RESTR ICTE D CIRCULATING COP?Y 3TO BE RETURNED TO REPORTS DESIK R e p o r t N 0. TO-199 IN GENERAL FILES This report was prepared for use within the Bank. In making it available to others, the Bankassumes no responsibility to them for the accuracy or completeness of the information contained herein. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT MIBORO HYDROELECTRIC PROJECT OF THE ELECTRIC POWER DEVELOPMENT COMPANY, LTD. December 22, 1958 Department of Technical Operations Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized
Transcript
RESTR ICTE DCIRCULATING COP?Y
3TO BE RETURNED TO REPORTS DESIK R e p o r t N 0. TO-199IN GENERAL FILES
This report was prepared for use within the Bank. In making itavailable to others, the Bank assumes no responsibility to them forthe accuracy or completeness of the information contained herein.
INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT
MIBORO HYDROELECTRIC PROJECT
OF THE
ELECTRIC POWER DEVELOPMENT COMPANY, LTD.
December 22, 1958
Department of Technical Operations
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CURRENCY EQUIVALENTS
U.S. $1 * 360 Yen1 Yen z .278 U.S. centsI million Yen * U.S. $2,7781 billion Yen - U.S. $2.78 million
.:
LIST OF' CONTENTSPage No.
Summary
I. INTRODUCTION 1
II. THE COMPANY 1
III. THE EROJECT 4
Description of the Project 4Present Status and Construction Schedule 5Estimated Cost of the Project 6Unit Construction and Generation Costs 6Thermal Alternative 7
IV. FINANCIAL 7
Power Prices 7Financial Structure of EPDC 8Past Earnings 9Capital Flxpenditures and Sources of Funds 9Forecast of Income Sources and Application of Funds 11Future Earnings 11Interest and Debt Service Coverage 11Future Capitalization 12
V. CONCLUSIONS 12
LIST CF ANNEXES
Annex 1 - EPDC Condensed Balance Sheets
Annex 2 - EPDC Funded Debt as at March 31, 1958
Annex 3 - EPDC Income Statements
Annex 4 - EPDC Forecast of Statements of Sources and Application of Funds
Annex 5 - Calculation of Generation Cost for Miboro
Annex 6 - Basis for the Calculation of Thermal Alternative
Annex 7 - Imported Equipment and Services
Summa rv
This Report contains an appraisal of the Miboro Project, whichis being built by the Electric Power Development Company, Inc., (EPDC),and has been proposed to the Bank as the basis for a $10 million loan.The Bank loan would be in conjunction with a $30 million bond issue tobe sold abroad by the Government of Japan.
ii. The Miboro Project, a reservoir-controlled hydroelectric instal-lation, will have a capacity of 215 MW. It will generate annually about545 million kwh. The entire production of Miboro will be bought by theKansai Electric Power Co. Construction of the Miiboro dam will also addabout 220 million kwh per year to the production of existing Kansaidownstream facilities.
iii. The Project is part of a Program which EPDC is carrying out toadd by 1962 almost 2 million kw of hydroelectric peaking power to thenational power facilities, at an estimated cost of about 340 billion yen($950 million).
iv. The cost of the Project is estimated at 37.2 billion yen ($103million). The net cost of energy from the Project at the end of thetransmission line is estimated at 5.50 yen/kwh (15.3 US mills). Thiscost is reasonable and the project is economically acceptable.
v. The activities of EPDC in the past are open to some questionswith regard especially to the effectiveness of its management and to theeconomic justification of some of the facilities which have been construct-ed. More recently, however, the quality of EPDCts management has shownconsiderable improvement, and so has the planning of future expansion.
vi. As to the engineering and operating services EPDC is capablystaffed and the construction of the Project is properly organized,
vii. EPDC has only recently begun the operation of the first of itscompleted facilities. It is its policy to determine prices for thebulk sale of power so as to earn a return of 6% on the investment. Asmore of the new facilities come into operation, the financial positionof EPDC is likely to improve and it is expected that after the presentprogram is completed in 1962, a substantial amount of the cost of futureexpansion will be met from self-generated funds. Debt service coverageshould gradually improve from 1.2% at present to 1.4% in ten yearst time.
viii. The Project is suitable for a $10 million Bank loan with a termof 25 years and a period of grace of 3 years.
YiIBORO HYDROElECTRIC PROJECT - JAPAN
I. INTRODUCTION
1. This report contains an appraisal of the Miboro Project, which isbeing constructed by the Electric Power Development Company, Inc. (EPDC)on the Sho River on the main island of Japan. It is based on informationsubmitted to the Bank by the Japanese Government and by EPDC on variousoccasions in the past and on the findings of a Mission which visitedJapan in November and December 1958.
2. The Miboro Project is estimated to cost the equivalent of $103million. The Bank has been requested to consider a loan of $10 millionequivalent to assist in the financing of the Project. Most of the pro-ceeds of the proposed Bank loan would be used to cover the cost oflocally manufactured equipment and materials and local labor. About$1.7 million would be used to cover imported equipment and foreign ser-vices. As in previous loans to Japan, the Japan Development Bank (JDB)would be the Borrower and would in turn relend to EPDC.
3. The Bank loan is to be in conjunction with a $30 million bondissue to be sold abroad by the Government of Japan. The yen equivalentof the proceeds of the issue would be relent by the Government of Japanto EPDC and, like the Bank loan, would be applied against expenditureson the construction of the project.
4. The YNiboro Project forms part of the program of construction of anumber of hydroelectric power plants, which EFDC started in 1952 andwhich is scheduled for completion in 1962. Total capacity to be provid-ed by the program amounts to 1,931 Mn, with an annual average energygeneration of 5,843 million kwh. The present estimate of the total in-vestment required for the program amounts to about 340 billion yen. Asof October, 1958, a total of 736 W had been commissioned, with anannual energy generation of 3,282 million kwh. All the other projectsin the program are under construction. The investment in the programamounted to 172 billion yen as of M'arch 1958.
II. THE COMPANY
5. EPFC was established in 1952 as a development corporation whosestock is owned almost entirely by the Government. Its main purpose, asstated in the Electric Power Development Law, is to develop power re-sources. It is not intended as a competitor of the nine privately-ownedpower companies and it is required to sell to them in bulk all powergenerated in its installations. For this reason the question of powermarket for the production of EPDC does not arise as such. The construct-ion program of EFDC is coordinated at Government level with that of theprivate power companies.
6. In the Electric Power Development Law and in the Statutes of EPDC,the Government has retained direct and effective contro7 of the policiesof EPDC and of its management. MITI (the vinistry of LaterrationalTrade and Industry) has responsibility for directing and supervising theactivities of EPDC, although the authority for the appointment to top
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EFDC management is vested in the Cabinet. EPDCts construction programmentioned in paragraph 4, consists exclusively of the development ofhydroelectric power sites in the islands of Honshu,, Hokkaido and Kyushu.All the more important projects in the program are designed for peakingoperation at low plant factor.
7. In the post-war period development of large reservoir-controlledhydroelectric installations has been necessary to firm up the capacityof existing run-of-river installations and to provide large amounts offirm hydro peaking capacity in the winter time to supplement highefficiency thermal units which constitute the major part of capacityadditions to the privately-owned systems and are designed for base-loadoperation.
8. In view of these considerations, EPDC was assigned in 1952 anumber of the large hydroelectric sites which had been under preliminaryconsideration by the private power companies. The current program con-sisting of sixteen projects or groups of projects was put under con-struction by EPDC almost simultaneously. This was done without muchregard to the capability of EPDC, to the necessity of carrying out com-plete engineering investigations, to the establishment of reliable costestimates or to economic value of the projects. As a result, severedifficulties were encountered in the course of construction which ofteninvolved changes in design, with resulting delays in completion andincreases in cost. The program, which had originally been scheduled forcompletion in 1960, is now expected to be completed by 1962. Theoriginal cost estimates for the largest projects have gone up as much as50% and 60%.
9. EFDC has been able to overcome most of the physical difficulties.While the projects will make a valuable contribution to the overallsystemd requirements, the economic justification of some of them isdoubtful because of their high cost. Since all projects in the programare in advanced stages of construction, to question them now would berather academic.
10. The initial preoccupation of EPDC in accomplishing its engineer-ing and construction mandate at practically any cost has lately beenbroadened to include an awareness of the economic significance and limi-tations of its work. Efforts are being made to achieve better cost-control supervision on construction yards, better utilization of theequipment available and a more detailed design and cost appraisal ofprojects, which results in the establishment of more realistic estimatesof cost prior to construction. Above all, they have begun to attachmore importance to the operational and financial soundness of the pro-jects.
11. This shift in emphasis from construction to operation of facilitiesinevitably brought with it a reappraisal of the projects which had beenunder consideration as the basis for the continued expansion of EFDCafter the present program will have been completed in 1962. The necessityfor the reappraisal is based mainly on the high cost of developing firmhydroelectric power in the country and on the resulting danger that, how-ever valuable such power may be for system operation, its cost could
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easily become so high as to destroy its market.
12. Until recently EPDOC planned their expansion after 1962 with a ten-tative program which would have involved continued investment of theorder of magnitude of the present rate of investment (about 50 billionyen a year). In the reappraisal three basic criteria were applied:
- economic priority of sites in view of cost of power obtainable.
- redesign of sites to obtain higher plant factor.
- provision of a reasonable proportion of expenditures fromfunds generated internally.
13. The new program for completion subsequent to 1962 is not yet de-fined in detail but will involve a rate of expansion not to exceed theinvestment of 30 billion yen per year. The relative features of therevised program for the period 1962-1968 compared with the original areshown in the following table:
1962-1968 Total Annual Construct- Construct- Construct-Capacity Energy ion Cost ion Cost ion CostIV ivilillions 1lillions US$/kw USO/kwh/yr.
- _ kwh Yen __
Revised Program 1,113 4,093 158.9 397 10.8
Original Program 2,257 5,570 274.3 338 13.7
14. The revised program shows a reversal of the trend followed in theearly years by EPIC, which consisted of building large capacity peakingplants with low utilization of capacity. It shows a reasonable concernwith the economic factors which should form the basis of power expansionplanning in Japan. It indicates the start within EPDC of proper manage-ment action. While these proposals are not yet firm, both the Presidentof EPDC and responsible MITI officials have stated their support of theproposed action.
15. While these developments are promising, the question of the sound-ness of EFDCTs future operations and expansion clearly depends on theexercise of proper management. The present attempt of EPDCts manage-ment to have more direct and complete control over the study and formula-tion of the Companyts policies and program should be encouraged. Personswho are familiar with the problems of the Company should be appointed astop officials and their term of office should be such that reasonablecontinuity of management policies will be assured. This has not been thecase in the past.
16. The Government has made it clear that it has no intention of re-linquishing or relaxing its control of EPDC. However, this would not benecessary. If the formation of a strong and competent management echelonat the head of EPDC should be accomplished, it would be advantageous tohave MYITI exercise close permissive control over the Company. This wouldbe a far better arrangement than the one followed in the past, where the
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Government control, instead of being permissive, consisted in formulatingEPrC policies and programs, a task for which MITI and other governmentdepartments are not properly equipped to unidertake. The Minister andother high officials of MITI indicated that they favor the above changein policy.
17. Letters and statements of policy obtained during negotiations givethe Bank reasonable assurance that in the future EPDC s operations willcontinue to improve. On this basis there is a good prospect that theCompany's economic and financial policies will also improve.
18. The Companyts organization for engineering, construction supervisionand power plant operation is capable. A good many of the senior EPDCstaff in all departments were originally on the staffs of the power com-panies and the quality of personnel in EPLC is to a large extent compar-able to that of the power companiest staff.
19. EPDC, however, still suffers from over-staffing and staff efficiencyis not as good as it could be. The management is aware of these problemsand is trying to improve the situation.
III. THE FROJECT
Description of the Project
20. The ]Yiiboro Project consists of a rock-fill dam with impervious claycore, an underground powerhouse with an installed capacity of 215 MW intwo units and of a step-up substation.
21. The dam is located at Shirakawa on the Sho river, near the westcoast of the main island of Japan. The height of the dam will be about130 meters and its volume about 8 million cubic meters of rock-fill andclay core. It will impound about 330 million cubic meters of usefulwater storage. The head on the generating units will be 192 meters.The units will discharge into a tailrace tunnel about 8 km long throughwhich the water will be returned to the main stream of the Sho riverjust upstream of the intake for an existing power plant owned by theKansai Power Company. Annual energy generation by the Miboro Stationunder median hydro conditions will be about 545 million kwh.
22. River regulation by the Miboro dam will improve the operation ofexisting downstream installations owned by the Kansai Electric Power Co.This will result in a net additional output of about 220 million kwh/year,and in an increase in winter peaking capability of the existing installa-tions of about 60 MW.
23. According to Japanese law, the Kansai Electric Power Company mustcompensate EPDC for these benefits by paying to EPDC part of the cost ofthe dam. The exact amount of compensation and the terms on which it willbe paid will be determined at the conclusion of construction. On thebasis of present estimates EPDC calculates that Kansai will pay as com-pensation the sum of 9,379 million yen. The payment to EPDC will probablybe in twenty annual installments, free of interest. Kansai is in general
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agreement with these provisional calculations. The entire production of1iiboro will be sold to the Kansai Flectric Power Company at a price basedon the actual cost of the project when completed. A preliminary agree-ment has already been signed by EPDC and Kansai.
24. The line needed for the transmission of Miboro power will be builtjointly by EPDC and Kansai, on the basis of an agreement recently signedbetween them. The transmission facilities are not included in the Banktsproject.
Present Status and Construction Schedule
25. Engineering work on the Miboro Project dates back several years.Construction of a dam at this site had been under consideration byKansai before the site was assigned to EPDC in 1953. EPLC then starteda complete program of borings and adits at the site, which confirmed theexistence of a serious fault running parallel to the river. The problemof treating the fault and the related problem of choosing a suitabletype of dam in view of known site conditions were studied in detail overa period of about three years in cooperation with several well-knownAmerican consultants and with the U.S. Bureau of Reclamation. Thesestudies resulted in the choice of the type of dam now being built, andof the method for treating the fault.
26. Construction of the project started in May 1957. By December 1958the projoct was about 40% complete. The construction camp is wellorganized, and the operation of rock quarries, clay borrow pit and theplacing of these materials are run efficiently. A supervisory forcefurnished by George Atkinson & Co., of San Francisco has been retainedby EBDO to advise their Japanese contractors on construction techniques.The amount of storage already available and the capacity of the twodiversion tunnels, makes the possibility of damage fro-, exceptionalfloods during construction very remote.
27. The underground power station and related service turnnals have beenalmost com-pletely excavated. About one-fourth of the lengt'h7. of the tail-race tunnel has also been excavated either on full section or on a pilotsection. The geology encountered in the segments of the tailrace tunnelso far excavated was found worse than expected and it was necessary toemploy steel shoring to a much greater extent than had been planned.There is -. possibility that poor rock conditions will be found in theremainder of' the tunnel.
28. Treatment of the main fault under the dam is being continued on thebasis of heavy grouting without excavating the fault itself, accordingto the advice of the Bureau of Reclamation. It cannot yet be ruled outthat grouting may not be sufficient to solve the problem.
29. The tailrace tunnel and the main fault constitute therefore thetwo major areas of physical contingency in the project. Even if very badconditions were encountered EPDC could successfully complete the projectwithout too much difficulty.
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30. Initial operation of both units is scheduled for the middle of 1961and completion of wsrk on the project for the end of 1961. On the basisof progress to date and of the organization at thle site, this scheduleis realistic.
31. Contracts for civil works and equipment purchases have been awardedto Japanese firms on a domestic competitive basis. Construction equip-ment has come from the pool owned by EPDC. Payments under the Bank loanfor expenditures outside of Japan will cover spare parts for foreign con-struction equipment and technical services. (Annex 7)
Estimated Cost of the Proiect
32. The Yiboro Project is estimated to cost 37.2 billion yen (equiva-lent to about $103 million). A breakdown of the estimate is as follows:
Millions of Yen
Land Acquisition and Compensation 5,646.5Site Preparation and Access Facilities 520.0Construction Equipment 1,402.4Construction Facilities 1,314,9Dam and Waterways 17,779.0Power House 1,710.5Electrical and Mechanical Equipment 3,719.5Engineering, Construction, Supervision
and Overhead 2,h5290
Subtotal 34,751.8Less: Residual value of construction
equipment and constructionfacilities 1 Z5,6
Net Subtotal 23,156o2Contingency (2.4%) 783.4Interest during Construction 3.330-3
Total 37,269.9
33. The estimate is up-to-date and much of it is based on contractsalready awarded. The allowance for contingencies is small but it must beborne in mind that the project is already about 40% completed. If un-expected difficulties are encountered in the sealing of the fault, thecompletion of the tailrace tunnel, and in the rernaining part of the com-pensation and expropriation proceedings, the total cost of the Projectcould exceed 37.2 billion yen. There is a good prospect, however, thatthe Project will be completed within this figure,
Unit Constri ton and Generation Costs
34. The net cost of the Yiboro Project, after deducting the compensationpayment for downstream benefits, will be about 28 billion yen ($78 millionequivalent). This is equivalent to about $360 per kw, and to about 14 UScents per kwh per year. These costs are reasonable for seasonal reservoir-
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controlled hydroelectric power in Japan. The production cost of Iiboroenergy will be 4.85 yen/kwh (13.5 US mills/kwh) at the outlet from thegenerating plant, and about 5.5 yen/kwh (15.3 US mills/kwh) at the ter-minal of EIDC ts transmission line in the Nagoya area (Annex 5).
Thermal Alternative
35. Two basic viewpoints are examined, that of the Company and thatof the economy as a whole. These viewpoints differ mainly in theirtreatment of fuel cost. The cost of fuel to the Company is assumed tobe the same as it would be for Kansai, as power from Miborb will flowinto the Kansai system. This cost,including duties and taxes, is about1 yen per 1000 calories (0.70 US cents per million BTU), whereas thecost of imported fuel for the economy excludes both duties and excisetaxes and could be assumed at a conservative level of 0.72 yen per 1000calories (50 US cents per million BTU).
36. From the point of view of the Company, the return on additional in-vestment in Miboro of about $70 million equivalent would be about 7%.(Annex 6) This is based on a 275 MW alternative modern thermal plant(equivalent to the Miboro capacity of 215 INW plus the increase in down-stream winter peak output of 60 NW) operating at full capacity for 5000hours per year. In the calculation, hliboro is charged with the fuelcost involved in generating the additional energy needed to equal theoutput of the alternative thermal plant. It is assumed that this energywould be generated by the thermal plants now existing on the system.Under the same assumption, but taking a fuel cost of 50 cents per millionBTU, annual savings would show a return of about 5.3% on the additionalinvestments.
37. While these rates of return are lower than those yielded by similarcalculations for installations of the private power companies recentlyfinanced by the Bank they are acdeptable. It will be noted that EPDCT sreturn of 6% on its total investment lies between the two figures.
IV. FINANCIAL
Power Prices
38. EPDC sells bulk power to six of the nine private power companiesin Japan. The wholesale price is established for each river system in aseparate power contract between EPDC and the purchaser.
39. The contract price for a given river system is computed so as toproduce, under average hydrological conditions, revenues sufficient forEPDC to cover its operating and maintenance expenses, including deprecia-tion, and to provide an adequate return on the Companyts investment. Ithas been the policy of EPDC to set the rate of return at 6%, with onlyone exception. The Hokkaido Power Company pays a contract price basedon a return of 5-1/2% for electricity generated by EPDCts four powerplants along the Nukabira River. This reduced rate is inspired by con-siderations of general economic development of the island of Hokkaidoand will only remain in effect until April 1960. From May 1960 on, the
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price for power from the Nukabira plants will be established on the basisof a 6% return on the investment.
40. In the case of installations from which EFDC expects to receivepayments for downstream benefits (as in the case of Miboro), the contractprice is based on the net cost of construction, after deduction of theagreed amount of downstream compensation payments.
41. Power contracts specify the summer and winter volumes of energydelivery corresponding to average hydrological conditions. Provisionsare made for retroactive price adjustments in Yay and November of eachyear, if actual deliveries in the previous half-year have deviated bymore than 10% from the contract volume. The effect of these adjustmentsis that EPDC and the purchaser share, within agreed maximum and minimumprice limits, both the risk of an abnormally low power production and thebenefits accruing from an exceptionally favorable water flow.
42. Power contracts are rather short term and may be revised at period-ical intervals to reflect changes in operating costs. An entirely newcontract is negotiated when a new plant comes into operation.
43. In the course of preliminary negotiations EPDC has agreed to anundertaking with the Bank that it will promptly establish and thereaftermaintain prices which will provide alreasonable return upon the propervalue of the total assets employed in its business". It defines thisreturn to be at least 6% and states that, having regard to present con-tract commitments it expects to attain such a level by 1961.
44. The EPDC has also agreed to an undertaking with the Bank by whichno new project should be initiated unless it would be able to earn arate of return upon it "corresponding to the rate of return which mightbe expected to be earned upon other investments in Japan with a similardegree of risk". The Company advises the Bank that the application ofthis yardstick currently would require a return measurably higher than6%. There is no test provided as to how the ability to earn a givenrate is to be based, but presumably this would be governed to a consid-erable extent by the cost to the customer companies of equivalent powerotherwise available to these companies from new projects.
Financial Structure of EPDC
45. A summarized balance sheet of EPDC as at Ijarch 31, 1958 is given inAnnex 1. The capitalization of the Company was approximately as follows:
Billions of Yen _f
Share Capital 46,10 27.7%Reserves .17 .1%Earned Surplus __°0
Total Equity 46.31 27.8%Long-term debt E72.2
Total 166.34 100.0%
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46. The share capital of EPDC is held almost entirely (99.6%) by theJapanese Government. The private power companies hold the remaining0.4%.
47. A breakdown of the Company's funded debt as at March 31, 1958 isgiven in Annex 2. Borrowings from government sources accounted for over94%o of the total debt. By far the largest part of this was in the formof 30-year loans from the "Trust Fund Bureau" of the Ministry of Finance,at an interest rate of 6.5%. The Trust Fund Bureau is the government'sdepositary of the reserves of the state postal savings and life insur-ance systems. Other borrowings from government sources included variousU.S. counterpart funds, some at an interest rate of 4% and others at3.3%. The only non-government borrowings of EPDC were 3 domestic issuesof 7-year bonds at a nominal rate of 7%, for a total of 7 billion yen,or less than 6% of the Companyts funded debt.
48. The bond issues are secured by a general mortgage. The rest ofthe funded debt is unsecured.
Past Earnings
49. EPDC did not begin selling electricity until three years after itsestablishment as none of the Companyts power plants had yet been com-pleted. EPDO is still largely at present a construction company, withmore than half of total fixed assets represented by work in progress.
50. Summaries of income statements for the past two fiscal years aregiven in Annex 3. Net profits of 'PDC were 710 million yen in 1956/57and 1,178 million yen in 1957/5g. As the Company is exempt from payingdividends until 1962 the management charged all but a small fraction ofthe profits to extraordinary depreciation, in order to avoid payment ofcorporate income taxes. This is permitted under the existing legislationwhich allows various industries, including electric power, to computedepreciation allowances, for income tax purposes, according to the de-clining balance method instead of the straight line method, thus enablingcorporations to charge substantially larger amounts to depreciation inthe early years of a plantts useful life.
51. Gross income before deduction of interest charges and extraordinarydepreciation was 3,278 million yen in 1956/57 and 4,478 million yen in1957/58. This amounted to a return of slightly less than 6% on theaverage investment in operation during the last two years thus conform-ing generally to the pricing policies of the Company as set forth inparagraph 39.
52. Non-capitalized interest charges were covered by gross income(before deduction of extraordinary depreciation which is, in effect, aprofit) 1.23 times in 1956/57 and 1.36 times in 1957/58. This low cover-age, results from the Companyts high ratio of debt to equity.
Capital Expenditures and Sources of Funds
53. Total construction expenditures of EPDC over the four years fromApril 1, 1958 to March 31, 1962 are estimated at Yen 197.5 billion (equi-valent to about $550 million) of which 37 billion yen for the Miboro Project.
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This is. an average of nearly 50 billion yen ($138 million) a year. Theprogram would more than double the Companyts total fixed assets (includ-ing Work in Progress) from 171.6 billion yen at the end of March 1958 to369 billion yen four years later.
54. From 1962 on, it is the stated intention of the management of EFDCand of the Ministry of International Trade and Industry to reduce therate of the Companyts expansion from about 50 billion yen to about 30billion yen a year. EFDC envisages spending a total of 182 million yenon capital account over the 6 years from April 1, 1962 to March 31, 1968,or an average of 30.3 billion yen ($85 million) a year.
55. Construction costs are expected to be met as follows:
Billicns of Y4 years from 6 years from TotalApril 1, 1958 April 1, 1962 (10 years)to March 31 1962 to March 31. 1968
Construction costs 197.49 182.00 379.49Increase in Working Capital (<AL. 1.Lv 1 1.42
Total needs for funds 197.45 183.46 380.91
*After 'deduction of amortization payments
56. During the first four years, EPDC would thus meet only 10.2% of itsconstruction costs out of self-generated funds. The percentage wouldincrease to an average of 27.4%o over the following 6 years. Towards theend of the period, as a higher proportion of the total fixed assets wouldbe in operation and depreciation accruals become larger, EPDC could meetup to 36% of its capital expenditures out of self-generated funds. How-ever, less than 2% of funds required will be from retained earnings.
57. Downstream benefit payments to be made by other power companies areexpected to amount to 300 million yen in 1962 and to 1 billion yenannually for the next 13 years.
58. New long-term borrowings would total 129.5 billion yen over thefirst 4-year period. Of this amount 14.4 billion yen, or about 11%would be the proceeds of the proposed IBRD loan and of the New York issue.The entire balance of 115.1 billion yen is expected to come from theTrust Fund Bureau of the Government.
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59. New share capital contributions by the Ministry of Finance are ex-pected to total 55.1 billion yen over the 4-year period.
Forecast of Income Sources and ADLLjAcation of Funds
60. A forecast of income statements for the years 1958/59 to 1967/68is given in Annex 3, and a projection of sources and application offunds for the same period, is attached as Annex 4.
61. The method of computation of rates has been assumed to remain asdescribed in paragraph 38 above. Ordinary depreciation is taken on astraight-line basis at an average rate of 2.15% a year (46 years).
62. For purposes of calculation, it has been assumed that the repaymentof the proposed IBRD loan and the redemption of the proposed externalbonds and notes would be made simultaneously by EPDC, as if the fullamount of 14.4 billion yen were, in effect, one single loan, This foreignloan has been assumed to carry a rate of interest of 6.25% and to have aterm of 25 years, with amortization beginning in April 1962 and endingin October 1983. The loans from the Trust Fund Bureau have been assumedto be on the same terms and conditions as those currently obtained byE PDC.
Future Earnings
63. Gross income of EPDC is expected to rise from 6.12 billion yen in1958/59 to 14.03 billion yen in 1967/68. Net profits would increasefrom 1.02 billion yen in 1958/59 to 2.61 billion yen in 1961/62. Up to1961, EPDC will not pay dividends on the share capital. The Companyexpects to continue to charge most of its profits to extraordinary de-preciation, so as to avoid corporate income tax liabilities. For thesake of clarity, however, all forecasts set forth in this memorandumshow operating surpluses as net profits.
64. Beginning with fiscal year 1961/62, EPDC plans to pay dividends,although the government may, at that time, follow a different policy inthis resoect. In order to be able to pay dividends, the Company willhave to show its profits as such, rather than charge them to extraordin-ary depreciation. This, in turn, will make EPDC liable to corporate in-come taxes.
65. The return on the Companyt s net fixed assets (after depreciation)is expected to show a gradual increase from 5.6% in 1958/59 to 6% in1961/62 and about 7.1% in 1967, whereas the return on gross fixed assets(before depreciation) will average about 5.5% over the 10-year period.
Iterest and Debt Service CoveragR
66. Interest other than charged to construction would be covered bygross income about 1.2 times throughout the 10-year period, with a slowlyrising tendency in later years.
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67. Debt service coverage would average about 1.2 during the first fouryears, and 1.35 from 1962 to 1968. In 1963, the coverage would reach thelow figure of 1.08, because of heavy bond repayments in that year. From1964 on, it would ren-ain stable at about 1.4. These coverages are low.It should, however, be borne in mind that most of the debt is owed tothe Japanese Government.
Future Canitalization
68. Projected balance sheets of EPDC as at March 31 of the years 1959to 1968 are given in Annex 1* The ratio of debt to equity would gradual-ly improve from the present 72/28 to about 67/33 in 1964 and 65/35 in1968.
V. CONCLUSIONS
69. EPDCts construction program, which was assigned to it by theGovernment when the Company was organized, will make a sizeable and use-ful contribution toward the final solution of the power supply difficul-ties which Japan has been experiencing since the end of the war.
70. Some of the facilities now under construction are costing consider-ably more than had been originally estimated and the economic justifica-tion of some of the projects is questionable. This is largely due to thefact that during the years immediately following the incorporation ofEPDC the basic functions of management were in effect exercised by MIITI.This resulted in a number of basic decisions being made before suitablestudies were completed, and in the absence of the necessary coordinationamong different phases of the Companyts activity.
71. During the last two years EFDC's management has been able to takea more active part in studying and formulating the decisions regardingits operations and future expansion. This improvement has resulted,among other things, in a reappraisal of the program of future expansion.
72. The program now under consideration, while not definitive, is animprovement over the one previously considered and gives evidence of abetter prospect of confining EPDCts future projects to those more suit-able to the economic development of Japan's power resources.
73. Statements on future policy obtained from officials of EPDC and ofMYlTI give the Bank reasonable assurance of the continued evolution of theEPDC management situation toward a sound balance between the Companytsown management action and the Governmentts supervision of the Companytsactivity. These statements on policy and other undertakings which havebeen agreed upon by EPDC also give assurances concerning the better just-ification and soundness of the future expansion program.
74. EPDCts engineering and operating staff is capable and work on theproject is properly organized. The project is adequately engineered andthe cost estimates are reasonable. The project is economically acceptable.
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75. The present financial position of EPDC should tend to improve overthe next few years. The percentage of the cost of new plant constructionwhich the Company can meet with self-generated funds will increase from10% at present to about 35% in 1967.
76. The debt service coverage will increase gradually from 1.2 in 195$to 1.4 in 1967. This coverage is low. h•ost of the debt is held by theJapanese Government, which also holds practically all the share capitalof the Company.
77. The Project is suitable as the basis for the proposed $10 millionloan. A term of 25 years with a period of grace of 3 years on amortiza-tion payments appears to be appropriate.
Based on average net fixed assets in 70operation during the year 56,615 75,097 109,466 123,217 154,329 232,881 269,028 300,978 322,416 353,435 367,142 382,309 ,
2/ Based on average gross fixed assets inoperation during the year 59,410 80,020 115,950 133,115 166,785 249,965 283,244 319,120 355,132 391,138 406,580 432,275
ELECTRIC POIBR DEVELOPMENT COMPANY
Forecast of Statements of Sources and Aplication of Funds(in millions of Yen)
Cash accrual for the year (-) 1,067 168 260 592 12 795 (-) 210 274 437 158
Cash balance at beginning of year 1,528 461 629 889 1,481 1,493 2,288 2,078 2,352 2,789
Cash balance at end of year 461 629- 889 1,481 1,493 2,288 2,078 2,352 2,789 2,947
Times debt service covered by netreceipts from operations 1.39 1.25 1.23 1.33 1.37 1.08 1.43 1.44 1.41 1.40
hMVE 5
CALCULATION OF GENERATING COST FOR IiIBORO
EPDC' s calculation of the annual cost of operation for the MiboroProject is based on an estimated net investrment of Yen 27,890,881,000.The detail of the calculation is as follows:
Annual Cost1000 Yen
Return on investment 1,673,453 6%
Depreciation 525,005 1.88% of 90% of net cost
Fixed Assets Tax 173,901 1.4% of 1/3 of net cost
Water rights charge 62,125
Salaries and wages 22,753 400,000 yen per annum.42 staff
Maintenance 47,300 220 yen/kw/year
Others 19,951
Overhead 37,270 0.1% of gross construction cost
Enterprise tax 39,011
Total 2,600,769
Total energy generated 535.7 million kwh/year. Cost of energy atMiboro 4.85 yen/kwh. Transmission and substation annual costs to the Nagoyaarea (where the proposed EPDC line terminates) are similarly calculated as251.6 million yen. After allowing for losses, the unit cost at the end ofthe transmission line becomes 5.49 yen/kwh.
NSTEX 6
BASIS FOR THE CALCULATION OF THERYiAL ALTERNATIVE
The assumptions made for this calculation are as follows:
1. Capacity of the alternative thermal installation equal to the capacityat Miboro (215 PIN) supplermented by the calculat.ed increase in winterpeaking capacity of dowTnstream power plants (60 PiW).
2. Average annual fuel efficiency 33% for a plant factor of 5000 hcursequi-ralent at full capacity.
3. Thermal auxiliary consumption 5%.
4. Investment in thermal plant per kw, $180.
5. Depreciation of thermal plant, 25 years, straight line.
6. Operating, maintenance and administrative costs on the basis of recentKansai figures.
7. Thermal efficiency for energy in excess of hydro's capability, which isto be obtained by increasing generation of all existing thermal plants,2V'.
8. Fuel cost as at Kansai's plants, 1 yen per 1000 calories (72 US centsper million BTU).
ANNEX 6 - page 2
CALCULATION OF THERMAL ALTERNATIVE(al] figures in millions c-, dcslars)
ThermalHydr AltEr ?.tive
1. Investment requirements
Plant 103 419.5
Transmission 17
Total 120 49.5
2. Annual Costs
Fuel 5.77 9*95
Oper., maint., and administration 0.53 1.50
Depreciation 2.08 1.98
Ta-es 0.7
Total 9.08 13.96
3. Savings in annual costs with hydro : 13.96-9.08 = 4.88
4. Additional investment in hydro 120-49.5 = 70.5
5. Return on additional inrestment : 88 = 6.94%
70.5
If the hypothetical fuel cost of 50 cents per million BTU is sub-stituted, the rate of return becomes: 3.71 = 5.3%.
70.5
IEfPORTED EQUIPITENT AND SERVICES
Amount i^n US$
Spare parts for imported construction equipment 600,000
Technical services for construction supervision _50O04P00
