~~ ~ $ j ~RESTRICTEDReport No. PU-- 13a

This report was prepared for use within the Bank and its affiliated organizations..They do not accept responsibility for its accuracy or completeness. The report maynot be published nor may it be quoted as representing their views.

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

INTERNATIONAL DEVELOPMENT ASSOCIATION

APPRAISAL OF

THIRD CUKUROVA POWER PROJECT

TURKEY

June 2, 1969

Public Utilities Projects Department

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

CURRENCY EQUIVALNTS

Turkish Lira (TL) = 100 Kurus (Krs)US$1 = TL 9TL 1 = US$0.11

TL 1,000,000 = US$110,000(10 mills = 1 US cent)

MEASURES EQUIVALENTS

kW = kilowattMW Megawatt (1,000 kW)kWh kilowatt hourGWh Gigawatt hour (1 million kWh)kV kilovoltMVA Megavolt Ampere1 meter (m) = 3.28 feet1 kilometer (km) = 0.6214 miles

LIST OF ABBREVIATIONS

CEC Cukurova Electric Co.

DSI Devlet Su Isleri (State Water Works)

CEC's Fiscal Year ends December 31.

TURKEY

APPRAISAL OF THIRD CUKUROVA POWtER PROJECT

TABLE OF CONTEI'NTS

Page Nio.

SUTEINP.ARY i

I. INTRODUCTION 1

II. THE PMJW7 SECTOR AND THE CEC SYSTEM 2The Sector 2CEC Facilities 3Future Program 3

III. THE PROJECT 4Description hCost Estimate 5Procurement 6aigineering 6Operation of the Plants 6

IV. PROJECT JUSTIFICATION 7The M4arket 7Alternative Project 8Rate of Return on Incremental Investment 8

V. THE CUK9UROVA ELECTRIC COiMP2AY 8Organization 8The Concession 9Tariff Regulation 9Customners 10

* Audit 10

VI. FINANCIAL ASPECTS 11The Current Situation 11Past Earnings 12Perforrmance Test 13Future Finances 13Future Earnings and Financial Position 16

VII. CONCLUSIONS 17

This report was prepared by Ralph L. Bloor and Giovanni Vacchelli.

LIST OF ANINEXES

1. Kadincik II Project - Cost Estimate

2. Actual and Forecast Income Statements, 1964 through 1973

3. Sources and Applications of Funds, 1968 through 1973

4. Actual and Forecast Balance Sheets, 1964 through 1973

5. Rate of Return on Incremental Investment

Hap

TURKEY

APPRAISAL OF THIRD CUhKUROVA POT3E PROJECT

SU111ARY

i. The Turkish Government on behalf of the Cukurova M ectricCompany (CESC) has requested a Bank loan of US$11.5 million equivalentto finance the foreign exchange costs of the 'Kadincik II hydroelectricplant, consisting of a low diversion dam, outdoor powerhouse with a 50 MWgenerating unit, penstocks and a 6 km tunnel. Total estimated cost isUS$17.2 million equivalent, including interest payable during theconstruction period. Commercial operation is scheduled for late1972.

ii. The IDA has extended two credits to the Government for relendingto CEC. The first (34-TU, 1963) for US$1.7 million equivalent was foradding a third 18 iiW unit to the Company's Seyhan hydroelectric plant andthe complete plant is now in satisfactory operation. The second Credit(59-TU), in 1964 for US$24 million equivalent, is helping to fina,nce theKadincik I hydroelectric plant of 70 Mn upstream of the proposed Project,a thermal plant of 100 Mw near Mersin, and associated transmission linesand facilities. Disbursements were USt15.2 million as of April 30, 1969.The closing date is June 30, 1971. Quality of the work is excellent.Construction progress is now satisfactory, although it had been affectedby the dealy in starting some features of the works, following therecommendations of the consulting engineer.

iii. Recently, there has been an unfavorable trend in CEC'sfinancial position, largely due to the rapid expansion of operations.This situation promises to be corrected by the proposed financing planwhich includes a tariff increase, a new stock issue, and the sale ofbonds; and the future financial position is forecast to be sound. TheCompany's operations are being managed satisfactorily. To improvefinancial planning and meet the anticipated technical requirements ofa more complex power system, some additional training of personnel isneeded and would be provided for under the proposed Project.

iv. The proposed Project is technically sound. Assuming that thecost of capital in the power sector does not exceed 17%o, it representsthe least cost alternative for meeting the growing demand of CEC'smarket and promises to yield a satisfactory incremental rate of return.With the assistance of its engineering consultant, the Company hasthe capability to carry out the Project.

v. The amount of the loan is based on the estimated foreign ex-change costs and any savings would be cancelled. Proceeds of the loanwould finance contracts for foreign goods and services or the foreigncomponent of contracts also involving local costs.

- ii -

vi. Satisfactory agreement was reached during negotiation onthe items summarized in paragraph 7.04 of this report, including atariff increase prior to effectiveness of the proposed loan. Inview of this, the proposed Project forms a suitable basis for a Bankloan of US$115. million equivalent for a term of 25 years, includingfour years of grace.

TURKEY

APPRAISAL OF THIRD CUKUROVA POWER PROJECT

I. INTRODUCTION

1.01 This report covers the appraisal of the Kadincik II Projectof the Cukurova Electric Company (CEC) of Adana, on whose behalf theTurkish Government has requested Bank Group assistance. The Projectconsists of a hydroelectric plant on the lower Kadincik River, about50 km west of Adana. Total cost is estimated at US$17.2 million equiv-alent, including interest on the Bank loan payable during the 3-yearconstruction period. The proposed Bank loan would finance all of theforeign exchange component of US$11.5 million.

1.02 The Bank made a Loan (63-TU) of US$22.8 million equivalient tothe Turkish Government in 1952 to help finance the multi-purpose Seyhanproject at Adana. At the Bank's suggestion, CEC was formed in 1953 topurchase and operate the powerhouse of the Seyhan hydroelectric facility,which was built by the State Water TWorks (DSI), the Government agencyresponsible for river development. An IDA Credit (34-TU) of US$1.7 mil-lion equivalent was extended to the Government for relending to CEC inFebruary 1963 to finance the foreign exchange cost of the third 18 MWunit at Seyhan. The relending terms were 5 1/2% interest with repaymentin 20 years including a grace period of two years, later extended toseven years. The third unit was installed on schedule and the completeplant has operated satisfactorily since late 1964.

1.03 A second IDA Credit (59-TU) of US$24 million equivalent wasextended to the Government for relending to CEC in July 1964 to helpfinance the first Kadincik hydroelectric plant of 100 NWpJ (upstream ofproposed Kadincik II), a thermal plant of 50 IV near Mersin, and asso-ciated transmission lines and facilities. The relending terms were5 1/2% interest with repayment in 25 years including a grace period ofsix years. On the basis of final studies, CEC's consulting engineeringfirm recormmended substantial changes in the project; and in May 196$7IDA agreed to reduce the Kadincik plant to 70 MW, increase the Mersinplant to 100 MW, and add some transmission facilities. In August 1968the IDA agreed to add further transmission facilities and provide forengineering studies of future projects. The first 50 FW of the Mersinthermal plant has been completed, and production started in 1966; thesecond half is under construction. Construction started late on theKadincik plant by reason of the change in plan. There will be latercompletion dates, but no serious problem is anticipated, since saleshave lagged behind original market predictions by about one year. Allfacilities have been or will be placed in service immediately upon com-pletion.

- 2 -

1.04 Other Bak lending for power in Turkey (see para. 2.03) consistsof a US$25 million loan in October 1968 to help finance 1,460 km of 380' kVtransmission line. The Bank has also made a grant of US$550,000 to studythe reorganization of the power industry in Turkey.

1.05 This report was prepared by Ralph L. Bloor and Giovanni Vacchelli,and is based upon the findings of an appraisal mission to Turkey in November/December 1968.

II. THE POIWER SECTOR AND THE CEC SYSTEM

2.01 Turkey, lying mostly in Asia Minor and partly in Europe, has atotal area of about 770,000 km2 and a population estimated in 1967 at32.7 million. From 1960 through 1967 the GDP, at constant prices, grewat an average annual rate of 5.3%; however, a 2.5% rate of populationgrowth resulted in an increase of GDP per capita of only about 2.8,%. Whileabout three-fourths of the labor force is engaged in farming and relatedoccupations, the agriculture sector contributes only about one-third of theGDP (estimated at US$11.3 billion in 1967). The second 5-year plan (1968-72)emphasizes the manufacturing sectors with a high technology input, such aschemicals, steel, engineering and electrical industries. Private iLnvestmentis expected to play a major role. In the power sector, investments of aboutTL 8.7 billion are expected to increase power production from 6,200 GWh in1967 to 11,800 GlWh in 1972 -- an increase of 14% per year compared with anincrease in consumption during the first plan period of 11.5% per year.

The Sector

2.02 The total capacity of generating plant in Turkey at the end of1967* was 1,950 MW. Of this, 1,327 MW was connected to systems ownied andoperated by Etibank, a State Enterprise which owms a large portion of CECstock; 519 lfM was installed in a number of small and isolated municipal-ities, villages and private industrial plants. The balance of 104 KH -5% of the total - constitutes the present CEC system, which will increaseto 224 MW in 1970 when the works under construction are expected to becompleted.

2.03 In October 1968 the Bank made its first loan to the nationalelectricity system operated by Etibank. The loan is to help finance a380 kV transmission line 1,460 km long extending from the 1,240 MW KebanHydroelectric Plant under construction on the Euphrates River to Istanbul.The Bank has also made a grant of $550,000 for the first stage of a studyof the reorganization of the power industry in Turkey. This work, com-prising preparation of accounting and engineering standards, has been com-pletedby Stone & Webster, a consulting firm of the U.S.A. The second phaseof the study covering implementation of the recommendations and revaluingof assets has been deferred pending the passage of a law which will, enablethe reorganization to proceed.

* Latest data available for the entire sector.

- 3 -

2.04 The CEC system, now isolated, serves one of the most rapidlydeveloping agricultural areas in Turkey (see map). In 1970 and 1971,when a power shortage in the Etibank systems is anticipated, CEC is ex-pected to have a surplus of power for its needs. Etibank is building a154 kV connection from its grid so that it may buy this surplus, esti.matedat 220 GEM for 1970 and 100 GWh for 1971. The sale of power to Etibankmay begin in late 1969, if either the Mersin thermal plant or the KadincikI hydroelectric plant is ready for full commercial operation by that time.

CEC Facilities

2.05 The operating facilities of CEC consist of the Seyhan 54 MWhydroelectric plant3 the Mersin thermal plant (first 2 of 4 units, 25 NWeach), a 118 km 154 kV transmission line, several 66 kV lines totalling206 km, and 9 substations totalling 213 MAU. No distribution facilitiesare involved, because CEO sells only bulk power (see para. 5.03). Allexcept the Seyhan plant were built by CEC. The Seyhan plant is part ofa multi-purpose river project (power, irrigation, flood control). Forthe purpose of flood control, a portion of the storage volume is keptempty.

2.06 The following CEO facilities are under construction:

i. The Kadincik I hydroelectric plant of 70 MW, tobe completed by the end of 1969 or early 1970.

ii. The last 2 units (25 1I4 each) of the Mersin thermalplant, to be completed by October 1969.

iii. A 6 km 66 kV transmission line, to be completed inJune 1969.

iv. 88 km of 154 kV transmission lines, to be completedby November 1969.

v. 6 substations or substation extensions totalling182 MVA, to be completed by June 1970.

Future Program

2.07 The following construction is planned for the period 1969-1974:

i. The Kadincik II hydroelectric plant of 50 1f4to be completed by the end of 1972.

ii. Several 154 kV transmission lines totalling270 km to connect new portions of CEC's servicearea to the system.

iii. 4 substations totalling 184 EVA.

Planning is incomplete beyond 1973. Although a new source of power will beneeded by 1974, as noted below, it has yet to be identified.

- 4 -

2.08 The Government is proposing a multi-purpose Aslantas projectto be built by DSI on the Ceyhan River, just east of the Seyhan River,and is urging CEC to participate. Although this proposed project wouldbe favorably located to fit into the CEC system, the power feature of84 MW does not appear, on the basis of available information, to beeconomically attractive. On DSI's request, two foreign engineering firms(Syndibel of Belgium and Acres of Canada) will give it further study. Inthe meantime, IDA has authorized expenditure from Credit 59-TU to employan engineering firm to survey the area near CEC's service area for otherhydroelectric sites. IThen the studies are completed, it may be possibleto select a hydroelectric project that will meet CEC's need for additionalpower in 1974. If such a project cannot be identified, a high-tensionconnection to the national grid to enable CEC to purchase power fromEtibank may be the solution because of the completion of Keban and otherlarge projects which will be connected to the grid by that time. Sincethese alternatives are still to be explored, a firm prediction of theexpansion program beyond Kadincik II cannot be made at this time.

III. THE PROJECT

Description

3.01 The proposed Kadincik II Project consists of a low diversiondam, a long and nearly horizontal tunnel under low head, and penstocksdropping steeply to an above-ground powerhouse at river level. Thesite is a short distance doimstream of the Kadincik I plant under con-struction; the powerhouse will be just downstream of the mouth of theKadincik River wrhere it discharges into the Tarsus. 1when both Kadincikprojects are completed, they will fully develop the river's power poten-tial. The proposed Project has been planned by Syndibel of Belgium, CEC'sengineering consultant.

3.02 The diversion dam would be a concrete structure wiith radialgates 11 m wide by 11.5 m high, the latter dimension being nearly equalto the height of the dam. These gates must pass floods without undulyraising the tail-water of Kadincik I and at the same time provide forsediment evacuation from the small reservoir created by the dam. Thedam provides very little storage; however, the daily storage providedin Kadincik I will also be available to Kadincik II. The dam divertswater into a concrete-lined tunnel, 5.9 km in length and about 4 m indiameter, which is extended to above the powerhouse site by a steelconduit about 1 .4 km in length. A surge tank and valve are at the endof this conduit, do=nstream of which a steel penstock slopes steeply tothe powerhouse near the river bank. The powerhouse would be of the usualconcrete construction wzith a single 50 -ffi turbo-generator set operatingunder a net head of 129 m. The generating facilities will be remotelycontrolled from Kadincik I. There will be a step-up substation, but nonew transmission facilities are required since the lines from Kadincik Ito Tarsus are routed past the site and are designed to carry the outputof Kadincik II.

- 5 -

3.03 CEC has proposed to include under the loan a training programthat would consist mainly of sending local personnel abroad to receiveinstruction for a few months. Although the program undoubtedly would beuseful, it i#ould not be intensive nor long enough to accomplish thedesired results. In addition to training abroad, it appears necessaryto hire some experts in the most needed fields to work within CEC forabout a year and give on-the-job training. To cover the foreign exchangecost of a year's effort along this line, additional amounts are includedin the proposed loan. (see para. 5.02)

Cost Estimate

3.04 The total estimated cost of the Kadincik II Project is sum-marized below; details are in Annex 1.

Millions of TL Miillions of US$Local Foreign Total Local Foreign Total

( TL9 US$1 )

Civil iJorks 29.20 43.80 73.00 3.24 4.87 8.11Mechanical and Elec-trical Equipment 5.85 33.06 38.91 .65 3.67 4.32

Other Expenses* 9.68 6.33 16.01 1.08 .70 1.78Subtotal 44.73 83.19 127.92 4.97 9.24 14.21

Contingencies * about13% 6.09 10.85 16.94 .68 1.21 1.89

Subtotal 50.82 94.04 144.86 5.65 10.45 :L6.10Interest DuringConstruction - 9.46 9.46 - 1.05 1.05

TOTAL 50.82 103.50 154.32 5.65 11.50 17.15

The estimate was prepared by Syndibel and CEC, using quantities taken offpreliminary drawings and unit prices derived from experience on Kadincik I,*which is being built under the same hydrologic, ge.ologic and metereologicconditions. Contingency allow ances are included, at the rate of 16% forthe civil wtorks and 10% for the equipment and other expenses - an averageof about 13% for the entire Project. These allowances are consideredadequate. The 16% contingency allowance for civil works is reasonablebecause the Project follows closely a similar one.

3.05 It is proposed to provide a Bank loan of about US$11.5 millionequivalent, for 25 years including 4 years of grace, to cover all of theforeign exchange costs including interest during construction. The Projectcould be ready for commercial operations by December 1972; however,Syndibel estimates that it could be advanced to September 1972 if K:adincik Iis completed by late 1969 and construction equipment moved expeditiously toKadincik II.

* Consulting engineering, administration and supervision, personneltraining, and land.

-6-

Procurenent

3.06 CEC will follow Bank procedures for procurement, i.e., inter-national competitive bidding for the civil works and all equipment, aswas the case with Kadincik I. No contracts have yet been made. Foreigncontractors, especially the one for the civil works, will no doublt obtaingoods and services from local firms and suppliers whenever it suits themto do so.

3.07 Proceeds of the loan wiould finance contracts or purchase ordersfor foreign equipment, engineering, and training. Those for civil workswould be a part of the periodic payments to the contractor so that; totaldisbursements would equal the foreign component of the civil works con-tract. Proceeds unutilized for any item would be available for ary otheritem including interest during construction. Overall savings wqould be

v cancelled.

Engineering

3.08 CEO intends to continue using the services of its engineeringconsultant, Syndibel, for the preparation of detailed plans and specifi-cations and for supervision of construction. Syndibel's services forthese purposes in the Kadincik I project are satisfactory.

Operation of the Plants

3.09 The Kadincik II plant (and also Kadincik I) will be essentiallya run-of-river facility with only daily storage available. Other facili-ties in CEC's system have storage or use fuel. Therefore, the twToKadincik plants may be expected to operate every day, using all the wateravailable (up to their full capacity) each day. During high flows theplants wTould operate on baseload; during low flows they would be used forpeaking purposes.

- 7 -

IV. PROJECT JUSTIFICATION

The Market

4.01 Energy requirements, peakloads, and capabilities, both recordedand projected, for the Cukurova system are as follows:

Energy PeakRequirements Loads Capabilities

Calendar Year GWh Mlr I 'TJ

1965* 251 52 54

1966* 323 66 104

1967* 376 77 lob

1968* 439 90 104

1969 55 124 154

1970 88o0* 205** 224

1971 880** 205JA* 224

1972 968 225 274

1973 1,065 248 274

197h 1,171 273 274

* Actual figures., Includes sales of bulk power to the national grid.

The annual increases during the years of record (1965-1968) vary fromabout 16% to 28%J in both energy and peak requirements. The rapid growthis due both to the vigorous economy of the region and the expansion ofthe transmission system into new areas. The estimates for 1969-1971 arebased upon a survey of present customers' plans and Government plans forbuilding in the area a fertilizer plant and steel mill as well as otherindustries. In case of delays in Government building schedules, morecapacity could be devoted to the national grid. The computation of theabove figures is complicated by the plan to supply surplus energy andcapacity to the grid in 1970 and 1971; thus the increases are abnormallyhigh between 1969 and 1970 and zero between 1970 and 1971. After 1971 theannual increases are estimated at 10%. This situation is satisfactory.

- 8 -

4.02 In 1972, before Kadincik II is in operation, the generating plantavailable will be:

Mersin (4 units) 100 IgitqSeyhan (3 units) 51 1jTKadincik I (2 units) 70 4WJ

Total 224 MW

Thus, the 1972 peak requirement of 225 nW could barely be met and therewould be no reserves. Since these figures are based on an average year,in event of a dry year in 1972 there would be a shortage (estimated at15 NJ). To meet the peak in December of that year, it is therefore im-portant that Kadincik II be completed on schedule in late 1972, thusmaking available 274 TW of generating capacity. The 1973 peak of 248 M1Ican then be met with about 25 Hil reserves, a minimum requirement for theCEC system. In 1974 additional plant will be needed to preserve somereserve capacity, as well as meet energy requirements.

Alternative Project

4.03 The only reasonable alternative to the Kadincik II hydroelectricplant which could be available when needed, as well as fit into the system,would be an oil-fired steam plant. A study made by Syndibel to determinethe least cost choice between Kadincik II and a thermal plant indicatedthat present value of the costs of the alternatives would be equal at adiscount rate of about 17%. Therefore, assuming that the cost of capitalin the power sector does not exceed about 17%, 'Kadincik II represents theleast-cost solution to 1972 power requirements.

Rate of Return on Incremental Investment

4.04 As indicated in paragraph 3.09, the Kadincik II plant may beassumed to operate on all the water available in the river up to the plant'scapacity. Therefore, the saleable output of the plant may be assumed tobe equal to that of a year of average flow corrected for losses. On thisbasis the rate of return on the investment would be between 15% and 16%,using tariffs expected to be in effect in 1972 when the plant would gointo operation (see Annex 5 for details).

V. THE CUIUROVA ELECTRIC COMPANY

Organization

5.01 CEC was formed in 1953 when the Government granted it a 149-year concession to purchase and operate the powerhouse at the DSI-builtSeyhan Dam (see para. 1.02). Operations began in 1956. An over-run inthe cost of the powerhouse and the 1958 devaluation complicated thefinal settlement (see para. 6.04), which was not reached until 1961.CEC's structure is that of a corporation with a majority of privatelyheld stock. The Board of Directors is composed of a chairman, three other

- 9 -

representatives of the private stockholders and three representatives ofEtibank, holder of the Government's minority interest. The supervisingauthority is the Ministry of Energy and Natural Resources. The Company'soperating organization is headed by a general manager and three assistantgeneral managers (operations, administration and finance, projects andinstallations). There were 528 employees in 1968. The organization hasperformed efficiently since 1961, when the present chairman of the! Boardwas appointed, despite the fact that the Company has had four generalmanagers in the same period. The chairman is a prominent local figureand has good managerial ability. His participation in C3C1 s managementhas been an important factor in its success.

5.02 There are some organizational problems, which are proposed tobe solved by training local personnel up to an adequate level of competence.(as noted in para. 3.03). In the small agricultural town of Adana theavailability of trained and talented people is limited; furthermore, it isdifficult to retain personnel who are not local residents. As generatingand transmission systems become more complex, more highly skilled personnelwill be needed. Also, because of the lack of staff experience in modernutility practices and accounting methods, the Company's financial forecastingand planning are not fully adequate.

The Concession

5.03 The original CEC concession was revised in 1968. The new text,approved by IDA, is expected to become effective in the coming months.This revised concession, which expires in 2013, provides a little moreflexibility in the buying and selling of power and in the tariff adjust-ment procedure. CW, generates and sells wholesale energy in the Provincesof Icel, Adana and Hatay and transmits energy outside the boundaries ofthe concession area. Energy may be sold to municipalities for distribu-tion, and directly to industries with an installed capacity of more than500 KW; upon the municipalities' authorization, industries with a lesserinstalled capacity could also be supplied directly. The shareholdersareentitled to recover their investment in the company over the life of theconcession, after which the property would be turned over to the Govern-ment. W4hile the mechanics are yet to be defined, the recovery is expectedto start by 1971. The concession is satisfactory.

Tariff Regulation

5.04 The concession permits tariffs to be set at such a level asto cover all operating expenses, including maintenance, taxes, depre-ciation, amortization of CEO's investment and interest charges, andto provide a reasonable return on equity. This return has alloweddistribution of dividends to the shareholders at 15` of par value.At the time of IDA Credit 59-TU, it was agreed with IDA that revenuesshould also provide a contribution to the construction program through1969 (see para. 6.07). Tariffs are set for a 3-year period, after whichthey are subject to review and adjustment by the Ministry. On the otherhand, CEC may at any time request new tariffs, subject to approval bythe Ministry upon examination of the supporting evidence. A tariff

- 10 -

increase will be necessary in 1969 to improve the Company's earningsand provide a reasonable contribution to the construction of Kadincik II(see para. 6.13).

Customers

5.05 As of November 1968, CEO was selling power in bulk to 25 townsand villages which distribute it. Also, CEC supplied directly 44 in-dustrial plants and 28 non-industrial establishments (such as the militaryair base in Adana, the port at i4ersin, various D6I pumping installations,etc.). In the 11 towns using more than 50 kW each, the breakdown of con-sumers was as follows:

Domestic 102,300Commercial 30,800Industrial 7,800

In 1968 industrial consumption accounted for 63% of total sales.

5.06 Customers' contributions are required to finance connectionswhich CEO cannot economically provide. CEO's policy has been to transferto income 5% of the customers' contributions accumulated at year end, withthe exception of 1967 when all of the year's contributions were passeddirectly to income. In the future CEC will revert to the previous policy,which is acceptable.

5.07 Billing and collection do not present any problem, although thetotal time now required (1 to 1-1/2 months) could probably be reduced. Ithas been suggested to CEC that its advisors (see para.3.03) considerways to reduce the time.

Audit

5.08 Under the terms of the concession, CEC is subject to Governmentaudit, and, as a condition of Credit 59-TUE which has been maintained, hasagreed to an independent audit. Since 1964, CEC's accounts have beenaudited by Newbery & Company, an experienced Istanbul firm, which alsohas performed a useful advisory function. Present arrangements aresatisfactory. However, CEC has been encouraged to ask for further assistance,especially in financial forecasts and in improving internal reporting formanagement information.

- 11 -

VI. FINANCIAL ASPECTS

The Current Situation

6.01 As of December 31, 1968, preliminary figures show that CEChad gross fixed assets in operation of TL 255 million (US$28.3 million)and work in progress of about TL 111 million (Us$12.3 million). Most ofthe financing had been provided by IDA credits and by the sale of capitalstock, as shown in the following table:

Sunmiar C apitalization

as of December 31, 1968

Equity TL millions %

Paid in Share Capital 100.0 28.7Reserves and Surplus 21.8 6.3Unappropriated net income for year 16.5 4.7

Subtotal 138.3 39.7

Long Term Debt

niDA Credits 139.2 39.9DSI Debt 38.4 11.0Deferred Interest 14.6 4.2Deferred CustonbDuties 9.2 2.6

201.4 57.7Current Maturities 8.9 2.6

Subtotal 210.3 60.3

Total 348.6 100.0

6.02 In 1968 CEC received final payments of a TL 65 million stockissue, fully subscribed by 1965 as part of the financing plan set up underCredit 59-TU. Of the total TL 100 million capital stock outstanding thepublic sector owns 43% (the greatest part being Etibank s holdings of40%); the remaining 57% is held by about 3,900 private individuals andorganizations, many of which are CEC1s consumers. Total equity, whichincludes various reserves, the surplus account and the year's unappro-priated net income, amounted to about 40% of total capitalization.

- 12 -

6.03 The long term debt consisted mainly of the proceeds of JIIACredits 34-TU and 59-TU, outstanding for TL 14.6 million and TL 124.6million respectively. Amortization will start in 1970 on both Subsi-diary Loans which bear an interest rate of 5 1/2% per annum. In connec-tion with Credit 59-TU and as a contribution to CEC's investment program,the Government agreed with IDA and CEC to: a) extending the grace periodon 34-TU: the credit will thus be amortized in 13 years, from 1970 to1983 (see para. 1.02); and b) deferring interest on both Credits until 1970,except for the 0.75% corresponding to the service charge payable by theGovernment to IDA. The remaining 4.75% is to accrue interest free, andwill be amortized in equal installments pari passu with the principal ofthe respective credits; as of December 31, 1968 it represented TL 14.6

million.

6.o4 The debt to DSI results from the 1961 agreement between CECand the Government, which settled the financial obligations of the zompanyin taking over the power facilities of the Seyhan project (see para. 5.01).The debt, outstanding as of December 31, 1968 for TL 38.4 million, willbe fully repaid by 1977. It represents the unamortized balance of: a) theportion of cost not covered by the original capital stock issue, andb) the exchange loss incurred on the portion of Bank Loan 63-TU allocatedto the power facilities as a result of the 1958 devaluation. Under theterms of the agreement, interest arrears are added to the 4.75% currentinterest charges and are charged to income.

6.05 Debt financing is completed by the deferment of custonEdutieson imported equipment, which the Company is allowed to pay in annuaLinstallments over six years from incurrence.

Past Earnings

6.06 Actual and forecast income statements for the period 1964* through 1973 are presented in Annex 2. Between 1964 and 1966 CEC's

operations, based on the Seyhan hydro plant only, were satisfactory:the rate of return on average fixed assets in operation was in the orderof 19% and net income per share, after corporate taxes, averaged abcut23% of par value. These results were achieved while charging straight-line depreciation at the high rates permitted by Turkish tax laws,resulting in about 4.5% of aggregate assets. Dividends were consistentlypaid at 15% to 17% of par value, a policy which, although conservative byTurkish standards, has contributed to the good reputation of the Companyamong investors. However, the results for 1967 and 1968 have been lessfavorable. The rapid market development could be met only with thermalcapacity (Mersin 1); this resulted in operating expenses increasing morethan proportionately to revenues, because of fuel costs and higher Plain-tenance and depreciation charges. The rate of return, adjusted to off-set a change in the treatment of customers' contributions in 1967 (seepara. 5.06), fell to 12.7% in that year and, on the basis of preliminaryresults, was 12.2% in 1968. Similarly, net income per share, aftercorporate taxes, fell to 17% of par value in 1967 and is expected to beonly 15% in 1968. Although CEO's ample cash reserves would enable it to

- 13 -

maintain its dividend record without difficulty, this would imply in 1968a distribution of about TL 2 million out of past retained earnings. Thissituation is clearly undesirable and indicates the need for a tariffadjustment which was agreed upon during negotiations (see para. 6.13).

Performance Test

6.07 Both existing IDA Credits contain a tariff covenant whichrequires CEC to obtain a "reasonable surplus" after appropriate operatingcharges and dividends. This formulation was more acceptable to the Govern-ment than the introduction of a rate of return concept, since it paraphrasedthe language of the concession. It provides adequately for: a) remunera-ting the shareholders, and b) ensuring a reasonable proportion of self-financing. A side letter further specified that the Company should be ableto provide, during the 1964-1969 period, at least 16% of new investments inpower facilities out of its own funds, consisting of: a) net internalcash generation, and b) a draw down from accumulated cash reserves notexceeding the equivalent of US$1.5 million. On the basis of availableinformation, this test would be met, in spite of the very low contribution(only 6%) expected for 1969, due to delays in the construction programresulting in a concentration of investments in that year.

6.08 Except for the earnings-squeeze beginning in 1967, as discussedin para. 6.06, CEC's performance has been satisfactory and its financingpattern sound. The debt/equity ratio as of December 31, 1968, was 60/40and current assets, characterized by a good liquidity, were 1.8 timescurrent liabilities. The level of inventories, at TL 9.7 million, appearshigh but prudently allows for the difficulties that an urgent need for animported item would create under the Turkish system of import quotas.

Future Finances

6.09 Between 1969 and 1972, when the proposed Project would becompleted, CEC's TL 341 million investment in new power facilities(see paras. 2.06 and 2.07) will almost equal total investments made upto 1968. In fact, about TL 300 million will be spent between 1969 and1971 (TL 135 million this year), covering completion of the Kadincik Iand Mersin II power plants. Debt service will also add to the increasingfinancial requirements: by 1970 it will reach a level about double thatof 1968, because of amortization starting under both IDA Credits and therelated deferred interest (see para. 6.03).

6.10 The proposed 1969-1972 financing plan is summarized in thefollowing table. In terms of the construction expenditures, Bank groupfinancing would contribute about 53%; this includes the proposed Bank

1 loan (29,) and disbursements under Credit 59-TU (240). Proposed salesof bonds are intended to provide a 3% contribution. The tariff increasewould allow net internal cash generation to contribute 27%, which issatisfactory. A new stock issue would provide about 9%, and thebalance would be provided by customers' contributions and Governmentcredits. This plan is realistic and the increased proportion of self-

- 14 -

financing constitutes an improvement on past financing patterns (seepara. 6.01). Annex 3 presents in detail sources and applications of fundsfor 1968 through 1973. (The apparent cash surplus shown in 1973 is attrib-utable principally to the inability at present to quantify constructionexpenditures which will be required in that year when the next powergenerating development is defined.)

Proposed Financing Plan, 1969-1972(in millions of TL)

Subtotal Total1969-1971 % 1969-1972 %

ApplicationsConstruction Expenditures 298.4 100.0 341.0 97.9Net Increase in Working

Capital - - 7.3 2.1

Total 298.4 100.0 348.3 100.0

SourcesStock Issue 30.0 10.0 30.0 8.6

Customers' Contributions 7.4 2.5 9.7 2.8

Borrowings:Proposed IBRD Loan & IDA

59-TU 162.0 54.3 183.4 52.6Sales of Bonds 10.0 3.4 10.0 2.9Deferment of Interest and

Customs Duties 20.7 6.9 21.6 6.2

Subtotal Borrowings 192.7 64.6 215.0 61.7

Internal Cadh Generation 213.5 71.5 321.0 92.2Debt Service, Dividends

& Other (160.9) (53.9) (227.4) (65-3)

Net Internal Cash Generation 52.6 17.6 93.6 26.9

Net Decrease in Working Capital 15.7 5.3 - -

Subtotal Own Resources 68.3 22.9 93.6 26.9

Total 298.4 100.0 348.3 100.0

Cash at the beginning of period 23.7 23.7

Net Increase (Decrease) duringperiod. (12-7) 6.5

Cash at the end of period 11.0 30.2

- 15 -

6.11 Borroiuings would cover about 62% of the construction expendituresand, as mentioned, -would consist to a large extent of Bank group f'inancing.The proposed Bank loan, of TL 103.5 million (Us$11.5 million equivalent),would cover the foreign exchange component of the Project, including in-terest during construction; a term of 25 years is proposed, including fouryears of grace, and an interest rate of 6-1/2% has been assumed. Dis-bursements wjould total about TL 100 million between 1969 and 1972, with thebalance to be utilized in 1973 to meet retention payments. Debt f'inancingwould also include: a) the sale of TL 5 million of bonds in each of the years1970 and 1971, at an interest rate of 14% and amortization terms of fiveyears plus one year of grace; b) disbursements under Credit 59-TU (aboutTL 83 million); c) deferment of customs duties (about TL 13 million), andd) deferment of interest under the IDA Credits relending arrangements(about TL 8 million, in 1969 only).

6.12 The stock issue of TL 25 million has been fully subscribed ata 20% premium. The full TL 30 million proceeds would be paid in byOctober 1969.

6.13 The tariff increase is necessary to provide a more adequateearnings base for meeting the forthcoming financial requirements The Govern-ment has agreed to act on an application by CEO for an increase in tariffs.The increase will be irVlemented before the proposed loan is effective. Thisreport assumes average revenues will be incroased October 1969 by 1.6 kurus,orabout 13%, for sal.s in GM's market, i.e., exclusive of sales to Etibank.The increase is essential to improve CEC's earnings during the 19659-1971period, when: a) the commissioning of the Kadincik I and Mersin II plantswould result in a sharp increase in operating expenses, mainly because offuel costs and depreciations b) interest charges would be almost twice ashigh as past charges; and c) although CEC's own market would be growingat an annual average rate of about 21%, sales to Etibank's system at a pre-ferential tariff (estimated at 7.25 kurus per kwh) would result in earningsgrowing less than proportionately to sales.

6.14 The financing plan would be completed by customers' contributions,in the order of TL 2.5 million per year. It would be supported by varia-tions in the ample existing working capital: cash reserves would be drawindown in 1969 and 1971, when the construction program peaks, and would bereplenished in 1970 and 1972, for a small net variation over the period.

6.15 The proposed financing plan is satisfactory. However, it doesnot take into account a possible additional requirement of funds,, forwhich sufficient information was not available at the time of the appraisal.CEC is very seriously considering acquiring a stock participation in Kepez,a private utility serving Axntalya; the reason for this move wiould be tofacilitate future expansion of the concession area, in view of the expectedtourism development of the Antalya region. A part of atibank's participationwould be offered to the public in the near future, and CEC is planning aTL 8 million investment to obtain control of the company. During negotiationsCEC has agreed not to proceed with this plan during the construction periodof the proposed Project, uithout having demonstrated its justification tothe Bank's satisfaction. In particular a market study, an evaluat:ion of

- 16 -

Kepez' position and of the consequent financial or managerial responsibili-ties of CEC would be required.

Future Earnings and Financial Position

6.16 On the basis of the tariff increase, CEC's future earnings wouldbe satisfactory. The rate of return would fall to a relatively low10.3% in 1969, when it is affected by substantial additions to assets inoperation and benefits only in part from the tariff adjustment. It wouldhowever rapidly improve, remaining at or above 16% from 1971. Net incomeper share, after corporate taxes, would average 30% of par value between1969 and 1972, thus allowing CEC to continue its policy of distributingdividends at 15% of par. From 1970, net internal cash generation wouldrepresent more than 23% of construction expenditure, a satisfactory levelin view of the availability of new share capital.

6.17 Under the tariff covenant in Credit 59-TU (see para. 6.07) thelevel of self-financing is defined through 1969 only, and is to berenegotiated after then. It has been agreed that during the constructionperiod of the proposed Project, 1970-72, CEC would maintain tariffs ata level that would provide, in each year, for at least 23% of the year'sconstruction expenditures to be financed out of net internal cash generation.In determining this latter quantity, internal cash generation will betaken net of debt service, dividends, staff bonuses, and corporate taxes.The uncertainties about future expansion programs and their financing(see para. 2.08) make it unrealistic to define any specific target beyond1972.

6.18 Annex 4 presents actual and forecast balance sheets as of December31, 1964 through 1973. The forecast financial position would be satisfactory:notwithstanding the cash draw down in 1969 and 1971, the current ratio wouldnever fall below unity and would average more than 1.1 in the 1969-1972period. This level is satisfactory in view of the good liquidity of thecurrent assets and the fact that current liabilities consist principallyof current maturities. Debt, including current maturities, would reach62% of total capitalization in 1969, and would decrease thereafter.

6.19 11aximum future interest payable, including interest on theproposed Bank loan, would be covered 1.76 times by 1969 income, adjustedto take into account the recommended tariff increase. The present covenant,which requires a 1.75 times coverage, is repeated. On an annual basis,total debt service would be covered by internal cash generation at; least2 times, which is satisfactory.

6.20 In summary, following resolution by a tariff adjustment of theproblem discussed in paragraph 6.06, CEC's performance is expected to besatisfactory and adequate for supplementing the external financing, duringthe execution of the expansion program.

- 17 -

VII. CONCLUSIONS

7.01 The Project, is technically sound and represents the least costalternative to meet the growth in demand by 1972, provided the cost ofcapital in the power sector does not exceed about 17o.

7.02 CEC's management, assisted by its engineering consultantSyndibel, is capable of executing the Project. The organization of theCompany is satisfactory, and staff will be trained and reinforced to copewith expanding operations.

7.03 Past financial performance and compliance with existing covenantshave been satisfactory. However, because of the sustained pace of ex-pansion, present tariff levels have become insufficient; a tariff increaseof about 13% is therefore necessary. The financing plan, which also includesa TL 25 rillion stock issue at a 20% prerium, and the sale of TL 10 millionof bonds, is realistic; CEC's forecast performance and financial positionare satisfactory.

7.04 The Project formns a suitable basis for a Bank loan of US$115.million equivalent, for a term of 25 years including four years of grace.During negotiations agreement has been reached on the following:

i. CEO will continue to employ engineeringconsultants satisfactory to the Bank (see para. 3.08);

ii. CEC will retain experts to assist and train thestaff in the fields of technical operations,accounting methods and financial planning (seepara. 3.03);

iii. CEC will continue to retain auditors satisfactory0 to the Banl= (see para. 5.08);

iv. bonds will be sold in the amount of TL 5 millionsin each of the years 1970 and 1971 (see para. 6.11);

v. satisfactory arrangements have been made to ensurethe placement of a TL 25 million stock issue at a20%. premium (see para. 6.12);

vi. prior to the effectiveness of the proposed loan,tariffs will be adjusted to produce an increaseof not less than 1.6 kurus in the average revenueper kWh on sales in CEC's market (see para. 6.13);

vii. during the construction period of the Project,1970-72, tariffs would be maintained at sucha level as to provide at least a 23% contributionfrom net internal cash generation to the year'sconstruction program (see para. 6.17);

- 18 -

viii. during the construction period of the ProjectCEC will seek the Bank's consent before under-takcing any significant expansion of its invest-ments by wray of acquisition or construction(see paras. 2.08 and 6el5); and

ix. CEC will not incur any indebtedness if, after theincurrence of such debt, and for any succeedingfiscal year, total interest payments would not becovered at least 1.75 times by the past fiscalyear's income (see para. 6.19).

May 28, 1969

ANN~EX 1

TURKEY

KADINCIK II PROJECT - COST ESTIMATE

Millions of TL Millions of US$Local Foreign Total Local Foregn Total

Civil WorksDam 5.20 7.80 13.00 .58 .87 1.45Intake 0.80 1.20 2.00 .09 .13 .22Tunnel 16.00 24.00 40.00 1.78 2.67 4.45Surge Tank 0.80 1.20 2.00 .09 .13 .22Valve Chamber and Penstock 1.48 2.22 3.70 .16 .25 .41Powerhouse 2.80 4.20 7.00 .31 .47 .78Switchyard 0.12 0.18 0.30 .01 .02 .03Camp, Roads, Quarters 2.00 3.00 5.00 .22 .33 .55

Subtotal 29.20 43.80 73.00 3 7E T7 8.11Contingencies @ about 16% 4.55 6.98 11.53 .50 .78 1.28

W A. Total Civil Works 33.75 50.78 84.5T 3.7 7 9.39

Mechanical and IKectrical EvouipmentMam 1.20 4.18 5.38 .13 .46 .59Intake 0.19 0.76 O.95 .02 .08 .10Penstock 2.31 14.25 16.56 .26 1.58 1.84Powerhouse 1.83 12.35 14.18 .20 1.38 1.58Switchyard 0.32 1.52 1.84 .04 .17 .21

Subtotal -75§ 33.06 36.91 3.6 7-7 1.32Contingencies @ about 10% .59 3.31 3.90 .07 .37 .44

B. Total M. and E. Equip. 6.44 36.37 12. l .72 1:T h.7

Other ExpensesConsulting Efgineering 1.50 4.43 5.93 .17 .49 .66Administration andSupervision 7.00 1.00 8.00 .78 .11 .89

Personnel Training .18 .90 1.08 .02 .10 .12Land 1.00 - 1.00 .11 - .113 Subtotal 6.33 16.01 10 .70Contingencies @ about 10% .95 .56 1.51 .11 .06 .17

C. Total OtherExpense 10.63 6.89 17.52 1.19 .76 1.95

Subtotal (A+B+C) 50.82 94.04 144.86 5.65 l0. 45 16.10

Interest During Constructionon Foreign Costs - 9.46 9.46 - 1.015 1.05

Total Project Cost 50.82 103.50 154.32 5.65 11.50 17.15

CUKUHDVA ELECTRIC COMPANY

Actual and Forecast Income Statements, 1964 through 1973

(in millions of TL unlesa otherwise indicated)

----- - ACTUAL - - -- FORECAST - - - - - - - - - - - -

1964 1965 1966 1967 :9611 1969 1970 1971 1972 1973

Sales, in millions of kwh 209.8 241.2 311.3 363.6 418.3 517.1 881.7 853.8 934.9 1,038.4

Average Revenue per kwh sold (kra/kwh) 12.07 12.61 12.54 312.46 12.83 13.14 13.60 14.38 15.77 15.31

Operating Revenues 25.32 30.42 39.04 45.31 53.67 67.96 119.91 122.78 147.43 158.98

Operating Expenses

Salaries, Wages and Social Benefits 3.28 3.87 4.97 6.10 7.07 7.86 10.08 11.20 11.61 12.89Materials and other 0 & M Expenses .97 1.31 1.51 1.93 2.21 2.32 2.44 2.56 3.39 2.82Water Charges (Seyhan) 3.15 3.62 4.51 4.73 4.78 5.22 5.22 5.22 4.85 5.22Fuel - - 1.15 2.52 5.55 8.00 18.30 11.93 17.31 11.93Purchased Power - - - - - 1.99 1.99 1.99 1.99 1.99Insurance and Taxes 1.28 1.45 1.30 2.09 2.53 2.76 4k06 4.25 4.33 5.28

Depreciation 5.33 5.21 6.13 11.67 11.63 12.16 22.46 23.73 24.94 32.66

Total 14 .01 15.46 19.57 29.04 33.77 40.31 64.55 60.88 68. 4 2 72.79

Operating Incose 11.31 14.96 19.47 16.27 19.90 27.55 55.36 61.90 79.01 86.19

Other Income 2.49 2.97 1.97 5.39 4.50 3.25 3 3.50 3.50 3.50

Total Income 13.80 17.93 21.44 21.66 24.40 5.90 58.86 65,40 82.51 89.69

Income DeductionsInterest on Long-Term Debt 3.63 6.51 6.40 8.09 9.73 12.69 15.35 1&74 20.38 21.01Less: Interest charged to Construction - (1.50) (1.82) (.62) (1.78) (4-91) (1.47) (3.22) (4.77) -Other Income Deductions - .43 - - - _ 3.00 -

3.63 5.44 4.58 7.47 7.95 7.78 16.88 15.52 15.61 21.02

NeI'Incomneme 10.17 12.49 16.86 14.19 16.45 23,12 41L.98 49.88 66.90 68.67

Appropriations of Net Income

Corporate and other Taxes 1.63 2.57 2.82 2.20 2.63 3.70 6.72 7.98 10.70 10.99Reserves and Surplus 2.95 .96 4.91 1.43 1.65 1.84 15.69 Z49.o 36.35 37.68Bonuses .34 .37 .47 .54 .60 .70 .82 .95 1.10 1.25Cash Dividends 5.25 8.59 8.66 10.32 13.59 16.88 18.75 18.75 18.75 18.75Reduction in Earned Surplus - - (.30) (2.02) -. - -

10.17 12.49 16.86 14.19 16.45 23.12 4I.98 19.88 66.90 66.67

Operating Expenses as % of Operating Revenues 55 51 50 64 63 59 54 5o 465 46

Return on Average Net Fixed Assets in operation, % 15.4 19.1 22.0 12.7 12.2 10.3 14.4 16.4 17.2 16.3

Net Income after Taxes, as % of par value 24 20 26 17 15 17 28 34 k6

Dividends as % of par value 15 17 16 15 15 15 15 15 15 15

* Preliminary figures.

May 28, 1969

ANNEX 3

COVRVA ETRIC COAMiPY

Sources and Applications of Funds. 1968-73

(in millions of TL)

ACTUAL - - - - - FORECAST - - - - - - - - - - - Total

1968 * 1969 1970 1971 1972 1973 1968-1973

SOURCES OF FUNDS

Internal Cash Generatias

Income before Interest 24.40O 30.90 58.89 58.86 65.40 82.51 89.69 351.76Depreciation 11.63 12.16 22.46 23.73 24.94 32.66 127.58

Total 36.03 43.06 81.32 89.13 107.45 122.35 479-34

E4gLitL

Share Capital 18.78 30.00 - - - - 48.78

BorrowingsProposed IBRD Loan - 7.39 27.77 43.29 21.42 3.63 103.50IDA Credit 59-TU 38.95 66.47 16.88 .16 - - 122.46Proposed Bonds - .50-0 .5.00 10.00Deferment of Interest IDA 5.68 8.19 - - - - 13.87Deferred Custom Duties 3.02 6.52 1.01 4.94 1.06 .08 16.63

Total 47.65 88.57 50.66 53.39 22.48 3.71 266.46

Customers' Contributions (Net) 2.29 2.46 2.53 2.40 2.28 2.17 14.13

TOTAL SOURCES 104.75 164.09 134.91 144.92 132.21 128.23 808.71

APPLICATIONS OF FUNDS

Construction Expenditure

Foreign Exchange 32.32 71.06 46.76 59.39 24.29 4.32 238.14Local Currency 43.49 63.72 24.19 33.28 18.34 3.45 186.47

Total 75.81 134.78 70.95 92.67 42.63 7.77 421.61

Debt Service

Interest 23 1..k: Proposed IBRD Loan - .23 1.24 3.22 4.77 6.20 15.66IDA 34-TU .80 .80 .79 .75 .70 .65 4.49IDA 59-TU 5.78 8.68 10.50 11.43 11.06 10.66 58.11DSI Debt 3.15 2.98 2.82 2.64 2.45 2.25 16.29Proposed Bonds - - - .70 1.40 1.26 3.36

9. 7 1-2-.69- 15.35 1 8.7 4 20.38 21.02 97.91Amortization

Pronosed IBRD Loan - - - - .85 .85IDA 34-TU- - .81 .81 .90 .95 3.47IDA 59-TI: -. 6.39 6.75 7.11 7.56 27.81DSI Debt 3.91 4.08 4.25 4.43 14.62 4.82 26.11Proposed Bonds - - - - 1.00 2.00 3.00

_ Custom Duties 4.71 4.86 6.16 4.65 3.08 3.31 26.23Deferred Interest - 1.75 1.75 1.75 1.75 7.00

Total 8.08 8.94 19.36 18.39 18.46 21.24 94.47

Total Debt Service 17.81 21.63 34.71 37.13 38.84 42.26 192.38

Cash Dividends 10.32 13.59 16.88 18.75 18.75 18.75 97.04

Bonuses .54 .60 .70 .82 .95 1.10 4.71

Coroorate and other Taxes 2.20 2.63 3.70 6.72 7.98 10.70 33.93

Dividend Arrears to Etibank - - 3.00 - - - 3.00

Variation in Working Capital

Cash, Banks and SecuritiesIncrease (Decrease) (11.04) (4.65) 4.07 (12.17) 19.19 45.02 4C.42

Net other Items 9.11 (4.49) .50 1.00 3.87 2.63 12.62

Net Variation in WorkingCapital (1-93) (9.14) 4.57 (11.17) 23.06 47.65 53.04

TOTAL APPLICATIONS 104.75 164.09 134.51 144.92 132.21 128.23 806.71

Times Annual Debt ServiceCovered by Internal Cash Generation 2.0 2.0 2.3 2.4 2.8 2.9 2.5

* Preliminary figures.

May 28, 1969

* ~~~~~~~~CUKUR07VA ELECTRIC OOttPANY

Actual and Forecast Balance Sheets 1964 through 1973

(in millions of TL)

- ACTUAL - - - - - - - - - - - - - - - - - - - - - - - - - FORECAST - - - - - - - - - - - -

1964 1965 1966 1967 196B* 1969 1970 1971 1972 1973

ASSETS

Fixed Assets in Operation 115.09 116.05 135.39 246.o6 254.93 473.79 505.21 514.96 718.79 721.79Depreciation Reserve (18X53) (23-74) (29.82) (42.52) (54.15) (66.31) (88.77) (112.50) (137.44) (170.10)Customers' Contributions - 1.39) (j,79) (1.70) 399(6-45) (8.98) ;11.3£ 13.66) 8

Net Fixed Assets in Operation 90.92 7 401.03 407.46 9 567.6 535.86

Work in Progress 7.15 60.65 107.39 42.58 111.30 32.13 73.13 159.27 2.84 7.61

Total 103.71 151.57 211.17 244.42 308.09 433.16 480.59 550.35 570.53 543.47

Current AssetsCash, Banks and Securities 21.69 21.75 34.17 34.78 23.74 19.09 23.16 10.99 30.14 19.2QCustomers' Receivables - Current Accounts 5.78 4.90 6.14 7.82 8.50 9.00 10.00 11.00 12.50 13.50Customers' Receivables - Notes 7.27 9.95 9.18 10.67 12.00 12.00 13.00 14.00 16.00 18.00Other Receivables andPrepayments 3.93 _4.21 4.89 5.46 3.50 3.50 3.50 3.50 3.50 3.50

Total 38.67 40.81 54.38 58.73 47.74 43.55 490 359.49 62.16 31,405

Inventories 4.12 4.44 6.14 9.67 9.67 7.00 7.00 8.00 8.00 10.00

TOTAL ASSETS 146.50 196.82 271.69 312.82 365.50 433.75 53A7,2l 597.ak 614(.1

LIABILITIES

EquityPaid in Share Capital 39.10 51.25 66.48 81.22 100.00 125.00 125.0S 125.00 10$ .00 125.00Reserves and Surplus 11.89 14.84 15.80 20.71 21.84 26.47 28.31 44.Q£ ODrtO 102.5Xnappropriated hetrIncome for Year 10.17 12.49 16.86 14.19 16.45 23.12 41.91 &9J" 66.90 ______

Total 61.16 78.58 99.114 116.12 138.29 174,59 195.29 218.88 258.10 p96.22Long Term Debt

Pruposed IDRD Loan - - - - 7.39 35.16 78.45 99.02 100.86Terw-credit 34-Tu 13.00 14.46 1M.55 14.56 14.56 13.75 12.914 12.0o4 11.09 10.10IDA Credit 59-TU 2.93 25.06 66.44 5!.66 124.61 184.69 194.82 187.87 180.31 172.35DSI Debt 53.77 50.41 146.39 42.46 38.40 34.15. 29.72 25.10 20.28 26Son da 9. 0e 7 0 5*00~~unda - - - ~~~~~~~~~~~~~ ~- 5.00 9.0 7.00Deferred Interest - - 3.67 8.94 14.62 21.06 19.31 17.56 15.81 14.06Deferred Custom Duties - 7.23 13.98 11.02 9.18 9.54 5.90 7.76 5.51 2.87

Total 69.70 97.16 145.03 162.66 201.37 . 270.58 302.85 337.78 339.02 520.50

Current LiabilitiesAccrued Liabilities and Provisions 6.66 7.90 9.66 10.62 4.62 5.50 6.oo 7.00 7.00 B.00Suppliera 1.18 2.79 4.65 5.79 6.0o 7.00 8.00 9.00 9.00 10.00Advance Collections and Deposits 1.14 1.34 1.11 1.36 1.50 1.50 1.50 1.50 1.50 1.50Water Charges 3.15 3.62 4.51 8.19 4.78 5.22 5.22 5.22 4.8S 5.22Current Portion of Long Term Debt 3.51 5.43 7.59 8.08 8.94 19.36 18.39 V.46 21.24 22.23

Total 15.64 21.08 27.52 34.04 25.84 38.58 39.11 41.18 h43,59 46.95

TOTAL LIABILITIES 1 196,82 271.69 312.82 67 483.T, 537.25 597.814 640.7 _6___

03.7, 537.,95 597.84 38 67

Debt, as % of Total Capitalization -54 57 61 60 60 62 62 62 58 54

Currenlt Assets to Current Liabilities 2.5 1.9 2.0 1.7 1.8 14.1 3,4 1.0 1.4 2.3

* Preliminary figures.

May 28, 1969

ANNEX 5Page 1 of 2 pages

Rate of Return on Incremental Investment

The method followed to determine the rate of return on theincremental investment consists of comparing the streams of costs andbenefits attributable to the Project. In the calculation, the followingelements have been taken into consideration:

* Costs

i. Investments in the Kadincik II generating facilitiesbetween 1969 and 1972, net of interest during cons-truction and of customs duties on imported equipment;and

ii. Operating and Maintenance costs, including insuranceand overheads.

Benefits

iii. The revenues on incremental sales attributable tothe Project, calculated at tariffs expected to beeffective by the time the facility would be com-missioned; and

iv. For 1973 only, the fuel savings obtained operatingthe facility in lieu of the Mersin thermal plant.

The resulting streams of costs and benefits are shown on page 2. Therate of return on the incremental investment is the discount rate atwhich the present value of costs equals the forecast value of benefits.This rate of return is between 15% and 16%.

ANNEX 5Page 2 of 2 pages

Cukurova Electric Company

Rate of Return on Incremental Investment

(in millions of TL)

1969 1970 1971 1972 1973 1974-203annually

COSTS

Investments 10.1 41.9 59.2 26.0 3.6 -

Operation and Maintenance 2.7 2.7

Total 10.1 4l.9 59.2 26.0 6.3 2.7

BENEFITS

Revenues on incrementalsales attributable toProject 15.8 31.0

Fuel Savings 4.

Total 19.8 31.0

Hay 28, 1969

TURKEY

CUKUROVA POWER SYSTEM ,--iExisting or

under conat, Proposed

ProjeOct/Project 0 20 40 60 8 0 / K m

Hydro plants U = //

Oil-fired steam plants A

154KV transmission lines N-,\b

66KV translmission lines

33KV transmission lines -o - £

(Owned by others)

BULGARIA LC ~SULGARIA k a A C K S EA A D A N A 0 V I N C E t

U. S. S. RN. Kozo

,< <~~~ANKARA ,,\\ Kdrj

0 - :L -)+ ------\ jzC E T U R K V I N C E o-o Je Is DasiS hre

Astalsa S YST7EM A REA -~'ITBN GAZ/A/TE

Osmni i(Owned by o(hers)

- SEA RADANAMEDITERtRANEA N SEAt

APRIL 1969 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~IBRD - 2531R