Uruguay - Thermal Power Project

R E S T R I C T E D R e p o r t N o. T.O. 40-b This docuiment was prepared for internal use in the Bank. In making it available to others the Bank assumes no responsibility to them for the accuracy or completeness of the information contained herein. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT THERMAL POWER PROJECT URUGUAY August 19, 1955 Department of Technical Operations  CURRENCY EQUIVALENTS I U.S. dollar = 1.9 pesos 1 peso = U.S. $0.53 1,000,000 pesos = U.S. $526,316  MIERAL POWER PROJECT, URUGUAY INDEX Summary Intro duction 1 Existing Bank Loan to UTE 1 - 2 Present Capacity and Age of UIEts Generating Facilities 2 - 3 Market for Energy 3 - 4 Ul1Ets Current Expansion Program 4 - 5 The Project 5 - 6 Organization and ivlanagement 6 - 7 Financial Aspects 7 - 13 Conclusionsand Recoimendations 13 Annexes A, B, C, D and E Map  THERMAL POWER PROJECT, URUGUAY SUMMARY This report covers an appraisal of a project, submitted as as basis for a loan of $5.5 million (equivalent) for the addition of a 50,000 kw thermal generating unit to an existing 100,000 kw steam power plant in Montevideo owned and operated by UTE,, n autonomous Government Agency established in 1912, which supplies practically all electric energy and telephone service in Uruguay sold to the public. A loan equivalent to $33 million was made t) UTE in August, 1950, for the expansion of its power and telephone facilities. The local currency costs were estimated to be the equivalent of 412 million. The prog,ram consisted of the addition of a 50,000 kw generating unit to an existing steam plant in Montevideo to bring its total capacity up to 100,000 kw, the installation of about 18,000 kw of diesel generating capacity in the Interior, the construction of abmut 625 miles of trans- mission lines, the expansion of primary and secondary distribution systems in Montevideo and in the Interior and various improvements in the telephone system throughout the country. At the end of July, 1955, both the power and telephone programs were practically complete and most of the facilities including the 50,000 kw generating unit, were in operation. Withdrawal from the Bank loan as at the same date totaled the equivalent cf ,31.3 million. The completion of the program is about eighteen months behind the oriainal schedule, owing partially to a nine-month delay in the ratification of the loan by Parliament. In addition there were delays in getting work under way caused largely by the complex legal and pro- cedural requirements in placing contracts; as a consequence construction did not gain much momentum until 1952, Largely because of the Korean War, prices and wages increased considerably after the loan agreernent was signed. As a result, the original estimates of cost will be exceeded by about the equivalent of $2.6 million in foreign exchange and $11.3 million in local currency. The excess in cost to date has been met from UTEts own resources as will the relatively small remaining unexpended balances. In 1953 the Uruguayan Parliament authorize(d the issuance of bonds to finance UTE's proposed new six year expansion program estimated to cost the equivalent of about $87 million. The Bank was a9kad to finance $40 million of the foreign exchange cost of the program, The Minister of Finance was advised on December 4, 1953, that the management of the Bank was prepared in principle to recoiwiend that the Bank partic- ipate in financing the equivalent of $30 million of the foreign exchange cost of the program after the currencies became known. Loans to UTE in two or more tranches were suggested with the first covering the foreign  - ii - exchange costs of the further expansion of the thermal pLant in Montevideo. The foreign exchange cost of the thermal unit which the Bank has been asked to finance is estimated at the equivalent of $5.5 million and the local currency cost at the equivalent of $800v,0C0 The foreign exchange required will be principally in Swiss francs and Italian lire. The awardsof the contracts were made after international bidding on the equipment for thl unit and its erection. The unit is expected to be in full operation during the last quarter of 1957. UTE is administered by a Board of five directors appointed by the Government. Its staff numbers about 10,400, of which 5,100 are in the power division. This staff is too large by normal standards but, as all government employees in Uruguay work only 5b hours a day, the excess staff is required to carry on operations at a normal pace. The Management, however, works longer hours and is reasonably efficient. The technical staff of UTE is adeqxate for the execution of the project but it will need strengthening before any large amount of additional work is undertaken. The balance sheet as of December 31, 1954, shcwed a totalcapital- ization of about 264 million pesos, of which 52.5 per cent was long term indebtedress. Current assets were 1.3 times current liabilities. The operating record of the company has been good and it has earned a net profit in each of the past ten years except one (1951) when a very small deficit was incurred. Rate increases instituted late in 1951 provided substantial profits since then. Net earnings in 1954 amounted to 1h.6 million pesos. In recent years, electric power has accounted for about 80% of the total income and more than 90% of ithe net income. It is estimated that the demand for power on the UIE system w.ill increase by 1L.5% in 1956 and 8% annually thareafter at least until 1961 or 1962. On this basis the load on the system is estimated to increase from 200,000 kw in 1955 to 337,000 in 1961. Additions to the steam plant recently completed will probably covertjU increased demand through 1956 and a part of 1957, provided no droughts occur. The total capacity of the new thermal unit proposed for financing under the loan will be absorbed before the end of 1959. In 1960 a new hydro development with an installed capacity of 103,000 kw ani a firm capacity of about 67,000 kw is scheduled for completion. Bids for this plant have been received and are being analysed. Construction is scheduled to begin as soon as financing, which contemplates a Bank loan, can be arranged. The proposed thermal project is urgently needed and is suitable for a loan of the equivalent of $5.5 million. The term of the loan should be 20 years including a grace period on amortization payments of about 2-1/2 years. UTE should be the borrower.  THERMAL POWER PROJECT, URUGUAY 1. Introduction 1. This report covers an appraisal of a project for the addition of a 50,000 kw thermal generating unit to an existing 100,000 kw steam power plant in Montevideo owned and operated by UIE, 1/ an autonomous Government agency established in 1912, which has the Tight to supply all electrlc energy and telephone service in Uruguay. The project is estimated to cost the equivalent of about $6.3 million. The Bank has been requested to finance the foreign exchange costs of the project, estimated at the equivalent of about $5.5 million. UTE would be the borrower. II. Existing Bank Loan to UTIE 2. A loan of $33 million equivalent (Loan 30 UR) was Ade to UTIE in August 1950 to meet the foreign exchange requirements_bf a four- year expansion program for both power and teleplhones. Of the total, $26.4 million was for power and $6.6 million was for telephones. The local currency cost&/were estimated to be the equivalent of $10.2 mil- lion for the power program and $1.8 millicn for telephones. 3. Although the loan was made in August, 1950, it was not rat- ified by Parliament until MIay, 1951. Partially because of the long delays in processing the loan and in letting contracts on many items, during which prices of equipment and labor costs increased as a result of the Korean liar, the cost of the program increased by the equivalent of $2.6 million in foreign exchange and 1l1.3 million in domestic cur- rency above the original estimates. These additional costs are being met from UTEls own resources. 4. In 1950 prior to the start of work on the expansion program financed by the Bank, UIE owned and operated power facilities with a total installed capacity of 213,485 kw. Of this, 189,000 kw installed in two steam plants and a hydro plant served Montevideo and an area within 100 km thereof and 24,485 kw in fifty independently operated diesel plants served the remainder of the country. The two steam plants (Batlle of 50,000 kw and Calcagno of 25,000 kw), located in Montevideo, and the hydro plant (Rincon del Bonete of 114,000 kw), located on the Rio Negro, a hundred and forty miles north of Montevideo, were connected by a high tension transmission line. These inter-connected stations are known as the Miontevideo-Bonete System. They supply 90% of the energy consumed in Uruguay. 1/ Administracion General de las Usinas Electricas y los Telefonos del Estados. 2/ Exclusive of interest during construction.  - 2 - 5. UIEts program financed by the previous Bank: loan included expanding the 50,000 kw Batlle steam plant in Montevideo by 50,000 kw to bring its total capacity to 100,000 kw; installing about 18,000 kw of diesel generating capacity in the Interior to supplement some existing units and replace others; constructing 416 miles of 110 kv and 209 miles of 15 kv to 60 kv transmission lines to serve twenty communities, now supplied by diesel plants, with transmitted energy; expanding its primary and secondary distribution systems in Montevideo and in the Interior; increasing its telephone switchtboard capacity; replacing its obsolete long distance toll board; installing new under- ground cables in Montevideo; constructing 818 miles of new pole lines; reconstructing 148 miles of existing lines and making other technical improvements. At the end of July1 1955, $25.3 million had been dis- bursed for the power program and $6,O mlllion for telephones or a total of $31.3 million, leaving only $1.7 million sti11 to be dis- bursed. 6. Both the power and telephone programs are at least eighteen months behind their original schedules, due partially to the delay in ratification of the loan. Although recent progress has been satis- factory, initially there were delays in getting work under way largely caused by the complex legal and procedural requirements in placing con- tracts. As a consequence of these and other delays resulting from the cumbersome procedures UTE is required by law to follow, the construction program did not gain much momentum until 1952. At the end of June, 1955, the expansion of the Montevideo steam plant was compLeted and the plant was in operation; the installation of diesel generating units in the Interior was complete except for the transfer of some units to other locations after the transmission lines are put into operation; the con- struction of the transmission lines was practically complete except for a number of substations and 201 miles out of the total of 625 miles of lines were in operation; the expansion of the distrilDution system in Montevideo was complete and also in most towns in the Interior. The few remaining items of work to complete the power program (chiefly transmission line substations) will be finished in October and the en- tire transmission system should be in operation shortly thereafter. The telephone program was practically complete and imzst of it was in operation. III. Present Capacity and Age of UT-ts Generating Facilities Capacity of Facilities 7. The present capacity of the Montevideo-Bonete system under normal rainfall conditions is 239,000 kw, but under drought conditions it is only 203,000 kw. The installed capacity in the fifty-four diesel stations operated by UEE on June 30, 1955, was 43,568 kw; their effect- ive capacity, however, was only 26,281 kw. There will be a progressive decrease in diesel capacity in 1955 as the transmittAd energy displaces the diesel stations. The diesel units in good condition will be moved to other localities and the older diesel units will be scrapped.  -3- Age of Facilities 8. The Rincon del Bonete hydro plant was completed in 1948 and is in good condition. Of the 100,000 kw in the Batlle steam plant, 50,000 kw was constructed in 1932 and is in reasonably good condition; the new 50,000 kw unit went into operation in February 1955 and, of course, is in excelJlent condition. The 25,000 kw Calcagno steam plant, which consists of four generating units and bighteen boilers, installed at various times between 1906 and 1922, is obsolete and should be aban- doned, but because the demand for power has been so acute it is kept in usable condition as a reserve plant and is used from time to time. It uses 50% more fuel per kilowatt hour and requires four to five times as much operating and maintenance labor as a modern plant. Most of the fifty-four diesel plants which will remain after the new transmission lines are in operation are fairly new and on the whole they are in reasonably good condition. IV. Market for Energy 9. Electricity consumption in Uruguay has increased steadily for decades. The average rate of increase from 1914 through 1942 was 8.0% in Montevideo, 11.8% in the Interior 1/ and 8.4% for the country as a whole. During the war years there waS a decrease because of rationing owing to the lack of adequate fuel supplies 2/. From 1947 through 1954 the total number of kwh sold by UTE increased at an aLverage rate of 9,6%, although sales in the Interior (which in the paLst was supplied by diesel units)increased at an average rate of 17% per annum. This re- flects the increasing growth of industry in the Interior, as industrial sales in the Interior have doubled in the past five rears. During the entire period 1947-54 UIE had applications on its bociks for connections both in Montevideo and in the Interior which it coulcd not serve. The sales to various classes of consumers in 1954 in Montevideo and in the Interior are showm in the following table: 1/ All areas outside of the Department of Montevideo 2/ Uruguay has no indigenous fuel supplies. Explorations for oil have 'Thus far been unproductive. All fuel must be imported.  -4 - Sales in 1000 kwh Class of Consumer Montevideo & Interior % Total % Residential 1744,210 31.3 51,422 34.9 225,632 32.0 Commercial 39,396 7.0 12,525 8.4 51,921 7.4 Industrial a/ 286,379 51.5 51,595 35.0 337,974 48.o Government 1/ 42,357 7.6 24,435 16.6 66,792 9.5 Municipal c/ 14,506 2,6 7,437 5.1 21,943 3e1 556,848 100.0 147 414 100.0 704,262 100. 10. In 1954 the Montevideo-Bonete system supplied over 90% of the energy consumed in the country. With the completion of the 110 kv trans- mission system, it will supply an even larger proportion of the con- sumption as it will then serve in addition to Montevideo and surrounding territory, most of the larger cities and towns in the country. 11. Sales in the period 1955-62 are estimated by UTE to increase at an average rate of 9% per annum. This is somewhat less than the average rate of 9.6% from 1947 to 1954 and is conservative. Based on the records for the first five months of 1955, UTE estimates its 1955 sales at about 11% above 1954. 12. The peak load on the Montevideo-Bonete system has increased at an average rate of 9.1% from 1947 to 1954. The peak occurs during the winter months (June, July, August). on June 21, 1955, the peak on the system was 188,000 kw 1/ (about 11.6% above 1954), but it is estimated to reach 200.,00(fkw (23% above 1954) before the end of the year primarily as a result of the .dditional loads to be picked up pro- gressively as the various sections of the new 110 kv transmission lines are put into operation. 13. UTE estimates the load will increase about 11.5% in 1956 and 8% annually thereafter at least until 1961. This is am average rate for the period of 8.6% and is reasonable. At this rate the load is expected to reach 337,000 kw in 1961 (see chart following page 4). V. UIE's Current Expansion Program 14. To meet the demands for power UIE has formulated an expansion program which has been approved by parliament. This program includes: the installation of an additional unit of 50,000 kw in the Batlle steam plant in Montevideo to bring its total capacity to 150,000 kw; the construction of a 103,000 kw hydro plant on the Rio Negro at Baygorria, 55 miles downstream from Rincon del Bonete and additional high trans- a/ Includes tramways in Montevideo E/ Includes port facilities and waterworks in Montevideo c/ Mostly street lighting 1/ Faults in distribution cables temporarily prevented the system complying with the full demand which was somewhat higher than this figure.  URUGUAY ESTIMATED LOAD & AVAILABLE CAPACITIES MONTEVIDEO-BONETE SYSTEM 390 _ W 384 MW 380 _ 370I CAPACITY MW 1 360 YEAR ESTIMATED DROUGHT NORMAL . 360 ==AS DEMAND MW CONDITIONS RAINFALL . 350 _ 195Ei 200 203 239 _ I ,:' 1956 230 223 259 1957' 248 253 289 1955 268 253 289 . 1959 289 253 289 . 330 - 1960 312 320 384 . 1961 337 320 384 3 320 - 1962! 364 320 384 \ - 310 - 300 290 289 MW -_ 67MW fIRM CAPACITY 280 --EBAYGORRIA HYDRO PLANT 280 _i.. - 270 -|- 260 259 MW ^50 | _ ~ ~ ~~ .../ 253 MW......... 250 4- 240 239 MW - - - ) 230 - .-50 MW STEAM IN 2. 73 MW BAT LLE PLANT 220 - - * 20 MW WI/TH 2,0 * STEAM FROM 210 -2 M EXISTING BOILERS 203 MW, J 200 . | __.-- CAPACITY, NORMAL RAIN CONDITIONS 190 _ CAPACITY, DROUGHT CONDITIONS 180 _ ,. l @-@*-@@@.....ESTIMATED LOAD 180 170 '95 I I I L.... I ... 170 _, : JAN JAN JAN JAN JAN JAN JAN JAN 94UL 955 60 160 -15 1954 1955 1956 1957 1958 1959 1960 1961 1962  - 5 - mission lines to inter-connect the Baygorria plant with the existing plants in the Montevideo-Bonete system; the construction of about 264 miles of new transmission lines of varying voltages to serve addition- al towns in the Interior; the construction of a "collector ring" and substations at Montevideo to improve the connections between the various hydro and steam stations and the transmission lines radiating from Montevideo and the installation of additional diesel generating units in the Interior. The Bank was asked to finance $40 million of the foreign exchange cost of this program. 15. The Staff Loan Committee considered this request on November 6, 1953, On December 4, 1953, the management advised the Minister of Finance that it was prepared in principle to recommend to the Board of Directors that the Bank participate in financing $30 million of the foreign exchange cost of the power program after the currencies required became known. The letter suggested proceeding with loans to UTE in two or more tranches: the first to cover the foreign exchange costs of proJects such as the thermal plant in Montevideo, for which the foreign currencies were partially known, and at a later date undertake rmgotiatiions on addition- al loans when the currencies involved could be determined for the projects desired. VI. The Project Description 16. The project consists of the installation and inter-connection with existing generating facilities in the existing Batlle Station in Montevideo of one 50,000 kw 3-phase, 50 cycle enclosed alternating curr- ent turbo-gererator with the necessary boilers and aux-iliary equipment including fuel and ash handling equipment in order to increase the capac- ity of the station to 150,000 kw. The boilers will normally use imported fuel oil, but the fuel handling equipment to be installed will be capable of preparing and delivering to the boilers either pulverized coal or fuel oil or both simultaneously. 17. As stated in paragraph 7, the present capacity of the Mont- evideo-Bonete System under normal rainfall conditions is 239,000 kw and 203,000 kw under drought conditions. As the demand on the system is estimated to reach 230,000 kw in 1956 and 248,000 in 1957, the existing capacity will be insufficient in 1956 and 1957 if a drought should occur. The additional capacity is, therefore, urgently needed. It will bring the capacity of the system up to 253,000 kw under drought conditions and 289,000 kw under normal rainfall conditions. By the end of 1959, however, the demand is expected to reach 289,000 kw at which time the new hydro station at Baygorria on the Rio Negro is planned to be completed. 1/ It will have a capacity of 67,000 kw under drought conditions and 103,000 kw under normal rainfall conditions. Owing to losses in transmission, the capacity in Montevideo will be about 10% less. I/ UTE is now in the process of analysing bids on this project and expects to award a contract for its construction before the end of 1955 provided the necessary financing can be arranged. A Bank loan for the foreign exchange cost of the project is desired,  -6- Cost of the Project 18. The project is estimated to cost the equivalent of $6.3 million, $5.5 million of which will be in foreign exchange. Contracts for supply- ing and erecting both the turbo-generators and boilers have been placed (after international bidding). A contract for the turbo-generators was placed in Switzerland in 1953. Bids for the boiler were opened in June, 1954, but all were rejected. New bids were invited and opened in January 4, 1955. A formal contract for the boiler was placed in April, 1955. Supervision of the erection will be undertaken by UIE's engineer- ing staff. It is capable of performing this work as it supervised the erection of a similar unit which went into operation in February, 1955. The estimated cost includes freight, insurance and about 10% for price escalation. The estimate is reasonable. Interest during construction, estimated at the equivalent of about $300,000, is not included in the amount of the loan requested, 19* Concurrently with this expansion in its generating facilities UIE will continue to expand its distribution facilities from its own resources. As will be seen in paragraph 38, UTE can finance this expansion without difficulty. Schedule of Construction 20. The delivery of the 50,000 kw turbo-generator began in may,1955. Commercial operation of the generator with steam from existing boilers is scheduled for March 1956. The capacity of the generator under such con- ditions will be 13,000 kw continuously, but for two hours the output can be raised to 20,000 kw. As the contract for the boiler for this unit was not awarded until in April, 1955, it will not be completed until the latter part of 1957. The project, therefore, cannot be placed in full operation until the last quarter of 1957. VII. Organization and Management 21. At present UTE is administered by a Board of five direc-tors. Three members of the Board, including the president, are appointed from the majority party in Parliament, and two from the minority party. Under the president there are managers for power, telephones, administra- tion and accounting. UIE's staff now numbers about 10,400 of which 5,100 are in the power division, 2,700 in the telephone division and 2,600 in the administration and accounting division. This staff is too large by normal standards but as all Government employees in Uruguay work only 5-1/2 hours per day, the excess staff is required to carry on operations at a normal pace. The management, however, works lornger hours and is reasonably efficient. UTE's administrative procedures are rather cumber- some, but this is largely due to the need for compliance with Government regulations. 22. UTE's engineering staff was very small before the expansion program under the existing IBRD loan was initiated and UTE was slow in  - 7 - adding the necessary technical personnel to supervise the program. The technical staff was expanded to an adequate size for the present program but some of the new employees were relatively inexperienced. The technical staff as presently constituted, however, will be able to supervise the construction of the proposed thermal unit, but it will need strengthening before any large amount of additionaliork is undertaken. VIII. Financial Aspects Rate Structure 23. Charges for energy apply uniformly throughout the country. This has resulted in net losses in the Interior. As revenue from sales in Montevideo has more than offset the losses in the Interior, UTE has shown a net profit on its power operations fairly consistently in recent years. When the transmission lines now under construction are completed, the losses in the Interior should drop or disappear as the average cost of transmitted power is about 3.8 centavos per kwh as com- pared with 8.4 centavos per kwh for diesel generation. UTE has the authority to change its tariff schedules, with the approval of the Executive Council. No parliamentary action is required. 24. The following rates have been in effect sinice 1951. Rates for the principal classes of consumers are shown below: Centavos U. S. Cents Class From To From To Residential 5j 12 - 2.9 - 6.3 Commercial 5 18 - 2.9 9.5 Industrial 4 9 - 2.1 - 4.7 Government 42 9 - 2.4 - 4.7 Municipalities 7 15 - 3.7 - 7.9 Tramways 3.85 2.0 25. On August 2, 1955, UTE received authority to increase its power and telephone rates. The magnitude and effective date of the increase are not known in detail. Part of the higher revenues expected from the rate increase will be offset by expected increases in wages and salaries but it is probable that sore additional revenue will be available for financing the expansion of power and telephone facilities. As full information concerning the rate increase is lacking, the effect of the increase in rates has not been taken into consideration in the financial analyses in this report.  Earnings Record 26. UTE's earnings' record has been satisfactory, although widely fluctuating. In every year during the past ten years except one UIS has earned a net profit. In la51 there was a small de,Eicit of about 500,000 pesos. At the end of that year UTE increased :Lts industrial tariffs about 40% and its residential tariffs about 325%. The gross revenues increased from 51.3 million pesos in 1951 to 70.4 million pesos in 1952 and the small deficit changed to a net profit of 1194 million pesos. Net earning for 1953 and 1954 emounted to 12.4 and 14e6 million pesos respectively. At present interest charges are covered by net income from operations about 4.7 times. Electric power in recent years has accounted for about 80%o of total revenues and more than 90% of net operating income. For details see Annex A (Significant Earnings Figures) and Annex B (UTE Income Statements). Present Financial Position 27. The equity financing of UTE has been confined largely to the investment of retained earnings and is expected to be Limited to such funds in the future. An exception has been the assurption by the Government of a part (one third) of the service requirements on the debt incurred by the Rione Hydro Electric agency 1/ at the time (in 1950) this agency was merged with UTE. This can be considered as an equity contribution by the Government in UTE. The balance of UTE's long term capital requirements, with the exception of the first 13ank loan of $33 million 'UR-30), have been met by Government bond issues, the proceeds of which are transferred to UTE with the obligation that UIE must service such issues from its own resources. UIE carries funds obtained in this way as long term debt. 28. Condensed balance sheets as of the end of 1952, 1953 and 19544, compiled from data supplied by UTE are given in Annex C. The 1954 balance sheet showed long term debt of 167.3 million pesos. 0? this amount, about 86.2 million pesos represented the balance of Rione obLigations. As indicated in the preceding paragraph the Government hais assumed one third of the service requirements on this debt. Hence, the net long term debt of UTE at the end of 1954 was actually about 138.6 million pesos. UTEIs capital structure might therefore be summarized as follows: Capital Structure as of Dec.31,1954 Mllions of Pesos Per Cent Long Term Debt 167.3 Less: Amount of Rione debt to be serviced by Government 28.7 138.6 52.5 Government Equity Reserves and Surplus 96.5 Rione debt to be serviced by Government 28.7 125.2 47.5 263.8 100. 1/ The Government agency now liquidated which constructed the hydro plant at Rncon del Bonete.  - 9 - 29. The net working capital position of UTE at the end of 1954 was reasonably satisfactory. Current assets of 54.1 million pesos were 1.3 times current liabilities of 42.1 million pesos. These figures indicate a substantial improvement in UTE's current financial position since the end of 1949 1/ when the agency reported a large work- ing capital deficit, but a detsrioration as compared with 1952 when the current ratio was about 2.4 to 1. About half of the current liabil- ities are due to the Government and represent accumulated service pay- ments made by the Government on UTE's funded debt during the last years. The Government has not required cash settlements by UV; for these pay- ments. The results has been that UTE was able to use a larger part of its operating revenues for construction than would otherwise have been the case. This procedure may be continued in the future. There is no risk that on this account UIE at some future date would be faced with a liquidity problem, because the Government has agreed to defer the collec- tion of debt service owing by UTE whenever funds would be needed to carry out the project or to enable UTE to meet any of its other obligations. The Government has further agreed that any deferred payments would be funded on a long term basis or would be capitalized from time to time. In view of the commitments obtained from the Government, no limitation of UTEts debt in relation to its equity is recommended. Method of Financing the Project. 30. As this project is a part of the much larger power expansion program described in paragraph 14, the financing of the whole program must be analysed in order to rake a realistic appraisal of UTE's ability to finance the project, as it cannot be considered independently of the larger program. 31. The entire power expansion program is estimated to cost the equiva- lent of 146 million pesos ($76.8 million) over a period of about six years including 11.9 million pesos ($6.3 million) for the project. The foreign exchange cost of the program (including the project) is estimated by UTE to cost the equivalent of 62.8 million pesos ($33 million). UTE proposes to finance 26.5 million pesos (<14 million) of the program from its own resources and 119.5 million pesos ($62.8 million) from borrowing. 32. It has been assumed in the financial forecasts presented in this report that the equivalent of 57.0 million pesos ($30.0 million) of the amount to be borrowed would come from Bank loans and the remainder 62.5 million pesos would come from the sale of peso bonds in the local market. UTE is assuming an average sales price of 83.5 for these bonds which is considered conservative. Recent price quotations for UTE bonds have ranged from 85 to 89 with few transactions reported. On the basis 17 Because of the poor financial condition of UTE in ].949, the Bank re- quired, as a condition of the existing loan, that UJE put into effect a financial plan satisfactory to the Bank. As part of -this plan UTE issued 30 million pesos in bonds, to cover a part of the local currency cost of the expansion program and to improve its working capital position. The bonds were sold as funds were required in the local market at an average price of about 92e  -10- of an average sales price of 83.5 the amount (nominal value) of bonds to be sold would be 75 million pesos. Most of the sales, about 75% (57 million pesos),will have to be made during the next three years. There is some doubt whether the local capital market could absorb bonds for this amount during this period. If bonds could not be sold as fast as now scheduled UTE probably would have to defer the con- struction of some items of less priority included in its program. The financial forecasts indicate, however, that UTE could service without difficulty borrowing of the 132 million pesos (57 million foreign and 75 million local). 33. Of the 11.9 million peso ($6.3 million) expenditure on the project, 10.5 million peso equivalent ($5.5 million) would be financed from the proceeds of the proposed Bank loan and 1.5 million pesos ($.8 million) for the local currency requirements would come from UTE s own resources. Rate of Expenditures and Currencies Required 3k. The estimated rate of withdrawal of the proposed loan, ex- pressed in U.S. dollars is shown below: 1955 1956 1957 Total Bank Loan in iMillions U.S.$ 1.87 2.28 1.35 5.50 The ammunt shown in 1955 includes a reimbursement of the equivalent of $140,000 spent in 1954 on the project. 35. The currencies required will be:' Rates of U.S.$ Amount in Exchange Equivalent Currency Thousands per U.S.$ in thousands U.S.Dollars 284 - 284 Swisss Francs 9,655 4.2975 2,247 S Sterling 2.9 0.3571 8 Italian Lire - 1,500,000 625.0 2,4o00 Contingencies equivalent in U.S.$ 561 - 561 Total $ 5,500 Future Financial Position 36. The financial forecasts presented in this report are as previously mentioned not limited to the project for which a loan is proposed, but comprise the entire power expansion program as planned by UTE for the next six year period as outlined in paragraph 14. on the expenditure side all the capital investments required to complete this program have been included, and on the receipt side all the resources enumerated in paragraph 32 for the financing of this program have been taken into consideration. The forecasts, however, do not include any  - 11 - major expansion of UTE?s telephone facilities. If such teLephone expansion would be undertaken, details of which are not known at present, it would be the subject of a separate financing plan. One of the main resources of such a plan would likely consist of additional revenues to be obtained from the recent increases in both power and telephone rates by the Government. As already mentioned in paragraph 25, the recent increases in rates have not been taken into consideration in this report. Estimated Future Earnings 37. A forecast of operating results for the period 1955 to 1962 is given in Annex D, shovwng satisfactory net earnings. In each year interest charges on existing and proposed indebtedness would be covered by net income from operations by an ample margin (4 times in 1958 and 4.4 times in 1962). As already indicated the forecast is based on present rates and price levels. A growth of 9% annually in sales has been assumed, which as an anmual average for the period, is consialered conservative. Forecast of Cash Flow 38. The forecast of receipts and expenditures for the period 1955-1962 is given in Annex E. In addition to the investrients for the power expansion program as described in paragraph IL the. forecast shows a re-investment of the full depreciation aIlowanoos. fiom which the in- crease in UTE's distribution facilit-ies wi)' be financed, These allow- ances, which total to some 74 nmillion pesos (639 imillion) during the construction period 1955/1960, are iiore than sufficient for thlat purpose. Moderate cash balances are shown during the construction period. These balances will depend upon the timing of bond sales. After completion of construction substantial annual cash accruals are shown in the forecast, which in actual practice are not lil2ely to occur, because they probably will be needed to finance further expansion. Pro Foama Balance Sheet 39. UTEts future financial position after completion of the project in 1957 and thre position after conmpletion of the entire program in 1960 is shown in thae pro fonna balance sheets given in Anmex Ei. UTE's capital structure at the end of 1960 is expected to be as follows:  -12- Millions of pesos Long Term Debts 1/ 269.6 Less 1/3 part of Rione debt out- standing for account of Govern- ment 22.5 Net debt for account of UTE __4__ 50.3 Government Equity Reserves and Surplus 222.2 Rione debt for account of Govern- 22.5 ment 2474.7 49.7 Total 491.8 100.- 4Go This is a satisfactory position. In spite ofS the considerable borrowing to be undertaken for the expansion prograi kba net long term debt for account of UTE would represent a somewhat lver proportion of total capitalization in 1960 than at the end of 19524. During the period 1955/1960 the equity would increase by 119.5 million pesos ($63 million) whereas the net increase in long term debt would be 108.5 million pesos ($57.1 million). The large increase in equity is based on the assumption that the Government will allow UTE to retain all net profits during the period estimated at 105 million pesos ($55.3 million). The Govez.nment has expressed its intention that it will do so. The remainder of the increase in equity of 14.5 million pesos ('07,7 million) represents a foreign exchange profit, as explained in footnote 2 to Annex C, to be recorded on dollar debt. 41. The capital structure as calculated for the end of 1960 assumes that no additional major construction work beyond the proposed program will be started before that date. Actually, if the power market develops as expected, new generating and transmission works will have to be started during 1960 which may necessitate additional borrowing. Additional borrow- ing may also be required for any major telephone expansion which would be started during the period to the extent that such expansion could not be financed from higher revenues from rate increases. Debt Service Coverage 42. Annual debt service, including amortizationjon the proposed IBRD loan of 55.5 million for the 50,000 kw unit to be installed in the Batlle Steam Station would amount to $h67,0o0 on the assumption that the loan would be for a term of 20 years including about 2-1/2 years of grace, and the interest rate would be 4-3/4% per annum. 1/ For the purpose of this calculation the deferred Government accounts of 18.1 million pesos have been included as long -term debt.  - 13 - 43. Total annual debt service on all debt (existing and proposed) would amount to approximately 20 million pesos in the immediate years after completion of the program and would be covered by net receipts from operations (before deduction of depreciation and interest) about 2.2 times in 1961 and 2.5 times in 1962. This ratio would increase gradually in later years as debt was amortized. IX. Conclusions and Recommendations 44. The project is urgently needed to meet the demand for power in Uruguay. It is sound and the cost is reasonable. 45. UTE's organization and management is capablT of executing and operating the project. UTE's financial position is souind and UTE aSbu1 be the borrower. 46. The project is suitable as a basis for a loan of $5.5 million. A term of 20 years, including a grace period of about 2-1/2 years on amortization payments, is appropriate for the proposed loan.  U. T. E, Annex A Significant Earnings Figures Years 1943 - 1952 (All Peso Figures in Millions) Net Profit Available Available Gross Net Legal for Times for Reven- Operating Contri- Interest Interest Interest Workers? Reserves Year ues Income 1/ butions Charges Charges Earned Bonuses etc. 1943 19.1 d 2.0 0.5 d 2.5 0.8 - _ d 3*3 1944 21.6 1,2 Oel 1.1 0.8 1.4 0*2 0.1 1945 23.3 3,1 0.5 2.6 0.7 3.6 o.6 13 19146 26.1 5r2 0.5 4.7 0.7 6,,6 Oo8 3n2 1947 27.1 2,,7 0.5 2.2 0.7 3X 0.9 o.6 1948 32.5 2.9 1,1 1.8 1.0 1,8 o.6 0,3 1949 1405 4.5 1.1 3.3 0.9 3.6 1.4 1.0 1950 44.8 8.4 1.1 7.3 3.9 1.9 197 1,7 1951 51.3 7.4 1.1 6.3 4.9 1.3 1.9 d 0.5 1952 70.4 19.6 1.1 18.5 4.9 3.8 2,2 11.4 1953 76.5 20.8 1.1 19.6 4.9 4.1 2,4 1214 1954 83X8 23.- 1.1 21.8 4.f 4.5 2.4 14.6 Note: Figures do not necessarily add to totals due to rounding d m deficit 1/ After depreciation charges CONflENIS: Gross operating revenues of U.T.E. increased in each year during the past twelve years but net operating income fluctuated widely. The operating loss of 2.0 million pesos in 1943 reflects the shortage of fuel in that year which necessitated restrictions on power sales and resulted in un- usually high operating costs. Net operating incore increased in the years immediately following, but declined in 1947, partially because of rate re- ductions in the Interior. Earnings resumed their upward trend in 1948 when rate increases averaging 23% for both power and telephones were effected in the middle of the year. In 1951, a dry year, earnings again s]Lumped due to increased reliance on thermal plant generation. New rate lncreases effected near the end of that year were fully reflected in the sharp increase in gross revenues and net operating income reported for 1952*  Annex B U. T. E. Condensed Income Statements (in millions of Pesos) 1949 1950 1951 1952 1953 1954 Electric Power Gross Revenues 32.49 35.82 41.05 56.90 62.12 67.44 Operating Expenses 28.61 25.34 30.90 33.89 37.39 40.32 Depreciation 1.05 2,89 2.93 4.57 5.09 5.87 Net Operating Income 2.83 7.59 7.22 1.J44 19.64 21.25 Telephones Gross Revenues 8.01 9.02 10.20 13.47 14.39 16.37 Operating Expenses 5.85 7.65 9.34 10.98 11.91 13.20 Depreciation .52 .54 .64 1.30 1.33 1.43 Net Operating Income 1.64 .-53 .22 1.19 1.15 1.74 Totals (Power and Telephones) Gross Revenues 40.50 44.84 51.25 70.37 76.51 83.81 Operating Expenses 34.46 32.99 40.24 44.87 49.30 53.52 Depreciation 1.57 .43 3.51 5.87 6.42 _*L