R E S T R I C T E D R e p o r t N o. TO-167a 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 DEVELOPMENI KANSAI HYDROELECTRIC PROJECT JAPAN April 11, 1958 Department of Technical Operations CURRENCY EQUIVALENTS U.S. $1 U 360 Yen I Yen a .278 U.S. cents I million Yen U.S. $Z,780 1 billion Yen a U.S. $2.78 million LIST OF ANNEXES ANNEX 1 Power Statistics for Japan as a whole and for the Kansai Power System ANNTEX 2 Peak load and energy requirements chart, Japan as a whole, 1952-1962 ANNEX 3 Peak load and energy requirements chart, Kansai. System, 1952-1962 ANNEX 4 Kansai Expansion Program ANNEX 5 Condensed Kansai Balance Sheets ANNEX 6 Condensed Kansai Income Statements ANNEX 7 Summary of Kansails Funded Debt ANNEX 8 Forecast of Kansaits Cash Flow Statements ANNFX 9 Imported Equipment and Services ANNEX 10 Calculation of Kurobe Generating Cost ANNEX 11 Calculation of Thermal Alternative YEap C ONTENTS Page SUiVIVARY I. INTRODUCTION 1 II. THE PCMER SITUATION IN JAPAN 1 III. THE COMvPANY 4 IV. THE PO,ER 4ARMET 4 V. KANSAIIS EXPANSION PROGRAM 5 VI. THE PROJECT 6 Deecription of the Project 6 Present Status and Construction Schcdule 7 Estimated Cost of the Project 8 UTnit Construction and Generation Costs 9 Thermal Alternative 9 VII. RATES 10 Rate Regulations 10 Financial Implications of the Present Rate System 10 VIII. FINANCIAL ASPECTS 12 Financial Structure E Present Debt 12 Past Earnings 13 Capital Expenditures & Sources of Funds 14 Financial Forecasts 15 Earnings and Dividends 16 Cash Position 16 Projected Belance Sheets 16 Interest and Debt Service Coverages 17 IX. CONCLUSIONS 17 SUMMARY This report covers the appraisal of the Kurobe project being built by the Kansai Electric Power Company, which has been proposed to the Bank as the basis for a $37 million loan. ii. The Bank made a loan of $21.5 million in 1953 to assist in financing the construction by Kansai of a 150 IvI steam power station which has been successfully completed. iii. The Kurobe project, a reservoir controlled hydroelectric installation, will have a capacity of 258 MW. It will add 1.3 billion kwh per year to Kansai's energy supply. The project is part of an expansion program by means of which Kansai plans to add 2.3 million kw of capacity to their facilities during the next 7 years. The program is estimated to cost the equivalent of $888 million. iv. The cost of the project is estimated to be 42.5 billion Yen ($118 million equivalent). The cost of energy from the project delivered in the service area where it will be consumed is estimated at 4.h5 'fen per kwh (equivalent to about 12 US mils). v. The increase in power demand both in the Kansai service area and in Japan as a whole fully justifies the expansion program of which Kurobe is a part. vi. The management and organization of Kansai and the arrangements made for the execution of their program and of the project are satisfactory. vii. The project is economically justified and its return on additional investment over a thermal alternative will exceed the rates of interest in the private financial market of Japan. viii. Power rates are and will continue to be sufficient for Kansai to cover its costs and to pay a 12% dividend on the share capital. However, as their program is carried out with a rapid increase in long-term indebtedness, long-term debt service coverage will decline from 2.1 times in 1957 to 1.49 in 1962 and then to 1.20 in 1963. This points up the need for a modification of the basic rate making policies in Japan, in as much as this trend will be reflected in the financial position of the other po-er companies as well as Kansai. Action is already being taken by the Government on this matter. ix. One other requirement which affects the entire power industry in Japan rather than specifically Kansai is the need for a review of the Govern- ment's policy for the approval of proposed power expansion works in order to maintain the cost of future hydro development within acceptable limits. The Bank has drawn the Government's attention to this problem. x. The project is considered suitable for a $37 million Bank loan with a term of 25 years and a period of grace of 412 years. KAN5AT HYDRO ELECTRIC FROJECT - JAPAN I. INTRODUCTION 1. The Government of Japan has asked the Bank to consider loans totalling the equivalent of $187 million for four hydroelectric projects or groups of projects and related transmission lines. Three of these will be owned and operated by privately owned power companies and the fourth by the Electric Power Development Company, a government agency which sells energy to private power companies. 2. This report covers the appraisal of the Kurobe No. 4 hydroelectric develop- ment in the western part of Honshu, one of those being constructed by private power companies. It is part of the overall expansion program of the Xansai Elec- tric Power Company scheduled during the period April 1, 1957 to Iharch 31, 1964. The project is estimated to cost the equivalent of $118 million of which Fbout $8 million for equipment and services purchased outside Japan. The Bank has been requested to make a loan of t37 million equivalent for the Kurobe project. The proceeds of the proposed loani, after covering the foreign components in the cost of the project would be spent in Japan for labor and locally produced materials and equipment. As in the previous loans to Japan the Japan Development Bank (JDB) would be the Borrower and would in turn relend to Kansai. The Compar-Yt s program includes both hydro and thermal generating facilities and also the necessary ex- pan-sion of its transmission and distribution systems. The program is estiratei to require the investment of g88S million equivalent.during the period 1958-1965. 3. The Bank made a loan to the Kansai Electric Power Company in 1953 (Loan 89-JA) for ¢21.5 million to assist with the construction of the 150 k;, Tanagawa ateam power station near Osaka, the total cost of which was the equivalent of about $33 million. The plant has been in full operation since the end of 1956. There was a slight delay in the commissioning of both the first and tae second unitt but responsibility for the delay was occasioned entirely by the manufactur- ers of the equipment. The perform.ance of Kansai on the project was very good. The actual cost of the part of the project which was financed by the Bank loan was smaller than estimated and $830,000 of the loan was cancelled. II. THE PQIKLR SITUATION IN JAPAN 4. The power supply industry in Japan is organized on the basis of nine well developed integrated power systems. The last recorded yearly peak load (1956) of the nine systems was 10,536 1W, and the 1957 peak load is estimated at about 12,000 P.W. Energy requirements in 1956 totalled 62,679 million kwh at the genera- ting end, and are estimated to reach 71,700 million in 1957. The corresponding load factors are respectively 6799% and 68%. The countryts peak load increased during the last two years at rates varying between 12 and 15%. (In some of the more industrialized service areas this has reached 18 to 20%/) Energy require- ments have also attained rates of increase in the same order of magnitude, between 15 and 20%. 5. There has not been a serious power shortage in Japan since 1955, but in- dustry has been operating perilously close to its ultimate capability. The very high rates of increase in demand during the last two years, if taken in isolation, 2 are likely to be misleading. While they are accompanied by an abnormally high increase in GNP (14% in 1956), they are far above the reasonable range for a country as well developed as Japan. Coordinated power statistics for the entire country based on uniformn assumptions and definitions are available since 1951 and current forecasts reach 1962. These data are condensed in Annex 1. An analysis of the information shows that during the 5-year period 1951-1956 the average annual increase in peak load has been 9$, and the average annual increase in energy requirements has been 8%. The very high increase in demand in 1956 and 1957 has been the result of satisfying the pent up demand following the shortage during 1953-55, as well as the unusually rapid growth in industrial production. 6. Current forecasts show that in 1958 capability at the time of the annual peak is still expected to be less than the peak load. However, past experience has shown that capability is calculated rather conservatively in Japan; further- more the recent levelling off in industrial production is checking,to some extent, the increase in demand. Thus, barring the occurrence of hydro conditions very much below average, an actual power shortage is not expected in 1958-59. The forecasts assume that after 1958 the rate of increase in peak load will decline to below 7% per year and that it will reach about 5) in 1960. Overall power development programs are tailored to these assumptions and it is forecast tihat sorme margin of capability will be available by about 1960. Chart No. 2 shows the trend of peak loads and energy requirements and the capacity available. From this it can be seen that the average annual increase in the 10-year perLod 1952- 1962 amounts to 9% for peak loads and 8% for energy consumption. 7. The current Japanese estimates of future power demand are acceptable and they may, in fact, be on the conservative side. The size of the construction programs of new power facilities is not too likely to provide an appreciable margin even after all the projects now proposed for financing will h2ve been placed in operation. 8. Every new facility proposed by the various Power Companies or Agencies is subject to Government approval. This results in the establishment by the Compan- ies of programs divided in two categories called respectively "decided" (where full Government approval has been received) and "proposed". The distinction iS an artificial one. In effect the Companies establish a long range program of expan- sion (5 to 7 years) and gradually undertake the preparation, engineering design and construction of the facilities in a normal fashion. Officially, however, any work by the Companies is not considered to be firmly programmed until the full Government procedure is completed and this involves mainly the approval by the Power Development Delibe-ation Council, IviITI and, when applicable, the JDB. It is customary for such approvals to be granted just before full scale construction gets under way. This results in some of the larger projects being undertaken in their initial phases before they become "decided". 9. The power economy of Japan in the past has been predominately hydroelectric. The hydroelectric sites remaining to be developed are now relatively few. They are difficult to reach and their construction cost will be high. I'Iuch of the postwar power expansion has been thermal. The program of expansion of power generating facilities during the period 1957-1962 involves the construction of about 3 million kw of new hydroelectric plants and about 4 miliion kw of thermal plants. Local fuel resources are limited and expensive, and the importation of fuel in increasing quantities represents a balance of payment problem, One of the most difficult economic problems in Japanese power development lies there- fore in the determination of which of the remaining hydrcelectric resources should be developed, and the relative timing of their development. 10. This would appear to call for a rather precise evaluation of the economic merits of each proposed new large hydroelectric project in relation to practical 'lternative power sources. In order to be meaningful such evaluation should take place before any substantial amounts of funds are invested in the initial construction stages. At the present time Government policy does not appear to be based on any such quantitative analysis but rather on the general principle that in order to save further imports of fuel an all out effort should be made to develop as much as possible of the remaining hydro resources as quickly as possible. Certain parties also hold the belief that relatively little weight should be given to the high cost of some of the hydro facilities because the steady slow rise of prices would eventually result in the true cost of their power becoming relatively cheaper at some later time during their usef2ul life. 11 As a result of this, there are at present under development in Japan, though not by Kansai,hydroelectric projects Ehich by reason of their design and resulting construction cost are probably beyond the limit of economic jrstifi- cation. Furthermore, the simultaneous development noTAT under way of unurous 'Large hydroelectric projects costing around 100 million eech is imposng con- siderable strain on the limited financial resources of the country even though most of these projects may be individually justifiable. 12. Undoubtedly, many of the hydro sites remaining to be developed are valu- able and deserve being put to use. What appears to be called for is a careful study of their features from the economic rather than from the purely engineering point of view in order to arrive at general layouts of construction which would keep the cost within acceptable limits; and then a realistic scheduling of con- struction to space the high rate of investment more evenly. Two general con- siderations would further justify this approach: firstly, there are so relatively few sites remaining that even if they were spaced farther apart they could still be brcught in during a relatively short period of years. Secondly, it is apparent that atomic power plants will quickly become a fundamental part of power develop- ment in Japan and it will not now be long until enough reliable information should be available to justify their introduction in the actual programs. 13. The Bankts views on these problems have been presented to the representa- tives of the Japanese Government on the occasion of negotiations for the Kansai loan. The attention of the Japanese Government has been drawn to the importance of effectively applying eccnomic criteria in Government planning pclicies, and to the continuing interest of the bank in this matter. 1/ In 1957 imports of petroleum and petroleum products accounted for 11.4% of total imports as compared to 7.44 in 1952. - 4 - III. THE COMPANY 14. The Kansai Electric Power Co., Inc., was established in 1951 when the Government owned national power system was returned to private ownership. Kansaits service territory is shown on the attached map. It consists of the middle section of Honshu and it includes, with Osaka and Kobe, one of the most heavily industrialized parts of the country. 15. Total installed generating capacity on Kansails system is 2.8 million kw, of which 1.5 hydroelectric and 1.3 thermal. Total length of the Company's transmission circuits is approximately 30,000 miles. Total generation of power during the fiscal year 1956 was 11.5 billion kwh and it is expected to reach 13.3 billioin in fiscal 1957. The assets of the Company are valued at $565 million equivalent. 16. Kansai represents therefore about one-fifth of the Japanese power in- dustry. It compares for size and organization with some of the largest power companies in the United States or in wiestern Europe. Its management is expe- rienced and it is as business minded as its counterparts in si milar privately owned organizations in other large industrialized countries. The Companyts engineering and operating departments are well organized and capably staffed. The Company's record of performance indicates that it should have no difficulty in plann- ng, engineering and carrying out its expansion program. IV. THE PO`4ER IvARKET 17. Developments of power demand and the relationship between forecasts and program up to 1962 on the Kansai system parallel closely those which have been outlined for the entire country (Annex 3). The last metered annual peak load (December 1956) has been 2,071 1W, the annual energy requirements for the Company's network in 1956 being 11,535 million kwho with a load factor of about 64%. The average annual rates of increase for peak load and energy requirements during the period 1952-1956 have been respectively llo and 8%. These averages reflect the 1953-1955 power shortage and compression of demand which was noted in connection with the nationwide figures, and include rates of increase of about 13% during the last two years. 18. The forecasts assume that the increase in peak load will still be 11% through 1958, then to decrease sharply to 7% in 1959 and more gradually to 5% in 1962, when the peak is estimated to be 3,295 MW. The forecast pattern of growth of energy requirements is very similar, with slightly lower rates and the corresponding slight decrease in load factor. Energy requirements in 1962 are forecast as 17,736 million kwh at the generating end. 19. rn the basis of these estimates the 10-year development 1952-1962 would show average rates of annual growth for peak load and energy requirements equal respectively to 8% and 7.5%. As Kansai serves the most heavily industrialized area in Japan, these forecasts may be conservative, but they are acceptable. 5 V. KANSQAI'S LXPANSION PROGRAIi 20. The coLmbined "decided" and "proposed" programs of Kansai which cover the period from 1956 to 1965 (Pnnex 4) are surmarized in the following table. The items listed in the table under "other" include the necessary transmission, substation and distribution facilities, and, in addition, a program of improve- ment of existing facilities: Cost billions of_yen US$ equiv. Hvdro Thermal Total Hvdro Ther-mal Other Total Total "Decided" and "Froposed" 1041 1706 2747 121.8 118.4 157.1 397.3 1104 Programs Already com- 113 291 404 27.4 32.8 17.6 77.8 216 pleted 1957 Remainder 928 1415 2343 94.4 85.6 139.5 319.5 888 21. A sizeable part of the "decided" program has already been completed. Specifically, the hydroelectric "decided" program covers the installation of 371 1vW of new hydro power divided among seven plants. Six of these have prac- tically been completed leavfrg Kurobe (258 IvM), the project proposed to the Bank for financing. Similarly, 291 14 of the 1,106 W1 in the thermal "decided" program have already been placed in operation. The remaining units will be commissioned respectively in 195', 1959 and 1960. "Decided" transmission, sub- station and distribution facilities, and improvement are about two-thirds completed. 22. The trend in generating facilities continues towards a constant increase of thermal power. At the present time Kansaits installed capacity is about half hydro and half thermal. The expansion program will add 1,.041 14 of hydro and 1,700 144 of steam and thus in the early 1960ts thermal power will be preponderant on the network. 23. The "proposed" hydro program is made up of 18 different installations of different types and characteristics, and it represents a further step towards the complete utilization of hydroelectric resources in Kansails territory. Design work and preparations for these new facilities are in various stages of progress, in keeping with the proposed timing of construction. Cost estimates have been established and while they are generally reliable, the contingency allocations tend to be low. However, Kansai's past performance in construction cost control is good, and furthermore the program includes s sizeable amount of lower priority works which could be delayed if difficulties were encountered without seriously affecting system capability and therefore projected revenues. For these reasons it is not considered necessary to add a larger contingency allowance to Kansaits estimates of cost of the program. On the basis of past and current performance, it can also be asEumed that the Company will succeea in completing the works in keeping with their proposed timing. 6 24. As to the cost at which the new hydro power will be obtained, the pro- jects proposed cover a very wide range, owing to the fact that installations of many different types are 4ncluded in the program. The average hydroelectric construction cost per kwh per year in the "decided" program is 35.4 yen (approx. 10 USO) while the corresponding figure for the "proposed" program is 42.5 yen (approx. 12 USq). By comparison, the general average for hydroelectric develop-: ment in Japan in recent years has been about 30 yen (approx. 8.5 US¢). A con- struction cost of 42.5 yen per kwh per year is likely to result in an average cost of generation of around 5 yen per kwh (14 mills); this is slightly above the generating cost for base loaded thermal power in large modern installations. 25. These figures show how the cost of hydroelectric power now being developed in Japan is relatively high and on the increase. Kansai's program does not include any large hydro project with a cost so far above the average level to warrant questioning its economic justification. 26. On the basis of the recent performance, it can be assumed that the Company should be able to carry out its thermal power program without diffi- culties. The cost estimates are based on recent and current experience and are reliable. 27. The transmission, substation distribution anJ improvement progrems are tailored to the timing and location of the generating facilities. These programs are not entirely firm and this is due to two major reasons. Firstly, considerable attention is being given at the p.esent tire to an improvement of the inter- connection among the systems of the various companies. The studies now being nade will undoubtedly affect the transmission and substation progrars. Secondly, these programs, which might be called acceessory, represent the fle -ihility of the Company in meeting its financial requirements: thus, according to their priority, these works might be advanced or delayed according to the actual con- ditions in future years. VI. THE PROJE7CT Eescrintion of the Project 28. The project proposed for Bank financing is a 258 IvW hydroelectric instal- lation with seasonal reservoir control, In Kansails overall expansion program it represents a little over 10% of both the genereting capacity and the cost. The Kurobe Project represents a further step upstream in the development of the power potential of the Kurobe River, which flows from the Japanese Alps into the Cea of Japan in Western Honshu. The area has abundant rainfall (3gO0 mm/yr) and rainfall and river flow records are available for a period in excess of 30 years. The dam, a double curvature arch structure, about 188 meters high, will impound 150 million cu.mt. of useful storage. A tunnel about 10 km long will take the water from the reservoir to the power station, which will be built underground and equipped with three 86 I/W units. The head on the turbines will be 560 mt. One of the major construction problems is access. Two long tunnels, one from the Omachi valley through the mountain into the Kurobe Gorge (5.5 km) and the other from the dam along the Gorge to the power station site (10 km) will be used for 7 access. Average yearly generation at the new station will be 1,037 million kwh or 4000 hours equivalent at full capecity, an exceptionally favorable rate of plant utilization in Japan, particularly for a hydroelectric peaking plant. 29. Existing d.ownstream stations will immediately benefit from reservoir regulation, to the extent of a combined net increase of 267 million kwh/year. Thus total average yearly generation resulting from the construction of Kurobe will be 1,305 million kwh. 30. The full downstream benefits resulting from river regulation will only be achieved after expanding some of the downstream facilities. General layout plans have been worked out for the expansiors, which are to be undertaken after the Project has been completed. Net additions from downstream plant expansion will be 157 MW with a further increase in yearly generation of 558 million kwh. Tentative cost estimates for these works total 11.6 billion yen ($32.2 million). 31. The transmission facilities required to connect Kurobe to the network are included in the overall program for transmission. Present Status and Construction Schedule 32. It is standard practice for Kansai to do its own engineering iesign work and supervision of construction for hydroelectric projects. This they will do in the case of Kurobe, with the exception of the design for the dam. A double curvature arch dam (dome dam) has been chosen for this project, the first of this type to be built in Japan, After determining that this type would be the most advantageous for the site, Kansai entered into a contract with Electro- consult, iiilano Italy, in order to secure assistance in the design of the dam. Electroconsult has supplied the basic design of the dam, is assisting Kansai in preparing the detailed working drawings and will advise Kansai on construction methods. I'lodel tests are being carried out in Italy. 33. Civil contracts and equipment purchases will be with Japanese firms, with the principal exceptions of penstocks and turbines in view of the high head on the station. As penstocks for such high pressure have never been built in Japan before, Kansai has made arrangements to have them supplied from Furope. Bids for the turbines (Vertical Shaft Pelton) were invited internationally and Voith of Germany has been selected as the supplier. Total imports for the project, including all construction equipment of foreign origin, will be approximately 7% of the total cost of the Project (Annex 9). 34. The selection of Japanese contractors and sunpliers has already been made for all major contracts. 35. All construction supervision will be carried out by Kansai's own engineer- ing department with specialized outside advice where and when needed. 36. In the field, borings and adits at the dam site have progressed very we'l and so far the results of these tests heve confirmed the suitability of the loca- tion chosen. On the other hand the geologic survey of the area where the two 8 long tunnels between the dam site and the power st:tion site are to be constructet is sketchy and it is difficult to obtain more reliable data in view of the feat- ures of the mountains and of the high coverage. Borings and access shafts at the proposed power station eite are almost complete. Large scale construction of access tunnels was started in late 1956. Serious geological difficulties slowed down the driving of the Omachi tunnel but they have been overcome and the tunnel was "holed through'" late in February 1958. Large scale construction at the site itself will get under way when the tlnnel is completed to final dimensions. 37. The first two units are scheduled for operation in October 1960 at reduced head while the reservoir is being filled. Maximum output is expected to be 153 1W until late 1961 when it will reach the actual combined capacity of the two units, 172 i,W. The third unit is scheduled for commissioning in October 1962, raising the output to its final design level of 258 IvW. Completion of work on the project is scheduled for June 1963. Estimated Cost of the Prolect 38. The Pro4ect is currently estimated to cost 42,532 million yen ($118 million). A breakdown of the estimate is as follows: Millions of Yen Land and Compensation 616 Access tunnels and roads 4,066 Construction facilities 2,389 Conetruction equipment 6,o09 Dam anr underground powerhouse 9,122 Water tunnels and penstocks 5,217 Electrical & mechanical equipment 3,432 Engineering, Construction, Supervision and Overhead 3,165 Contingency 3,000 Tnterest during construction 4.616 Total 42.532 39. This estimate is based on prices prevailing during the latter part of 1956. It does not include any allowance for possible riees in cost of materials, equipment or labor and the allowance for physical contingencies, especially in view of the nature and amount of underground civil works, is rather low. 40. If there should be further increases in cost, funds to cover the increases would be available, through adjustments in the timing of the lower priority items in the program and the possibility can be ruled out that Kansai's management would allow the Kurobe project to be delayed. For these reasons, it does not seem worthwhile to require additional contingencies to be adde&, to the estimates. 9 41. The Bank is being requested to finance 037 million equivalent, which would cover the foreign expenditures (Annex 9) and approximately 26%50 of the local cost as estimated at present. The balance of funds would come from Kansaits local sources according to the Program's financing plan. The details about sources of funds are given in Chapter VIII. Unit-Construction and Generation Costs 42. On the basis of cost estimates, the Kurobe project will cost 165,000 yen/ kw (R450), The potential benefit from river regulation will not be fully achieved until existing downstream facilities are expanded. This involves the addition of 157 MIW of capacity in four plants. These expdnsion works will not be undertaken until Kurobe No. 4 is completed, and they will presumably be carried out in the 1960's. Cost per kw for Kurobe and the future downstream ex- pansion will be 133,000 yen ($370). These costs are quite reasonable. They compare favorably with mc;t other projects of this nature in Japan. By comparisor the cost of large modern steam power stations in Japan is about $200 per kw in- stalled. Construction cost per kwh/year wUl be 32,6 yen (9 USO) for Yurobe and immediate downstream inierease, 30 yen (8.3 US¢) after extension of downstream facilities. This compares very favorably with similar type projects now under construction (many of which are in the 50-60 yen range) and in fact it is at the level of the average for over-all hydroelectric work carried out after the war, which includes mostly facilities without seasonal reservoir control. 43. The full production cost of Kurobe energy will be: 5.06 yen/kwh (14 mils) fo- Kurobe No. 4 only 4.03 yen/kwh (11.2 mils) for kurobe No. 4 including immediate downstream benefits, The latter becomes 4.45 yen/kwh (12 mils) at the main stepdown sub- station, in the general area where the power will be consumed (Annex 10). Thermal Alternative 44. While it is already apparent from the figures and considerations given above that there cannot be any reasonable question about Kurobe's economic justification, it is of interest to show the range of its return on additional investment when compared to a thermal alternative. There are two basic view- points to be considered when making this calculation. These have to do with the cost of imported fuel to the Company which includes duties and taxes (at Dresent this is about 80 US¢/million BTU), and the cost of imported fuel to the economy before duties and taxes (which could be somewhere between 50 and 60¢/million BTU). 45. From the point of view of Kansai, depending on the reasonable leeway in determining the features of a thermal alternative, the return on an additional investment of between 19 and 25 billion yen is shown to fall between 10 and 15% (Annex 11). For the Company, therefore, there is an unquestionable economic advantage in developing Kurobe rather than equivalent thermal installations. 10 46. The annual savings are somewhat smaller when taking the overall economy's viewpoint, although the comparison still shows returns on additional investmerib of about 7% for a fuel cost of 50¢/million BTU and 8.6%o for 60¢/million BTU fuel. These rates of return are in the range of actual interest rates in the private financing market in Japan. 47. This type of analysis is a tool better suited to the case of isolated in- stallations in underdeveloped countries than to that of additions to complex in- tegrated systems as in Japan. The determination of a thermal alternative in the form of a modern high efficiency plant is an oversimplification and it penalizes the hydroelectric alternative by assuming almost complete utilization of thermaltf higher plant factor capability. It is impossible to translate into figures and give proper credit for the advantages of a hydroelectric installation such as Kurobe for peaking service. Finally, some credit should be given to the hlydro- electric alternative for its fuel import saving features. In the light of these considerations it is felt that the rates of return on additional investment shown for Kurobe are understated and that Kurobe is well below the limit at which higher --vestment in hydro than in alternati7e power sources could be ciuestiened on econoilic grounds. VII. RATES Rate Repulations 48. The iviinistry of Industry and International Trade (11iITI) has authority over all matters pertaining to the regulation of public utility enterprises, including changes in rates. 490 Power rates are computed on the basis of overall cost, including all opera- ting and maintenance expenses, depreciation, taxes and a sufficient gross return on the companies' investment to cover interest charges and the payment of adequate dividends on the par value of the share capital. A return on the share capital is considered adequate, for purposes of rate determination, when it enables the utilities to raise additional equity funds on the market. It is based, therefore, on the estimated cost of equity financing and is subject to variation from time to time. Except for a short period in 1953, the return allowed for rate purposes has consistently been 12% on the par value of the capital. 50. The procedure followed by the utilities in applying for a rate increase is relatively simple and fairly expeditious. The increase is granted as soon as MITI is satisfied that it is needed to provide the applicant with revenues sufficient to cover its costs and the 12% return on the share capital. Finanial Imnlicatiens of th& Presert Rate Svsto 51. Electric Power Companies have been authorized to revalue their utility plant three times: in Hay 1951, July 1952 and April 1954. For accounting pur- poses, the result has been to increase the depreciated value of the property account on the asset side and to set up on the liabilities side a revaluation a reserve of an identical amount. The utilities pay property taxes and are allowed to charge depreciation on the revalued basis. These higher costs are recognized both for nate andi for cornporate income taxes. On the other hand, the compaies are not allowed to revalue tne stockholders past con- tributions, except indirectly and to a minor degree through bonus sh-ares distributed in connection wituh new equity financing. Thlese bonus issues are char-ed to the revaluation reserve and added to the nominal capital. The resulting increase in the amount of permitted earnings enters into account in the computation of power rates. 52. 'As existing rate regulations allow for a return on nomiinal capital only, neither tne revaaluation reserve nor any- earned surplus are considered as capital for rate making purposes. Three consequences stand out as of particular im- portance in apporaising the finrancial position of the private power industry in Japan; 1l The retention of earning is, in effect, penalized since no return is allowed on earned surplus. In view of this, electric utilities distribute, in cash dividends, a relatively high percentage of their net profits. For the year ending 11arch 31, 1957, the average dividend pay-out for the nine private power compan-es was 89i as aga-nst 52-r for all cor-orate enterprises in Japan. This hias the effect of limiting internal cash generation to depreciation accruals and -lodest amounts of provisions and retained earnings. The portion of the cost of capital expansion programus which is mlet out of internal resources is, therefore, relatively smell, and the co3mpanies rely increasingly on borrowing to finance the construction of new facilities. 2. Whereas the rate of return on t1he corpanies' share capital alone is 12% or higher, the net return on the total equity is very much lower, av*raging less than 2,Z. The follouing table gives for 1956/57, the returns on tine share capital and cn thae equity- and thne cross return on thie net investment of Kanisai with corresponding aggregate figures for ti-e nine private power cofqoaniles in Japan: (in billions of Yen) Kansai P4ine Power Companies Share Capital (A) 13.5 76.0 Total Equity (B) 114.4 476.3 Vlet Fixed Assets in Operation (C) l7O.4 86h.2 Gross Income (after depreciation)(a) 5.9 4o.4 IEet Profit (b) 1.9 9.2 Return on Share Capital (b/A) 13.7% 12.1% Return on Equity (b/B) 1.7% 1.9% Gross Return on operatinic investment (a/C) 3.5% 4.7% 3. WThile the debt/equity ratio and the debt/service coverage tend to deteriorate as the utilities borrow in rapidly increasing amounts, the return on thie companies? investments tends to increase. This is due to tlhe fact that, while interest charges become an increasingly large part of the "overall cost" on which tariff rates are based, the revaluation reserve, w-hich earns no return, becomes of diminishing importance in the total capitalization. 12 53. The present imetlhod or calculation of tariff rates represents a cornI- promise whereby the government has been able, -or a few years, to keep power rates low. The main circunstance wlhich Ziiade it yossible to adopt tai's policy was the fact that the 'bulk of the assets on the CorTpaniest property accounts nad been built before the war with pre-inflation firnancini. *As the utilities rely increasingly on borrowings to finance th-e construction of more and more high- cost facilities, interest coverage and debt service coverage tend to deteriorate. 54. The Government is aware that the present rate policy may have outlived its feasibility. The hinistry of Industry and International Trade has recently created a Power Rate Investigations Council composed of 20 members representing consumers, the power industry and the governmitent. The council is exqpected to begin in the s. ring of 1958 a thorougll study of present rate systemsB and to re- coizLmend by the end of the year such changes in rate policies as maay afppDear advisable. 55. TJhile it is not possible to anticinate thi-e conclusions of thle Council as to ihoTw the presert cysten can best be modified, tte Bank has received f'rom the lLinister of Industry a-d lnternational Trade tle assarance that changes Trill, in fact, be m!ade, willhich will result in Eradual increases in tariff rates over and above tne nLcreases waf.ch would result from the appli- cation of the present syster.. VIII. FL.AOCIAL AlSLECTS Financial Structure and Present Debt 56. At the time of its creation in 1951, the Kansai i7lectric iower Company received the greater part of its assets from the state electric authlority. 2ixed assets were vritten up to take into account the devaluation of' the Yen, and a revaluation reserve was set up on the liabilities side of the balance sheet. Further revaluations took place in -ay 1952 and April 1954 -whfich in- creased thle amount of the revaluation reserve to over Yen 100 billion, or ten times the then amount of the shiare capital. The revaluation reserve hias been chlarged since 1951 with a revaluation tax, operating losses in tle wear ending iiarch 31, 1952 and with- three relatively snall issues of bonus shares. The bonus shares were distributed to -stocknolders in connection with each of tlhree successive sales of slhare capital. The slhare capital thus went up from. Yen 1.69 billion in 1951 to 6.76 billion in 1953, to 10.14 billion in 1954 and to 13.52 billion in 1956. This partial capitalization of the revaluat-'on reserve is expected to continue in futu-re liears, as the Company plans to distribute stock dividends with every new issue of capital stock. 57. Summaries of balance sheets for tie last 5 years are given in Alnnex 4. The ratio of equitty to total capiItalization w-rent down sligltly from 71X0 in 1953 to 64,; in 1957. as of iiarch 31, 1957, the capitalization of Kansai was approximately as followis: Billion of Yen % Share Capital 13.5 8% Capital Reserve and Surplus 1.5 1% Revaluation Reserve 99.4 55% Total Equlity 114. - Long Term Debt 64.5 36% Total 178.9 :ZM 13 58. A breakdown of the Company's fumded debt as of larch 31, 1957 is given in Annex 8. Borrowings from government saurces amounted to Yen 34j,461 billion or 53.5%0 of the total I ong-term debt and carries an interest rate of 6ˇ i, with termns ranging from 15 to 3O years. The IBRID Loan of 1952 (li,o. 89-CA) accounted for 11.3%o of the total. The Loan was rnade to the Japan Development Bank (JDB) and re-lent to Xansai. The various loans from government sources were talken over by JDB when the latter was created in 1)51. Borrowings frora private sources totalled Yen 22.75 billion, of -wiich Yen 15.23 billion in the form of t ortgage Bonlds and Deberntulres and the balance in 3 to 10-year loans by pr_vate banks. 59. !kIost of -Kansaits long term debt is secured by a general mortgage. The IBRD loan is also secured b-y a general mortgage and rates pari-passu with the larger part of the Company's f-mded debt. 60. Due to an irmprove-ent in the Company's financial position and to a slight easing of the capital shortage in Japan during the last three years, Kansai was able to borrow funds from private sources at somewlhat lower rates of interest and with longer matur-ities than previ ously. Bond issues floated since October 1955 have a n aturiZy of sevaen -,-ears, as against five for earlier issues. *Iedium- term loans from the two private industrial f anks andld from insurance cowoanies have followed a parallel trend, with maturities extended fromra fi-ve to ten years and Tith slightly lower in terest rates. 61. As of 1iarch 31, 1957, current liabilities exceeded current assets by a substantial nargin, but t'h1e liabilities included )'en 5 billion of bankl loans which, although legally shiort-terri debts, lave in fact, alwTa,v-s been renewed. 1/ Past Earnings 62. Suzrmaries of income statements for 1952/53 to 1956/57 are given in Annex 6. After incurring a loss of onie billion Yen for the year ending iiarch 31, 1952, the Corcaany i,iade n-et urofits which went up progressively from 793 million Yen in 1952/53 to 1,857 million Yen in 1956/57. This represernted a return on the par value of the share capital ,which fluctuated slightly from i14.4% in 1952/53 to 13.7, in 1956/57. Dividends of 12% a year have been paid on the shlare capital. At tile marklet value of' 650 Yen a share 2/ (par: Yen 5\0) tlhis amouiats to a return of 9.25%o on the market value of the silares. Because of the relatively lar-e size of the revaluation reserve, tuie return on the total equity was much low-ier, ranging from 1.2$ in 1952/53 to 1.65%O currently. From 1953 to 1957, total irterest on the long-term debt was covered 1.33 tiniies (after depreciation) on the average and the coverage on1 all non-capitalized interest charges averaged akout 1.60. For the last year, the ratios Tere 1.33 and 1.54 respectivelr. 1/ In the summary of past and estimated balance sheets (Annex 5), these short-term loans have been shown separately and other current liabilities have been deducted from current assets to arrive at the amounts showm on the asset side, under "net current assets." 2/ As of December 31, 1957. 14 63. The main problem for Kansai, as well as for other private power companies in Japan, is that with the exception of the modest distributions of stock dividends the utilities have not been permitted to revalue their shareholders' past contributions by capitalizing the revaluation reserve. As power rate regulations allow for a return on the share capital only, revenues have been insufficient to produce what is generally considered as a satisfactory return on the investment. The gross return (before interest) on Kansai's fixed assets in operation was only 3.5% in 1956/57, which is very low. Capital Expenditures and Sources of Funds 64. As the project is a relatively small part of Kansai's continuing expansion program, all financial forecasts in this appraisal deal with the Company's system and operations as a whole. 65. The Company estimates the total cost of its construction program over the seven years from April 1, 1957 to March 31, 1964 at Yen 319 bil- lion (equivalent to US$ 888 million at present exchange rates), of wnich about 12% (Yen 38.33 billion) for the project to be financed by the pro- posed loan. 66. These funds will be obtained from the following sources: Billion Yen Net increase in debt 190.57 59.7% Sales of Stock 34.76 10.9% Sales of Assets and Consumers Contribution 6.20 1.9% Internal Generation 87.51 27.5% 319.04 100.0% 67. Taking into account the repayment of long term debt, new long term borrowings for the seven year period would total Yen 246.59 billion, to be obtained from the following sources: Billion Yen Proceeds of sales of Bonds 103.24 41.9% Proposed IBRD Loan 13.35 * 5.4% Export-Import Bank and Westinghouse 7.70 3.1% Private Banks 22.50 9.1% Life Insurance Companies 58.00 23.5% Japan Development Bank 41.80 17.0% 246.59 l0o.0% * including Yen 29 million drawn from IBRD Loan 89-JA after April 1, 1957 - 15 - 68. A salient feature of the projected future borrowings is that the portion which would be obtained from Government sources (and channeled through the Japan Development Bank) will be relatively smaller than in the past, while sales of bonds and loans from private sources will become relatively larger. Life insurance companies, in particular, have indicated their willingness to invest substantial amounts in power expansion programs and are expected to supply nearly one-fourth of the Company's new loan capital over the 7-year period. 69. The amount of long-term borrowings expected from non-government sources mar have to be reduced somewhat, however, if a pronounced and per- sistent shortage of capital were to result from the government's present monetary policies. Power projects will be given a high priority in the allocation of government funds, and Kansai may be obliged to borrow from JDB more than it now plans to do. Although there cannot be, at this time, any degree of certaintyr as to the amounts which will be available from each of these sources) it does not appear likely that Kansai will have to make drastic reductions in its expansion program as a result of tight mrnetary conditions in. Japan. 70. Sales of new share capital are expected to produce a total of Yen 34.8 billion, of which Yen 6.7 billion in 1958159 and Yen 9,i4 billion in each of the 3 years 1959/60, 1960/61 and 1963/64. 71. In view of the Company's experience with new stock issues in recent years, and because of the incentive of bon.us shares in connection with new equity financing, Kansai does not expect any difficulty in selling its shares. Bonus shares will 'De given at the rate of 1 share with each block of 9 now shares. At a pat value of 500 Yen, this amounts to a payment of 450 Yen per share. As previously mentioned, the Kansai stock is currently quoted on the Tokyo Exchange at 650 Yen a share. Financial Forecasts 72. A forecast of income statements for the years 1952-1964 is shown in Annex 6 and a projection of cash flow statements for the same period is attached as Annex 8. With the exception of minor changes and adjustments in interest rates and loan amortization schedules, the statements are based on the Company1s estimates. 73. The estimates of revenues are based on growth of sales corresponding to the forecast of load development and system capability given in Chapters III and IV. Rates have been assumed to remain unchanged until January 1, 1960. The Company plans to apply in 1959 for selective rate increases to be made effective on January 1, 1960 and which would amount to increases of 21% to 5% in average revenues per kwh. As the regulatory authority is required to grant increases in tariff rates when the utility can prove that it needs the in- crease to cover its "toverall cost" as defined by present regulations, there is little doubt that Kansai will obtain this rate increase. - 16 - 7h. Labor and fuel costs have been taken at present levels. Any substantial cost increase would have to be offset by a compensating adjust- ment in tariff rates. 75. Depreciation has been assumed to remain on the present straight-line basis, taking an economic life averaging 45 years for hydroelect-ric plants and 28 years for thermal plants, which is conservative. 76. For purposes of calculation, the proposed Bank loan has been taken as carrying an interest rate of 6.05%, of which 5.75% on the loan itself and 0.3% to be retained by the Japan Development Bank. The loan has been assumed to have a term of 25 years, with amortization beginning in October 1962 and ending in April 1983. Future internal bond issues and long-term loans have been taken as having the terms and interest rates which Kansai currently obtains. 77. In 1956 and 1957, the amount of depreciation charged to operation has been in excess of that permitted for tariff rates and income tax purposes. The Company was thus increasing its internal cash generation by appropriatiLig part of the additional revenues resulting from higher than normal hydroelectric production. Although this may be repeated in the future, the depreciation accruals shown in the forecast are only those which will be permitted for rate and tax purposes. Earnings and Dividends 78. Gross income is expected to rise steadily from Yen 6.9 billion in 1957/58 to over Yen 21 billion in 1963/64. These figures represent returns on investmenlt increasing from the present level of about 3.5% to about 5.7% in 1963/64. 79. Net profits will go up from Yen 1.8 billion in 1957/58 to about Yen 5.6 billion in 1963/64. This amounts to an overall return on the ec uity increasing from 1.6% in 1957/58 to 3.7% in 1963/64. As in the past, cash dividends of 12% will be paid every year. Cash Position 80. Since the Company will use the small amounts of retained earnings available (after dividends and the provision of adequate increases in working capital) to assist its expansion program, no substantial building up of liquid assets is contemplated. Projected Balance Sheets 81. Estimated Balance Sheets as at March 31 of the years 1958 to 1964 are given in Annex 5. Total long-term debt which during the last 5 years varies between 29% and 34% of net fixed assets will increase to 49% in 1960, 57% in 1962 and 61% in 1964. - 17 - 82. The debt/equity ratio situation will be practically reversed, changing from 36/64 at the end of March 1957 to 63/37 in 1964. The two-to-one debt/equity ratio limitation placed on the Company by Project Agreement 89-JA will be maintained, with an amendment providing that in the computation of equity the revaluation reserve should be taken at whatever value is shown on the Company's books. Interest and Debt Service Coverages 83. The rapid increase in the Company's long-term debt will be reflected by a relatively poor interest coverage in the period ahead. As shown in the forecast gross income (after depreciation) would cover total interest payments (other than charged to construction) about 1.5 times. 84. Long-term debt service will be covered 2.1 times in 1957/58, 1.75 times in 1960/61, 1.66 in 1961/62, 1.49 in 1962/63 and 1.20 in 1963/64. In subsequent years (not shown on the forecast) the coverage is not likely to decline further. Even after allowing for the relatively short maturities of a large part of Kansai's debt, these ratios of debt service coverage are low. One of the main purposes of the proposed revision of the present rate system is to improve the debt service coverage situation by finding ways in which debt repayment can be taken into account in the determination of power rates. IX. CONCLUSIONS 85. Power demand in Japan has been increasing recently at a very high rate. The size of the expansion programs now established to meet the demand in future years is justified and may not provide the needed amount of reserve capacity. The cost at which the hydroelectric components of the programs are to be realized is generally high and slowly rising. While this is a typical feature of the Japanese power situation and it does not affect the justifica- tion of hydroelectric development as a whole, there are in the programs some hydrc projects whose cost is far enough above the average to raise a question of economic justification when compared with alternative sources of power. 86. The Kansai Electric Power Company's expansion program is conservative in size and the average cost of power to be provided by it is acceptable. The program does not include any large hydroelectric projects whose economic justification could be questioned. The Kurobe project is sound and econom- ically justified. 87. The management of the Company as well as its engineering and operating organization are capable and the arrangements made for construction and supervision of the project are satisfactory. 88. Cost estimates for the program and for the project are acceptable. While the contingency allowances are on the low side, there is sufficient flexibility in the timing of the program's lower priority components to give assurance that the important features, and particularly the project, can be completed even in the event of their cost being increased above established contingencies. -i-18 - 89. Tariff rates now in force, with the upward adjustments planned during the next few years will be sufficient for the Company to meet its cost and to pay a 12% dividend on the share capital. As a consequence of the rapid increase in the Companyts outstanding long-term debt, the debt service coverage during the construction period will become less and less favorable. As the possibility of improving the debt service coverage by selling more share capital and by borrowing at longer terms appears very limited, the situation could only be materially improved if the Company was allowed to generate more cash internally which would call for a change in the present policy of rate determination. The Japanese Government is studying the way in which this can be done and the Bank proposes to obtain assurances that modifications of the present rate system will be made, wnich will result in larger amounts of cash generation. 90. The financial structure of the Company will be materially affected as the current expansion program is carried out. The debt/equiity ratio (now 36/64) is estimated to reach 63/37 in March -164W During the same period, however, the return on the Companyts operating investnent will improve from 3.5% to 5.7% mostly as a result of the diminishing importance of the revalua- tion reserve (on which no return is allowed) in the total ecmity. 91. The project is suitable as a basis for a loan of $37 million. Based on the useful life of the project and on its construction period a term of 25 years with a period of grace of 4h1 years on amortization pay- ments appears to be appropriate. hUl 1 DECEMBER PEAK LOADS AND CAPABILrrIES, ANNUAL ENERGY RE2TUIEAENB AND LOAD FACTOIS FOR JAPAN AS A WHOLE AND FOR THE KANSAI :Y!5TEM Actual (revised Oct. 1957) 1955 1952 1215 19568 1959 1960 1961 1962 Unrestricted December peak loads VW All Japan 7,235 (7.5) 7,775 (9.4) 8,508 (2.9) 8,754 (6.7) 9,331 (12.9) 10,536 (14.2) 12,032 (10.9) 13,347 (9.1) 14,565 (7.9) 15,714 (7.3) 16,861 (6.3) 17,916 Kansai 1,397(18.3) 1,655 (2.5) 1,696 (9.7) 1,844 (12.2) 2,071 (13) 2,340 (U) 2,600 (7) 2,780 (6) 2,950 (5.7) 3,120 (5.5) 3,295 December Capability All Japan 6,467 (6.5) 6,887 (14) 7,845 (7.5) 8,434(12.5) 9,494 (9.2) 10,365 (8) 11,194 (10.6) 12,375 (20.1) 14,866 (10.8) 16,473 (5.7) 17,413 (2.4) 17,830 Kansai 1,397 1,655 1,696 1,844 2.071 2,158 2,267 2,614 2,965 3,342 3,641 Annual energy requirements (millions kwh) All Japan 42,312 (9.8) 46,467 (5.2) 48,933 (4) 50,827 (7) 54,407 (15.2) 62,679 (14.4) 71,705 (9.6) 78,616 (7.9) 84,853 (7.3) 91,011 (6.5) 96,969 (6.7) 102,904 Kansai 8,436 (10.3) 9,308 (1.7) 9,471 (7) 10,175 (13.5) 11,535 (13.3) 13,089 (11) 14,518 (5.6) 15,322 (5.2) 16,131 (5) 16,929 (4.8) 17,736 Load factor All Japan 66.6 68.2 65.7 66.3 66.4 67.9 68 67.2 66.5 66.1 65.7 65.6 Kansai 68.8 64.2 63.8 63 63.6 63.9 63.8 62.9 62.4 62 61.4 Note: Energy requirements at sending end Numbers between pqrentheses are percentage variations between figure on left and figure on right. ANNEX 2 JAPAN: DECEMBER PEAK LOADS AND CAPABILITIES, AND ANNUAL ENERGY REQUIREMENTS MILLIONS OF KW BILLIONS OF KWH 40 400 35 350 30 300 25 250 20 200 15 150 tS ~~~PEAKE LOAD ( LEFT SCALE) . _ ,0 __ __ __. 9 ~~~~~~~~~~~~90 8 ~---~80 7 ...@. -l *EFT SCALE) . 70 6 60 ENERGY REQUIREMENT (RIGHT SCALE -*.) 4 40 3 30 * LINE IS LAW OF DOUBLING EVERY TEN YEARS, OR CONSTANT 7.17% INCREASE EVERY YEAR. LONG RANGE DEVELOPMENT OF POWER IN JAPAN (SINCE THE 1930's) HAS FOLLOWED THIS LINE VERY CLOSELY. 2 _ I I I I I I I I _ 20 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 ACTUAL - FORECAST IBRD- Economic Staff 1365 ANNEX 3 KANSAI ELECTRIC POWER COMPANY: DECEMBER PEAK LOADS AND CAPABILITIES, AND ANNUAL ENERGY REQUIREMENTS 30 20 __ 15 (BLIN OFI KWH)FKW> _ I 0 8 7 6 3 ____ .__--- - CAPABILITY (MILLIONS OFMILION OFKKW) ~ 3 ~ PAKLA __ -__ .__ ____ * LINE IS LAW OF DOUBLING EVERY TEN YEARS, OR CONSTANT 7.17% INCREASE EVERY YEAR. LONG RANGE DEVELOPMENT OF POWER IN JAPAN (SINCE THE 1930's) HAS FOLLOWED THIS LINE VERY CLOSELY. 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 ACTUAL - FORECAST - IBRO - Economic Staff 1366 ANNEX 4 KANSAI EXPANSION P1GRAM1 Installed Annual Total Expenses up to Expenses Ecpenses Average Average cost per Capacity bergy Cost & incl. 1957 1958-1963 after 1963 Cost per KW kkh per year Hydro Decided 371,400 1,637,591 57,881 26,885 30,996 - 156,000 35.40 Proposed 669,900 1,501,668 63,884 538 45.249 18,097 95,300 42.50 Total 1,041,300 3,139,259 121,765 27,423 76,245 18,097 116,800 38.80 Thermal Decided 1,106,000 74,579 32,784 41,795 67,500 Proposed 60o 043,800 27,740 73,000 Total 1,706,000 118,379 32,784 69,535 16,060 69,500 Transmission & Decided 16,567 9,268 7,299 S-ibstation Proposed 70.118 87 66,738 3,293 Ibtal 86,685 9,355 74,037 3,293 Distribution Decided 4,091 3,263 828 Proposed 29,238 29.238 Total 33,329 3,263 30,066 Improvement & Decid ed 6,887 4,968 1,919 General Works Proposed 30.208 29,102 10104 Total 37,095 4,968 31,023 1,104 Grand Totals 2,747,300 397,253 77,793 280,906 38,554 KARMAI P(3 CLIPANY Condensed Balance Sheets A C T U A L rF O RB C A S T As at March 31 1 9 41955 1956 1957 1958 19960 1961 162 1963 1964 ASSETS Fixed Assets and Work in Progress 116,323 135,828 173,696 193,096 217,304 253,468 308,859 360,896 402,528 437,254 477,859 523,274 Less: Depreciation reserve 5,483 10,032 8.730 18,038 25,869 34.501 42,527 51,206 62,227 74,988 88.589 103.615 Net Fixed Assets and Work in Progress 110,840 125,796 164,966 175,058 191,435 218,967 266,332 309,690 340,301 362,266 389,270 419,659 Investzert and Funds 295 617 830 1,146 1,662 1,662 1,662 1,662 1,662 1,662 1,662 1,662 Net current assets 6,313 2,953 4,992 1,963 2,879 2,109 3,995 4,217 4,100 3,969 3,721 4,307 Deferred debits (a) 48 62 74 75 66 129 405 630 787 857 924 1.073 Total Assets 117,496 129,428 170,862 178J242 196,042 222,867 272.394 316,199 346.850 _368.754 395.577 426,701 LIABILITS AND CAPITAL Lonz-term debt Bonds and Debentures 5,263 7,012 7,926 9,499 15,226 21,563 34,578 48,113 62,234 77,638 91,522 100,970 IBRD Loan No. 89-JA - 603 3,888 6,913 7,262 6,986 6,662 6,325 5,971 5,599 5,208 4,798 Proposed I6RD Loan - - - - - - 6,180 9,360 12,140 13,320 13,144 12,778 Other long-term loans 270 2 71 27 41988 51,679 70,555 87,963 101.663 112.154 2.883 138.502 Total lorg-tenm debt 33,071 38,797 48,979 55,690 64,476 80,228 117,975 151,781 182,008 208,711 234,757 257,048 Short-term bank loans 35 2,050 3,364 1,300 5,000 15,000 19,500 19,400 9,700 4,200 4,300 3,000 Special reserves (b) 2,372 4,502 6,431 9,369 12,117 13,336 13,890 14,355 14,798 15,235 15,646 16,046 Share capital 6,760 10,140 10,140 10,140 13,520 13,520 21,000 31,500 42,000 42,000 42,000 52,500 Revaluation reserve 74,704 73,028 100,864 100,455 99,414 99,077 98,220 97,154 96,102 96,100 96,100 95,050 Capital reserve 40 41 41 40 44 44 44 44 44 44 44 44 Earned surpluas 514 870 1.043 1,248 1,471 1,632 1,765 1,965 2,198 2,464 2,730 3,013 Total Equitv 82,018 84.079 112.088 111,883 114.449 114,273 121,029 130 663 140.344 140,608 140.874 150,607 Total Liabilities and Capital 117.496 129,428 170.862 178.242 196.042 222,867 272,394 316,199 346.850 368.754 395.577 426.701 Ratio or long-term debt to equity 29/71 32/68 30/70 33/67 36/64 41/59 49/51 54/46 56/44 60/40 62/38 63/37 Ratio of total debt to equity 29/71 32/68 31/69 34/66 38/62 49/51 53/47 57/43 58/42 61/39 62/38 63/37 (a) Unamortized debt discount and share capital expenses. (b) Incllding provision for drought and employee retiremmnt provision, IC 46AI P(IJIl C04PANY Condensed Income Statements A A T U A L F O R 13 C A s T Fiscal Year endirt March 31 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 whs sold (millions) 6,062 6,936 7,295 8,049 9,471 10,635 12,030 12,947 13,792 14,576 15,359 16,450 verage revenue in Yen per Kwh (actual or present rates) 5.60 5.64 5.55 5.79 5.68 5.64 5.60 5.57 5.53 5.51 5.50 5.47 verage revenue in Yen per Kwh (proposed rates) - - - - - - - 5.60 5.69 5.78 5.68 5.72 Millions of Yen Millions of Yen evenues from retail power sales (present rates) 33,965 39,111 40,468 46,622 53,778 59,989 67,477 71,651 76,324 90,44B 84,552 90,139 norease in revenues, accruing from proposed rates - - - - - - - 350 2,090 4,330 3,157 4,459 ther operating revenues (a) 6,491 7,399 6,082 6,035 3,B88 5,349 806 1,960 5,137 5,007 4,987 4,995 ther income (net) 610 500 627 1,122 1,201 609 609 609 609 609 609 609 Total Revenues 41,066 47,009 47,177 53,779 5e,867 65,947 68,892 74,570 84,160 90,400 93,305 100,202 perating expenses (b) 34,739 37,720 35,408 38,579 42,874 49,478 49,814 50,580 53,308 54,529 55,619 59,200 epreciation 3,350 4,611 6,341 9,345 9,062 9,632 8,026 8,679 11,021 12,761 13,601 15,026 orporate Income Tax 0 1,334 774 763 987 949 2,217 3,321 3.872 4.423 4.423 4,700 Total revenue deductions 39,099 43,665 42,523 48,687 52,923 59,059 60,057 62,580 68,201 71,713 73,643 78,926 Gross Income 2,977 3,344 4,654 5,092 5,944 6,888 8,835 11,990 15,959 18,687 19,662 21,276 nterest on long-term debt 2,116 2,477 3,697 4,210 4,453 5,951 7,179 9,792 12,160 14,307 16,295 18,092 ,ess: Interest charged to construction 420 750 780 843 909 1,950 2,B22 3,731 2,503 2,056 2,o75 3,401 let interest on long-term debt 1,696 1,727 2,917 3,367 3,545 4,001 4,357 6,061 9,657 12,251 13,420 14,691 nterest on short-term debt 70 100 225 170 320 850 1.387 1,20 17062 506 3°9 262 Total interest, other than capitalized 1,766 1,827 3,142 3,537 3,865 4,851 5,744 7,481 10,719 12,757 13,729 14,953 msortizsation of debt discount and capital stock expenses 238 173 113 124 222 240 424 515 583 610 613 671 Total inccse deductions 2,004 2,000 3,255 3,661 4,087 5,091 6,168 7,996 11,302 13,367 14,342 15,624 let Profit 973 1.344 1,399 1,431 1,857 1,797 2.667 3,994 4,657 5,320 5,320 5,652 )ividends 451 979 1,216 1,216 1,622 1,622 2,520 3,780 4,410 5,040 5,040 5,355 !amgement bonus 8 9 10 10 12 14 14 14 14 14 letained earnings 514 356 173 205 223 16i 133 200 233 266 266 283 ;arned surplus at the boginning of the year 0 514 870 1,043 1,249 1,471 1,632 1,765 1,965 2,198 2,464 2,730 arned surplus at the end of the year 514 870 1,043 1,249 1,471 1,632 1,765 1,965 2,198 2,464 2,730 3,013 'imes interest covered by gross incnse Interest on long-term debt 1.41 1.35 1.26 1.21 1.33 1.16 1.23 1.23 1.31 1.30 1.21 1.18 Net interest on long-term debt 1.75 1.94 1.59 1.51 1.68 1.72 2.02 1.98 1.65 1.52 1.46 1.45 Total interest, other than capitalized 1.69 1.83 1.48 1.44 1.54 1.42 1.54 1.60 1.49 1.46 1.43 1.43 [a) Including sales of power to other utilities. fb) Including purchased power, provision for drought, property retirene nt losses and taxes other than corporate income tax. KANSAI PFUWR COMBPANY Funded debt as at March 31. 1957 (in millions of Yen) Amount Rate outstanding % I. Secured debt Bonds and Debentures Former Kansai Distribution Company 1 issue of 12-year debentures, due 1958 4.3% 20 Kansai Electric Power Company 39 issues of 5-year bonds, due 1957/1960 8.5% 6,806 It if " " 2 issues of 7-year bonds, due 1962 8.5% 500 "i "i It It 2 issues of 7-year bonds, due 1962/63 8.0% 600 "It It 7 issues of 7-year bonds due 1963/1964 7.3% 7.300 Total Bonds & Debentures 15,226 23.4% Mortgage Loans IBRD Loan No. 89-JA* 1 20-year loan, due 1956/1973 5.5% 7,262 l1.3 Counterpart Aid Fund Loans" 1 20-year loan, due 1951/1970 6.5% 304) it i if "t * 3 30-year loans, due 1956/1983 6.5% 14,307) 22.6% Former Reconstruction Bankx- 1 15-year loan, due 1949/1964 6.5% 2,386) If it t ' 1 15-year loan, due 1952/1967 6.5% 381) 4.3% Japan Development Bank 5 30-year loans, due 1958/1986 6.5% 17.084 26.5_ Total Mortgage Loans 41,724 64.7% Total Secured Debt 56,950 88.3% II. Unsecured debt Industrial Bank of Japan 2 5-year loans, due 1953/1959 9.5% 1,839 if it It it 2 10-year loans, due 1956/1967 9.15% 1,850 Long-term Credit Bank of Japan 3 5-year loans, due 1953/1960 9.5% 1,413 "1 "1 11" "1 " 1 10-year loan, due 1967 9.15% 650 Sumitomo Trust Bank 3 5-year loans, due 1953/1960 9.5% 1,024 " ft It 1 5-year loan, due 1962 9.15% 200 Life Insurance Companies 1 3-year loan, due 1957 9.15% 250 1 10-year loan, due 1958/1967 8.8% 300 Total unsecured debt 7,526 la. Total Long-term debt 64LiL76 100 % * Administratively, these loans are held by the Japan Development Bank, but the funds were lent by the sources KANSAI PCWEl CaPANY Forecast of Cash Flow Statements In millions of Yen Fiscal Year ending March 31 19'5 195922 1 1960 1961 1962 1964 (actual) Sources of Funds Gross Incom, as per income statements 5,944 6,888 8,835 11,990 15,959 18,687 19,662 21,276 Add back: Depreciation accruals 9,062 8,632 8,026 8,679 11,021 12,761 13,601 15,026 Property retirement losses 853 865 1,000 1,000 1,000 1,000 1,000 1,000 Provision for drought 1,518 1,200 - - - - - - Other non-cash items 773 49 524 465 443 437 400 Net Receipts frOm Ooerations 18,150 17,634 18,385 22,134 28,423 32,8S5 34,674 37,702 oales Of Assets 954 500 350 350 350 350 350 350 Contribution in Aid o Construction 539 604 500 500 500 500 500 500 Sales of share caital (Net Proceeds) 2,710 - 6,704 9,350 9,350 - - 9,350 Sales of Bonds (Net Proceeds) 7,103 8,197 14,400 15,360 15,360 16,320 16,320 17,280 Long-term loans IBMD Loan No. 89-JA 496 29 - - - - - - Proposed IBRD Loan - - 6,180 3,180 2,780 1,180 _ _ Export-Import Bank and Westinghouse - 2,419 3,461 1,821 - - - Japan Development Bank 1,943 2,700 5,100 6,200 5,000 5,000 8,000 9,800 Othbr loans 2,300 6.500 14.000 14,000 13,000 11.000 11.000 11,000 Total long-term loans 4,739 11,648 28,741 25,201 20,780 17,180 19,000 20,800 Short-term loans 9,940 15,000 19.500 19,400 9,700 4,200 4,300 3,000 Total Receipts (A) 44,135 53,583 88.580 92,295 84,463 71.435 75,144 88.982 APPlication of Funds Construction expenditures, inel. capitalized interest Project to be financed by proposed IBRD Loan 4,198 8,698 9,802 8,040 7,216 3,350 950 278 Other Constructions 24,124 29,435 47,439 45,847 36,266 33.226 41.505 46.98? Total construction expenditures 28,322 38,133 57,241 53,887 43,482 36,576 42,455 47,265 Service of the long-term debt Net interest on long-term debt 3,545 4,001 4,357 6,061 9,657 12,251 13,420 14,691 Redemption of bonds 1,573 2,163 1,985 2,465 1,879 1,596 3,116 8,552 Repayment of IBED Loan No. 83-JA 147 305 324 337 354 372 391 410 a R Proposed IBRD Loan - - - - - - 176 366 n n Export-Import Bank Loan - - 119 353 581 581 581 581 n n Japan Development Bank Loan 557 838 1,260 1,450 1,585 1,672 1,763 1,920 ", Other Loans 976 1,090 2,306 2,790 2,154 3.256 3,927 4,680 Total long-term debt service 6,798 8,397 10,351 13,456 16,210 19,728 23,374 31,200 Service of the short-term debt Interest on short-term debt 320 850 1,387 1,420 1,062 506 309 262 Repayment of short-ternm debt 6,240 5.000 15.000 19,500 19.400 9,700 4,200 4,300 Total short-term debt service 6,560 5,850 16,387 20,920 20,462 10,206 4,509 4,562 Revaluation tax 324 337 181 16 2 2 - - Dividend. 1,622 1,622 2,520 3,780 4,410 5,040 5,040 5,355 Management bonms 12 14 14 14 14 14 14 14 Total Expenses (B) 43.638 54,353 86.694 92,073 84,580 71,566 75,392 88,396 Cash accrual for year (A-B) 497 (-) 770 1,886 222 (-) 117 (-) 131 (-) 248 586 Cash available at beginnirg of year 1,989 2,486 1,716 3,602 3,824 3,707 3,576 3,328 Cash available at end of year 2,486 1,716 3,602 3,824 3,707 3,576 3,328 3,914 Times long-term debt service covered by receipts from operation 2.68 2.10 1.79 1.64 1.75 1.66 1.49 1.20 ANNEX 9 flvPORTED FQUIPMiFNT AND SFRVICES Amount in US$ Equiv, Contracts Already Awarded Engineering Services 181,994 Turbines 795,500 Penstocks, valves, steel lining 2,654,591 Construction Equipment 2,k80.422 Sub total 6,112,507 Contracts to be Awarded Extension of engineering services 90,000 Construction Equipment 18Q0.244 Sub total 1,897,244 Grand total imported comsponents 8,009,751 ANNEX 10 Sheet 1 ChLCULATTON CF GENFEBATING COST FOR KUROBE Kansai's calculation of the annual cost of operation for the Kurobe Project is based on an estimated book value of the project of 40,902 million yen. The detail of the calculation is as follows: Annual_Cost liAillions of Yen Interest 3,518 Based on a rate of 8.6% per annum, representing the weight- ed average of actual expected financing terms Depreciation 818 2% per annum of book value, or straight line method applied to 9C% of book value (10% is con- sidered salvage) for 45 years (average of useful lives of components). Fixed Asset Tax 205 1 .4o of 1/3 of book value Wages, Salaries and Benefits 18 490,000 yen per annum x 31 staff Mlaintenance 154 .754%° per annum of - book value Water Rights Charge 95 Others 53 .13% per annum of book value to cover sundry other direct opera- ting costs Overhead 105 257% per annum of book value (based on 1956-57 averages) Total 4,966 Enterprise Tax 76 1.5/98.5% of total Total Annual Cost ,0_42 Energy generated at Kurobe, assuming a 96% water utilization factor 996 million kwh/yr. Immediate downstream benefits 257 million kwh/yr. Total energy generation 1253 million kwh/yr. Cost of energy generated by Kurobe, including downstream benefits: 1253 x lC= 40O3 yen/kwh ANNEX 10 Sheet 2 Based on its arrangements for the use of this power in a servIce area relatively near the site, Kansai calculates that the cost at the outlet of the primary stepdown substation will be 4A45 yen/kwh. If on the other hand the production from Kurobe should be transmitted to the main Osaka area, as must be assumed in a hypothetical calculetion of thermal alternative (Annex 11), then the cost at the primary substation outlet would rise to about 5.3 yen/kwh. ANNEX 11 Sheet 1 BASIS FOR THE CALCULATION OF THEI>AL ALTERNATIVE Kurobe No. 4 is compared with several alternative thermal plants in this annex. In Case 1 the return on the additional investment in Kurobe is calculated on the basis of data for a 366 PIW thermal alternative which was submitted to the Bank by Kansai. In Case 2 the thermal alternative was modified as to size (300 1KW) and the fuel cost was taken before duty and taxes to base the comparison on the viewpoint of the economy of the country rather than on the actual operating conditions of Kansai. A price of fuel between 50 and 60 cents per million BTU for imported oil seems realistic for the future. Basic Assu,nptions: 1. Investment in thermal power plant per KLW, 73,000 yen ($,203) 2. Alternative thermal plant factor 6000 hrs/yr. 3. Investment in transmission and substations for thermal per KW, 9,600 yen (&'27) 4. Investment in transmission and substations for hydro 32,500 yen/Kl ($90). 5. Life of the thermal plant assumed to be 2S years and hydro 45 years. 6. Depreciation maintenance and personnel charges based on current Kansai operating procedures. 7. Thermal efficiency of alternative base load plant assumed to be 37% and efficiency of supplemental steam power plant 32.5. 8. Price of fuel paid by Kansai averages 1 yen per kilocalorie or 70 cents per million BTU. This includes imported fuel oil at SO cents per million BTU. ANNEX 11 Sheet 2 Case 1 Comrarison of Kurohe No..4 with a thermal alternative on the basis of data prena ed bv Kansai (all value figures in million yen) Kurobe No. 4 Thermal Alter_native 1. Capital Reouirements Generating facilities 40,902 26,718 Transmission plant 6,014 357 Transformation substation 2,365 3,1 Total investment 49,281 30,245 2. Annual Operating Costs Fuel Cost 1,950 l/ 4,690 Operating, maintenance & admin. 562 735 Depreciation 1,020 855 Taxes 338 2'2 Total annual costs 3,870 6,532 3. Additional T=+estment ino Hydro Investment in Kurobe No. 4 49,281 Investment in thermal al'ternative 30,245 Additional Investment 19,036 4. Savings in Annual Opratina Costs Total annual cost with thermal 6,532 Total annual cost with Kurobe 3 870 Annual Savings 2,662 5. Annual Savings as a Return on Addition- al Investment in Hvdro. Rate of return 2,066 14-0% 19,036 - 4O .1/ Fuel cost of supplemental steam power charged as an annual cost to hydro. In order to make the comparison Kansai estimated that an additional 736 million kwh would have to be generated in an existing steam plant to supplement KurobeTs annual energy generation. ANNTX 11 Sheet 3 Case 2 Comrarison of Kurobe No. 4 with modified1 thermal alternativel! (all value figures in million yen) Modified Kurobe No.. Ther,mal Alternative 1. Canital Reouirements Power facilities 40,902 21,900 Transmission plant 6,014 340 Transportation substation 2,36$ 2,60 Total investment 49,281 24,840 2. Annual Operatinp-Costs Fuel Cost 940 3,050 Operating, maintenance & admin. 562 571 Depreciation 1,020 700 Taxes 328 2i1L Total annual cost 2,860 4,535 3. Additional Investment i.n Hvdro Inveetnent in Kurobe No. 4 49,281 Investment in thermal alternative 2_____ Additional investment 24,441 4. Savings in Annual Oneratinr Costs Total annual cost with thermal 4,535 Total annual cost with Kurobe 2X86 Annual Savings 1,675 5. Anual Savings as a Return on Additional Investment in Hydro Rate of return L6 _5 6.9% 24,441 1/ Thermal alternative modified to reflect more realistic assumptions - genera- ting capacity lowered by 6S,000 KW. reducing capital investment in thermal. Price of fuel lowered to 50 cents per million BTU to reflect lower cost of imported fuel oil both in thermal alternative and in the supplemental steam plant. 2/ Indicated return would be 8.6% if fuel price assumed to be 60 cents instead of 50 cents per million BTU. N A G A N 0 T 0 Y A M A R E RF E CRT U RE O \ J ~~~~~~~~~~~~anld Pne9nsTtocksel -. * P ; R E F E C T U REState Railways 4 > ! ,,,,,,,, I,~~~~ Cojnstruction\ . g Roods '.- .-> 2S40m.~~~~~~~~~~~~Rad ;$; <. ---- ~~~~~~~~~~~~~~~~~~~~Watershed line ike~~~~~~~~~~~~~~~~~~~~~ - - Prefecture boundary( KUROBE PROJECT ARAKUROBE 1 PROJECT SHOWN MARCH 1958 IBRD-446R