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R E ST R I CT E D CIRCULATING COPY TO BE RETURNED TO REPORTS DESK R e p o r t No. TO-185-b IN CENTRAL FILES Public Disclosure Authorized This report was prepared for use within the Bank. In making it available to others, the Bank assumes no responsibility to them for the accuracy or completeness of the information contained herein.

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT Public Disclosure Authorized

VIANDEN PUMPED STORAGE HYDRO POWER PROJECT

LUX EMBOURG Public Disclosure Authorized

November 7, 1958 Public Disclosure Authorized

Department of Technical Operations TABLE OF C ONTENTS

Summary ' - ii

I. INTRODUCTION 1

II. THE BCHRRWER 1

Organization 2

III. LUXEI1BO-iJG-RHINELAND PAIATINATE TREATY 2

IV. THE PROJECT 3

Present Status of the Project 4 Construction Schedule 4 Cost Estimate 4 Schedule of Expenditures 5

V. POWER PARKET 5

RWE System 5 Future Demand b Peak Load Requirements 6 International Exchange of Power 6 Power Supply in Luxembourg 7

VI. POWER CONTRACT g

SEO-RWE Contract 8

VII; FINANIIAL ASPECTS 9

Sources of Funds 9 Financial Forecasts 10 Earnings and Dividends 10 Interest and Debt Service Coverages 10 Projected Balance Sheets 10 Financial Position of RWE 11 Security 11

VIII. ECONOMIC ASPECTS 11

IK. CONCLUSIONS 12 LIST OF ANNEXES

1. SEO, List of Shareholders

2. Vianden Project, Detailed Description and Technical Data

3. Vianden Project, General Plan

4. Vianden Project, Detailed Cost Estimate

5. RWE System, Typical daily load Curves

6. RUE System, International Power Exchange

7. Vianden Project, SEO-RWE Contract

8. SEO, Forecast of Income and Cash Flow Statements

9. SEO, Projected Balance Sheets

10. Vianden Project, Comparison with Alternative Thermal Plant

General Map VIAliDEN PUPED STORAGE HYDRO POWER PROJECT LTJXE,OURG

S u m m alr

This report covers an appraisal of a pumped storage hydro power project to be constructed by Societe Electrique de ltOur (SF0) at the town of Vianden in Luxembourg. ii. The project will convert base energy into peak energy of higher value by utilizing power available during the night to pump water from a lower into an upper reservoir and releasing water to generate power during periods of peak demand. The total generating capacity will be 320 1W. The plans provide for a possible future extension of the project increasing the total capacity to 640 MW. iii. The project is scheduled to be completed by the end of 1961. The total cost is estimated at $40 million equivalent of which $28.9 million will be required for expenditures outside Luxembourg. iv. SE0 was established in 1951 for the planning, execution and operation of the Vianden project. The present share capital of Fr.Lux.30 million ($0.6 million) will be increased to Fr.Lux.500 million (10 milllion). The main shareholders are the Luxembourg Government and the German utility company, Rheinisch-Westfaelisches Elektrizitaetswerk AG (RUE). The management of SEO is competent and the organizational arrangemertts made f r tne execution and operation of the project are satisfactory. v. The project will utilize the waters of the river Our which forms the border between Luxembourg and the German Land of Rhineland Palatinate, The concession and other rights required by SE0 are embodied in a Treaty which has been submitted to the two legis'latures for approval. vi. The project will be operated in accordance with a contract between SEO and RWE. The generated power will be absorbed by the RWE system and the pumping power required will be supplied by RWE. SE0 's total annual expenditures, including debt service and dividend on the share capital, will be covered by regular payments by RWE to SEQ. Part of these payments will be in the form of firm power supplied from the RWE system to consumers in Luxembourg and for sales by SEQ to third parties, vii. The capacity to be provided by the project will be fully utilized in the RWE system. Conservative calculations show that the project is economically justified. viii. The proposed share capital together with bond issues to be placed in Luxembourg and in Germany would provide 50% of the funds required for the construction of the project. A bond issue in New York and loans from the European Investment Bank and the Bank would provide the balance. ix. Financial forecasts show that the financial position of SEQ would be satisfactory. RWE is in a strong financial position and it can easily meet the obligations under its contract with SEQ. ii x. The project is suitable for a Bank loan in an amount of $6.5 million equivalent. A term of 25 years including a period of grace of 3-1/2 years would be appropriate. VIANDEN PUMPED STORAGE HYDRO POWER PROJECT LUXEBEOURG

I. IhTRODUCTION

1. The Vianden pumped storage hydro power project will be carried out by Societe Electrique de l'Our (SEO), a Luxembourg company. The project, which is located on the Our river near the town of Vianden in north-east Luxembourg, (see map attached) will convert base energy into peak energy of higher value by utilizing power, available during the night, to pump water from a lower into an upper reservoir, and releasing water to generate power during periods of peak demand. The plant, which will have a generating capacity of 320 MW, is designed to help meet the need for peak capacity in the power system operated by the German utility company, Rheinisch-Westfaelisches Elektrizitaetswerk AG (RWF), and the operation of the plant will be based on a long term contract between RWE and SEO. RWE will absorb all the power generated by the Vianden project and supply the pumping power required. It supplies power to a substantial part of Western Germany and its system is interconnected with the power systems of the surrounding countries. The Vianden plant will play an important part in the operation of this interconnected power system by providing peak power and will also be ideally suited for the control of voltage and frequency on the system.

2. The cost of the project is estimated at $40 million equivalent. The proposed financing plan provides for an increase in the presenv share- capital of SEO, sales of bonds in New York, Luxembourg and Germany, and loans from the European Investment Bank (EIB) and the Ba±ik. The proposed loan from the Bank would amount to ab-out $6.5 million equivalent anri wouli cover about 22% of the estimated external expenditures on the project.

3. This report is based on information prepared for the Bank by SEO and reviewed by Bank staff in the field, supplemented by discussions in Luxembourg, Germany, Brussels and Washington with representatives of SEO and the various other parties interested in the execution of the project.

II. THE BORROWER

4. Societe Electrique de l'Our was established in 1951 and incorpor- ated in Luxembourg. The company was formed to carry out studies of the Vianden project, and later to be responsible for its execution and operation.

5. The share capital of SEO amounted to Fr.Lux.30 million ($600,000) as of June 30, 1958. For the construction of the project, it would be increased to Fr.Lux. 500 million ($10 million), of which the Luxembourg Government and RWE would each hold 40%. The remaining 20% of the shares would be held partly by Luxembourg organizations and individuals and partly by Belgian, Swiss, Dutch and French companies. A list of shareholders with present and proposed participations is given in Annex 1. -2-

Organization

6. The Board of Directors of SEO consists of 11 members representing the major shareholders. Upon the increase in share capital, additional 10 members will be nominated. The President of SEO is appointed by the Board. He, together with six Board members, form a committee which is responsible for the management of the company. The members of this committee are well qualified and have wide experience in the management of public utility undertakings. The committee has appointed a secretary who handles day to day operations. SEO has retained the Swiss consulting firm Societe Generale pour l'Industrie (SGI) to serve as financial and technical advisor for the planning and execution of the project.

7. Personnel for the operation of the plant will be trained by RWFE in existing pumped storage plants in Germany. RWE will also make available key men for the first years of operation.

8. The organization of the company and the arrangements made for the execution and operation of the project are satisfactory.

III. LUXEMBOURG-RHINELAND PALATINATE TXEATY

9. The river Our, on which the project will be located, forms the border between Luxembourg and Germany except for a short distance at the town of Vianden where Luxembourg territory extends on both sides of the river. The concession and other rights required by SEO for the construction and operation of the project are embodied in a Treaty between the Grand Duchy of Luxembourg and the Land of Rhineland Palatinate. The concession will run for 99 years from the time the project comes into operation. The Treaty provides that the deliveries of pumping power to Luxem- bourg will not be treated as imports nor will be subject to any duties. On the other hand, the Rhineland Palatinate will use its best efforts to ensure that deliveries of peak power to Germany are not treated as imports. Luxembourg will further grant SEO a 5Wo reduction on capital and profit taxes.

10. The Treaty has been approved by the Federal Authorities in Germany and submitted to the legislatures of Luxembourg and Rhineland Palatinate for approval. It is expected to be finally approved and ratified at the end of November 1958. In its upper reaches the Our flows through Belgian territory. The appropriate authorities in Belgium have confirmed that they would have no objection to the execution of the Vianden project.

11. The proposed Bank loan would become effective only after legal opinions satisfactory to the Bank had been received showing that the Treaty has been duly executed and ratified and is binding upon the two parties. IV. THE PROJECT

12. The project consists of a lower reservoir in the Our Valley, an underground powerhouse, an upper reservoir and connecting pressure shaft and tunnel. The project is designed to convert base power, available during period of low power demand, to peak power. The overall development is planned to be carried out in two stages; the construction of the first stage only is considered now.

13. The lower reservoir which will have a useful capacity of 5 million cubic meters will be created by a 125 meter long gravity concrete dam across the Our.

14. The upper reservoir with a capacity of 3 million cubic meters will be formed by a closed earth and rock dike with a perimeter of about 2,300 meters. It will be connected with the powerhouse cavern by an intake structure and a steel lined pressure shaft about 500 meters long. A tailwater pressure tunnel, about 360 meters long will connect the cavern with the lower reservoir. Four horizontal units will be installed, each consisting of a turbine, a motor-generator and a pump. Each generator will have a capacity of 80 MW. A separate cavern will be excavated for the installation of four 100,000 kva step-up transformers. An outdoor switching station will be constructed and all necessary auxiliary and control equipment will be installed.

15. Certain civil works, necessary for the future expansion, will be carried out as part of the first stage. This is justified both for technical reasons and because of the savings obtained in the overall cost of the project. The main works to be carried out for the second stage will include the expansion of the upper reservoir to a capacity of 5 million cubic meters, the construction of a second pressure shaft and the installation of four additional units with auxiliaries, increasing the total generating capacity of the project to 640 MW.

16. The transmission lines and switching stations connecting the plant with the RWE system will be located on German territory and will be constructed and financed by RWE. The installations include 163 kilometers of 220 kv lines, 7.5 kilometers of 11O kv lines, and switchyarcis at Sel- hausen, Niederstedem, Trier and Tawern. A more detailed description and a general plan of the project are given in Annexes 2 and 3.

17. The plans of the project are based on detailed studies and surveys which were carried out during a period of several years. The detailed engineering plans and specifications have been prepared by the German consulting firm Elektrizitaets Aktien Gesellschaft of Frankfurt for the main part of the civil works, and by SOPADE, a firm formed by five Belgian utility and engineering companies for the electrical and mechanical equipment and the lower reservoir dam. The work of these two consultants is coordinated and given a final review by SGI. Reliable streamflow and rainfall data are available for an extended period and show that the filling of the lower reservoir presents no difficulties. The operation of the project will not change the natural flow of the Our river downstream from the project, because the minimum flow is sufficient to offset evaporation and seepage losses. Extensive core drillings and excavation of test tunnels show that the geological conditions are favorable. - 4- Present Status of the Project

18. The detailed plans and specifications have been completed and bids for the execution of the civil works and for all major items of equipment have been received and evaluated. A wide international participation was obtained in the bidding. Construction of the project would start promptly after the financing has been assured.

Construction Schedule 19. The time required for the construction of the project is estimated at three years. Assuming that work can be started and orders for major equipment can be placed in December 1958, two of the units should come into operation by the middle of 1961 and the remaining two by the end of 1961. Cost Estimate

20. The total cost of the project is estimated at Fr.Lux. 2,000 million ($40.0 million), which can be broken down as follows (additional details are given in Annex 4): Item External Internal Total Expenditures Ex enditures (million Fr.Luy.)

Civil Works 417 210 627 Equipment 613 80 693 Land, Roads and ReconstruLction 6 104 110 Preliminary Works, Overhead, Supervision 100 30 130 Financing Costs, Interest during Construction 158 82 240 Contingencies 150 SQ 200 Total 1.4 556 2,000

Million US$ equivalent (28.9) (11.1) (40.0) 21. The estimate is based on actual bids, received by SEQ on the main parts of the civil works and on all major equipment. The unit prices quoted in the bids for the civil works are based on the present level of wages and cost of materials. They are subject to changes in accordance with variations of the official indices published in Luxem- bourg. The estimated costs of the main items of civil works include, however, allowances ranging between 10% and 15% to cover unforeseen expenditures. For major equipment, 20% of the prices quoted in the bids are firm. This share will increase to about 35% when the orders are placed, leaving a balance of about 65% subject to escalation.

22. Ample allowances have been made for overhead, supervision and financial costs. Interest rates ranging from 5% to 6% for the various loans contemplated have been used for the calculation of interest during construction. The overall allowance of 11% for contingencies is reasonable - 5 -

23. The estimated external expenditures of $28.9 million equivalent include payments of about $15 million equivalent in German Marks, about $5.1 million equivalent in Belgian francs, about $2.9 million equivalent in Swiss francs and the rest in other EPU currencies and U.S. dollars.

24. Included in the cost estimate is an amount of Fr.Lux.117 million for civil works necessary for a future expansion of the project. The additional investment which will be required to carry out this expansion is at present estimated at Fr.Lux.1,300 million ($25.6 million).

25. The transmission line network does not form a part of the project to be financed by the proposed Bank loan. The cost of this work is estimated at D.Nk. 42.1 million ($10 million).

26. The cost per installed kw of generating capacity amounts to $124, which is low for an installation of this type. Including transmission facilities the unit cost increases to $156/kw.

27. The proJect costs have been conservatively estimated and are judged to be realistic.

Schedule of Expenditures

28. As of June 30, 1958 expenditures on the project amounted to Fr.Lux. 30 million. Scheduled expenditures are estimated as follo.-s (in millions Fr.Lux):

1958 1959 1960 1961 1962 Total 6 months Expenditures 5 590 690 600 85 1,970

V. POWER MARKET

RWE System

29. RWE is the largest power company in Western Germany. Its supply area in the heavily industrialized western part of the country covers some 12% of the area with about 15% of the population of the country. In 1957 power deliveries amounted to 26.5 billion kwh with a peak load of 4,900 MW, representing some 40% of the total power supplied in Germany.

30. Generating plants operated by RWE, its subsidiaries and associated companies had, at the end of 1957, a total capacity of 4,200 MW of which 829 MW was hydro capacity. In addition, 1,100 MW was available through long term agreements, mostly from thermal plants operated by coal mining companies. ME owns and operates an extensive grid system including more than 10,000 kilometers of high tension transmission lines. The most important of these lines connects the large thermal plants of RWE with the hydro plants operated by power companies in South Germany, Austria and Switzerland. Other lines provide connection with France, Belgium and the Netherlands. -6-

Future Demand

31. Power demand in the RWE grid has increased since 1950 at an average annual rate of 13%. RWE exDects a slower rate of increase in future years and bases its forecasts of future demand on annual rates de- clining from 11% for 1958 to 6% for 1962. On these reasonable assumptions the peak load by the end of 1962 would have increased to 7,400 SW.

32. RWE plans to increase the capacity of its main thermal plants by 1,200 MW during the period 1958-62. These plants are located in the lignite mining area close to Cologne, and are designed to burn this low cost fuel. The addition of generating capacity is coordinated with the plans for increased production in the mines.

33. New capacity of the order of 1,000 NW is also expected to become available during the period by additional long-term agreements with coal mining and industrial companies in the Ruhr area.

34. Total generating capacity by the end of 1962, including the 320 MW of the Vianden project, would amount to 7,820 NW and would provide only a small margin over the expected peak load. RWE will therefore, to the extent possible, enter into standby agreements with other interconnected power companies, to insure that the demand for power in the system can be met.

Peak Load Requirements

35. The graphs given in Annex 5 show typical daily load variations in the RWE system in 1957. The base load is largely met by thermal plants while hydro plants operating with natural or pumped storage reservoirs provide the capacity required to meet the sharp load variations during the peak periods. During the winter the difference of about 500 SW between the base and peak load could be met by hydro capacity. During the summer, however, when this difference amounted to nearly 1,000 MW, some thermal capacity had to be operated on a peaking basis.

36. Past operational records of the RWE system show that the base and peak loads have increased nearly proportionately and, assuming that this will continue, the peak capacity requirements should by 1962 increase to 750 MW in the wiinter and to 1,500 MW in the summer. The capacity of the Vianden project, therefore, can be fully utilized when the plant comes into operation.

37. The daily load curves also show that there is an ample margin of thermal capacity in the RWE system to produce power for pumping during the night.

International Exchanae of Power

38. The interchange of power between the countries of Western Europe has increased considerably in recent years. The addition of interconnect- ing transmission lines and improved methods of automatic regulation has - 7 -

made it possible during extended periods to operate an integrated power system serving most of France, Eelgium, the Netherlands, West Germany, Switzerland, Austria, Italy and parts of Spain. Total generating capacity of this system amounts at present to more than 65,000 MW.

39. These interconnections made possible a more economical utilization of the available generating plants; they reduce the amount of reserve capacity required in the individual systems, and make alternative supplies of power available during interruptions and outages.

40. RWE is one of the principal participants in this power interchange. In 1957 total exports amounted to about 1 billion kwh and imports to 0.5 billion kwh. The maximum capacity made available to foreign companies reached 350 MW or 8% of the RWE system peak load. Annex 6 shows a number of graphs illustrating the extent of these power deliveries with respect to individual countries.

41. The Vianden project is located in the center of a heavily industrialized area with a large demand for power (see map). Its great flexi- bility in operation will make it well suited to meet the daily load fluc- tuations. The installation will also be used for frequency regulation and facilitate the operation of the interconnected European network.

Power Sunply in Luxembourg

42. Electric power in Luxembourg is mainly supplied from thermal plants operated by the steel and iron industry. Total capacity of these plants at the end of 1957 was 258 M4. The distribution of power for general consumption is carried out by CXGEtEL (Compagnie Grand-Ducale dtElectricite du Luxembourg). This company also operates three small hydro plants with a total capacity of 13 MW. Total consumption of power in 1957 was 1,176 million kwh of which only 148 million kwh was distribu- ted by CEGEDEL; the rest was consumed by the iron and steel industry.

43. The iron and steel industry is carrying out a continuous program of modernization and improvement but no substantial increase in production capacity is planned at present. Its energy requirements and, since it is the predominant consumer, the total consumption of electricity in Luxem- bourg is therefore expected to increase at a moderate rate in future years. Estimates show that the existing power plants will be able to meet energy requirements until 1965, but additional peaking capacity would be required earlier. During 1965-75 an additional supply of 250 million kwh, corres- ponding to a capacity of 50 HZ will be required to meet the estimated increase in electricity consumption.

44. It would not be practical to supply power directly to the Luxem- bourg grid from the Vianden project, which will generate power only during the relative short periods of peak load on the RVE system. The contract between SEO and RWE (discussed more fully in Chapter VI) provides, therefore, that RW4E will supply power to Luxembourg directly from its system. Upon completion of the project, the firm capacity to be made available to the Luxembourg system will be 15 M4 and from 1966 this will be increased to 30 KW. Luxembourg therefore is assured a firm supply of power sufficient to meet the expected increase in demand during the next 10-12 years. The construction of the second stage of the project would double the capacity to be made available by RWE and extend this period further.

VI. POWER CONTRACT

SEO-RWE Contract

45. A contract between SEQ and RWE forms the basis for both the execution and operation of the Vianden project. The main provisions of the contract as signed in February 1956, and of the amendnents made later, are given in Annex 7. The contract is based on the asauiption that SEQ will be granted the necessary concession to construct ard operate the project. It will remain in force for the same period as the concession (99 years).

46. The principle of the contract is that RWE is committed to make regular payments to SEO in amounts sufficient to covtir all expenditures incurred in connection with the operation of the pro ect. Included in these expenditures are total debt service on all loars and the payment of a 5-1/2% dividend on the part of the share capital he'.d by the Luxembourg Government and RWE, and a 7% dividend on the balance cf the share capital. The payments will be made in Luxembourg francs with tho exception of obligations of SEQ in German Marks, which will be made available to SEO by RWE in Germany.

47. The contract as amended provides that if the payments to be made by RWE are not possible, because of transfer difficulties or for other reasons, RWE can at SEOQs request make certain amounts of power available to SEQ for sale to third parties. This procedure, however, can not be used with respect to payments needed to cover service of the proposed New York bond issue and the proposed Bank loan.

48. All power generated by the Vianden project will be supplied to RWE. The power required for pumping will be supplied from the RWE system at no cost to SEQ. In addition, RWE will make available to SEQ at preferential rates firm amounts of power both for the supply of consumers in Luxembourg and for sales to other countries. The RWE payments to SEQ will be reduced by the amount of revenues earned by SEQ through these power sales. The purpose of these power deliveries by RWE is to make firm power available to meet the increase in consumption in Luxembourg and to provide SEQ with alternative sources of cash income.

49. With the approval of RWE, SEQ has already made use of the pro- vision in its contract with RWE, for supply of power to third parties by making, in 1956, an agreement with Electricite de France (EdF) for the - annual supply of 84 million kwh at a maximum capacity of 70 SW. The deliveries are being made directly from the RWE system to EdF and in accordance with a program assuring that RWE can supply this power from plants operating on base load. The price paid by EdF for this power is based on the average production cost of power in the RWE system and amounts to Fr.Lux.0.72/kwh (14.5 US mills). SEO's annual revenues from this sale to -9-

EdF amount to Fr.Lux.60.5 million, and are, until the Vianden project comes into operation, being passed on to RWE by SEE. The contract with EdF expires in 1966.

VII. FINANCIAL ASPECTS

Sources of Funds

50. The estimated cost of the project (Fr.Lux.2 billion) would be financed from the following sources:

Millions of Fr.Lux.

Share Capital 500 New York Bond Issue 500 Luxembourg Bond Issue 250 German Bond Issue 250 European investment Bank 200 IBRD 325

Total 242M

The additional Fr.Lux.25 million were included to cover estimated underwriting commissions on the bond issues.

51. The full amount of the share capital of SEQ is expected to be subscribed by the end of November1958. A satisfactory schedule of payments is to be included in the resolution by SEOts Board of Directors providing for the increase in the share capital.

52. SEQ has approached the First Boston Corporation which plans to issue $10 million of SEQ bonds in New York. The bonds would be guaranteed by the Luxembourg Government.

53. The bonds to be issued by SEQ in Luxembourg will be guaranteed by the Luxembourg Government with respect to full subscription and to repayment. The issue is expected to be made in 1960 and no difficulties are envisaged in the marketing of the bonds. In the Government's investment planning the Vianden project has a high priority.

54. Arrangements have been made by SEQ with a group of German banks headed by the Dresdner Bank to place a bond issue in Germany. The loan is expected to be made in 1961, towards the end of the construction period. It would amount to D.M.21 million but assurances will be given that the amount would be increased if necessary to cover a possible increase in construction cost.

55. The EDB is prepared to make a loan of D.M.16.8 million, guaranteed by the Luxembourg Government. - 10 -

56. The proposed Bank loan, also guaranteed by the Luxembourg Govern- ment, would amount to about nb6.5 million equivalent. It would be made sim- ultaneously with the New York market issue and the EIB loan.

Financial Forecasts

57 A forecast of income statements and cash flow for the period 1958-67 is shown in Annex 8, The estimates of revenues are based on the provisions of the contract between SEO and RWE described in Chapter VI. The annual costs have been assumed to remain constant throughout the period considered. Any increase in costs would be compensated for by increased payments from RIE. A straight line depreciation allowance of 2.5% per year has been assumed in the forecast based on an average economic life of the installation of 40 years.

58. For calculation purposes a term of 25 years has been assumed for the proposed Bank loan and the Luxembourg bond issue, and a term of 20 years for the iNew York and German bond issues and the EIB loan. An interest rate of 6% has been assumed for the Bankc loan. The respective interest rates used for the bond issues and the EIB loan are based on preliminary and confidential information received from the various lenders. Repayments and redemptions are assumed to start during the fourth year after the respective loan is made.

Earnings and Dividends

59. The net income of SEO is expected to increase from Fr.Lux.37 million in '962 to Fr.Lux.53 million in 1967. These amounts correspond to returns on the share capital of 7.14% and 10.6% respectively in these years. The gross return on investment would increase from 6.2% to 7.4% auring the period considered. As mentioned previously, dividends of 5-1/2%o per year would be paid on 8C; of the share capital and dividends of 7% per year would be paid on the balance.

Interest and Debt Service Coverages

60. As shown in the forecast, the coverage of interest would increase from 1.4 in 1962 to 1.7 in 1967. The aebt service coverage would remain constant at about 1.3 throughout the period.

Projected Balance Sheets

61. Actual and pro-forma balance sheets as of December 31, 1957, 1962 and 1967 are shown in Annex 9. The debt-equity ratio would change from 74/26 in 1962 to 66/34 in 1967. - 11 -

62. The forecasts show that in the future the financial position of SEO would remain sound; it is of course completely based on the commitments made by RWE in its contract with SEO.

Financial Position of .WE

63. RNE is in a strong financial position. The balance sheet as of June 30, 1957 shows fixed assets of D.M.1.3 billion. Depreciation reserves amounted to D.M.2.2 billion. Investments in subsiciiary and other companies were valued at D.M.446 million.

64. The share capital of EWE was D.M.426 million while total equity including statutory reserves and surplus amounted to D.M.691 million. Total long-term debt was D.M.764 million.

65. The earnings record is good and dividends have been paid regularly. Operating revenues for the financial year 1956/57 amounted to b.M.1.34 billion and net income after provisions for taxes was D.M.42.8 million. Total interest on borrowings was covered about twice.

66. EWE estimates its total capital requirements during the five years 1°57/1958 to 1961/1962 to be about D.M.2 billion. About 50G of this amount can be financed from EWE's own resources leaving the rest to be covered by new borrowings and possible sales of new shares.

67. The commitment undertaken by RWE to cover the total estimated annual expenditures of SEO, amounting to the equivalent of D.M.16.5 million, represents only 1.3% of RWE's operating expenditures in 1956/57. Under the circumstances, it is reasonable to assume that RWE can without difficulty fulfill its financial obligations in connection with the operation of the Vianden project.

Security

68. The Dresdner Bank will obtain security in form of an assignment of XWE payments to SEQ adequate to cover the service on the German bond issue. In consequence, First Boston, the EIB and the Bank are each obtain- ing separate assignments of SEO's rights and claims under its power contract with RWE sufficient to meet amortization, interest and other charges on amounts lent to SEQ. Irrespective of the assignment, the underwriting agreement and the loan agreements with the EIB and the Bank would contain the standard negative pledge covenant,

VIII. ECONOMIC ASPECTS

69. As already mentioned in this report, the peak capacity requirements in the EWE system are mainly met by existing hydro plants with natural or pumped storage facilities. Only a limited amount of thermal capacity is available in the system in the form of medium sized generating units, which would be suitable for operation on peak load. The normal - 12 - practice of transferring older thermal plants to peak operations while adding new high efficiency thermal capacity to meet the iLcreased base load, is therefore not possible in the RWE system.

70. The alternative to the construction of the Vianoen project, under these circumstances, is the construction of new thermal plant designed to meet the equivalent peak load. A calculation hEs been made (for details see Annex 10) of the estimated cost of peak power delivered to the system for the two alternatives. The usual me&hod of estimating the return on additional investment cannot be applied, because the capital required in both cases is about the same.

71. The capital cost of the 320 MW Viandan project, including transmission lines, is estimated at $50 million equivalent or $156/kw. To generate 465 million kwh of peak power, the supply of 692 million kwh of pumping power is required, based on an overall efficiency of the plant of 70% and 4% transmission losses. The pumping power is assumed to be pro- duced by coal fired thermal plants operating with a heat rate of 10,000 BTU/kwh. With these assumptions the cost of powJer is estimated at the equivalent of 19.4 US mills per kwh, which is reasonable for high value peak power. In actual operation, some 5% of the pumping power will be obtained in the form of surplus run-of-the-river hydro power and the rest from lignite fired thermal plants. As a result, the total cost of the pumping power should be lower then assumed in the estimate. No allowance has been made for fuel savings resulting from the lower heat rate at which the thermal plants will be operated, due to the better atilization of their capacity.

72. The capacity of the equivalent thermal plant has been assumed at 350 MW to allow for the higher consumption of auxiliaries and the lower availability inherent in thermal plants compared with hydro plants. The assumed capital cost of $140/kw is low. The same heat rate of 10,000 BTU/ kwh has been used, but in practical operation a plant with only 1,500 hours of utilization will have a 30-401o higher heat rate.

73. Based on these conservative assumptions the cost of peak power from the equivalent thermal plant is estimated at US 21.9 mills per kwh, or 13% higher than the cost of power from the Vianden project. In addition to the many operational advantages, the project is therefore economically well justified.

IX. CONCLUSIONS

74. The Vianden project to be constructed by SEQ is technically sound. The estimated costs are reasonable. Satisfactory steps have been taken for the execution and operation of the project. The management of SEO is good. The project will help to meet the demand for peak power in the RWE system and the integrated power system in Western Euqope. The contract entered into by SE0 and RWE will insure that SEQ will remain in a sound financial position and in addition provide Iuxembourg with a firm - 13 - supply of power to meet estimated future requirements. The project is economically justified. 75. The project is suitable for a Bank loan of $6.5 million equivalent. A term of 25 years including a period of grace of 3-1/2 years would be appropriate. A NNEX 1

VIANDEN PROJECT

LIST OF SHAREHOLDERS

Mill.Lux.Fr. .%1 EXISTING (JUNE 30, 1958)

Luxembourg Government 17.2 57.0 Other Luxembourg Shareholders .2 .7 Rheinisch-Westfaelisches Elektrizitaetswerk (Essen, Germany) 2.8 9.4 Societe Generale pour l t Industrie (Geneva, Switzerland) 2.8 9.4 SOPADE Societe de Participations et d'Etudes d'Installations Hydro-Electriques (Owned by five Belgian Power Holdings) 2.8 9.4 Societe Auxiliare d'Energie (Subsidiary of Electricite de France) 2.8 9.4 Samenwerkende Electriciteits - Productie- bedriejven (Nzetherlands).7 Total 30.0 100Q.0

PROPOSED

Luxembourg Government 200.0 40.0 RWE 200.0 40.0 SGI about 20.0 4.0 SOPADE, SAE, SEP and existing Luxembourg shareholders about 30.0 6.0 Shares issued publicly in Luxembourg about 50.0 10.0

Total 5200.0 100.0 ANNEX 2PaaTe 1

VIANDEN FROJECT

Detailed Descrittion and Technical Data

Hvdrology

The river Our rises in the Prum district in Germany, close to the Belgian border. It runs largely through Belgian territory until it reaches the point where the borders of Belgium, Germany and Luxembourg meet. From there it forms the border between Germany and Luxembourg until it flows into the river Sure, except for a short distance at the city of Vianden, where Luxembourg territory extends on both sides of the river.

Total catchment area is 673 square kilometers of which 636 square kilometers are above the dam site at Lohmuhle. The average annual rainfall in this area is 870 mm. The streamflow varies between a maximum of 400 and a minimum of 1 cu.meter/second. The average flow, based on 15 years records, is 12.5 cu.meter/second.

The lower reservoir will be filled during the winter, when ample water is available. The minimum flow is sufficient to compensate for estimated evaporation losses.

Geologv

Extensive geological explorations, including core drillings and the excavation of test pits and two exploratory tunnels, have been carried out. They have shown that no particular difficulties are to be expected in connection with the construction of the project. Most of the rock, earth and sand materials required for the works are available in sufficient quantities in the project area.

Unner Reservoir

The upper reservoir will be created by a continuous dam structure constructed of rock and earth. The total length will be about 2,300 meters and height will vary between 8.4 and 23.3 meters. The bottom and sides will be covered by a watertight layer of asphalt concrete. The water level will vary between a maximum of 507.8 meters and a minimum of 499.0 meters, giving a useful storage of 3 million cu.meters.

Two intake towers will be constructed, the second to serve the future extension of the project.

Pressure Shaft

The pressure shaft will have a length of about 500 metdrs and a dia- meter of 6 meters. It will run at an angle of 350 with a vertical upper section and a horizontal lower section. The shaft will be steel lined. The lower end will connect into distributing steel pipes with a total length of 124.5 meters. Power House Cavern

The power house cavern will be excavated to provide space for the ultimate installation of eight generating units. It will be 268 meters long, 17 meters wide and 28.5 meters high. A separate cavern will be excavated for the installation of the main transformers. The cavern will be connected with the lower reservoir by a 360 meter long pressure tunnel ter- minating with a concrete outlet structure. The tunnel will serve as tail- race for the turbines and as intake for the pumps. Three separate access tunnels will be excavated. An outdoor switchyard will be constructed along the right bank of the lower reservoir.

Equipment

Four main units will be installed. They will be of the horizontal type, each consisting of a turbine, a motor-generator and a pump. The Francis type turbines will operate under an average head of 280 meters. The generators will each have a capacity of 80 IW. The two stage pumps will each have 81,200 hp and provide a maximum lift of 287.8 meters. An auxiliary unit also designed for alternate generation and pumping operation and with a capacity of 800 kw will be installed. The four main transformers will step up the generator voltage from 10.5 kv to 220 kv and will. each have a capacity of 100,000 kva. Conventional type switchgear, protection and control equipment will be provided.

Lowe Reservoir

The lower reservoir will be formed by a dam across the Our at Lohmuhle, a short distance north of the town of Vianden. The level of the reservoir will fluctuate between 219.75 and 226 meters giving a useful capacity of 5 million cu.meters. The dead storage capacity will be about 4 million cu.meters. The dam will be a gravity concrete structure, 125 meters long and 25 meters high. A spillway section with two gates and four bottom outlets with a total maximum capacity of 500 cu.meters per second will protect the dam during periods of high river flow.

A small run-of-the-river power plant will be constructed to utilize the 17 meter head developed by the dam. The powerhouse will form a part of the dam structure. Two generating units with capacities of 1,200 kw and 400 kw respectively, will be installed. The turbines will be of the Kaplan type. The plant will be connected to the main switchyard by a short 10 kv transmission line.

The construction of the reservoir makes necessary the relocation of 4.4 kilometers of roads and reconstruction work in the town of Bivels, which will be partly submerged. Second Stape

The second stage of the project will include an extension of the dam structure forming the upper reservoir increasing its useful capacity to 5 million cu.meters. A second pressure shaft will be constructed and ANNEX 2. Pape 3 connecting distribution steel pipes installed. Four additional main units identical to the original four will be installed in the power house cavern. Four mein transformers will be added. A second tailwater pressure tunnel will be excavated.

Transmission Lines

The 220 kv transmission lines to be constructed by RWE, will have a total length of 163 kilometers. They will connect the plant to the RWE substation in Trier and Selhausen which is located close to RWEts main thermal plants near Cologne. In addition, two switching stations will be constructed at Niedersteden and Tawern and a 7.5 kilometer 110 kv line will connect Tawern with the Luxembourg system operated by CEGEDEL.

Alternate supply of auxiliary power for the main installations will be provided by a 25 kv transmisE ion line to the RWE substation at Bit- burg and a 10 kv line to the CEGEDEL substation at Stolzemburg.

YjanB&_Prfict DIat

Generating Capacity 320 MW Pumping Load 260 MW Average daily operation of generators 4 hours Average daily operation of pumps 8 hourc Average annual operation of Generators 1,450 hours Average annual operation of pumps 29720 hours Average annual power generation 465 million kwh Average annual pumping power requirements 692 million kwh t ~ ~ ~~NWALDHNsOPs < vc ~~~~~I ALK JSr/A

SrOLZEMBURG' I / OB ER 'EESAUSE/L'

8/ VELS

STAGEI -, ACCESSTUNNEL STAGEI- L P WER HOUSE CAVERN -ATAGE I STAGE 1- i-PRESSURE TUNNEL /STAGE 2

PRESSURESHAFT_ P-OWERHOUSE CAVERN STAGEI t STAGE 2

UPPER LOWER RESERVOIRRERVI STAGE I- iTdtE STAGE2

/,, - /

03 SUBSIDIARY HOUSE A-LO HMUHLE DAM

I ,'UPPER /,-RESERVOIR STAGE 2 O

----- VADV

LUXEMBOURG LAYOUT OF VIANDEN PROJECT

OCTOBER 1958 IBRD-494R ANNEX 4

Vianden Proijct

Detailed Cos EtimateM Mll.lion Fr.Lux. Civ -Works

Upper Reservoir 211.0 Pressure Shaft 49-0 Power Cavern 256.0 Lower Reservoir 103.0 Construction Camp 8 62 Sub Total 627.0

Equipment

Turbines 70.0 Pumps 126.0 Valves 48.0 Generators 104.0 Transformers 48.0 Auxiliary Equipment 69.7 Accessory Equipment 24.2 Equipment Lohmuhle Plant 38 ,6 Steel Constructions 67.7 Erection 31.2 Freight 9.6 Customs Duty S6.0 Sub Total 693.0o

Other Costs

Land 36.0 Road Construction 40-. Reconstruction in Bivels Town 16.0 Permanent Houses .180 Sub Total 110.0

Overhead

Studies, Surveys and Planning 15.0 Administration, Engineering and Supervision 115.0 Financing Costs 35.0 Interest during Construction 205.0 Sub Total 370.0 Contingencies 200.0

Grand Total 2.000.0 RWE SYSTEM - DAILY LOAD CURVES (MEGA WATT S) 5,000 I I I I I I I I 5,000 WEEKDAY - SUMMER 1957 WEEKDAY-

NATURAL AND PUMPED STRAGE HYDRO PLANTS 4,000 4,000

3,000 3,000

2,000 2,000

1,000 1,000

0 0 0 2 4 6 8 10 12 14 16 18 20 22 24 0 2 4 6 8 10 12 14 16 18 20 22 24 HOURS HOURS > z z IBRD - Economic Staff Xn (R)1394 Cn INTERNATIONAL POWER EXCHANGES-TYPICAL DAILY CURVES, 1957 (MEGA WATTS) m POWER SUPPLIED BY RWE N POWER SUPPLIED TO RWE - ~~~~~~~~NETHERLANDS 100 100

1c - __

BELGIUM 100_ _ _ __ 100

100 __1 __ 1__ 1 1 11 ~~~~FRANCE 100

oolI_ 1 1111 11l_±~~~ 11 - 1~1-11 11'1lo - ITALY

SWITZERLAND

2-00 ___ _ _200

100 J.. ~- o~~~~~~~~~~~~~~~~~~~~~~~~~~_ _ .100 o. 0 ... . - . _ _ _ ~~ ~ ~~ ~ ~~ ~ ~~ ~ ~ ~ ~~ ~ ~~ ~ ~ ~~ ~ ~~ ~~~~ ~~ ~~~~~~~~~~~~~~~~~~~~~~. . . . . 0 AUSTRIA 100 - __ 100

_o-- _ _17:. CCF2o 7T 100-_102°0 X 0TX0S1 20C __ _------__ ------_ 200 0 6 12 18 24 0 6 12 18 24 0 6 12 18 24 0 6 12 18 0 6 12 18 240 6 12 18 240 6 12 18 24 MONDAY JAN. 21 THURSDAY MAR. 14 THURSDAY MAY 9 TUESDAY AUG. 20 THURSDAY SEP. 12 TUESDAY OCT. 15 THURSDAY DEC. 19

HOURS z IBRD-Economic Staff Xri 1395 0) ANNEX 7. Page 1

Vianden Prolect

SEO - RWE Contract

The relationship between SEO and RWE, in connection with the construction and operation of the Vianden project, is formulated in a contract; the main provisions are:

a. The contract is conditional on the ratification of the Treaty between Luxembourg and Rhineland Palatinate. The purpose of the contract is to establish rules for the supply of pumping power, sales of peak power and the payment of annual operating costs.

b. The project will be constructed by and for the account of SEO according to general plans which will form part of the concession documents. The transmission lines and substations on German territory and necessary for the operation of the project will be constructed and financed by RWE.

c. RWE undertakes to supply all the pumping power required for the operation of the project. All the generated peak power will be delivered by SEQ to the RWE system.

d. RWE undertakes to pay promptly to SEQ the amounts necessary to cover the annual costs incurred for the operation of the project. These costs consist principally of: Operating costs, maintenance, administration, insurance, taxes, debt service on loans (interest and principal) allocation to legal reserves (5% of net profits), allocation to a renewal aii(1 exchange risk fund (1% of share capital), a 5j% dividend on the part of the share capital held by the Luxembourg Government and RWE and a 7% dividend on the balance of the share capital.

All debts have to be fully repaid within 30 years after start of operations. The payments will be made in Luxembourg Francs, payments due in German Marks will, however, be made directly by RWE in this currency.

e. RWE undertakes to cover the costs of all renewals necessary to keep the project in efficient operating condition.

f. Should transfer difficulties or other reasons interfere with the payments to be made by RWE, it may, at SEofs request, supply power for sale to third parties to permit SEQ to come into possession of the sums outstanding. This option is not applicable to payments covering service of the New York market issue and the proposed Bank loan.

g. SEQ has with the approval of RWE, entered into a contract with Electricite de France (EdF) for the annual supply of 84 million kwh at a maximum capacity of 70 1W. This power will be delivered directly by RWE to EdF. The contract is for 10 years and expires ANNEX 7. Page 2

in 1966. After the project comes into operation RWE will supply annually to Luxembourg 36 million kwh at a maximum capacity of 15 MW. After 1966 RWEts power deliveries will be increased to 120 million kwh at a maximum capacity of 90 MW. Of this 40 million kwh are re- 5 erved for Luxembourg. The balance can be sold to consumers in Luxembourg, Belgium, France or the Netherlands, and the maximum amount of power can vary between 80 and 140 million kwh. The maximum capacity will vary correspondingly between 60 MW and 30 MW.

The unit price of power to be delivered to EdF and Luxembourg has been fixed at Fr.Lux.0.72/kwh (14.5 US mills). For the additional deliveries after 1966 the total value is established at Fr.Lux.97.04 million ($1.94 million) giving higher unit prices at higher capacities than 30 MW.

Amounts, equivalent to the revenues earned by SEQ as a result of these power sales at established rates, will be deducted from the payments to be made by RWE to SEQ. h. The contract also includes provisions with regard to the construction of the second stage of the project which would increase the total generating capacity to 640 MW. RWE would continue to be responsible for the payment of total annual costs and the supply of power required for pumping. An additional supply of 100 million kwh at a maximum capacity of 70 SW would be made available to SEO from the RWE system, including 30 MiW reserved for Luxembourg at a preferential rate. SEQ would also have the right to operate one of the eight units independently; this right would be transferred to third parties. In both instances RWE could be relieved of the responsibility for supplying the necessary pumping power and covering the annual costs of the operation of this unit, and a suitable reduction would be made in the direct power deliveries from the R1 E system to SEQ.

i. The contract remains valid for the duration of the concession (99 years). The contract may be revised after 30 years or before if substantial changes in the exchange rates take place. The prin- ciples for the establishment of the payments to be made by RME shall, however, remain unchangeable.

J. In case of disputes, each party nominates an arbitrator who in turn nominates a chairman. If the two arbitrators cannot agree on the nomination, the Chairman will be nominated by the office of the Swiss Commercial and Industrial Association in Zurich.

k. An annex to the contract provides rules for the execution and operation of the project. In general, agreement by RWE is required on all matters related to the planning, supervision, deliveries, construction and tests. Instructions for the daily operation of the project will in effect become an integral part of the RWE system. .ANEX8

SOCIETE EIECTRIQUE DE L'CUJR LUXBWBOURG

Forecast of Income and Cash Flow Statements (in millions of Lux. Frs.)

1958 1959 1960 1961 1962 1963 1964 1965 1966 1967

I. Income Statement

Contract Payments by RIWE 124.3 123.7 127.9 135.8 134.2 93.0 Contract Payments by Others 86.4 86.4 86.4 86.4 86.4 125.8 Total Revenues 210. 210.1 z.3 222.2 220. 118.8 Operation, Maintenance and Insurance 19.5 19.5 19.5 19.5 19.5 19.5 Depreciation 46.1 46.4 50.( 50.0 50.0 50.0 Taxes 23.0 23.0 23.0 23.0 23.0 23.0 - Gross Income 122.1 121.2 121.8 129.7 128.1 126.3 Interest 85.2 84.3 81.0 78.7 76.3 73.7 Net Income . 3.9 40.8 51.0 51.8 52.

II. Sources of Funds

Gross Income, as above 122.1 121.2 121.8 129.7 128.1 126.3 Add back Depreciation 46.1 46.4 50.0 50.0 50.0 50.0 Net Receipts from Operations 168.2 167.6 171.8 179.7 178.1 176.3 Capital subscriptions 96.4 150.0 150.0 75.0 Borrowings Proposed IBRD Loan 200.0 125.0 European Investment Bank 125.0 75.0 New York Market Issue 500.0 Luxembourg Bond Issue 250.0 Germn Bond Issue 250.0 Total Receipts 596.4 150.0 725.0 525.0 168.2 167.6 171.8 179.7 178.1 176.3

III. Application of Funds

Construction Expenditures, including Capitalized Interest 9.9 590.0 690.0 600.0 85.0 Debt Service Interest (other than capitalized) 85.2 84.3 81.0 78.7 76.3 73.7 Repayment of proposed IBRD Loan 9.4 9.6 9.8 10.0 10.2 10.5 Repayment of EIB Loan 7.3 7.4 7.6 7.8 8.0 8.0 Redemption of Bonds Issued in New York 29.4 29.4 29.4 29.4 29.4 29.4 Redemption of Bonds Issued in Luxembourg 6.7 6.9 7.1 7.3 Redemption of Bonds Issued in Germany 9.1 9.3 9.5 Total Debt Service 131.3 130.7 134.5 141.9 140.3 138.4 Dividends 29.0 29.0 29.0 29.0 29.0 29.0 Contribution to Exchange Risk Fund 5.0 5.0 5.0 5.0 5.0 5.0 Contribution to Legal Reserve Fund 2.9 2.9_3.3 3.8 3.8_3.9 Total Expenditures 9.9 590.0 690.0 600.0 253.2 167.6 171.8 179.7 178.1 176.3

Cash Accruals for Year 586.5 (-)440.0 35.0 (-) 75.0 (-) 85.0 - - - - - Cash Balance at beginning of year 3.5 590.0 150.0 185.0 110.0 25.0 25.0 25.0 25.0 25.0 Cash Balance at end of year 590.0 150.0 185.0 110.0 25.0 25.0 25.0 25.0 25.0 25.0 IV. Ratios

Interest Coverage 1.43 1.43 1.50 1.65 1.68 1.72 Debt Service Coverage 1.27 1.27 1.27 1.27 1.27 1.27 ANTNEX 9

SOCCITE ECTRIQUE DE LtOUR LUXEMBOURG

BALANCE SHEETS (in millions of Fr.Lux.)

December 31 27196212

Assets

Fixed Assets, at Cost 25.1 2,000.0 2,000.0 Less: Depreciation Reserve -4 /6.1 292.5 Net Fixed Assets 25.1 1,953.9 1,707.5 Net Current Assets 3.5 25.0 25.0 Investments and Funds - 729 § Total 28.6 1,986.8 1,783.1

Liabilities and Capital

Long-term Debt Proposed IBRI Loan 315.6 265.5 Other long-term Debt 1,163.3 921.6 Total long-term Debt - 1,478.9 1,187.1 Share Capital 28.6 500.0 500.0 Legal Reserve Fund - 2.9 20.6 Exchange Risk Fund - 5.0 30.0 Earned Surplus - - __45-4 Total 28.6 1.986.8 i.783.1

Debt/Equity Ratio 74/26 66/34 ANNEX 10

Viandem Proiect Coi.jarison with Alternative Thermal Plant 1. Vianden Project

Installed Capacity 320 MW Annual Generation 465 million kwh Pumpirg power requirements at 70% efficiency and 4% transmission loss'3s 692 million kwh

Cost of Plant $/40 million Cost of Transmission Lines ItMQillion

Total $50 million

Cost of Operations (Plant)

Operating charges, Administration $310,000 Depreciation (Straight Line and 40 year life) 1,000,000 Taxes, Insurance 490,000 Return on Capital (6%) 2s400-000

Sub Total $4,200,000

Pumping Power

Fuel Costs based on coal price $14.30/ton and heat rate 10,000 BTU/kwh 3,570,000 Transmission Costs 1 .250 000

Total Annual Costs E9.020,000

Unit Cost 19.4 mills/kwh 2. Equivalent Thermal Plant

Installed Capacity, 17 units 350 MW of 50 SW Available Peak Capacity 320 MW Annual Generation 465 million kwh

Cost of Plant ($140/kw) $49 million Cost of Operations Operating charges, Administration, Taxes $2,400,000 Depreciation (Straight Line, 20 year life) 2,450,000 Return of Capital (6%) 2,940,000 Fuel Costs (Coal price $14.30/ton and heat rate 10,000 BTU/kwh) 2,L40.0000

Total Annual Costs 910.2A0O Unit Cost 21.9 mills/kwh VIANDEN PROJECT

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