RESTRICTED 'FILE torY Report No. TO-346b Public Disclosure Authorized
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 The report may not be published nor may it be quoted as representing their views.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 Public Disclosure Authorized
CUKUROVA ELECTRIC COMPANY PROJECT
TURKEY Public Disclosure Authorized
January 9, 1963 Public Disclosure Authorized
Department of Technical Operations CURRENCY EQUIVALENTS 1 US $ = 9 Turkish Lira (TL) 1 TL = 11 US cents 1 million TL = 111, 111 US $ TURKEY
CUKUROVA ELECTRIC COMPANY PROJECT
Table of Contents Page No.
SUMMARY i
I. INTRODUCTION
II. THE ELECTRIC POWER IThDUSTRY IN TURKEY
Ownership and Government Controls Capacity and Use 2 Transmission 2 Program for Expansion 2
III. ORGANIZATION OF THE CUKUROVA ELECTRIC COMPANY 3
Management 3 Facilities 3
IV. THE POWER MvARKET IN THE CUKUROVA AREA 4
Sales and Capacity of CEC 4 Post Project Needs 4 Expansion Program 5
V. THE PROJECT 5
The Hydroelectric Unit 5 Description 5 Engineering and Procurement 6 Construction Schedules 6 The Engineering Studies 6 Cost Estimates 6 Justification 7
VI. FINANCIAL ASPECTS 7
Present Financial Position 9 Financial History 9 Assets and Depreciation 11 Past Earnings 11 Financing Plan 12 Estimated Future Earnings and Financial Position 13
VII. CONCLUSIONS Ai\D RECOMMENDATIONS 11
A1NEXES
1. Forecast of Energy Sales.
2. Forecast of Peak Loads.
3. Estimated Load Curve and Available and Proposed Capacities.
4. Estimate of Cost.
5. Condensed and Adjusted Balance Sheets 1958-1966.
6. Condensed and Adjusted Income Statements 1958-1966.
7. Forecast Sources and Applications of Funds 1962-1966.
Map
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SUMMARY i. This report covers the appraisal of a project of the Cukurova Electric Company (CEC) of Adana, Turkey, consisting of the installation of a third 18 MW unit in the existing powerhouse at Seyhan Dam (financed in part by Bank Loan 63-TU) and of engineering studies by foreign consultants to plan additional steps in an expansion program. An IDA credit of $1.7 million equivalent has been requested to cover the foreign exchange cost of the project, the total cost of which is estimated at $2.3 million. ii. The borrower would be the Government of Turkey which would relend about $1.6 million to CEC for the 18 MW unit and use the balance for engineering studies. iii. CEC, with 56.5% of its stock privately held, is the only private power company in Turkey. It was created in 1953 after the Government agreed, in connection with Bank Loan 63-TU, to grant it a 49-year concession to operate the power facilities at Seyhan Dam. CEC is capable of installing and operating the 18 MW unit and has the funds necessary for local costs. iv. The project is technically sound and urgently needed to meet the energy demand in CEC's operating area. Further additions of generating capacity should be started soon and the proposed engineering studies are for the purpose of firming up plans for a new thermal station at Mersin and a new hydro-electric plant on the Kadincik River. v. CEO's financial nerformance has been unsatisfactory until 1961 when CEC and the Government agreed on realistic values of the power facil- ities and raised average revenues by 78%. Since then CEC has been able to meet all of its financial obligations and to produce a reasonable profit on its share capital. vi. It is not yet certain whether the Government will extend CEC's concession, nor is it certain that if the concession is extended it will be done in a manner which would allow the Company soundly to undertake the Mersin and Kadincik projects. vii. The proposed project would be suitable *foran IDA credit of $1.7 million.
TURKEY
CUKUROVA ELECTRIC COMPANY PROJECT
I. INTRODUCTION
1. This report covers the appraisal of a project of the Cukurova Electric Company of Adana, Turkey consisting of the installation of a third 18 MW unit in the existing 36 14W powerhouse at Seyhan Dam near Adana (financed in part by Bank Loan 63-TU) and engineering studies by foreign consultants of additional steps in an expansion program.
2. The estimated cost of the project is TL 21 million, (US$2.3 million). IDA has been asked for a credit to cover the foreign exchange cost, excluding interest during construction, estimated to be equivalent to USW1.7 million.
3. The borrower would be the Government of Turkey and the bene- ficiary would be the Cukurova Electric Company (CEC), which was created and was granted a 49,-year Government concession in 1953 to operate the powerhouse at Seyhan Dam.
4. This report is based on information submitted to IDA by CEC and the Government, and on findings of an IDA mission which visited Turkey in June 1962.
II. THE ELECTRIC POWER I3DUSTRY IiN TURKEY
5. The industry is characterized by its relatively recent begin- nings and its general inadequacy to keep up with the growing demands for energy. Electricity for industrial use was first introduced in 1930 and transmission along modern lines did not begin until 1952. Consumption at a per capita rate of 110 kwh/year is lower than any country in Europe. Only 30 of the population is supplied with electricity.
Ownership and Government Controls
6. All of the electrical power industry is publicly owned except the facilities of the proposed beneficiary CEC, whose share capital is owned as to 56.5g by private interests and as to 43.5% by the Etibank. Other electric power enterprises are owned by one or more of the following:
Municipalities; Etibank, a Government enterprise for the development of mining and electrical energy; Ellerbank, a Government bank to assist the financing of municipal projects; Devlet Su Isleri (DSI), a Government agency in the Ministry of Public Works for irrigation and flood control, which produces hydropower at multipurpose projects.
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The Minister of Finance controls Government budgeting for electric power development with the aid of the State Planning Board. The Minister of Industry controls electric rates, which in the past, have been kept low in relation to costs. Proposals for the development of electric power must be technically approved by: "Elektrik Isleri Etut Idaresi" (EIEI), a technical group in the Ministry of Industry, which also makes general plane for national power programs and maintains statistics on the industry. Its general planning work is well done and it regularly employs consulting firms from the United States and Europe to accomplish more detailed plans.
CaDacity and Use
7. The installed capacity of power plants operating for general consumption in 1960 (latest available data) was 1,260 MW of which 854 MW was thermal and 406 MW was hydro. In addition, industrial plants had a total capacity of 261 MN for their own use. Net production was 2,715 million kwh. Consumption may be classified as follows:
Domestic 19% Public Services 6% Industry 73% Traction 2%
The high proportion for industrial use is accompanied by a large pent-up demand for this purpose. The relatively low domestic use indicates the large part of the population not having access to electricity.
Transmission
8. There are transmission lines as follows:
High tension (154 Kv) 2,000 Km. Medium tension (66 & 33 Kv) 3,312 Km. Low tension distribution 10,850 Km.
Most of the lines are concentrated in the north-western and western parts of the country.
9. Load growth has been about 12.55 per year in recent years. However, plants under construction in 1960 would add only about 15% to 1960 capacity in the following three years with consequent worsening of the system's ability to supply the demand.
Program for Expansion
10. In an effort to meet the increasing need for electrical energy, the Government has prepared a statement of its five-year program (1963- 1967), intended to increase production on an average of 12.5% per year and to provide increased transmission facilities. The total capital cost is
estimated at TL 5,000 million (US$ 556 million). The statement contains a discussion of need for substantial internal cash generation, which would call for a sharp revision of the past policy of low rates.
I1I. ORGANIZATION OF THE CUKUROVA ELECTRIC COMPANY
11* CEO was formed in 1953, when the Government granted it a 49-year concession to operate the powerhouse at the Seyhan Dam, which was constructed partly for irrigation and flood control purposes. The concession area covers the Provinces of Seyhan and Icle, (see map) the larger part of the Cukurova alluvial plain, bounded on the north by the Taurus Mountains and on the south by the Mediterranean Sea. It is a rich agricultural area, the most prosperous region in Turkey.
12. The 36 MW power plant and other facilities were constructed for the Turkish Government and financed in part by the Bank's loan of $25.2 million (No. 63-TU) made in June 1952 to the Turkish Government, it having been agreed that the plant would be turned over to the CEC.
13. Operations began in 1956. Due to controversy within the Govern- ment about private ownership of utilities, an overrun in the cost of the powerhouse, and a devaluation of the currency, which complicated a settle- ment, a firm agreement on CEC ownership of the powerhouse was not reached until 1961 (see paragraph 39). Management
14. The Board of Directors consists of a Chairman and three other representatives of private stockholders and three directors representing Etibank, the holder of the Government's minority interest.
15. The General Manager is a capable engineer with experience in both hydroelectric and thermal power installations. He directs a force of about 200, in which the heads of the technical departments and some of the assistant heads, seven in all, are experienced engineers. The present Chairman of the Board and the General Manager have been in charge for about 18 months. During that time they have reached agreements with the Government on all of the important relationships which affect the Company and which had been allowed to remain unsettled by the previous management. The works are efficiently managed and well maintained. The staff is capable of operating the proposed project, and with the help of equipment suppliers during erection, would be able to construct it. However, the staff has had little opportunity or incentive to plan for expansion, since this is normally done by the Government, and the staff cannot now be considered qualified for this type of work. Facilities
16. The installed generating capacity of CEC is two 18 MN hydro units in the Seyhan plant at Adana.. In addition there are 15 NW of diesel units a - 4 - in the service area owned by municipalities and private industries. These are expensive to operate and of limited usefulness in meeting load peaks, since they are not equipped to operate in parallel with the hydro units.
17. CEC owns 89 km. of 66 Kv transmission lines connecting the Adana area with the cities of Tarsus and Mersin, and 14 step-down substations and distribution lines to industrial consumers with individual demands in excess of 500 Kw. (See Map) Distribution to other consumers is over lines built and operated by municipalities.
IV. THE POWER MARKET IN THE CUKUROVA AREA
Sales and Capacity of CEO
18. The sales of CEC have increased 8% per year for the last three years. (See Annex 1.) However, in 1962 the completion of the port of Mersin, a grain elevator and a flour mill at Mersin, an airbase at Adana, and other industrial facilities is expected to cause an average increase in sales of 12% per year over the next three years. This estimate is con- servative and contracts have been signed by CEC for practically all of the new sales. There will be no lack of energy during this period,but the estimated peak load will be 13% over name-plate capacity of the Seyhan plant in 1962, 33% over in 1963 and 47% over in 1964. (See Annex 2.) The annual peaks are due mainly to agricultural processing and occur near the year's end after harvest. Arrangements are being made to care for the capacity shortage in 1962 and 1963, by use of the industrial and municipal diesel facilities. This will be expensive and not very reliable. It is essential, however, that additional capacity be installed by the fall of 1964 and the proposed project is intended for this purpose. There will be ample water to operate the existing 36 MW at Seyhan even in dry years. With the propo-_c 18 M4 in addition, the dry year minimum capacity would be 45 MW, which would be barely adequate for the estimated 1964 peak and the capability available in an average year (54 MW) would be reached in 1965. Under these circum- stances CEC is deferring applications for industrial supplies until a further step can be taken in its expansion program.
Post Project Needs
19. In order to plan for further expansion which should be started soon, the Government has prepared a study through EIEI. The study includes the problem of alleviating a serious energy shortage in the adjacent pro- vince of Hatay. This province contains part of the Cukurova plain and Iskenderun, the most important Turkish port on the Mediterranean. The area is served by a 3 MW hydro plant and 12 MW of diesel plants. There are serious power shortages and frequent load shedding. Prices per kwh vary from 3 US cents to over 10 US cents. There are no additional hydro possi- bilities in the Hatay area. The EIEI study showed that a thermal plant was needed and that, allowing for transmission costs, it could produce more advantageously in Mersin adjacent to an existing oil refinery than it could in Iskenderun, where residual oil would have to be shipped in. The study concluded that CEC should extend its operating area to include Hatay Province and the Government has given preliminary approval to this proposal. The conclusions of the study are sound.
20. Bringing in this additional area in 1965 would increase the CEC's peak load by 55%. This estimate is conservative, since it is based on additional demand of the new area of 21 MW in 1965 compared to 12 NW of present diesel generation in the area under severe conditions of load shedding, low voltage, and part time supply.
Expansion Program
21. The proposed program for expansion as developed by EIEI assisted by CEC, (see Annex 3) is to build a 50 MW thermal plant at Mersin and a second circuit for the existing 66 kv transmission line from Mersin to Adana and a 154 kv line from Adana to Iskenderun. This has been estimated to cost TL 128 million (US$ 14.2 million). It would be desirable to com- plete it in 1965 in order to care for the Hatay area as promptly as possible. Expansion beyond Mersin would be needed in 1967 and for this an 80 MW hydro plant (Kadincik) near Tarsus is proposed at an estimated cost of TL 180 million (US$ 20 million). This general program is technically sound, but it will require detailed analysis by foreign consultants (see paragraphs 22 and 27).
V. THE PROJECT
22. The proposed project consists of the installation of a third 18 NW hydroelectric unit in the Seyhan powerhouse, where space and appurtenant facilities have already been provided; and engineering studies by foreign consultants to formulate firm plans and reliable cost estimates for the proposed Mersin thermal plant and the Kadincik hydro plant.
The Hydroelectric Unit
Description
23. The new third 18 FW unit would be practically identical to the two units already in operation. Required appurtenant equipment for the new unit would be a small amount of station control equipment, an extension to the powerhouse substation, and four step-down substations in Adana and Mersin.
24. Studies of water availability at the Seyhan plant show that the plant would have an unusually high firm capacity for a hydro plant. The powerhouse discharges would supply all expected needs of irrigation; and the full plant capacity of 54 MW could operate throughout average water years, but would be limited to 45 NW during water years like the driest of a 25 year record of flowso
Engineering and Procurement
25. Little new engineering is involved in the purchase and installation of the third unit. The specifications for the first two units have been used with minor alterations. Firm price contracts have been let for the turbine and generator with the original manufacturers after solicitation of prices from other manufacturers, which showed that the original contractors could furnish the equipment more cheaply. IDA has already given its approval to this pro- cedure. The installation of the unit would be under the direction of the manufacturers? construction supervisors and the simple construction work involved could be done readily by CEC.
Construction Schedules
26. Orders for the principal items of equipment were placed in May 19620 The further construction schedule is as follows:
April 1, 1964 - All equipment delivered. April 1 1964 - Begin erection. October 15 1964 _ In operation.
This schedule is reasonable.
The Engineering Studies
27. The proposed engineering studies for Mersin would be for the purpose of determining whether steam or .as turbines should be used and whether cooling water should be from wells or the sea, selecting optimum steam conditions and preparing a general plant layout and a firm estimate of cost. The studies for Kadincik would include a review of an existing feasibility study prepared by EIEI to determine whether the proposed plan is the optimum which can be developed, whether the project is economically feasible, including comparisons with alternative thermal plants, and whether the cost estimates are adequate and reasonable. EIEI is now preparing to enter a contract for the studies with a consulting firm which is satisfactory to IDA. Both EIEI and CEC would assist in the studies with their regular personnel. The contract for the work would be between the consultants and EIEI which has had experience with similar contracts. The studies would be started early in 1963 and completed in about three months.
Cost Estimates
28. The estimated cost of the proposed project is as follows: (for details see Annex 4).
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Foreign Local - Total Costs-- Exchange Costs in in Us$ TUS$ US$ T million million million million
Third Unit
Powerhouse equipment 4heluding installation 1005 .420 L1h25 12.825
Step-up substation .115 .032 .147 1.32e
Step-down substations .420 .153 *573 5.157
Contingencies @ 5% .080 o029 ol09 o981
Total for Third Unit 1.620 .634 2.254 20.288
Engineering Studies .080 .080 .720
Total for the Project 1.700 .634 2.334 21908 are The purchase and erection of the third unit and appurtenant equipment covered in part by firm price contracts. The allowance for contingencies the shouid be ample to cover price rises on the remaining equipment and in local costs. The latter cover principally the simple placement of mass concrete. The estimate is adequate and reasonable,
Justification
29. The proposed third unit at Seyhan powerhouse is critically needed to meet power demands which are conservatively estimated to exceed existing capacities before the'project can be completed. The unit cost would be only USA 90 per kilowatt at the switchyard, since the powerhouse was originally for constructed to receive this third unit. The proposed engineering studies additional expansion steps are needed preparatory to construction, which should be started within the next year. The proposed work forms a small bu-t urgent part of the 'coniemplated Government expansion program for the electrical industry of Turkey for the years 1963-1967.
VI. FINANCIAL ASPECTS
under 30. CEC operates its Seyhan powerhouse and transmission facilities a 49-year concession dated August 2'6, 1953, at the end of which its properties will be turned over to the Government. The concession provides that tariffs should cover:
(a) Operating expenses, including straight-line depreciation,
(b) An annual provision to a reserve for the redemption of the share capital at the end of the concession;
(c) Charges for water at the Seyhan dam;
(d) A "reasonable" profit for distribution as dividends.
31. In addition, the November 8, 1961 agreement between the Government and CEC described in para 39 below, provided that tariffs should also cover: a) interest on the newly assumed debt to the Government and b) amortization, over the 16 year remaining life of Bank Loan No. 63-TU, of (i) the deferred exchange loss on the power portion of this loan, resulting from devaluation of the Turkish currency in 1958 from TL 2.8 to 9 - $1 and of (ii) the interest payments made by the Government to the end of 1961 on the power portion of the Bank loan.
32. Tariffs, subject to approval by the Ministry of Industry, are reviewed at the Ministry's initiative or after periods of 3 to 5 years initially, then every 10 years, by a Ministry-appointed committee representing CEC, the Ministry and the consumers.
33. In connection with the Mersin and Kadincik projects, the Government and CEC are contemplating amending the concession to define the conditions under which CEC's service area would be extended. The Government has agreed, however, that any changes in the concession would be subject to the agreement of IDA,
3h. Owing to political interference and the lack of an agreement between the Government and CEC over the terms of payments for the Seyhan power facili- ties, tariffs were maintained at unduly low levels since the beginning of CEC's operations. Following the November 1961 agreement already cited, the average tariff was increased effective March 1, 1962 by 78% from about 6a5 Kurus/kwh to about 11.6 Kurus/kwh. (One Kurus equals about one US mill). The present rate is about 10 Kurus/kwh, as against 2 previously, for municipalities, and about 13 Kurus/kwh, as against 9 Kurus/kwh for industrial consumers. As indicated in para. 52 below, resulting revenues should be sufficient to cover CEC's increased operating expenses and fixed charges and to generate a small but rapidly growing profit on capital invested in the first three units. To this extent, existing tariffs are adequate for the purpose of the present project.
35. The Government and CEC have agreed to maintain rates to provide CEC with revenues sufficient: (a) to cover operating expenses, including taxes, adequate maintenance and depreciation, and interest; (b) to meet repayments on long-term indebtedness to the extent that such repayments shall exceed provision for depreciation; (c) to meet payments to the Government on account of exchange losses; and (d) to provide a reasonable profit. This agreement paraphrases the concession and the 1961 agreement between the Government and CEC.
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Present Financial Position
36. Condensed and adjusted balance sheets as of December 31, 1958, 1959, 1960 and 1961 are shown in Annex 5. CEC's financial statements are certified by three accountants: two appointed by the private shareholders and one by Etibank, These arrangements are satisfactory.
Financial History
37. The initial capital of CEC was TL 16 million subscribed by the public, of which TL 14 million were paid to the Government as construction advances, and TL 2 million were reserved for working capital. The final capital was to be equal to the value of the power facilities taken over, originally estimated at TL 28 million, plus TL 2 million for working capital. Accordingly, share capital was to be increased from TL 16 million to TL 30 million at the end of the construction period, by the issue of TL 14 million worth of shares to Etibank as repayment for Government expenditure on the project. However, increased costs and the currency devaluation made these arrangements inadequate.
38. For several years CEC operated without an agreed value for its assets and with an unrealistic capitalization. Water charges paid to the Government were assessed on an understated cost of the dam and power rates were maintained at low initial levels.
39. In late 1960 a new Chairman and Board were elected and a new General Manager was appointed. Negotiations with the Government resulted in the issue to Etibank, as originally provided, of TL 14 million worth of shares. It was further provided by agreement of November 8, 1961 that:
(a) CEC would reimburse TL 13 million to the Government, the difference between the original TL 28 million estimated cost and the TL 41 million final cost of the power facilities taken over;
(b) CEC would collect from the consumers the amounts necessary to amortize the T1 52 million exchange loss incurred on the power portion of the Bank loan for Seyhan when the Turkish currency was devalued in 1958;
(c) CEC would reimburse the Government about TL 14.8 million for interest paid to the Bank until the end of 1961;
(d) the amounts under (a), (b) and (c) would be reimbursed over a 16 year period, the remaining life of the Bank loan, in 32 approximately equal semi-annual installments including interest at 4-3/4% on outstanding balances of (a) and (b);
(e) the water charge paid to the Government's DSI, would be raised to 1.5 Kurus/kwh, reflecting revised capital costs of the dam;
(f) amortization and interest payments would be increased in relation to any further devaluation of the currency, and tariffs would be increased correspondingly;
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(g) in case of delays, the Company would be charged 6% annual interest on payments overdue.
40. The agreement became effective in June 1962 after the necessary tariff increase was made effective and the third unit at Seyhan had been ordered. The Government has agreed that no changes would be made in the agreement without the approval of IDA.
41. The following is a summary of CEC's December 31, 1961 capitalization reflecting the substantial changes caused by the new agreements:
In Millions TL $ equive
Paid-in share capital: A-shares, issued 1954, par value TL 100 16.00 1.78 B-shares, issued 1961, par value TL 500 11400 1.55 C-shares, issued 1961, par value TL 500 1.25 .1b
Subtotal 31.25 3.47 Legal Reserve .99 .11
Total Equity 32.24 3.58
Government debt: Unpaid balance of TL 41 million final costs 13.00 1.44 Deferred 1957-1961 interest paid by Government to Bank 14.80 1.64 Revaluation of Bank Loan to TL 9 - $1 52,00 5.78 Miscellaneous Government claims 1.70 .19
Total debt 81.50 9805
42. Subscribed share capital was TL 35 million, including a late 1961 TL 5 million issue of C-shares for financing the proposed project, which is to be fully paid in by mid-19630 All shares are ordinary bearer shares, quoted in the Istanbul market. A-shares, issued to the public - primarily large con- sumers - carry one vote per share of par value TL 100. B- and C-shares carry one vote per par value TL 500. B-shares were issued to Etibank. C-shares were issued to the public and Etibank in a 3 to 1 ratio. Voting rights of B- and C-shares are presently under discussion between CEC and Etibank, a state owned autonomous organization, which holds the minority Government interest in the company. Etibank may own up to 49% of the share capital and may sell portions of its holdings to the public. The present ratio of private to public owner- ship is about 56/44.
43. Long-term debt to DSI, the Government department which constructed the project, and owns and operates the dam and irrigation facilities, was TL 81.5 million as previously described. The ratio of debt to total capital- ization was about 72% at 1961's end, as compared with an originally planned capitalization 100% in equity. I Assets and Depreciation
44. Gross fixed assets were TL 43.75 million at original costs, under- stated as a result of currency depreciation in recent years. For analysis purposes, the TL 52 million deferred exchange loss on the Bank loan which CEC has agreed to amortize, was considered in this report as an addition to fixed assets, which would thus become TL 95.75 million, a more realistic figure in the light of present-day values. Accrued depreciation was TL 13.85 million, leaving net fixed assets of TL 81.90 million. Stralightline depreciation was charged on book value at adequate rates averaging about 4.5% in 1961, and at higher rates in earlier years. Starting 1962, CEC will charge in addition the amortization over 16 years of the TL 52 million deferred exchange loss. This amortization may be considered as an additional depreciation charge on the increased value of assets.
45. Other assets included TL 1.26 million worth of non-negotiable 6% Government savings bonds and net current assets of about TL 18.65 million. This unusually high amount consists of:
(a) cash and banks, for TL 6.82 million,
(b) receivables, for TL 7a35 million,
(c) promissory notes, for TL 6.08 million, and
(d) inventories for TL 3U11 million, less
(e) current liabilities of TL 4.71 million.
The large current assets reflected accrued internal cash generation not reinvested in expansion, as well as the first payment of the newly subscribed share capital. CEC took advantage of its ample cash resources to grant long payment terms to its customers - partly in the form of promissory notes, charging interest at 10%. The debtors are solvent, and CEC stated that all arrears and notes would be repaid by the end of 1963. These funds will thus be available for the financing of CEC's program.
Past Earnings
46. Because of the delay in setting-up CEC as originally envisaged past earnings as shown in CEC's accounts give little indication of its true earning power. Condensed and adjusted income and profit and loss statements for the years 1958 through 1961 are shown in Annex 6. Since the beginning of its operations, CEC distributed dividends of 11% in 1958, about 13% in 1959 and 18% in 1960. The 1961 dividend was about 14.5%, Despite low tariffs, such dividends were possible because CEC was paying low water charges and re- munerating only a small proportion of the capital invested in its plant. Furthermore, no surplus was accrued and the concession's requirement for a capital redemption reserve was not observed.
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Financing Plan
47. A forecast of the sources and application of funds for CEC is given in Annex 7. This forecast covers the period 1962 through 1966 and it assumes that the proposed third unit project would be followed shortly by the next step of the program, consisting of the 50 MW Mersin thermal plant and trans- mission lines to Mersin and Iskenderun. Although the Kadincik hydro plant is to be started in 1963 no provision is made in the forecast for its financing for the reasons mentioned previously and because it has not been determined yet whether CEC would be the agency responsible for its construction and operation.
48. The estimated cost of the third unit is TL 20.29 million ($2.25 million equivalent), towards which the proposed credit would contribute the foreign exchange requirements of TL 14.58 million equivalent ($1.62 million) or about 72%. The Government and CEC have agreed that this portion of the proposed credit would be relent to CEC at 5-1/2% interest and for a term of 20 years including a grace period of about two years. The local currency required - TL 5.71 million - will be provided by the CEC which already has sufficient resources for the purpose.
49. Capital expenditures for the four year period through 1965, when the above program would be completed, could amount to about TL 148.3 million ($16.5 million) as follows:
Millions of TL $
Seyhan Third Unit 20.29 2.25 13.7 Mersin Thermal Plant 10.00 11.11 67.4 Transmission 28.01 3.11 18.9
Total expenditures 148.30 16.647 lOO.0
50. Assuming that a new foreign loan of about US$ 8.5 million would be obtained to finance the foreign exchange cost of the Mersin plant and trans. mission facilities, CEC would have to raise about TL 28 million worth of share capital in addition to the TL 5 million already subscribed and partially paid in. The total requirements would be financed as follows:
Millions of _L $ % Net cash generation 12.93 1.44 8.7 Net decrease in working capital 12.54 1.39 8.5 New share capital 31.75 3.52 21.4 Total own resources 57.22 6.35 =3. Proposed IDA Credit 14.58 1.62 9.8 Future foreign borrowing 76.50 8.50 51.6 Total borrowings 91.08 10.12 3i717
Total Sources 148.30 16.47 100.0
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51. It is likely that the high estimated cost of the thermal plant on which this tentative plan is based will be revised downwards and that less share capital will have to be raised and a smaller loan may be adequate. CEC is reviewing prospects for issuing new share capital and proposes to submit a reasonably firm financing plan when cost estimates have been more accurately determined.
Estimated Future Earnings and Financial Position
52. If CEC did not expand beyond the proposed third unit addition, exist- ing rates would provide satisfactory earnings. In each of the three years through 1964, interest payable would be covered at least 2.5 times by net income and debt service at least 1.8 times by internal cash generation of the corresponding year. Taking into account the recent issues of new share capital, net profit after taxes would be about 9% of average share capital outstanding in 1962 and 1963, as compared with 18% in 1961. Earnings prospects would improve thereafter with full utilization of the three units and gradual redemp- tion of the debt.
53. Forecast income statements for the years 1962 through 1966 are shown in Annex 6. They are based on a conservative estimate of the effects of the recent rate increase and on the assumption that CEC would go ahead with its plans for construction of the Mersin thermal plant and transmission facilities. Net income before interest and taxes would increase from TL 8.6 million in 1962 to TL 12.8 million in 1965 and would decrease to TL 11.7 million in 1966 due to the additional cost of operating the Mersin thermal station. The interest coverage would deteriorate from 2.6 times in 1962 to 1.5 in 1964 and 14 in 1966. No profit would be available for dividends in 1966. In the period 1962 capitale to 1965 net profit after taxes would range between 7% and 9% of share A rate increase might be necessary to help finance the next step and to cover the higher operating cost of the proposed thermal plant. The timing and magni- tude of this increase will depend on the actual effect of the present rate increase on CEC's revenues and the firming up of present plans for expansion including estimated costs. 54. As shown in Annex 5, the debt ratio of 72% as of December 31, 1961 would rise to a maximum 74% by December 31, 1963 and decline to 70% by December 31, 1965 just prior to the start of amortization of the assumed credit for financing of the next step. These debt ratios are high. CEC has accepted a covenant which would limit incurrence of new debt by an earnings test requiring that actual net income for a recent twelve month period (factored with any rate increase in effect at the time the new debt is to be incurred) be at least 1-3/4 times the maximum interest requirements for any succeeding fiscal year on all indebtedness including the indebtedness pro- posed to be incurred. The test would permit incurrence of the proposed credit by an ample margin. Under present estimates a new rate increase might be required to meet the test for borrowings of the magnitude contemplated in this report for financing the next step in the expansion program.
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VII. CONCLUSIONS
55. The project is technically sound, its estimated cost is reasonable and its construction schedule is realistic.
56. Completion of the third unit at Seyhan by the fall of 1964 is essen- tial to meet the conservatively estimated peak load increase in the area served0
57. CEC's operations are well managed. It is capable of constructing and operating the project.
58. Satisfactory agreement was reached in 1961 regarding the value of the Seyhan power facilities transferred by the Government to CEC and the portion of the capital cost of the dam to be used as a basis for computing water charges payable by CEC. It resulted in an unfavorable but more realistic debt ratio of 72%. The Government has agreed that no change would be made in this agree- ment without the approval of IDA (para. ho). CEC has accepted a covenant limiting future incurrence of debt by an earnings test requiring that actual net income cover at least 1-3/4 times the annual interest charges on existing and proposed long-term debt (para. 5h).
59. A rate increase of about 78% was made effective March 1, 1962, which would enable CEC to meet the new commitments resulting from the 1961 agreement. Revenues forecast on the basis of these new rates are adequate as far as the proposed project is concerned; but rates may have to be further increased depending on the size of CEC's next expansion step. The Government and CEC are aware of this and have accepted a rate covenant which is satisfactory.
60. CEC's concession would have to be amended if the Company expands to service a larger area. The Government and CEC have agreed that any change in the concession would be subject to approval by IDA. 61.. Further expansion steps should be started soon. Studies by foreign consultants are, however, still required, which would be arranged and paid for by the Government. Consultants satisfactory to IDA will be selected by the Government.
62. The project is suitable for an IDA oredit of $1,700,OCO. Of this amount, $802000 would be used directly by the Government for financing the studies described above. The Government has agreed to relend to CEC the $1,620,000 necessary for the financing of the third unit at Seyhan at an interest rate of 5 : and for a term of 20 years including two years grace.
CUKUROVA ELECTRIC COMPANY
Forecast of Enerv Sales (GWh)*
1958 12S2 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 197
Municipal Sales
Adana 25,405 30,470 35,302 38,750 46,0 52,0 58,0 66,o 75,0 85,0 96.0 108.0 123,0 Mersin 6,553 8,607 10,426 11,750 13,0 15,0 16,4 20,0 23,0 26,8 30,8 35,6 41,0 Tarsus 4,174 4,940 6,678 7,200 8,4 9,4 10,5 12,0 13,5 15,1 17,0 19,2 21,7 Ceyhan 4,0 5,9 8,3 11,0 13,5 16,4 Iskenderun 37,0 41,3 46,5 53,0 60,5 69,5 Antakya 10,0 11,6 13,5 16,5 18,0 21,0 Others 7,66 8,82 lo,1l 11,66 13,26 15,31 Subtotal I 36,132 44,017 52,406 57,700 67,4 76,4 84,9 156,66 179,12 205,31 235,96 268,06 307,91
Industrial Sales (Above 900 kw)
Adana 67,938 68,348 72,200 76,000 77,0 83,0 89,0 96,0 100o, 104,5 109,5 115,0 120,0 Mersin 11,036 11,195 11,748 14,600 13,5 14,5 15,5 16,5 17,4 18,2 19,1 20,1 21,2 Tarsus 9,968 9,758 9,146 8,500 10,0 10,5 11,0 11,5 12,0 12,5 13,0 13,6 14,2 Ceyhan 1,5 1,6 1,7 1,8 1,9 2,0 Iskenderun 5,0 5,7 6,5 7,0 7,5 8,0 Antakya 7,0 7,6 8,1 9,0 9,5 10,0 Others Subtotal II 88,942 89,301 93,094 99,100 100,5 108 ,0 115,5 137,5 144,3 151.5 159,4 167,6 175,4
New Industries
Mersin Grain Elevator (TMO) 0,5 1,0 1,25 1,5 1,75 2,0 2,25 2,5 2,75 Mersin Anadolu Mahsulat - - 0,2 1,0 1,5 1,75 2,00 2,25 2,5 2,75 3,00 Mersin Port Facilities _ _ - - 0,8 1,6 2,5 5,0 6,o 7,0 8,0 9,0 10,0 Mersin Other Facilities _ _ _ _ 1,0 1,5 2,0 2,5 3,0 3,5 4,0 4'5 5,1 Adana Incirlik Air Base _ - - - 5,0 7,0 9,0 11,0 13,0 14,0 15,0 16,0 17,0 Tarsus - _ 00,5 0,8 0,9 1,0 1,1 1,2 1,3 1,4 1,5 Subtotal - - - - 8,0 12,9 17,15 22,75 26,85 29,95 33,05 36,15 39,35 Unknown - - - - 25,0 40,0 50,0 55,0 60,0 Subtotal III _ - - - 8,0 12,9 17,15 22,75 51,85 69,95 83,05 91,15 99,35
Total (I+II+III) 125,074 133,318 145,500 156,800 175,9 197,3 217,55 316,91 375,27 426,76 478,41 526.81 582,66 Annual increase % 6.6 9.1 7.8 12.2 12.2 10.3 45.7 18.4 13.7. 12.1 10.1 10.6
* These figures do not include losses on the transformers and transmission lines. After 1961 the figures include smel! mnounts of municipal and industrial diesel generation.
CUKUROVA ELECTRIC COMPANY
Forecast of Peakloads (MW)
1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970
Municipal Loads
Adana 8.8 9,3 lo?, 12,0 13,7 15,5 17,3 20,0 22,5 25,7 29,2 33.0 37,0 Mersin 1,25 2,3 2,95 3,0 3,95 4,55 4,85 6,05 6,95 8,1 9,3 10,4 12,0 Tarsus 1,18 1,45 2,0 2,2 2,55 2,85 3,2 3,65 4,1 4,6 5,2 5,85 6,3 Ceyhan 1,2 1,7 2,4 3,2 3,9 4,7 Iskenderun 10,6 11,8 13,3 15,2 17,3 20,0 Antakya 3,3 3,8 4,4 5,3 5,9 6,6 Others 2,9 3,6 4,1 4,8 5,4 6.4 Subtotal I 11,23 13,05 15,65 17,2 20,2 22,90 25,35 47,70 54,45 62,60 72,2 81,75 93.0 Industrial Loads (Above 500 kw)
Adana 11,0 11,4 11,6 13,0 12,8 13,9 14,8 16,o 16,6 17,4 18,2 19,2 20,0 Mersin 2,35 2,3 2,35 2,7 2,76 2,97 3,16 3,37 3,55 3,7 3,9 4,1 4.3 Tarsus 1,8 - 1,8 1,3 1,6 1.86 1,95 2,04 2,13 2,22 2,32 2,41 2,51 2,63 Ceyhan o,6 0,7 0,8 0,8 0,9 1.0 Iskenderun 1,5 1.7 1,9 2,1 2.2 2,3 Antalwa 1.1 1.1 1,2 1,3 1,4 1,5 Others . ------Subtotal II 15,15 15,5 15,25 17,3 17,42 18,82 20,0 24,7 25,87 27,32 28.71 30,31 31,73 New Industries
Mersin Grain Elevator (TMO) 1,0 2,5 2,5 2,5 2,65 2,8 2,9 3,1 3,2 Mersin Anadolu Mahsulat 0,1 0,5 0,7 0,8 1,0 1,1 1,3 1,4 1,5 Mersin Port Facilities °,5 1,0 1,5 2,5 3,5 4,5 5,5 7,0 9,0 Mersin Other Facilities 0,4 0,5 0,7 0,9 1,0 1,l 1,3 1,4 1,7 Adana Incirlik Air Base 0,8 1,2 1,5 1,9 2,2 2,3 2,4 2,5 2,6 Tarsus 0,4 o,6 0,7 0,8 0,9 0,95 1,0 1,l 1,2 Subtotal 3,2 6,3 7,6 9,4 11,25 12,75 14,4 16,5 19,2 Unknown 5,0 8,0 lo,o 11,0 12,0 Subtotal III 3,2 6,3 7,6 9,4 16,25 20,75 24,4 27,5 31,2
Total (I+II+III) 26,38 28.55 30,9 34.5 40,82 48,02 52,95 81,80 96,57 110,67 125,31 139,56 155,93 Annual increase % 8.2 8.2 11.7 18.3 17.6 10.3 54.5 18.1 14.6 13.2 11.4 11.7
200 Kodincik P/ant completed (80MW odded) _ / 180
160
140 ______
120 _ _ _ Mersin 7hermal P/ant comp/e d% (50 MW added) cmeed
3. 100__ _ _ _
80 ____X _
Seyhan 3rd Unil instailed 60 (/8 MW added) TURKEY 36 MW |/ CUKUROVA POWER SYSTEM
40 ______'__ ESTIMATED LOAD CURVE AND AVAILABLE AND PROPOSED CAPACITIES 20
0 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 > CD YEARS >
SEPTEMBER 1962 IBRD-1043R CA
ANNEX 4
CUKUROVA ELECTRIC COMPANY
Estimate of Cost (Excluding interest during construction)
Foreign Local _____Total Costs_ --- Exchange Costs US$ US$ US$ TL million millior. million million
THIRD UNII'
Powerhouse equipment including installation: Engineering and training CEC staff .028 .011 .039 .352 Turbine .422* .068 .490 4.414 Senerator .486* .299 .785 7.058 Auxiliary equipment .052 .027 .079 .710 Spare parts .017* .015 .032 .291 Contingencies - .019 .019 .175 Sub-total 1.005 .439 1.444 13.000
Step-,,up substation: Transformers .090 .022 .112 1.010 Auxiliary equirment .015 .007 .022 .195 Spare parts .010 .003 .013 .120 Contingencies .005 .002 .007 .060 Sub-total .120 .034 .154 i.385
Step-down substations: Adana 1-5 IMVA 66/15 kv transformer .035 .008 .043 .385 Adana 2-5 MVA 66/6 kv transformers .070 .015 .085 .770 Mersin 1-5 MVA 66/15 kv transformer .035 .008 .043 .385 Cables and accessories .130 .050 .180 1.620 Distribution substation equipment .100 .072 .172 1.553 Contingencies .018 .008 .026 .232 Sub-total .388 .161 .549 4.945
Total for third unit 1.513 .634 2.147 19.330
Engineering studies: Mersin .167 - .167 1.500 Kadincik .070 - .070 .630
Total for engineering studies .237 - .237 2.130
Total for the Project 1.750 .634 2.384 21.460
Contract Prioes
CUKUROVA ELECTRIC COMPANY
Condensed and Adiusted Balance Sheets 1958-1966 In millions of Turkish Liras - TL9=41
ACTUAL FORECAST Fiscal year ending December 31: 1958 1S 1960 1961 1962 1963 1964 1965 1966
ASSETS
Fixed assets in operation / 42.53 42.90 43.43 95.75 95.75 95.75 95.75 144.34 251.84 Less: depreciation reserve?] 6.34 9.30 11.90 13.85 17.91 22.11 26.91 32.82 43.51 Net fixed assets in operation 36.19 33.60 31.53 81.90 77.84 73.64 68.84 111.52 208.33 Work in progress 7.81 55.74 113.30 107.50 - Net fixed assets 36.19 33.60 31.53 81.90 85.65 129.38 182.14 219.02 208.33 Portfolio investments 4.10 4.03 1.16 1.26 1.57 1.97 2.37 2.77 3.50 Net current assets 5.75 8.68 14.39 18.65 18.88 6.82 4.51 8.87 9.04 Deferred interest due to DSI3U 14.84 14.25 13.64 12.99 12.31 11.50
46.04 46.31 47.08 116.65 120.35 151.81 202.01 242.97 232.37
LILABILITIES
Paid-in capital 16.00 16.00 16.00 31.25 32.50 35.00 55.00 63.00 63.00 Reserves and surplus 1.13 1.25 .76 .99 2.08 3.29 4.69 6.61 8.86 Sub-total: equity 17.13 17.25 .16.76 32.24 34.58 38.29 59.69 69.61 71.86
Debt to DS v 27.00 27.00 27.00 81.50 78.29 74.93 71.41 67.72 63.30 Proposed IDA credit 4.49 10.92 14.57 16.45 15.88 Other foreign credit - 24.67 53.15 84.00 81.09 27.00 27.00 27.00 81.50 82.78 110.52 139.13 168.17 160.27
Net profit after taxes but before dividends 1.91 2.06 3.32 2.91 2.99 3.00 3.19 5.19 .24
46.04 46.31 47.08 116.65 120.35 151.81 202.01 242.97 232.37
Debt as % of adjusted capitalization 61 61 62 72 71 74 70 71 69
2 Adjusted values: a) 1958 and 1959 figures have been increased by TL41 million, the value agreed upon later for the assets taken over from DSI in 1957; b) 1961 and later figures have been increased by TL52 million, the deferred exchanges loss arising from revaluation of the Bank loan in Turkish currency. ? Consists of: a) ordinary depreciation, b) a speoial reserve buiit up from profits until a value of assets was agreed upon and c) the writing off after 1961 over 16 years of the TL52 million deferred exchange loss cited above. / Interest paid by DSI until the end of 1961 on the portion of the Bank loan used in financing the Company's assets. The Conpsny agreed to pay it back over 16 years. M/ Adjusted figures. The December 31, 1961 official balance sheet shows debts of only TL29.5 million representing the TL13 million unpaid balance of assets valued at TL41 million taken over from DSI, the TL14.8 million deferred interest (see note 3) and minor claims of TL1.7 million. The TL52 million additional liability arising from reevaluation of the Pank loan - which the Company considers a contingent liability - was added here for purpose of analysis.
CUKUROVA ELECTRIC COMPANY
CondenBed and adjusted income.statements 1958-1966
(In millions of Turkish liras unless otherwise stated) TL 9 = US$1 Actual ------Forecast Fiscal year ending December 31 1958 1959 1960 1961 1962 1963 1964 1965 1966
Sales, in millions of. kwh 125.0 133.3 145.5 156.8 173.0 182.1 200.0 311.0 369.0
Average revenues per kwh sold kUrua/kwh 6.2 6.7 6.6 6.5 .11.0 11.6 11.8 11.7 11.6
Operating revenues Sales to municipalities 72 88 1.05 1.14 6.40 7.70 8.19 15.08 17.28 Sales to industries, 8.01 8.04 8.49 9.06 12.61 13.29 15.35 20.83 25.51 Sub total operating revenues 8.73 8.92 9.54 10.20 19.01 20.99 23.54 35.91 42.79
Operating costs Operations and maintenence 1.31 1.95 2.61 3.64 3.55 3.86 4.45 9.28 12.48 Real estate and other taxes 3 3 59 1.59 1.62 1.65 1.65 1.70 1.70 Insurance 10 32 28 30 30 32 40 1.10 1.10 Water charges 63 67 73 79 2.25 2.73 3.00 4.20 4.20 OverhesAd and other expenses 19 16 31 25 21 22 30 90 95 Ordinary depreciation 3.62 3.21 2.64 1.96 1.96 2.00 2.50 3.50 7.80 Deferred exchange loss written off 36 3 2.10 2.20 2.30 2.41 2.89
Sub total: operating costs 5.88 .6.34 7.16 8.53 11.99 12.98 14.60 23.09 31.12
Net receipts from operations 2.85 2.58 2.38 1.67 7.02 8.01 8.94 12.82 11.67 Other income (net) 31 52 1.71 1.90 1.57 50
Net income before interest and taxes 3.16 3.10 4.09 3.57 8.59 8.51 8.94 12.82 11.67
Income deductions Interest payable 3.34 4.81 6.23 7.61 8.67 Interest during construction (credit) (05) (1.67) (3.18) (3.85) Deferred interest written off 59 61 65 68 81 Reserve for redemption of capital 78 81 1.00 1.52 1.52 Corporate tax 1.25 1.04 75 66 94 95 1.05 1.67 43
1.25 1.04 75 66 5.60 5.51 5.75 7.63 11.43
Net profit 1.91 2.06 3.34 2.91 2.99 3.00 3.19 5.19 .24
Disposition of net profit Legal reserve 12 12 16 31 40 40 40 73 4 Bonus to personnel 11 15 21 23 25 27 30 33 20 Cash dividend 1.68 1.79 2.97 2.37 2.34 2.33 2.49 4.13 -
Ratios 2 Return on net fixed assets in operation 4.4 11.0 11.6 13.0 11.5 5.6 Return on net total fixed assets 4.4 10.0 6.6 4.9 5.9 5.6 Times interest payable covered by net income 2.6 1.8 1.4 1.7 1.3 Times total debt service covered by cash generated 1.9 1.6 1.4 1.6 1.3 Net profit as %of average share capital outstanding 11.9 12.9 20.9 18.0 9.2 8.9 7.1 8.8 .4
L/ Amortization of the liability incurred as a result of revaluation of the Bank loan, which is chargeable to power rates, was considered for analysis purposes, as an additional depreciation charge (See also footnotes 1 and 2 to Annex 5).
/ Except as otherwise stated, all ratios cited are year end ratios. For definition of net fixed assets see footnotes 1 and 2 to Annex 5. Total debt service includes all interest payable, as shown in this Annex and all amortization, as shown in Annex 7.
ANNEX 7
CUKUROVA ELECTRIC COMPANY
Forecast of Sources and Applications of Funds 1962-1966
In millions of Turkish Liras TL 9 US$1
Total 'iscal year ending December 31 1962 1963 1964 1965 4 years 196 A ources of funds
Internal cash generation Net income before interest and taxes 8.59 8.51 8.94 12.82 38.86 11.6 Depreciation 4.06 4.20 4.80 5.91 18.97 10.6 12.65 12.71 13.74 18.73 57.83 22.3
Payment of customers' arrears 4.56 6.42 10.98
Capital contributions from shareholders 1.25 2.50 20.00 8.00 31.75
Proposed IDA credit 4.44 5.93 2.95 2.43 15.75 Future loan: thermal plant 23.50 26.00 27.00 76.50 4.44 29.43 28.95 29.43 92.25
22.90 51.06 62.69 56.16 192.81 22.3 pplications of funds
Additions to plant Seyhan hydro third unit 2.76 9.26 4.38 2.93 19.33 Thermal plant 4.00 25.00 38.00 33.00 100.00 Transmission ].O0 12.00 12.00 3.01 28.01 7.76 46.26 54.38 38.94 147.34 Interest DSI debt 3.29 3.14 2.98 2.81 12.22 2.6 Proposed IDA credit 7 95 1.02 9' Future loan: thermal plant 5.0, 3.29 3.14 3.05 3.76 13.24 8.6' Amortization DSI debt 3.21 3.36 3.52 3.69 13.78 4.4; Proposed IDA credit 55 55 5' Future loan: thermal plant 2.9:
3.21 3.36 3.52 4.24 14.33 7.9( Other expenditures Corporate tax 94 95 1.05 1.67 4.61 4: Dividend and bonus 2.60 2.59 2.60 2.79 10.58 4.4( Government savings bonds 31 40 40 40 1.51 7 Working capital requirements 5.00 5.00
3.85 3.94 4.05 9.86 21.70 5.6.
Total Applications 18.11 56.70 65.00 56.80 196.61 22.1'
Cash surplus (or deficit) for year 4.79 (5.64) (2.31) (64) (3.80) 1' Cash at beginning of year 6.50 11.29 5.65 3.34 6.50 2.7( Cash at end of year 11.29 5.65 3.34 2.70 2.70 2.8'
TURKEY
CUKUROVA POWER SYSTEM ) - -
Future Expansion Existing Program 0 20 40 60 80 00Km.,/ Hydro plants * ______
Therxal plant A |
154KV transmission lines .
66KV transmission lines __-__-___/__ 33KV transmission lines ,'- -
BULGARIA 8 L .4 C if S E A ' . E Y H A N gPR o v I N C E
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