Peru - Power Distribution Project

RESTRICTED R.port No. TO-547a This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION APPRAISAL OF THE POWER DISTRIBUTION PROJECT OF EMPRESAS ELECTRICAS ASOCIADAS - LIMA LIGHT AND POWER COMPANY PERU July 22, 1966 Project Department  CURRENCY EQUIVALENTS U.S.$J$ = Soles 26.82 1 Sol = U.S. $0.037 1 Million Soles = U.S. $J.7.286  TABLE OF CONTENTS Page No. SUMMARY i-ii I. INTRODUCTION 1 II. THE ELECTRIC POWER INDUSTRY IN PERU 2 III. THE BORRCWER 3-5 Organization and Management 3-4 Associated Companies h Existing Installations 4-5 IV. THE POWER MARKET 5-6 V. THE TRANSMISSION AND DISTRIBUTION SYSTEM 6-9 General Description of System 6-7 System Planning 7-8 Operating Organization 8 VI. CONSULTANTS 9 VII. THE PROJECT 9-10 Summary of Project Costs 10 VIII. FINANCIAL ASPECTS Electric Power Legislation 11-12 Present Financial Position 12-15 Hidrandina 15-16 Insurance 16 Auditors 16 Financial Services 16 Taxes 16 Guarantee Commission 16 Earnings Record 16-17 Depreciation 17 Dividends 17 System Expansion Fund and Fund for Third-Parties Installations 17-18 Financing Plan 18-21 Future Earnings 21 Future Financial Position 22 Debt Limitation Tests 22 Performance under Previous Bank Loans 22 IX. CONCLWSIONS 23-24 This report is based on the findings of a mission to Peru in March-April 1966 composed of Messrs. R.V. Sear and C. de Beaufort.  LIST OF ANNEXES 1. Peru - Electric Power Legislation 2. Lima Light - List of Power Plants - 1965 3. Lima Light - Distribution System Planning 4. Lima Light - Description of the Project 5. Lima Light and Power Company - Typical Monthly Electricity Bills 6. Lima Light and Power Company - Balance Sheets 7. Lima Light and Power Company - Long-Term Debt Outstanding at December 31, 1965 8. Lima Light and Power Company - Income Statements 9. Lima Light and Power Company - Sources and App'lications of Funds 10. Lima Light and Power Company - Financial Ratios Map 1 - Peru- Lima Light Concession Area Map 2 - Peru- Principal Power Market Map 3 - Peru- Lima Light Transmission Line System Map 4 - Peru- Feeder Lines in the New Concession Zone Diagram 1 - Peru - Lima Light Principal Substations 220 KV and 66 IW Lines Diagram 2 - Peru - Lima Light and Power Company System Voltages and Transformer Connections  APPRAISAL OF THE POWER DISTRIBUTION PROJECT OF EIPRESAS ELECTRICAS ASOCIADAS - (LIMA LIGHT AND POWER COMPANY ) PERU SUMMARY i. Empresas Electricas Asociadas (Lima Light), a privately owned electric utility company serving the greater Lima-Callao area in Peru has requested the Bank for a loan of US$10 million to finance transmission and distribution system expansion for the three year period from 1966 to 1968 inclusive. ii. The Project is needed to meet the constantly increasing demand for power and to extend service to the new territories the Government has recently added to the company's service area. iii. The Project is adequate to meet the forecast demand which is realistic and based on actual annual growth rates during the past 20 years along with known major load increases planned for the next three years. iv. The Company's top management is competent and in order to meet the needs of a rapidly growing company, it has agreed to engage consultants to assist in preparing a program to train personnel for future senior responsibility and to make a comprehensive review of existing facilities and future plans to expand and modernize these. v. The earnings of the Company have been satisfactory and its financial position is expected to remain sound. Power rates are based on the provisions of the Electricity Law and permit the Company to earn a reasonable return on its equity. vi. Two previous loans were made by the Bank to the Company,viz. Loan No. 260 PE of $24 million for stage I of the Huinco hydro- electric project, including stage I of the Marcapomacocha diversion scheme and Loan No. 365 PE of $15 million for stage II of that project and for an expansion of the distribution system. The project financed by the first loan has been completed to the satisfaction of the Bank. The project financed by the second loan is about 90% complete and is proceeding satisfactorily. The company's performance under the two loans has been satisfactory.  - ii - vii. The financing plan for the three-year period of the project is satisfactory. Net earnings will contribute 21%i, and sales of shares and customers' constributions will raise the contribution to 54%. Proposed borrowings will consist of disbursements under Loan 365 PE, the proposed Bank loan, a future loan to finance the Matucana project which is expected to be started in 1967 and an issue of Two-Year Notes. viii. The project would be suitable for a Bank loan of $10 million equivalent with a term of 20 years including a grace period of 3 years.  APPRAISAL OF THE POWJER DISTRIBUTIOiN PROJECT OF EMPRESAS ELECTRICAS ASOCIADAS - (LDIA LIGHT AND POWER COMPANY) PERU I. INTRODUCTION 1. This report appraises the proposed project of Empresas Electricas Asociadas - Lima Light and Power Company (Lima Light), comprising the extension of its high voltage transmission lines and the expansion of its distribution system during 1966, 1967 and 1968. 2. The estimated total cost of the project would be about US$22 million equivalent and the Bank has been requested to finance US$10 million. The Government of Peru would guarantee the loan. 3. Lima Light's system demand has had an average annual growth of 10% during the past 20 years and present indications are that this growth will at least be sustained for the next several years and could be exceeded. 4. The Company's original service area has been increased several times at the government's request. In 1962 the area served included the capital city of Lima and the port of Callao, a total of 515 km2. This area was increased in 1963 and twice more in 1965, so that the present area is 18h0 km2. Further increases to the north and south of Lima were authorized by the Government during 1966 to bring the total area served to 2850 km2. 5. The pattern of steady growth in system demand and the very considerable increase in service area make it essential for the company to expand all its facilities continuously. Previous. Bank loans assisted the company to finance its expansion. The transmission and distribution system must now be expanded to complement recent increases in generating plant and further additions to plant now7 being planned to meet system demand. 6. The company has maintained a sound financial position, especially since the passage of the Electricity Law in 1955, and has provided substantial funds for its system expansion from earnings and the sale of stock to local and foreign investors.  - 2 - II. TILE ELECMIC POWER INDUSTRY IN PERU 7. At the end of 1965 electric power generating capacity in Peru aggregated about 1,242 MW, which was divided between four main groups: (a) Private companies serving the public - about 490 MW; (b) Captive plants in major private industry and mining - about 580 MW; (c) Government-owned autonomous corporations - about 120 MW; (d) Small government owned plants supplying rural population centers - about 50 MW; 8. Since 1955 when satisfactory electric power legislation was enacted (see Annex I) the private companies serving the public have earned adequate rates of return on their investment enabling them to finance the expansion of their systems to meet the growing demands for power. Among these companies Lima Light and its associated company Energia Hidroelectrica Andina S. A. (Hidrandina) account for 435 MW or about 89% of the generating capacity. 9. Prior to 1955 the government had only participated actively in electric power through its autonomous development corporations which, by 1965, had constructed a total of about 120 IM of generating plant to supply their own power needs. In 1961 tth government became more directly involved in power development by creating the Mantaro Corporation with authority to develop the electric generating potential of the Mantaro River. This scheme has been under consideration for over 20 years and a first phase of development has been defined which would be constructed in two stages, consisting of an initial installation of about 330 MW later extended to 660 MW. The power would be used principally to supply the Lima area. Only preliminary preparatory civil work has been undertaken so far and the government of Peru is in discussion with a group of firms which has offered to construct and partially finance the project. 10. Since the Mantaro project would at earliest be available to serve the Lima area by 1972, Lima Light is planning the construction of the Matucana (120 MW) hydro plant for service in 1969 to serve forecast increases in demand. Lima Light is also planning its trans- mission and distributon system expansion so that these would be suit- able for receiving Mantaro power, should it become available in the future.  - 3 - III. THE BORROWER 11. The Borrower iwould be Empresas Electricas Asociadas - Lima Light and Power Company, a privately owned public utility corporation responsible for supplying electric service in the Greater Lima area. Its head office is situated in Lima. The loan would be guaranteed by the government of Peru as was the case in previous Bank loans to Lima Light. 12. The Company was originally incorporated under Peruvian Laws in 1910. Lima Light's present concession was granted by the Peruvian Government in 1956. It is valid for a period of 50 years and gives the Company the exclusive right to generate and distribute power within the concession area (See Map 1). 13. At the end of 1965 Lima Light had outstanding S/860 million of common shares and $10 million of preferred shares. Until recently the majority of the share capital was owned by a Swiss group of public utility holding companies and banks. The sales of shares in Peru have gradually increased Peruvian ownership to over 3000 share- holders who hold about 52% of the stock. However, the Swiss group, holding about 38% of the stock, in effect still controls the Company. The remaining 10% of the stock is held by other investors outside Peru. 14. The Bank has made two previous loans to Lima Light. The first was loan 260-PE(1960) for US$24 million for stage I of the Huinco hydroelectric project (120 MW), and stage I of the Marcapomacocha diversion scheme. This project has been completed to the satisfaction of the Bank. The second Bank loan was 365-PE(1963) for US$15 million for stage II (120 M1W) of the projects financed by the first loan and for an expansion of the distribution system. This project is about 90% complete and is proceeding satisfactorily. Organization and Management 15. Lima Light's Board of Directors has 18 members, including the two General Managers and three alternate directors. A majority of the directors reside in Lima. 16. The General Managers, one concerned chiefly with engineer- ing and the other with finance, are jointly responsible for the operation of Lima Light. They are assisted by 5 departmental managers, in charge of, (1) planning and new works, (2) operations, (3) general relations and the secretariat, (4) commercial services, (5) general administration and finance. At the end of 1965, the company had 2,138 regular employees serving 272,501 customers, giving a satisfactory average of 127 customers per employee.  - h - 17. The Company has an efficient organization and its relation- ship with the authorities and public is good. The top management is experienced but there is a lack of experienced personnel below this level. Steps are to be taken by the Company to modernize operating facilities and train middle management personnel for future senlor responsibility. (Further comment is given on this matter under Operating Organization). Associated Companies 18. Hidrandina In 1946 Energia Hidroelectrica Andina S. A. (Hidrandina) was formed by the Swiss group which controls Lima Light, to finance, construct and operate power plants and to sell all the power under a long term agreement to Lima Light. This company was formed because Lima Light was prevented from borrowing for new projects by a limiting indenture in a previous bond issue. Lima Light has the option to purchase the power plants owned by Hidrandina but is not likely to do so in the near future. Further comment is given under Financial Aspects. 19. Atelsa In 1965 Atencion Electrica S. A. (Atelsa) was founded to operate the distribution system to be constructed and owned by Lima Light in the remote areas of its system. It will obtain its revenues from fees and commissions to be paid it by Lima Light for services rendered in operating the distribution system. The principal share- holder in Atelsa is Latina lux - See paragraph 73. The reason Atelsa was formed was to provide a means to operate the gradually developing and sparsely populated new service areas in an economical manner by using the more rudimentary type of operation required in the initial stages of developing a new area. Lima Light would not be able to do this under its labor agreements and other regulations. Existing Installations 20. The generating capacity of the system, which operates at 60 cycles, was 435 MW at the end of 1965, installed in one thermal plant (68 MW) and six hydro plants (367 i4VO). Annex 2 lists all Lima Light's and Hidrandinals plants and their capcaities. Of the total capacity only about 115 MW was installed prior to 1955. Since then a total of 320 MI has been added of which 240 was added in 1965 and 1966 in the Huinco hydroelectric plant. Thus most of the generating plant is less than 10 years old and all except 14 MW of the oldest units are in good working order.  - 5 - 21. The Transmission and Distribution system has been ex- panded continuously to meet increased demand and to transport the power from hydro plants to the load center in the Lima-Callao service area. This system is in good condition and is adequate to meet present requirements. However, the steady growth in demand and rapid increase in both population (23% since 1961) and area served has caused the company to make a comprehensive review of its facilities for serving its customers. The company is studying a plan for the construction of a completely new complex of buildings to house its central office, operating centers and stores. The project described in this report is the start of a long range transmission and distri- bution expansion program to complement the company's proposed power additions and to meet the forecast load growth. IV. POWER MARKET 22. At the end of 1965 the population in the Company's service area (greater Lima and Callao) was about 2,800,000, representing over 24% of the country. The area is the main administrative, commercial and industrial center of the country and is the principal power market in Peru. The major zones of future expansion lie to the south of Lima down to the Ica region and north to the Pativilca and Chimbote areas. See Map 2. This section of the country contains 85% of the power capacity serving the public and about 20% of the captive plants, or about 42% of all the power capacity in the country. The following data for 1965 illustrate the size of the company's market: System maximum demand 260 MW System Load factor 56% System installed capacity 435 MW Losses 10.9% Total sales 1965 1135 million kwh Increase of sales over 1964 9.18% Classification and Number of Customers: Classification Number of Customers Increase Enery Sold Increase (Mwh) 1964 1965 1964 1965 Residential 2037i6 2l7T 5.4% 368 390 6% Commercial 49658 53448 7.6% 227 249 10% Industrial 3413 3518 3.1% 377 430 14.4% Street Lighting 614 691 12% 49 53 10% Traction 1 0 - 18 - - Total 257432 272501 5.85% 1039 1135 9.18%  - 6 - 23. The average monthly consumption per residential customer is 150 kwh and compares very favorably with most countries in Latin America. The system loss of 10.8% is exceptionally good for a system of this type and indicates that the transmission and distri- bution systems are adequate for the load carried. System demand has increased at an average annual rate of 10% during the past 20 years and sales have increased at an annual rate of about 9%. 24. The influx of population into the Lima area continues. New industry and residential developments are steadily being added so that the growth rates mentioned above can be expected to continue for some years and could be exceeded. Lima Light has based its fore- cast of growth on this past trend and upon known new industries and residential developments planned for its service area. The annual growth rate of 10% is considered realistic and is expected to continue for some years. 25. Market prospects in the more distant future include the extension of transmission lines from Lima into the Pativilca and Chimbote area to the north and the Ica area to the south where industrial development is already taking place. V. THE TRANSMISSION AND DISTRIBUTION SYSTEM General Description of System 26. Lima Light's primary transmission line system is shown in Map 3 and has the following principal features: (1) The hydro plants are located on the Rimac and Santa Eulalia rivers. The most distant is Huinco at about 65 km from Lima. (2) Transmission lines connect these plants to the Santa Rosa thermal plant and principal substation in Lima. (3) The service area of greater Lima and Callao has already been described in paragraphs 4 and 12. (4) The proposed 220 kv primary transmission line extensions are to form the beginning of a 220 kv ring around Lima which would deliver the power from the plants to the distribution system from four principal substations instead of only from the Santa Rosa substation as at present. Diagram I shows the principal substations and (220 kv and 60 kv) lines in the company's service area and their relative locations schematically. Out- going underground cable feeders from these sub- stations feed 750 distribution substations at 10kv from which 1435 km of underground cable  - 7 - supply individual low voltage customers at 225 volts. The 10 kv feeders are frequently inter- connected to form loops or grids to give more dependab'le continuity of service. There are in addition services at 60 kv, 30 kv and 10 kv direct to larger industrial and commercial customers. System Planning 27. System planning for power plants as well as transmission lines and the distribution system is well organized and is a continuing process. Additional detail is given in Annex 3. 28. Until the construction of the Huinco plant (240 MW) two years ago the main transmission voltages were 60 kv and 30 kv. Now, in order to transmit the much larger amounts of power over the longer distances, the 220 KV system will form the backbone to carry the power from the plants to the main substations which feed the distribution system. This 220 KV system will be extended in stages to form an arc around 75% of Lima and, in the more distant future, it may be continued to complete a 220 KV ring encircling the city. The number of principal 220 KV substations is being increased from one to four under the present phase of expansion but only two will operate at 220 KV. The other two will initially operate at 60 KV and will be converted to 220 KV operation some time later when the demand increases and additional feed points into the distribution system are required. 29. The 220 KV substations will step the supply down to 60 KV to feed the main distribution substations. At present there are both 60 KV and 30 KV lines and substations but as load increases it is proposed to convert the 30 KV installations to 60 KV and to make all new extensions at 60 KV. 30. Two principal types of work characterize system expansion at the lower voltage levels: (a) the new areas outside the present city limits where new housing developments and factories are being constructed continuously, and (b) the replacement of older homes and buildings in the existing areas by large multistoried offices and apartment buildings. 31. In the case of the new areas system planning is governed by the electricity law which stipulates that the developer of the land must install a distribution system adequate to serve the load expected when the development is completed. Since the law states exactly the load allowed for each housing lot for the various categories of development and since the developer is obliged to complete his distribution and street lighting system before the first lot can be sold, the power company knows exactly what distri- bution feeder lines and substations will be required. In the case of new factories or large buildings the power company enters into separate negotiations with the owners to give supply through a  - 8 - customer or company owned substation on the customer's premises. The tariff structure encourages the customer to make the investment in his own substation. 32. In the existing system demand increases continuously as customers increase in numbers and individual demands for power. The company keeps a continuous check on the loading of its trans- formers and feeders and as predetermined limits are approached system additions are made to meet the higher demands and keep within established limits of service quality,which is principally judged by the variation in voltage at the customer's service entrance. The electricity law stipulttes a maximum variation of 10%. 33. The criteria used by the company in planning its distri- bution system have proven satisfactory in the past and with the introduction of the 220 kv ring, should continue to meet the power demand in the foreseeable future adequately and economically. There are no important low voltage complaints and system overhead line, cable and transformer loadings are held at conservative levels while system losses (10.8%) are remarkably low. Operating Organization 34. The company has a well run and adequately staffed operating section in charge of the operation of plants and the distribution system including attendance to system failures and customer service calls. A regular annual maintenance program is carried out on all substation equipment. Complete records of all activities are kept and a more detailed record of equipment failures has been started so that fault analyses may be made and preventive measures taken. 35. A well organized training school for technicians and skilled workers has been operating for some years and Electricit6 de France has an instructor assisting in the school and has provided special equipment which it has developed for teaching electricity. 36. In order to strengthen the middle management level the Company has agreed to engage consultants to assist in organizing a formal program of development to train personnel for future senior responsibility and to replace older staff who are approaching retirement. 37. Many of the operating and maintenance facilities, such as the transformer maintenance shops, meter shops and underground cable laboratories, etc., should be modernized. The Company is aware of this and is planning a new building complex, already mentioned in paragraph 21.  _ 9 _ VI. CONSULTANTS 38. The Company has agreed to engage consultants under terms and conditions satisfactory to the Bank for the following purposes: (1) To review its program for the training and development of personnel for future management responsibility. (2) To review its operating and maintenance procedures for the purpose of introducing changes to procedures and equipment to modernize these. (3) To review its requirements for a load dispatching system and to recommend a gradual development and installation of communications and other equipment to achieve the desired goal. VII. THE PROJECT 39. The project is most conveniently analysed by relating it to voltage classifications, new connections, meters and communicattion system (details are given in Annex 4). The tabulation on page 10 summarizes the proposed investment in each classification. 40. The goods procured with Bank funds will be imported. However, if by observing the Bank's requirements for international competitive bidding and after allowing a 15% premium a Peruvian manufacturer should be competitive in offering goods, the cost of these goods will be reimbursable from loan funds. 41. The estimated amount of the Bank loan is US$10 million which would finance about 455O of the Project. 42. The company proposes to undertake the Project with its own technical and operating personnel who are capable of designing and constructing the transmission and distribution extensions since they have been doing this work successfully for many years and the existing system is in good condition and is adequate to meet the power demand efficiently. 43. The proposed additions to the system included in the Project are needed to meet system growth, they are adequate for the purpose and the major items have been supported by detailed explanations and cost estimates. The routine system expansion items in the 10 KV and 225 volt systems have been estimated on past annual requirements plus a reasonable increase to reflect the greater demand and area to be served. 44. The cost estimates for the various items in the Project are reasonable and are based upon previous actual costs for similar work.  - 10 - 45. The radio communications system is only in outline form at present and specific approval will be given after a firm proposal is sent to the Bank for comment. The amount requested in the loan is reasonable for the additions contemplated. 46. Summary of Project Costs Cost Cost Financed Financed Total by Company by Bank Cost (thousands of US$) ITEM A. 220 KV Transmission System Lines 670 980 1650 Substations 35 125 160 B. 60 KV & 30 KV Distribution System Lines 845 1070 1915 Substations 1815 2175 3990 C. 10 KV Distribution System 10 KV additions to 60 KV substations 145 860 1005 New lOKv/225 V Substations 1350 360 1710 10 KV underground cable 540 1010 1550 D. 225 Volt Distribution System Underground cable and line extensions 2345 205 2550 E. New Connections 3355 1065 4420 F. Meters 140 1050 1190 G. Communications System 175 455 630 H. Consulting Services - 100 100 I. Contingencies 585 545 1130 Total 12,000 10,000 22,000  VIII. FINANCIAL ASPECTS Electric Power Legislation 47. The supply of electric power in Peru is regulated by the Electricity Law of July 1955. A summary of the main provisions of the Law is given in Annex 1. 48. Power rates are regulated by the National Tariff Commission, which consists of seven members appointed by the President according to regulations designed to ensure the competence of the members and a reasonable degree of independence of the Commission. 49. The Law provides for tariffs to be established at a level which will produce gross revenues to cover all operating costs and, in the case of large companies such as Lima Light, give a return of 11.5% on the capital invested by the concessionaire. The return is divided into two portions: a) 8.5% annual dividend on the share capital and free reserves and b) a "commercial profit" of up to 3% to give the total return mentioned above. Lima Light is permitted to distribute dividends of 8 1/2% on its common shares and of 8% on its preferred shares. In addition it is allowed to earn a commercial profit of 3% on common share capital and reserves invested in the business and of 1 1/2% on its preferred share capital. The operating costs allowed include all direct costs, depreciation, interest payments, contributions to the System Expansion Fund (described below) and all taxes. 50. Rate revisions and revaluations of assets are made every three years, or at shorter intervals at the request of either the Minister of Development and Public Works or the concessionaire, if existing rates generate more or less than the permitted return. 51. Installations are revalued by appraisal on the basis of re- placement costs. Corresponding adjustments are made in the concessionaire's accounts for depreciation reserves, foreign currency obligations and equity. 52. The Law obligates the concessionaire to expand the distri- bution system in his service zone and to create a System Expansion Fund out of which the concessionaire is obliged to extend the distribution system beyond the original service zone to meet demands for electric service. 53. Since the Law came into force the assets in operation of Lima Light have been revalued four times; in 1955-56 by almost 100%, in 1959 by 27%, in 1961 by 14t% and in 1965 by 8.5%. The four revaluations were followed by tariff increases, the last of which went into effect on February 7, 1966. As a result of the last increase average revenue per kwh is expected to rise by 19% to S/. 0.716 (US mills 26,5) in 1966 and by another 2% to S/. 0.73 (US mills 27.0) in 1967. Details of present rates and typical monthly bills are given in Annex 5.  - 12 - 54. Lima Light's experience with the Law during the ten years it has been in force, is satisfactory. During this period the Company has been able to attract all the funds it needed for its rapid expansion. The periodic revaluations and tariff revisions have enabled the Company to adjust without too much difficulty to a rising price and wage level and to maintain regular dividend payments on a share capital which is now more than five times as high as it was at the beginning of the period. 55. VWhen the two previous loans were granted the Bank relied on the provisions of the Law and did not require a separate tariff covenant. The continued good record of operations under the Law indicate that, as far as the proposed loan is concerned, there is no need to obtain additional safeguards. The Guarantor has undertaken to inform the Bank of any proposed changes in the Law to enable the Bank to comment upon them. Present Financial Position 56. The following is a summary of the balance sheet at December 31, 1965: (in millions of Soles) ASSETS Utility Plant 3,582 Less: Accumulated depreciation 935 Net Utility Plant 2,647 Construction work-in-progress 489 Investments 3 Current assets 218 Deferred debits 48 Total Assets 32405  - 13 - (in milli.ons of Soles) LIABILITIES AND EQUITY Share Capital Common, 8,600,000 shares par SI. 100 860 Preferred, 1,000,000 shares par US$10 268 Total share capital 1,128 Reserves and surplus 258 Total Equity 1,386 Long-term debt: Sinking Fund Debentures 6 1/2 and 7% due 1972 to 1979 611 IBRD Loan 260 PE 6% due 1985 619 IBRD Loan 365 PE 5 1/2% due 1988 342 Sub-total Secured Debt 1,572 Two-year Dollar Notes 161 Suppliers' credits 18 Local debt 20 Total Long-Term Debt 1,771 Current liabilities, including current maturities of long-term debt 255 Deferred credits (7) Total Liabilities and Equity 3, 05 57. Utility Plant has been taken at the replacement value determined in 1965 by the National Tariff Commission with subsequent additions added at cost. 58. The common share capital has been rising rapidly as the result of a continuous effort to sell new shares and through the distribution of bonus shares. During the three-year period which ended December 31, 1965 the increase amounted to S/. 299.3 million of 53%. Sales of new shares accounted for S/. 130.8 million, the distribution of bonus shares came to S/. 71.5 million out of earned surplus and S/. 96.5 mi1lion out of revaluation surplus. In addition S/. 0.5 million were issued in exchange for preferred shares. 59. The preferred shares are denominated in dollars, they are entitled to a fixed annual dividend of 8% and are convertible at the option of the holder into common shares. They were first issued in 1960 for a total amount of US$ 6 million. Since then additional preferred shares were sold in Peru and Switzerland in two issues of $3 million in 1962 and of $1 million in 1963.  60. Reserves and surplus totalled S/. 258 million consisting of S/. 46.6 million of free reserves and surplus and a SI. 211.4 million credit balance in the exchange equalization account. Foreign exchange losses on external obligations may be charged to this credit which has arisen out of the periodic revaLuations of assets in operation and liabilities in foreign currencies. 61. The long-term debt totalled SI. 1,849 million including current maturities of SI. 79 million. Details of the debt are given in Annex 7. All but 15% of the debt was issued under an open ended indenture created in 1957 with Schroder Trust Company, New York, as trustee. This part of the debt totalled S/. 1,630 million and is secured by a first floating charge on all property, present and future,L' It included five series of 15-year debentures, totalling S/. 653 million, mainly placed in Stwitzerland, with the group controlling Lima Light and to a lesser extent in Peru where they are widely distributed and in the United States. Each series was originally issued for US$6 million except one which amounted to Swiss Francs 25 million, US$5.8 rmillion equivalent. Debt service on each series is paid in equal semi-annual installments calculated to retire the series within a period of 15 years. Interest rates are 7% for the Dollar and 6 1/2% for the Swiss Franc debentures. 62. Also issued under the 1957 trust indenture and included in the secured debt were IBRD loans 260 PE and 365 PE, represented respectively by series D and series F debentures, to a total disbursed amount of SI. 977 million. Each issue was for a term of 25 years at interest rates of respectively 6% and 5 1/2%. 63. The issue of additional debentures is limited, under the indenture, by earnings and assets tests which require that actual net income for a recent 12-month period be at least 150% of annual interest charges on existing and proposed debentures and other funded debt, and that net tangible assets at the time of the proposed issue be not less than 150% of debentures and other funded debt, outstanding and proposed. 64. A supplemental indenture will be issued for the purpose of securing a new series comprising the proposed Bank loan which would rank equally with the existing debentures as to security. 65. Unsecured debt totalled S/. 219 million, its largest component consisting of two-year 6% Dollar notes outstanding in the amount of US$6 million. These notes were issued in 1965 and were placed in Peru, Switzerland and the United States. They are convertible at the option of the holder into long-term debentures to be issued during their term. Trustees for these notes are the Banco de Credito del Peru and the Privatbank of Zurich. 1/ A second floating charge is outstanding in favor of the Republic of Peru as security for guaranteeing Bank loans.  - 15 - 66. The remainder of the unsecured debt includes: (a) three 6 1/2% credits from Bro'm Boveri and Company totalling Swi F 6 million, repayable in 1966 and 1967 and covering the purchase of equipment, (b) an 8% loan from the Banco Industrial, Lima,for US$600,000, repayable in 1967, and (c) a non-interest bearing loan for S/. Lt1 million from the Junta Nacional de la Vivienda, repayable in equal installments from 1966 to 1972. The two latter loans are financing properties administered by the Fund for Third Parties Installations (see paragraph 81). 67. During the last three years Lima Light's negative current position was reduced from S/. 93 million to S/. 37 million. A further improvement is expected during the next few years. The current position is not serious in view of the availability to the Company of short-term facilities from local and foreign banks as well as from the S-wiss holding group. At the end of 1965 the outstanding bank overdrafts totalled S/. 38 million and advances from associated companies S/. 9 million. Hidrandina 68. The financial relationship between Hidrandina and Lima Light is mainly based on a long-term contract under which Lima Light purchases all power generated by the Moyopampa hydro plant, paying a price based on the actual operating and capital expenses of Hidrandina including debt service and dividends. The National Tariff Commission fixes these prices after its regular three-year review of Hidrandina. For 1965 the price was set at 18.86 centavos per kwh (US mills 7.0), for 1966 at 19.6h centavos (US mills 7.3) and for 1967 at 20.44 centavos (US mills 7.6). The power contract was pledged by Hidrandina in connection with its issue of US$10 million 7p1 debentures of 1951 of which US$4.8 million were outstanding December 31, 1965. The revenues of Lima Light's sales to the Government and certain other large purchasers of power have been pledged as additional security for the Hidrandina debentures. The contract gives Lima Light an option to acquire the plant in 1972. No contract exists for Lima Light's purchases of power generated by Hidrandina's Huampani plant. 69. Hidrandina started in 1964 to construct the Pativilca hydro plant, the power of which will be sold under a long-term contract to W.R. Grace & Co. (Peru). This project which physically is not connected with the Lima system is mainly being financed by internal cash generation and loans from AID, W.R. Grace & Co. (Peru), Motor-Columbus and Banco Industrial de Peru. The financing plan also includes S/. 60 million in new shares and US$6 million debentures to be issued under a new indenture. At the same time some US2h million of outstanding debentures would have to be paid off or refunded.  - 16 - 70. At the suggestion of the Bank the Company will be re-examining its relationship with Hidrandina, including the ownership of the power plants and other properties that form an integral part of the Lima Light system. Before the end of 1966 the Company will submit to the Bank for its comments proposed changes in its relationship with Hidrandina. Insurance 71. The Company maintains adequate coverage against losses and liability. Auditors 72. The financial statements of Lima Light are audited by Price Waterhouse, Peat and Co. The Company has undertaken that its accounts will continue to be audited by a firm of accountants acceptable to the Bank. Financial Services 73. Latinalux, a company controlled by the Swiss holding group, maintains a market in Peru of Lima Light's shares. Its operations appear to have had a beneficial effect on the volume of sales of new shares by Lima Light. Latinalux also provides advisory services of a financial and legal nature to Lima Light and Hidrandina. Taxes 7h. As a public utility company Lima Light enjoys certain tax privileges. Its statutory dividends and the interest on its Debentures and two-year Notes are exempt from existing and future Peruvian taxes. Its commercial profit is subject to the profits tax of 20% which was in existence when the Electricity Law became effective. A tax of 10% is payable by the Company on the par value of its issues of bonus shares. Guarantee Commission 75. The Ministry of Finance charges an annual guarantee commission of 1/h% on outstanding balances of Loan 365 PE. It is assumed that a similar commission will become payable in the case of the proposed loan. Earnings Record 76. The framework for tariffs set up in the Electricity Law (see paragraph 49) is intended to produce revenues which will cover all costs and provide a fixed return on equity. However, since tariff revisions are normally carried out only once every three years increases in prices and wage levels which take place between revisions can cause a shortfall in revenues, In recent years, especially in 1964, Lima Light experienced increased wages and expenses and in addition increased  - 17 - construction costs of the Huinco and Marcapomacocha projects resulted in a higher interest burden than had been foreseen when the projects were started. 770 In spite of these difficulties during the five-year period to December 31, 1965, for which summaries of income statements are given in Annex 8, Lima Light succeeded in maintaining a reasonable margin of earnings above those required for dividend payments at permitted rates. The increase in revenues, resulting from increases in both sales and tariffs, averaged about 16% annually. Savings in fuel after Huinco came into operation permitted operating costs to be limited to an average annual increase of about 14% caused mainly by increased wages. The margin between these two rates was sufficient to cover the increasing expense of interest charged to operations. Total interest paid rose from SI. 40 million in 1961 to SI. 100 million in 1964 and to S/. 117 million in 1965. Interest was covered by gross income 2.1 times in 1961. 1.9 times in 1962, 1.8 times in 1963 dropping to 1e2 times in 19640 A recovery to 1.7 times took place in 1965. Depreciation 78. In the past depreciation has normally been calculated at percentages based on the estimated life expectancy of individual categories of assets. During the four-year period l961-196I4 the resulting annual rate of depreciation on gross plant assets in operation at the end of the year ranged between 3.6 and 4%. Due to the revaluatinn of assets and the coming into operation of Huinco, assets subject to depreciation increased by almost 80% during 1965. Depreciation provided for on the gross value of plant at the end of 1965 worked out at an average rate of 2.39%. In order to enable the Company to make up for this low rate of depreciation the National Tariff Commission has allowed a considerable increase in the depreciation percentages for 1966 and 1967 (see paragraph 95). Dividends 79. Dividends on preferred shares (which were issued for the first time in 1960) have been maintained at the rate of 8%. On common shares cash dividends have been paid since 1956 at the annual rate of 8 1/2%. In addition bonus shares are distributed from time to time to incorporate into share capital increases in surplus resulting from revaluations of assets and retained earnings. System Expansion Fund and Fund for Third-Parties Installations 80. The System Expansion Fund was created under the Electricity Law (see Annex 1) which requires the Company to contribute annually to the expansion of distribution works o'omed by the public domain. The Company's annual allotment is to be approved by the National Tariff Commission and is limited to 5% of the Company's total investments during the year.  - 18 - 81. A similar fund called the Fund for Third-Parties Installations receives low voltage distribution installations constructed and paid for by the developers of residential developments. The Fund also administers connections to be paid for by new customers. The Electricity Law provides that all distribution works financed by third parties belong to the public domain. 82. dLima Light is permitted to charge depreciation on the distribution works owned by the public domain as an operating expense. The relevant cash is used, under the control of the Ministry of Industry, for meeting the Company's costs of supervision, administration and maintenance of the public domain works, and for reinvestment in distribution. The transactions of the two funds, consisting mainly of transfers of assets, are administered by the Company. The Company also keeps records of the public domain distribution works. 83. Besides its contributions the Company also finances third parties' distribution works from time to time. Thus, at the end of 1965 the Company had advanced SI. 19 million for this purpose. Financing Plan 8h4 During the construction of the proposed project, Stage II of the Huinco and Marcapomacocha project is expected to be completed. It is also likely that construction will go ahead on the Matucana hydro project. The financing plan for the years 1966 through 1968 includes, therefore, not only provisions for the last phase of the projects financed by Ioan 365 PE but also a tentative assumption on the financing of the proposed Matucana project which has not been appraised by the Bank. 85. The following is a summary of sources and applications of funds for the period 1966-1968, and is shown in more detail in Annex 9:  - 19 - 1966-1968 (in millions of Soles) Sources Internal cash generation 1,374 Less: Debt Service 753 Dividends and bonuses 305 Financing expenses 26 1,08o Net internal cash generation 290 Contributions from customers 322 Sales of shares 120 Sub-total: own resources 732 Borrowings 1/ Existing Bank Loan 365 PE balance 79 Proposed Bank Loan 270 Future Matucana financing 189