'0 It is implicit in the policies and procedures of the Government that it would make available all funds required for the completion of these projects once they have been assigned to EPDC. In this context, and having regard to the fact that EPDC plays only a supplementary and indirect role to that of the private power com- panies in providing the required supplies of power, EPDC's earnings level can be considered adequate. Proposed Financing Plan 55. A forecast of sources and applications of funds for the five fiscal years ending in 1969 is shown in Annex 8 and can be summarized as follows: (in billions of Yen) Financial Requirements: Construction expenditures 155.05 Debt service 171.30 Miscellaneous requirements 5023 Total 331.58 IWould be met from: Internal cash generation 177c52 Borrowings including IBRD loan 138-78 Share capital 1304o Payments for downstream benefits 1.72 Reduction of existing cash balances .16 Total 33158 56. Total required borrowrings for this period are estimated at Y 138.8 billion and are assumed to come from the following sources: (a) The proposed IBRD loan of Y 9 billion (US$25 million would be obtained at the beginning of 1965 at an assumed interest rate of 5ig and a term of 25 years including a four-year grace period. This loan would finance about 30%0 of the construction expenditures for EPDC's portion of the Kuzuryu Project between 1964 and 1968 and would represent about 6% of the total loan funds required. The an- nual loan withdrawials shown in the forecasts reflect the assumed disbursement for the specific items financed under this loan (see paragraph 40).  - 12 - This loan would be secured by a mortgage pari passu with the outstanding bond issues. (b) The Government would contribute about 69% of the new borrowings, Y 85 billion at through its Trust Fund Bureau and Y 10 billion at 4% from U.S. counterpart funds; all these loans would have a 30-year term. (c) EPDC plans to raise the remainder of about Y 35 billion, or 25% of total borrowings through seven-year bond issues at 7%, which would in all probability be placed with Government institutions. The distribution between the loan sources under (b) and (c) is based on past experience and will ultimately depend on the annual decisions of the Government; their availability, however, can be considered as assured. 57. New share capital amounting to I 1314 billion is expected to come from the Government. These contributions are meant as financial support for the construction of EPDC's thermal plants, to the extent of roughly 30% of their capital costs. The amount of Y 1 billion of new share capital for fiscal year 1965 has already been assured. 58. Payments for downstream benefits are made to EPDC by other companies for operational improvements to their downstream plants derived from EPDC's investments. The estimated benefits are capitalized at the time when the respective project of EPDC starts operation, the resulting amount is then recovered by EPDC in the form of annual payments including interest on out- standing balances. The insignificant draw-down of cash balances from the present high level would still leave EPDC with an adequate cash position at the end of the period reviewed, talcLng into consideration that provisions for the necessary working capital are included under miscellaneous require- ments, 59. In view of the role that the Government plays as regulatory agency under the Electric Power Development Promotion Law, as EPDC's owner and major creditor, and also considering that it is conmitted to complete projects once they are approved by the Coordination Council, this financing plan is reason- able and EPDC should have no difficulty to complete the envisaged construction program. Estimated Future Financial Position 60e Estimated income statements, sources and applications of funds and the resulting balance sheets are given in Annexes 7, 8 and 5 respectively. EPDC's projected revenues are based on the sales forecasts shown in Annex 1 and the wholesale tariffs as described in paragraph 44a. Total revenues in- clude in addition the income from EPDC's power wheeling operations, On this basis net income before interest and extraordinary depreciation would increase from Y 19.8 billion in the current fiscal year to Y 28.4 billion in 1968/69, Applied to net fixed assets in operation this would result in return figures from 6.1% to 6.4% which would satisfy the proposed rate covenant, (See para- graph 46,) For purposes of this covenant revenues should be understood  - 13 - to include all revenues from EPDC's power operations not merely those from the sale of its own power, and net income should be applied to average net fixed assets in operation as shown on EPDCts books. 61. Internal cash generation would increase frem Y 28.4 billion to Y 41h8 billion in fiscal year 1968/69. This would cover total debt service about 1.1 times throughout these years except in the last year when Y 13.6 billion of bond issues would mature and necessitate a refinancing operation from government loan funds. These coverages would be inadequate if it were not for the willingness and ability of the Government to provide EPDC with all the funds required for the completion of its financing plans. 62. The debt/equity ratio would remain unchanged at 85/15 throughout the five years under review which shows that the equity contribution for the construction of the new thermal plants would be just sufficient to maintain EPDCls present financial structure. As long as EPDC does not have to compete with other enterprises for capital and loan funds on the market and can rely on Government resources, this situation should not cause any difficulties. VI. CONCLUSIONS 63. The proposed Project will supply the needed peaking capacity for the central regional system. Its pumped-storage feature will be a useful tool for the system operation. 64. The Project is economically acceptable. The engineering is sound, the estimated cost reasonable and the construction schedule realistic. 65. The borrower, EPDC, is adequately staffed to execute the Project. 66. EPDCts financial situation is characterized by a high debt capital- ization. However, since the Government is EPDC's major shareholder and creditor at the same time, the required funds for expansion and debt service have always been available. The return on EPDC's investment has been about 6% in the past and shows a slight improvement over the next few years. The Government has approved EPDC's expansion program including the proposed Project. Its financing can, therefore, be considered assured. 67. The Project would be suitable for a Bank loan of US$25 million with a term of 25 years including a grace period of four years. December 30, 1964 IBRD  JAPAN ANNEX 1 ELECTRIC 01WZR Di,XELOT1'lNT COiPANY INSTALLED CAAPFIrY, ArJNUAL ShLhS, CONSTHUCTION EYPEi-NDI'RTt, AND PU1UBTi OF N4PLOYEES Installed Revenue Capacity Annual Sales from Sales Construction Number of Fiscal at Year End of Energy of Energy Expenditures / Employees at Year=/ (jvTh) (million kwh) (million Yen) (million Yen) Year End Actual 1952 - - 2,401 524 1953 14.6 9 30 19,778 1,283 -1954 35.6 71 176 30,269 1,770 1955 133.7 247 613 35,703 1,983 1956 516.7 1,647 5,226 36,951 2,130 1957 653.6 2,183 7,215 43,254 2,278 1958 748.1 3,324 11,043 48,150 2,354 1959 958.3 3,493 12,434 47,298 2,563 1960 1,555.3 3,648 15,380 45,402 2,694 1961 2,000.3 5,529 22,644 39,810 2,958 1962 2,285.9 5,611 26,243 36,577 3,085 1963 2,455.6 6,722 30,331 35,793 2,953 Estimated 1964 2,737.6 7,658 33,548 41,144 2,913 1965 2,895.6 8,638 38,722 38,979 3,013 1966 3,109.6 8,815 40,174 33,058 2,938 1967 4,148.6 12,865 53,383 34,135 3,068 1968 4L,294.6 14,156 58,666 20,648 2,985 1969 4,369.6 14,653 60,395 14,099 2,917 1970 4,478.6 14,951 61,949 4,298 2,815 1/ Beginning April 1. 2/ Including capitalized interest. September 9, 1964  JAPAN KUZURYU HYDROELECTRIC PROJECT Construction Schedule for Nagano Station F.Y. 1964 F.Y. 1965 F.Y. 1966 F.Y. 1967 lo :.az1irinary Work-Surveying and Planning 20 Land Acquisition and Compensation 3,