FILE COPT FOR OFFICIAL USE ONLY. Public Disclosure Authorized. Document of The World Bank. Report No. 2411b-BR. Public Disclosure Authorized

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of The World Bank FOR OFFICIAL USE ONLY STAFF APPRAISAL REPORT BRAZIL COPEL SECOND POWER DISTRIBUTION PROJECT May 3, 1979 FILE COPT Report No. 2411b-BR Projects Department Latin America and the Caribbean Regional Office This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

2 CURRENCY EQUIVALENTS1/ Currency Unit = Cruzeiro (Cr$) Cr$1.00 = 100 centavos = US$0.056 Cr$1,000,000 = US$55,555 US$1.00 = Cr$18.0 US$1,000,000 = Cr$18,000,000 ABBREVIATIONS AND ACRONYMS CAEEB = Companhia Auxiliar de Empresas Eletricas Brasileiras CEEE = Companhia Estadual de Energia Eletrica CESP = Centrais Eletricas de Sao Paulo S.A. COPEL = Companhia Paranaense de Energia Eletrica DNAEE = Departamento Nacional de Aguas e Energia Eletrica ELETROBRAS = Centrais Eletricas Brasileiras S.A. ELETROSUL = Centrais Eletricas do Sul do Brasil S.A. FURNAS = Furnas-Centrais Eletricas S.A. GCOI = Grupo Coordenador para Operacao Interligada IDB = Inter-American Development Bank UNITS AND MEASURES kw = kilowatt MW = megawatt (1,000 kw) kwh = kilowatt hour GWh = gigawatt hour (million kwh) kv = kilovolt (1,000 volts) kva = kilovolt - ampere MVA = megavolt - ampere (1,000 kva) km = kilometer ( mile) km 2 = square kilometer (0.386 sq. mi.) FISCAL YEAR COPEL's fiscal year ends December 31 1/ The exchange rate on June 30, 1978 was used to compute currency equivalents in this report.

3 BRAZIL FOR OFFICIAL USE ONLY STAFF APPRAISAL REPORT COPEL SECOND POWER DISTRIBUTION PROJECT Table of Contents Page No. 1 THE SECTOR... I Energy Resources... Energy Use in the Southeastern and Southern Regions... 2 Bank Participation in the Sector... 2 Sector Organization... I I... 3 Tariffs... 4 Existing Facilities Coordination of Operations... 6 Access to Service... "I Rural Electrification... 6 Sector Development THE BORROWER. 8 Organization, Management and Staff.. 8 Management Information Systems and Audit.9 Billings and Collections.. 10 Performance under Loan 1257-BR THE MARKET.11 General.. 11 Sales Fore:sAt Energy and Capacity Balance., PROGRAM AND PROJECT Background... ; Generation The Program This report is based on the findings of an appraisal mission carried out in Curitiba, Brazil by Messrs. C. F. Mena and P. Owusu during November This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

4 TABLE OF CONTENTS (Continued) Page No. Program Costs The Project Project Cost Estimate Implementation Procurement Disbursement Environment Project Risks FINANCES Financial History and Present Position Capital Investment Program and Financing Plan Future Financial Performance Performance Indicators ECONOMIC ANALYSIS Least-Cost Solution Return on Investment PROPOSED AGREEMENTS AND RECOMMENDATIONS LIST OF ANNEXES Annex 1 - Energy Utilization.31 Annex 2 - Organization Chart.32 Annex 3 - Energy Balance (GWh).33 Annex Investment Program.34 Annex Project Cost and Implementation Schedule 35 Annex Procurement Schedule.39 Annex Cost of Service Forecast.40 Annex Actual and Forecast Income Statements Annex Estimated Sources and Applications of Funds Annex Actual and Estimated Balance Sheets Annex Estimated Debt Amortization Schedule Annex Estimated Interest Schedule Annex Long-Term Debt Outstanding at December 31, Annex Statement of Changes in Net Fixed Assets 47 Annex Performance Indicators.48 Annex 6 - Cost and Benefit Streams - Rate of Return 49 Annex 7 - Selected Documents and Data Available in the Project File.50 Map IBRD 14185

5 BRAZIL STAFF APPRAISAL REPORT COPEL SECOND POWER DISTRIBUTION PROJECT 1. THE SECTOR Energy Resources 1.01 The estimated total gross consumption of energy in Brazil in 1978 was 109,733 M.T.o.e. (0.93 T.o.e. per capita, compared to about 0.79 T.o.e. per capita for Costa Rica and 1.6 T.o.e. for Mexico) 1/ and it is expected to grow at about 6% per annum in the next 5 years, reaching about 1.11 T.o.e. per capita in Oil products account -or about 42% of the national energy consumption, mineral coal, wood products and wastes 32% and hydroelectricity 26% (see Annex 1) Brazil's proven oil reserves are limited. Present domestic production of crude covers only 15% of the country's requirements and is concentrated in the Northeastern region. To increase domestic production Government accelerated exploration in 1977 by granting risk type contracts to private concerns, putting an end to government monopoly in this field. Bituminous and sub-bituminous coal reserves which are located in the Southern region are estimated at about 3,200 million tons. Coal extraction is rather costly because shaft mining is predominantly required. Nevertheless, coal is an important fuel used in thermal generating plants in the South; recent proposals of the State of Rio Grande do Sul envisage two major power projects with openpit mining and one coal gasification project with underground mining Brazil has vast water resources with a potential for hydroelectric development estimated at about 200,000 MW, of which only about 21,600 MW have been utilized. An additional 35,000 MW are scheduled to be in operation by Many watersheds could be developed economically but they are relatively remote from the demand centers. In addition to the future hydroelectric plants, 3,000 MW of nuclear generating capacity has been scheduled for 1985 operation in the Southeastern region, the largest demand center in the country. The first unit of 600 MW, supplied by Westinghouse (USA), is expected to operate in The Brazil-West Germany agreement of June 27, 1975 provides for the supply of an additional 2,400 MW in nuclear plants and a Brazilian option for six additional 1,200 MW units. The configuration of major generating and associated transmission facilities in Brazil has few load concentrations. Under pronounced differences in regional hydrological regimes, electrical interconnections could economically substitute or attenuate complementary thermal generation. This diversity exists between the Southern and Southeastern regions and a high voltage interconnection is under construction and being financed with Loan 1343-BR to ELETROSUL. Other electrical interconnections are being considered by sector authorities leading towards least cost intraregional investment programs. 1/ T.o.e.: tons of oil equivalent, approximately 10 kcal; M.T.o.e. = 1,000 T.o.e. Data source: Ministry of Mines and Energy, Balanco Energetico Nacional of 1978.

6 1.04 With respect to other energy sources, firewood, charcoal and sugarcane bagasse are also used but not for electric public service. Firewood is used only in some small industries and for cooking in rural and some urban low income households. Charcoal is also used for cooking, in blast furnaces and steel mills. Bagasse is burned to produce steam in sugar milling. These fuels represent about a quarter of Brazil's energy utilization and would probably not increase. Among other energy sources of lesser current significance in Brazil is natural gas, with apparently small reserves in Northeastern fields for local supply. There are few sites for tidal energy development, and geothermal fields have not yet been discovered. Brazil has been active in exploring alternative energy sources; the largest endeavor, in the use of alcohol as fuel in internal combustion engines. In the power sector, tests are being conducted on wind-driven generators and on use of electricity for public service that was obtained in association with production of steam in a petrochemical plant In 1978 electricity generation amounted to 110,000 GWh; its annual rate of growth since 1973 has been 11% with per capita consumption in the same period going from 550 to 830 kwh. Energy Use in the Southeastern and Southern Regions 1.06 The Southeastern region, with 42% of Brazil's population accounted for about 71% of the total electricity utilized in the country in The Southern region, with 18% of the population utilized 12%. The two regions, where most of the country's agricultural and industrial production takes place, used in 1978 about 80% in all energy forms. In the last five years, electric generation in the Southeastern region grew at 11% p.a. and at 15% in the Southern region The Southern region, comprising the States of Parana, Santa Catarina and Rio Grande do Sul has an area of 577,723 sq km, or 7% of the Brazilian territory; Parana has about half the population of the region and in 1978 utilized about 5% of Brazil's electricity generation. Bank Participation in the Sector 1.08 Since 1949 the Bank has made 31 loans in the Brazilian power sector. Most have been for hydroelectric plants and associated transmission facilities in the Southeastern and Southern regions. Bank participation has contributed to sector organization and planning and facilitated foreign commercial financing of the sector. Bank lending has also assisted Government in its effort to implement a tariff policy which has enabled the sector to contribute a considerable proportion of the funds required for sector investments. Project

7 - 3 - performance audit reports on power plant 1/ and distribution system 2/ projects have been distributed to the Executive Directors. These reports state that, despite construction delays and cost overruns, the projects were substantially successful The most recent loans have been for transmission and distribution projects: Loan 1257-BR of May 1976 to COPEL for its distribution expansion program; Loan 1300-BR of August 1976 to ELETROBRAS for the system expansion programs of three Northeastern utilities; Loan 1343-BR of February 1977 to ELETROSUL for its high voltage transmission project, and Loan 1538-BR of May 1978 to ELETROBRAS for the system expansion programs of three stateowned utilities; two in the Southeastern rerion and one in the South The proposed loan, which would be for subtransmission and distribution would be the second to COPEL, and would build on the experience acquired under the previous loan (para. 2.09). As in the first loan, Bank participation is principally oriented towards providing financing for least cost procurement of project equipment and materials, as well as effectively facilitating foreign commercial financing of the sector through cofinancing arrangements. In addition, the agreements on the proposed Bank loan would encourage expansion of rural electrification and electricity services to urban low-income households in the State of Parana. Sector Organization 1.11 Though complex and one of the largest in the world, the sector is well organized and the policies well formulated and applied. Decree of June 7, 1967 estabished the current sector arrangement, wherein the Departamento Nacional de Aguas e Energia Eletrica (DNAEE) performs regulatory functions, grants licenses for generating plants, assigns concessions, sets tariffs and approves expansion plans; Centrais Eletricas Brasileiras (ELETROBRAS), a holding company for those utilities owned by the Federal Government, administers public funds for use by its subsidiaries and stateowned utilities, and coordinates external borrowings, expansion plans for major generating and transmission facilities, and operation of interconnected systems in the country's network The five geographical regions are served by ELETROBRAS' subsidiaries (bulk suppliers), in conjunction with state-owned utilities (principally in distribution) as follows: Centrais Eletricas do Norte do Brasil (ELETRONORTE) for the North and part of the Central-West; Companhia Hidro Eletrica do Sao Francisco (CHESF) for the Northeast; Furnas-Centrais Eletricas (FURNAS) in the Southeast and part of the Central-West; and Centrais Eletricas do Sul do Brasil (ELETROSUL) for the South. A joint Brazil-Paraguay authority (Itaipu Binacional) has responsibility for the Itaipu hydroelectric project, under construction on the Parana River where it defines the border between the two 1/ Loan 404-BR (Sec.M of June 28, 1977); Loans 442-BR and 566-BR (Sec.M of January 13, 1978). 2/ Loans 475/476/477 and 478-BR (Sec.M of September 4, 1975).

8 -4- countries. In January 1979, the Federal Government, through ELETROBRAS, acquired from Brascan Ltd. of Canada about 83% ownership of LIGHT, the distribution utility serving the cities of Rio de Janeiro and Sao Paulo Government guidelines contained in the 1967 decree (para. 1.11) promote concentration of public electricity services in the individual states into single state-owned utilities. The resulting action produced mergers and acquisitions by the major state-owned companies of most municipal and privately owned utilities. The main existing state-owned utilities, ranked in value of assets, are: Centrais Eletricas de Sao Paulo (CESP); Centrais Eletricas de Minas Gerais (CEMIG); Companhia Paranaense de Energia Eletrica (COPEL); Companhia Estadual de Energia Eletrica (CEEE) - Rio Grande do Sul; Centrais Eletricas de Santa Catarina (CELESC); Companhia Eletrica da Bahia (COELBA); Companhia Eletrica de Pernambuco (CELPE); and Companhia Eletrica de Ceara (COELCE). Tariffs 1.14 Consumer bills contain the following charges: A. On a nationwide basis, tariffs provide about 78% of revenues collected from consumers. According to current legislation, these charges should be set at levels to cover: (a) operation, maintenance and administrative expenses; (b) taxes other than for income (mainly property taxes); (c) foreign exchange losses arising from foreign exchange borrowings; (d) straight line depreciation of average gross revalued fixed assets in operation; (e) reversion (federal tax of up to 5% of assets in operation to fund loans to concessionaires for facility expansions, compensation of private utilities for acquisition of their assets, and the Global Guarantee Fund--a tariff equalization facility); and (f) a legal return (normally between 10 and 12%) on remunerable investment (net average plant in service plus an allowance for working capital). B. The sole tax on residential, commercial and small industrial 1/ consumer bills which provides about 12% of sector revenues. From this source 40% goes to federal sector agencies, 50% to state and federal district utilities, and 10% to municipal utilities; and C. The Compulsory Loan (10% of revenues), an obligatory investment scheme under which industrial consumers of more than 2,000 kwh per month acquire ELETROBRAS bonds (20-year maturity yielding 6% and revalued through monetary adjustments). 1/ Industries utilizing less than 2,000 kwh per month.

9 In 1973 DNAEE initiated application of a policy to reduce regional tariff inequalities in order to promote a more balanced economic development. By 1976, with minor exceptions, average tariff levels had been equalized. The Global Guarantee Fund (GGF) was used in the tariff equalization process through distributions to eligible utilities to supplement their earnings, allowing them to obtain a return on remunerable assets up to 10%. The GGF is financed through a surcharge of up to 2% on assets in operation of all the utilities. DNAEE has used its control over the GGF to encourage improved performance by participating utilities. To be eligible for transfers from the Fund, utilities are required: (i) to have a valid agreement with the state government where they operate for the payment of all bills in arrears by the state government agencies; and (ii) when owned by the federal, state or municipal governments, and these have assumed a legal obligation to reinvest their dividends into the utility, to have all such dividends reinvested Under Loan 1257-BR COPEL agreed to maintain its earnings (including transfers from the Global Guarantee Fund) at levels consistent with sound financial public utility practices and in accordance with existing legislation. COPEL also agreed to maintain its eligibility under norms prescribed by DNAEE in the event it requires transfers from the GGF, and Government confirmed the Bank's understanding that DNAEE would allow COPEL a return on remunerable assets of at least 10%. Furthermore, any change in legislation which would materially and adversely affect COPEL's financial position would be an event of default. The same conditions have been agreed for the proposed loan In connection with the proposed loan, the Government has informed the Bank that: (i) in fixing the annual remuneration to be allowed to concessionaires, DNAEE recognizes all reasonable costs of operation, administration and maintenance, taking into account the service characteristics of the concessionaire and the feasibility of increasing its efficiency; (ii) DNAEE will provide to the Bank, by July 31, 1979 comprehensive information regarding the criteria being applied in determining whether a utility's service costs are to be recognized; and (iii) DNAEE will exchange views with the Bank regarding the foregoing, and will inform the Bank of any changes in such criteria The legislation summarized above has been used to establish power tariffs which have enabled most of the Brazilian utilities to attain a reasonable return on invested capital and allowed them to finance a considerable share of sector investments. Present tariffs also contain generally appropriate features such as separate demand and energy rates for industrial and commercial consumers, discounts to encourage large industrial consumers to accept supply at higher voltages, and life-line rates for rural and minimum residential consumption. However, the tariffs do not provide for differentiation between peak and off-peak rates, and the equalization feature warrants reassessment. There are also some indications that current tariff levels may need to be raised. In order to ensure that the tariffs would provide adequate revenues, to evaluate the economic effects of pricing policy and to consider a new rate structure design, DNAEE, with Electricite de France assistance, is undertaking a comprehensive study. Under Loan 1300-BR, Government agreed to present to the Bank the results of the study, expected to be completed by mid-1979.

10 -6- Existing Facilities 1.19 By the end of 1978 the power sector had about 25,200 MW of installed generating capacity of which about 86% was in hydroelectric stations and the remainder in thermal plants (one-third in oil-fired steam units, about 15% in coal-fired units and the remainder in diesel internal combustion and gas units). The high voltage transmission system contains about 34,000 circuit-km at voltages ranging from 230 to 500 kv. Coordination of Operations 1.20 In order to achieve the most economic operation of interconnected systems, Government established regional coordinating groups (Grupos Coordenadores para Operacao Interligada - GCOIs); in July 1973 for the South- Southeastern regions and in March 1977 for the Northeast. In these groups, the regional operating utilities under ELETROBRAS coordination plan and carry out improved allocation of loads to generating stations, compensate for diversity in regional load peaks and hydrological regimes and control operating costs through reductions in operation of thermal plants, by higher use of hydro facilities. Access to Service 1.21 About 80% of Brazil's urban population is receiving electricity service. However, the number of people receiving this service in the rural areas (where about 40% of the population lives) is very low. Government is promoting expansion of subtransmission and distribution facilities to provide electricity service to a higher proportion of the population, particularly in rural areas. The proposed loan would contribute towards this objective in the State of Parana. Rural Electrification 1.22 Rural electrification on a national level was started in 1970 when the Instituto Nacional de Colonizacao e Reforma Agraria, a self-governing agency attached to the Ministry of Agriculture, was made responsible for the planning, promotion and control of rural electrification through consumer cooperatives. Progress, however, was slow (4 to 5 thousand customers/year) and in 1974, ELETROBRAS created a rural electrification department to complement the Ministry of Agriculture's activities. ELETROBRAS' approach to rural electrification has been that of financing distribution networks in rural areas close to existing lines. It does not finance household wiring or connection fees. ELETROBRAS finances 50 to 80% of the cost of individual rural electrification projects at a subsidized interest rate of 12% (principal not subject to monetary correction) with 15 years maturity including a grace period of 5 years. This results in a large subsidy given inflation rates much in excess of the interest rate charged. The remaining cost is borne by the utilities or by consumers. The Ministry of Agriculture's program (which

11 -7- has been assisted by two Inter-American Development Bank (IDB) operations totalling US$84.4 million, including US$68.7 million of funds provided on concessionary terms) grants similar terms to participating rural electrification cooperatives About 43,000 rural customers (about 200,000 people) were connected in 1978 through ELETROBRAS-assisted programs and at a total cost of about US$100 million. Of these new customers, about 44% were located in the Southeastern region and 43% in the South. Over the period ELETROBRAS expects to participate in projects estimated at about US$570 million, and provide services to about 160,000 new rural consumers (45% in the Southeast, 32% in the South, 3% in the Central-West, and 19% in the Northeast and 1% in the North), thereby providing services to about 800,000 people. Sector Development 1.24 No constraints have been observed in sector organization that could adversely affect continued sector development. The high level of investment required in the sector (about 9% of the country's gross capital formation) and the Government's present policy of limiting public sector investments as part of the program to control inflation may, on the other hand, affect future sector investment programs. In connection with Loan 1538-BR, ELETROBRAS expects to complete by the end of 1979 a master plan for sector facility expansions to the year This plan should permit assessment of various solutions for maintaining adequate service reliability while adjusting longrange investment programs affected by Government actions to curb inflation More serious constraints could arise in the future if utilities are unable to obtain revenues sufficient to appropriately contribute to their own expansion programs. This concern has prompted DNAEE to review sector financial requirements and tariffs. This study is being carried out together with a review of rate structure which has been agreed with the Bank (para. 1.18). DNAEE expects to present to the Bank by mid-1979 the results of these reviews, including an integrated financial forecast for the sector through 1985.

12 THE BORROWER 2.01 The borrower would be Companhia Paranaense de Energia Eletrica - COPEL, a joint-stock corporation which is the major public service electric utility in the State of Parana. COPEL was established by State Decree of 1954 and charged with the responsibility for planning, building and developing systems of generating, transmission, transformation, distribution and sale of electric power in Parana. Before COPEL was established, the electric power sector in the State of Parana was very fragmented. Service was provided by Companhia Forca e Luz do Parana (CFLP), 1/ a subsidiary of American and Foreign Power Inc., as well as by a number of smaller private companies and municipal entities. There was no coordination of planning to provide electric power service in the State because of the multiplicity of concessionaires and the absence of a central coordinating authority; the quality of service was poor because national tariffs then in effect did not provide the utilities with sufficient revenues for expansion and also because the utilities did not have technically qualified staff in sufficient numbers. The decision to establish COPEL, thus, grew out of the recognition on the part of the Parana state authorities, of the need for a more effective organization arrangement, for better coordination of electric power service within the State. COPEL has grown very rapidly since its inception and has acquired most of the other power utilities in Parana; it currently supplies about 90.5% of the electricity services in the State. At year end 1978, COPEL had 6,382 employees, its installed generating capacity amounted to 420 MW and it had total assets valued at about US$780 million. Its voting capital stock was valued at Cr$3,741 million (US$207.8 million) of which the State of Parana, its municipalities, and agencies owned about 86%, ELETROBRAS 13%, and other entities the remainder. Organization, Management and Staff 2.02 COPEL's organization is well structured (Annex 2 shows the organization chart). General policy directives are set by a 7-man Administrative Council elected for a 3 -year term by the General Assembly of shareholders. Current members of the Administrative Council include three representatives from the Parana state government--the state secretaries for finance, for planning and for commerce and industry; one from private industry in Parana; one from ELETROBRAS and two officers of COPEL--its president and its financial director. The diversity of the composition of the Council brings the necessary depth and broad perspective to decisionmaking in the Council while the presence of the two key COPEL officials provides an important link between policy formulation and implementation within the company. The utility is managed by a six-member Board of Directors appointed by the Administrative Council, consisting of the President and the directors of COPEL's five departments. The organization of the company also includes an independent 3-member Fiscal Council, elected by the General Assembly, to advise on the corporation's accounts and proposed capital increases. 1/ CFLP was acquired by ELETROBRAS in It was the borrower for Loan 476-BR, which has been assumed by COPEL.

13 2.03 COPEL is organized along functional lines: there are five departments each headed by a director. The departments are: Administration, Economic and Finance, Distribution, Operations, and Engineering and Construction. Each department has two or three subdivisions headed by a superintendent. COPEL's regional operations covering Curitiba, Ponta Grossa, Londrina, Maringa and Cascavel come under the Distribution department. This organizational structure is similar to those in other Brazilian distribution companies and works well for COPEL COPEL's policy of systematically identifying, training and promoting staff from within has enabled the company to build up a core of competent upper and middle management. Several of the upper and middle management personnel, including the president and some directors, rose through the ranks within the company. At year end 1978, COPEL's permanent staff numbered 6,382; about 50X were professionals. Through a program of carefully recruiting, placing and training its work force, COPEL has been able to build up an efficient, well motivated and competent work force. COPEL's policy of identifying the potential of its staff through appropriate evaluations and training them accordingly for higher positions has resulted in a rather stable work force. Despite absorption of several smaller and less efficient utilities in recent years, COPEL has been able to achieve steady increases in its customer to employee ratio which was 98 in 1975 and 124 in COPEL has a well designed training program covering its supervisory, technical and financial personnel. In 1977, about two-thirds of the permanent staff participated in in-house or external training programs. COPEL has also been a beneficiary of the training program financed by the Bank under Loan 1343-BR and administered by ELETROBRAS. COPEL is expected to carry out a satisfactory training program during the project's execution. Management Information Systems and Audit 2.05 COPEL's financial planning and budgeting systems are good. Its financial forecasts have been computerized and tie in with its technical and market forecasts. COPEL prepares 10-year financial plans and an annual budget covering projected expenditures for capital investment and operations. These are supplemented by several auxiliary budgets including its borrowing needs, projected debt service and cash flow. Through a computer model, which allows projections of its daily cash needs, COPEL is able to keep its cash balances to a minimum and to borrow efficiently COPEL's internal reporting and management information system is also good. It has established a modular linked computerized system covering its customer accounting, payroll and personnel administration, accounting, property control, financial control, inventory management and transport management. Operating and financial reports are prepared accurately and promptly COPEL has a well staffed internal audit division under the Financial Director. The division carries out a program of continuous audit and internal controls on all aspects of the company's operations. The internal audit program is satisfactory. The independent Fiscal Council (para. 2.02) reviews

14 all financial transactions of the company. COPEL's financial statements have been audited and certified by Arthur Andersen and Company annually. The scope of the audit is satisfactory. COPEL should agree to continue to appoint independent external auditors satisfactory to the Bank and to send to the Bank audited financial statements and the auditor's report within four months of the end of its fiscal year. Billings and Collections 2.08 COPEL's billing is part of its computerized information processing system. Bills are rendered monthly and are due 15 days after receipt. Through strict enforcement of its disconnection policy COPEL has been able to bring down its outstanding receivables from an unsatisfactory 83 days sales at year-end 1975 to 68 days sales at year-end / Outstanding accounts receivable are expected to remain satisfactory throughout the execution of the project. Performance under Loan 1257-BR 2.09 COPEL's performance under the ongoing Bank-financed project (Loan 1257-BR) has been satisfactory. Engineering designs, preparation of equipment specifications, and supervision of project works have been carried out by COPEL's staff. COPEL used the services of CABEB for the preparation of bidding documents for ICB procurement of Bank-financed items and for fabrication inspections. Project execution has been smooth, but completion may be delayed by about 3 months due principally to initial administrative difficulties in the preparation of bidding documents. l/ Despite a change in accounting principles which increased the 1978 figure by including unbilled sales in accounts receivable.

15 THE MARKET General 3.01 The State of Parana, in Brazil's Southern region, has an area of 199,554 sq km and, though situated on the Tropic of Capricorn, its climate is varied. The Northern, Western, and Eastern zones are tropical, while the Central and Southern, due principally to higher terrain, are temperate. Parana has a population of 9.8 million (42% urban, 58% rural), close to 8% of the country's total; and about one million people live in Curitiba, the state capital. Parana's share of Brazil's agricultural production represents about 25% (soya 31%, cereals 20%, cattle 15%, coffee 10%, cotton 6% and potatoes, sugarcane and various other products 18%) In the early sixties, Parana had primitive electricity services; per capita utilization amounted to 23 watts (86 watts for Brazil as a whole) and total generation in 1961 amounted to 660 GWh, compared to more than seven times as much (4,940 GWh) in 1978, when total utilization in all energy forms amounted to the equivalent of about 5.9 million tons of oil, or 5.4% of the country's total (see Annex 1). Of the total electric energy utilization, COPEL supplied 90.5%, captive plants 8%, and small public utilities the remainder. Sales Forecast 3.03 From 1973 to 1978 COPEL's sales grew at an average annual rate of 22% and from 1979 to 1983 a growth rate of 15.9% is forecast. The main factor contributing to the relatively high growth rates has been the substantial development of the industrial sector, which in 1978 accounted for 41% of total sales, while residential sales amounted to 20% and the commercial share was 15%; the remainder went to rural, government, and public service customers. The relative market share of the industrial sector (75% agrobased) is expected to continue to grow during the project period, as shown below. During the period the total number of consumers is expected to increase by about 400,000 (335,000 residential, 35,000 rural, and 30,000 in other categories. Actual Forecast (1978) (1983) GWh % GWh % Industrial 1, , Residential , Commercial , Public lighting Public services Rural Government agencies Others , ,

16 Except for large industrial consumers, the above forecasts were prepared essentially on the basis of population trends in the State and wellrecorded consumption indices. Exponential equations were derived to project requirements by categories for the period In order to define forecast figures using averages and standard deviations, several study hypotheses were developed. In each hypothesis, a random form of population evolution was estimated. Through the population estimate and historical consumption rates, a series of per capita consumption rates were evolved. The forecast figures were also adjusted to reflect market saturation effects With respect to large industrial consumers COPEL received service requests from 60 concerns, totalling 320 MW for the period Of these requests, 50% of the firms have signed supply contracts with COPEL and the remainder, letters of intent. The probability that these loads will materialize during the period is estimated at 85%, which is reflected accordingly in the forecast The analysis to define the sales forecast was comprehensive and thorough and reflects well-substantiated trends, and the results have been reviewed by ELETROBRAS and approved by DNAEE for COPEL's system expansion planning. Because COPEL has maintained good market statistics and its distribution planning staff is well experienced in this field, the Bank selected this utility to carry out a case study in 1978 for the formulation of a forecasting procedure and studies to define economic system reliability levels. 1/ The case study performed jointly by Bank staff, consultants and COPEL staff proved successful and the Bank will publish a book by year-end 1979 on the case findings. Also as a result of this work, COPEL has initiated implementation of the forecasting methodology and economic analysis. However, due to the recent completion of this work and the time they would need (about 2 years) to phase it into their planning programs, it was not applied in preparing the current forecast Under Loan 1257-BR COPEL is carrying out a program to provide electricity services to about 20,000 low income households. For purposes of this program, low income households are defined as those within COPEL's concession area which, though located near existing feeders or distribution circuits, are not served because of their inability to pay for connection fees (about US$100). In order to provide service to these households, COPEL financed the connection charges without interest and for a period of three years. This program was also coordinated with state government urban development agencies. The results of this undertaking have been much more favorable than expected and COPEL will extend it during the project period to 45,000 additional low income households covering approximately 225,000 people; the Bank obtained assurances from COPEL and state authorities that the new program would be executed. 1/ Optimum Economic Power Supply Reliability - Bank Staff Working Paper No. 311 of January 1979.

17 Although COPEL's expansion program for the period is well balanced and designed to appropriately provide forecast service requirements, service to the rural areas could be expanded. Of the 3.7 million rural inhabitants, about 128,000 (3.5%) have electricity service. Under current planning (covering the period ), which is based on the expected availability of subsidized credit for rural electrification, COPEL expects to connect about 35,000 new rural customers, representing about 175,000 people, close to one-and-a-half times the number presently served. However, this figure could be increased to about 50,000 consumers without requiring an increase in COPEL's staff or straining its financial position, provided COPEL obtains the borrowings included in the financing plan on reasonable terms (which is expected to be facilitated by the proposed cofinancing arrangements). Through this effort, the number of rural inhabitants with electricity service could be nearly tripled in three-and-a-half years. COPEL agreed to prepare and implement a program to provide services that would permit about 50,000 connections to new rural consumers during the project period; the program should be presented for Bank review by November 30, Energy and Capacity Balance 3.09 The requirements for electricity supply by COPEL and its energy purchases (primarily from ELETROSUL, the regional bulk supplier), have been forecast under the assumption that COPEL would gradually reduce its own consumption and system losses by COPEL would be capable of meeting its energy needs and power requirements from its own plants and purchases from ELETROSUL under average hydrological conditions (see Annex 3). Hydrological conditions in 1978 were below average and some rationing of electricity services was applied. As a consequence, year-end sales were 243 GWh (6%) lower than expected. These conditions have since improved and current sales figures confirm the accuracy of the original forecast for the first quarter of Forecast figures for the period have, therefore, not been modified. ELETROSUL is familiar with COPEL's demand forecast and has current contractual arrangements to supply these requirements. ELETROBRAS, ELETROSUL and COPEL review these requirements about every six months and through past experience have been able to adequately adjust system operation schedules to maintain service reliability.

18 PROGRAM AND PROJECT Background 4.01 The relatively rapid economic growth of the State of Parana, which became stronger since the early seventies and closely linked with industrial development in the state, produced proportionate increases in demand for electricity services provided by COPEL. Expansion of COPEL's electric system was planned to meet this demand and implementation of the first program covering the period is scheduled for completion by mid The first Bank loan (1257-BR) to COPEL partially financed the distribution system expansion in this program and was instrumental in the execution of a plan to provide electricity service to about 20,000 low income households. The second major expansion program would be initiated in July 1979 and completed by mid The project proposed for Bank financing would comprise the program's subtransmission and distribution facilites which are needed to supply the required reliable electricity services. Bank particiption would also be instrumental in expanding rural electrification and services to an additional 45,000 urban low-income households. Generation 4.02 COPEL owns and operates 23 hydro and thermal generating plants with an aggregate installed capacity of 420 MW (390 MW hydro and 30 MW thermal) which provide about 35% of COPEL's system generation requirements COPEL's Foz do Areia hydroelectric plant (1,674 MW), under construction and partially financed by the IDB, constitutes an integral component of the least-cost generation and transmission expansion program for the South and Southeastern regions that was prepared by ELETROBRAS in December ELETROSUL's Salto Santiago hydroplant, also under construction and with partial financing by the IDB, is part of the same program. By 1981 these plants will be linked to a 500 kv transmission system which in addition to providing an interconnected grid in the Southern region will also be connected to the Southeastern regional grid and, before commercial operation of Itaipu (1983/1984), supply complementary generation to that region. The 500 kv interconnection is being financed under a Bank loan (1343-BR) to ELETROSUL. The original program undergoes periodic updating, and the proposed second loan to COPEL would give the Bank an opportunity to review any major investment in generation or high voltage transmission that COPEL may consider to undertake and not included in the utility's program described below. Thus, the Bank could contribute towards attaining compatibility in sector investments. The Program 4.04 COPEL's construction program comprises the following works:

19 (a) Generation - completion of the Foz do Areia hydroelectric project - 1,674 MW; expected completion of first stage 1981; 2,512 MW ultimate capacity; (b) Subtransmission - substations: improvement and installation of about 1,320 MVA of transformer capacity at 230 kv, 400 MVA at 138 kv, and 450 MVA at 69 kv; lines: 360 circuit-km at 230 kv, 480 circuit-km at 138 kv, and 140 circuit-km at 69 kv; (c) Distribution - improvements and installation of about 470 MVA of aggregate transformer capacity at 34.5 kv, 13.8 kv, and lower voltages in distribution transformers; installation of lines at 34.5 kv, 13.8 kv aggregating about 2,850 circuit-km, expansion of feeders, distribution circuits, street lighting fixtures (102,300 new units), consumer meters (410,000 new units) and about 400,000 new service connections, including some 45,000 for urban low income households and 35,000 for rural consumers; (d) Communications and control equipment - expansion of communications and control facilities and equipment for system operation; (e) General plant - expansion of the electric center laboratory and physics and chemistry laboratories, operations and maintenance equipment and materials for subtransmission and distribution systems, tools and equipment for electromechanical shops, motor vehicles and office equipment and civil works related to expansion of administration and abovementioned facilities; and (f) Rural electrification - an aggregate of about 17,500 circuit-km of lines at 34.5 kv and 13.8 kv to provide connections for about 35,000 new rural customers. 1/ Program Costs 4.05 The cost estimate of the expansion program appears in Annex 4.1 and is summarized below: ----million---- Cr$ US$ % Generation 1, Subtransmission 1, Distribution 3, Communications and control General plant Rural electrification 2, , / As noted in para. 3.08, this portion of the program would be increased and program costs would rise accordingly.

20 The above estimate, which does not contain price contingencies and was prepared by COPEL on the basis of a well-balanced program and prices prevailing in June 1978, is considered to be sound and realistic. The Project 4.06 The program containing the project proposed for Bank financing has been defined, considering priority facilities that would permit COPEL to meet the rapid growing demand with reliable service. The project, consisting mainly of subtransmission and distribution works to be initiated by January 1, 1980 and completed by June 30, 1983, would represent about 55.7% of COPEL's investment program and comprise the following facilities (details appear in Annex 4.1): (a) Subtransmission Substations: improvements and installation of about 1,300 MVA of transformer capacity at 230 kv, 380 MVA at 138 kv, and 440 MVA of 69 kv; lines: 320 circuit-km at 230 kv, 380 circuit-km at 138 kv, and 110 circuit-km at 69 kv; (b) Distribution Ci) line extensions at 13.8 kv and 34.5 kv aggregating about 2,250 circuit-km; (ii) installation of about 6,900 transformers (34.5 kv-13.8 kv/ V) with an aggregate capacity of about 410 MVA: (iii) installation of about 590 km of 13.8 kv feeders; (iv) improvement of about 1,300 circuits at 34.5 kv and 13.8 kv (340 m average length); (v) installation of about 1,360 new circuits at 34.5 kv and 13.8 kv (340 m average length); and (vi) installation of about 410,000 watt hour meters (315,000 single phase and 95,000 polyphase); (c) Auxiliary facilities Ci) modernization and enlargement of metering, general electrical equipment and chemistry laboratories; (ii) subtransmission and distribution maintenance and operation equipment, tools and equipment for electromechanical workshops; and

21 (d) Consultant services Project Cost Estimate for preparation of bidding documents (100 staff 1/-months) and equipment fabrication inspections in and outside Brazil (145 staff-months) The project's estimated cost is US$361.7 million; the foreign cost amounts to US$161.8 million (44.7%), part of which would be financed with the proposed loan. The project cost estimate was prepared by COPEL's engineering staff using as a basis equipment and material prices, as well as installation and construction costs, obtained from contracts recently made under COPEL's current project (Loan 1257-BR), adjusted to prices prevailing in June 1978, plus the assumption that about 50% of the contract values would be won by Brazilian manufacturers. Items financed by the Bank are exempt from taxes or duties. Taxes on items procured locally and not financed by the Bank amount to about US$16 million, or about 4.5% of project cost. The consulting services required for equipment fabrication inspections outside Brazil were calculated on the basis of equivalent expenditures for ongoing project items (Loan 1257-BR) and amount to about 72 staff-months, estimated at US$5,000/staff-month, excluding subsistence and travel expenses. Adding these expenses, the corresponding figure would be US$8,100/staff-month. The foreign cost of subsistence, travel, and miscellaneous expenses for COPEL's inspection supervisors has been estimated at US$217,000. A thorough and comprehensive analysis was carried out by COPEL to define sound project base costs. Physical contingency allowances of 5% for equipment and materials and 10% for equipment installation and civil works have also been used. These values are considered appropriate in relation to the type of project involved and degree of accuracy of the base cost estimate Allowances for price increases have been incorporated in the cost estimate using the following annual percentages and at a constant (Cr$18.0/US$) exchange rate: Equipment Works % Project costs, which are detailed in Annex 4.2 are summarized below: 1/ One individual.

22 Cr$ million US$ million Foreign Local Total Foreign Local Total Subtransmission , Distribution 1, , Auxiliary facilities Engineering and administration Fabrication inspection Physical contingencies Direct cost 2, , , Price contingencies , &81/ Total cost 2, , , The proposed Bank loan would finance equipment and materials suitable for procurement under ICB, as well as the foreign cost of equipment fabrication inspections. The estimated cost of the equipment and the foreign cost of the inspection, including price contingencies, but not interest during construction, is US$109 million, which would be covered by the proposed Bank loan. Implementation 4.11 As in the ongoing project (Loan 1257-BR), COPEL's own staff will carry out engineering designs, prepare specifications for equipment, materials and works, as well as supervise construction for the whole project. COPEL will continue to use the services of its consultant, Companhia Auxiliar de Empresas Eletricas Brasileiras (CAEEB) for complementary services in the preparation of bidding documents for IcB procurement of project items and in related fabrication inspections. COPEL's technical staff has demonstrated its high professional performance in the diligent and well-managed execution of the ongoing project, expected to be completed, with minor delays, by mid Project subtransmission and distribution works will be spread throughout the State of Parana (para. 3.01) and most of these works will be executed concurrently. Consequently, they are not suitable for effective and economical handling by a single contractor. COPEL, therefore, expects that state-based contractors (of which there are many qualified to perform the work) will submit the winning bids for these works. Installation of major equipment will be done in most instances by the suppliers, under COPEL staff supervision. Some construction and equipment installation will also be performed by COPEL's own forces. The abovestated arrangement has worked effectively and economically in the implementation of the first project; through the experience recently gained with it by COPEL, higher performance in the execution of the proposed project should be attained. 1/ US$20.24 million for items financed by the Bank.

23 In the first project (Loan 1257-BR) bidding documents were jointly prepared by COPEL's staff, which was unfamiliar with ICB under Bank guidelines, and CAEEB, their consultants in this work who had the necessary experience. The main objective in this arrangement, proposed by the Bank, was to provide an effective transfer of knowledge to COPEL's staff in this field and in that of equipment fabrication inspections. The period to implement this arrangement and issue well-prepared bidding documents was longer than orlginally foreseen. This delayed procurement of Bank-financed items, requiring adjustments in the scheduling of some project works and introducing a considerable lag in the initial loan disbursements. This lag has recently been substantially reduced but completion of the project is expected to be delayed by about three months; final loan disbursements may require a corresponding extension of the closing date COPEL's staff is now fully capable of handling the preparation of all bidding documents and supervising equipment fabrication inspections. However, COPEL will continue to use CAEEB's services to complement its staff when necessary. Since project items are similar to those for the first project, bidding documents for most of them are ready and the sets of documents could be issued shortly after loan approval By mid-1979, COPEL's expansion program would be substantially completed and its program initiated. The project to be financed with the proposed loan comprises facilities to be initiated not earlier than January 1, 1980 and completed by June 30, 1983 (para. 4.06). Annexes 4.2 and 4.3 contain the project implementation schedules, which will serve as a basis to monitor project progress. Procurement 4.16 Procurement of equipment, materials and instruments to be financed by the Bank will be through international competitive bidding (ICB) and in accordance with guidelines for procurement under Bank loans. Special imported metering and system protection and operation equipment that is not appropriate for ICB because of the advisability of maintaining standardization would be acquired through direct purchases at an estimated cost of US$3 million. Miscellaneous imported items required in small quantities, and therefore not suitable for ICB, would also be imported and purchased directly through international shopping (US$2 million). The aggregate cost of direct purchases amounts to US$5 million Based on the outcome of ICB recently completed for COPEL's first distribution project (Loan 1257-BR), about half of the value in contracts is expected to be won by Brazilian suppliers. Bids for equipment and materials to be financed with the proposed loan that contain elements of Brazilian manufacture, equal to at least 50% of the bid price, would be given a margin of preference of 15%, or the applicable import duties, whichever is lower.

24 Items not financed by the Bank loan include equipment and materials which are unlikely to attract foreign bids under ICB. Bulky items such as concrete poles and cross arms, construction materials, as well as miscellaneous low voltage switches, connectors, lighting fixtures are examples of this category of goods, which COPEL would procure in accordance with its normal competitive bidding procedures which are satisfactory. In the unlikely event that foreign bidders would wish to participate in the supply of these items, COPEL would not be eligible to receive import licenses for such goods unless financing of more than 15 years' maturity is available from sources other than the Bank. A sufficient number of local suppliers and contractors are available to expect a satisfactory degree of competition. The total cost of these items (including price contingencies) is estimated at US$132 million, with a foreign component of about US$44 million. Disbursement 4.19 The proposed Bank loan would be disbursed as follows (disbursements will be fully documented): (a) 100% of foreign expenditures for imported equipment and materials, including foreign costs for their installation, and the ex-factory cost of locally manufactured equipment and materials; and (b) 100% of foreign expenditures for equipment fabrication inspections outside of Brazil The estimated schedule of disbursements is based on the formulated procurement program and actual experience with Loan 1257-BR to COPEL. Disbursements are expected to proceed at the rate shown below: Estimated Loan Disbursements IBRD Semester During Cumulative at Fiscal Year Ending Semester End of Semester US$ millions June 30, December 31, June 30, December 31, June 30, December 31, June 30,

25 The closing date would be June 30, 1983 to coincide with the expected date of project completion, because no retention of payments are envisaged (equipment performance would be guaranteed through appropriate bonds). Environment 4.21 COPEL has carried out previous projects with due regard to environmental protection. Under the proposed project all high voltage line routes have been selected to skirt urban concentrations, and clearing of rights-ofways would be kept to a minimum. The terrain traversed by the lines is relatively flat and natural drainage patterns would not be affected. Distribution system rehabilitations, particularly of feeders and disarrayed overloaded aerial circuits will be executed with special attention to safety and, in congested urban zones, reduction of adverse visual impact. Project Risks 4.22 The execution of project works does not have associated risks aside from those normally inherent in this type of work for construction crews, particularly in transmission line construction and energized line work in some distribution system installations. However, COPEL's construction supervision staff is highly experienced in this work and applies stringent safety standards; their low accident record is excellent. Construction schedules have been defined on the basis of normal and well-recorded progress attained by COPEL on similar projects; consequently, major delays in project execution are unlikely.

26 FINANCES Financial History and Present Position 5.01 Compared to other utilities in the Brazilian power sector, COPEL's financial performance has been good, reflecting the effectiveness of its stable management and its operating efficiency. Annexes 5.1, 5.2 and 5.9 give data on COPEL's financial performance during During this period COPEL achieved a 10% rate of return on its revalued "remunerable assets." Its average financial rate of return on average revalued net fixed assets in operation, achieved during the period, was about 14.6% which is quite satis- factory. Consumer-based resources financed about 22%o of total investment during the period which is reasonable considering that the capital investment undertaken, including Foz do Areia, was quite large. These results fell somewhat short of those forecast in the appraisal report for Loan 1257-BR (16% financial rate of return and 25% self-financing, respectively) COPEL's financial management has been good. By means of a computerized cash flow forecast which enables it to estimate its cash needs on a daily basis, COPEL has been able to keep its cash balances at a minimum while temporary cash surpluses are invested in short-term securities. At the end of 1977 COPEL's debt/equity ratio was 41/59 which provides a reasonable margin for borrowing. COPEL's capitalization at December 31, 1977 was as follows (Annexes 5.4 and 5.9): Cr$ million US$ million % Equity Paid-in Capital 2, Legal Reserve Retained Earnings Surplus from Revaluation 2, Total Equity 5, Long-Term Debt Foreign Loans: AID IDB IBRD Commercial Banks Other Total Total Foreign Debt 1, Local Loans ELETROBRAS 2, Others Total Local Debt 3, Total Debt 4, Less: Current Portion (351) (20) (4) Net Long-Term Debt 3, Total Capitalization 9,

27 Local currency loans represent about 75% of COPEL's outstanding debts. ELETROBRAS is COPEL's major creditor accouting for about 77% of the local indebtedness. About 40% of the outstanding foreign currency loans are owed to commercial banks. While COPEL's ratio of debt to equity financing is conservative for a power company, the terms of COPEL's past loans are short compared to the useful life of the related assets. The weighted average repayment period for COPEL's outstanding debt is about 11 years, while the average economic life of the assets they financed is about 33 years. This disparity could result in cash flow problems for COPEL unless it is offset by high levels of equity financing. It will, therefore, be necessary for the Bank to scrutinize COPEL's financing of its investments during project implementation Accounts receivable from customers, which had been high in the past because of delays in payments by state government agencies, is now at a reasonable level. It declined from the equivalent of 83 days sales at year end 1975 to an estimated 68 days sales at year end This improvement resulted from a reduction in the billing lag and strict enforcement of the disconnection policy. COPEL is currently implementing a program to further reduce the billing lag in order to achieve further improvements in its outstanding receivables. The ratio of receivables to billings will continue to be monitored during the project's execution Notwithstanding COPEL's relative operating efficiency and favorable financial performance achieved over the past several years, there are signs of financial imbalance. For instance, over the period it received transeers from the Global Guarantee Fund each year in order to earn a minimum 10% return on remunerable assets. Except in 1981, it is expected to continue to require transfers from the Fund. COPEL's annual debt service coverage ratios (Annex 5.9) are low, expected to average 1.2 between 1978 and The internal rate of return obtained for COPEL's investment program suggests that the overall tariff levels may need to be raised. The problems described above also point to possible deficiencies inherent in the existing power sector tariff and financing policies--among them the cross-subsidization and reversion features (para. 1.14) of the tariffs and the appropriateness of the terms of ELETROBRAS loans (the principal source of borrowing for the utilities). On-going studies on sector tariffs and finances, which are being undertaken as part of the agreements related to Loan 1300-BR are expected to lead to recommendations on these issues. Capital Investment Program and Financing Plan 5.05 COPEL's capital investment program and the financing plan during the construction of the proposed subtransmission and distribution project ( ) are shown in detail in Annex 5.3 and summarized below:

28 Investment Program and Financing Plan (In June 1978 constant prices) Requirements for Funds Cr$ million US$ million % Investment Program Foz do Areia 1, Rural Electrification 2, Other Ongoing Future Projects 1/ 1, Proposed Subtransmission and Distribution Project 5, Subtotal Investment Program 10, Interest Charged to Construction 2, Total Construction 12, Increase in Working Capital (15) (1) _ Total Financial Resources Needed 12, Sources of Funds Gross Internal Cash Generation 10, Less: Debt Service, Net Dividends Participation and Taxes 6, Net Internal Cash Generation 3, State and Municipal Governments Equity from Reinvestment of Sole Tax 1, Consumer Contributions in Aid of Construction Total Directly from Consumers 6, Other Equity Investments Borrowing: For Foz do Areia (IDB, ELETROBRAS, BADEP, FINEP, and FINAME) 1, ELETROBRAS (Rural Electrification) 1, Other Existing Loans Proposed IBRD Loans 1, / 13 Financing Gap (Proposed Cofinancing) / 4 Total Borrowing 4, Total Financing Sources 12, / Including expanded rural electrification program (paras and 4.04(f)). 2/ The amount of the Bank loan shown here excludes price contingencies of about US$20 million. 3/ In addition, COPEL will need about US$30 million of cofinancing in 1979.

29 The investment program includes the co,npletion of the Foz do Areia hydro project being financed by: (a) a US$74 million loan from IDB, (b) loans from ELETROBRAS and other federal financing agencies, (c) equity investments by ELETROBRAS and the State Government, and (d) by COPEL's own internal cash generation The ongoing projects also include extension of distribution lines to serve Parana's rural population. This rural electrification program is currently financed 60% by ELETROBRAS and 40% by the consumers. As explained in para. 3.08, the current and projected level of investment in rural electrification could be expanded and, therefore, COPEL is expected to formulate a program of additional investments in rural electrification to provide services to about 50,000 new rural customers during the project period The financing plan for COPEL's capital investment program during the construction of the proposed project is reasonable. Consumer-based resources, consisting of COPEL's internal cash generation, customer contributions in aid of construction and reinvestment by the state and municipal governments of their proceeds of the sole tax, will cover about 53% of COPEL's financial needs. Borrowing, for the on-going Foz do Areia hydro project, the existing and proposed Bank loans, ELETROBRAS loans for rural electrification and commercial bank cofinancing are expected to cover 39% of requirements and the remaining 8% will be covered principally by equity investments consisting of capital subscriptions by ELETROBRAS and the State of Parana for the Foz do Areia project Financial arrangements for the first power loan included a US$20 million cofinancing operation with the Bank of Nova Scotia. COPEL was able to secure better terms for this loan than it would have obtained without Bank participation. It is, therefore, proposed that COPEL's financing gap for the period amnounting to about US$60 million 1/ be met with a similar cofinancing operation. COPEL has received a large number of indications of interest from commercial banks and is not expected to have any difficulty in obtaining cofinancing on favorable terms. The contracting of the cofinancing operation would be a condition of effectiveness of the proposed loan The financial forecasts assume the reinvestment of dividends earned from COPEL by ELETROBRAS and the state and municipal governments during the construction of the project. The reinvestment of these dividends and other projected equity investments by ELETROBRAS and the State Government are necessary to enable COPEL to maintain a satisfactory ratio between debt and equity financing. The State Government agreed to report the provision under Loan 1257-BR under which it undertook to reinvest in COPEL's capital stock all dividends received through the completion of the project (or December 31, 1983, whichever date is later). As was the case with the first power project, the State Government agreed to provide all funds necessary to complete the project 1/ US$29.5 million and US$24.9 million in 1979 and 1980, respectively, in June 1978 prices, plus US$5.6 million to cover price increases.

30 should COPEL's financial resources be inadequate. ELETROBRAS is expected to continue its current practice of maintaining its 15% share of COPEL's total capital stock through the completion of the Foz do Areia projeel and to reinvest all dividends received from COPEL during the period of the project proposed for Bank financing As is customary with Brazilian power borrowzers, the financial projections in this chapter including the annexes are based on constant (June 1978) prices. The capital investment program as well as Bank and other loans shown in the financial forecasts do not include price contingencies. The reconciliation between the project cost shown in para and proposed Bank loan shown in para is as follows: US$ million Para Para Project cost (including contingencies) 362 Less: Price contingencies 80 Project cost (June 1978 prices) Proposed Bank loan (including price contingencies) 109 Less: Price contingencies 20 Bank loan (June 1978 prices) The proposed Bank loan of US$109 million is assumed to be made to COPEL for a term of 15 years including 3 years of grace. The financial forecasts have been based on an annual interest rate of 7.9% for the proposed Bank loan. Future Financial Performance 5.13 Within the limitations described in para. 5.04, COPEL's financial and operating performance is expected to continue to be satisfactory during the project's execution. The entering into service of the Foz do Areia hydro plant beginning in mid-1980 will reduce COPEL's energy purchases and reduce its operating ratio accordingly (Annex 5.9). COPEL has projected its operating revenues on the assumption that tariffs would be maintained in real terms at their 1978 level; the forecasts also assume that COPEL would be allowed a minimum 10% return on remunerable assets. As already noted, COPEL would require transfers from the Global Guarantee Fund to achieve this objective in every year except Its financial rate of return on revalued average net fixed assets will not fall below 13% and its debt/equity ratio will improve from 44/56 in 1978 to 35/65 in Because the maturity of COPEL's existing debt is relatively short, compared to the useful life of the related assets, COPEL's annual debt service coverage ratio is expected to be low, when it would improve to 1.4 times, remaining at satisfactory levels thereafter. To provide the Bank the opportunity to review COPEL's finances on a systematic basis, a series of

31 tests applicable to future investments and borrowings were agreed. With regard to investments, COPEL would not carry out any major expansion other than the program described in para without giving the Bank evidence that such expansion is economically justified, that adequate financial resources are available and that it conforms to the power expansion program for the South/Southeast endorsed by ELETROBRAS. For this purpose, a major expansion is one whose cost excees 2% of gross fixed assets in operation plus work in progress in the case of generation and transmission projects, and 1% in the case of distribution projects. In addition, COPEL agreed not to incur debt with an original term of less than 8 years without the Bank's consent, if by so doing the total outstanding principal of such debt would exceed 5% of its total fixed assets. These two provisions are included in the existing agreements with COPEL (Loan 1257-BR). COPEL's performance under these provisions has been satisfactory. COPEL also agreed to seek the Bank's concurrence prior to contracting any long-term borrowing during project execution if its forecast annual debt service coverage ratios fall below the levels indicated in Annex 5.9 (or 1.5 times, whichever is lower). To establish a mutually agreed basis for the test, COPEL would furnish financial projections, which would be deemed acceptable to the Bank if not specifically objected to by the latter. COPEL has secured (principally in connection with rural electrification) fixed-interest borrowings in Cruzeiros. The inclusion of such borrowings would distort the forecast debt service coverage ratio, as they would not be comparable to the index-linked local currency debts and borrowings in foreign currencies making up the bulk of COPEL's indebtedness. It was, therefore, agreed that the debt service on such debts would be excluded for purposes of the test, subject to a maximum of 15% of total debt service As with the first power project, the Federal Government should agree that should funds provided by the State of Parana be inadequate for carrying out the project, it would make arrangements satisfactory to the Bank for the provision of these funds. Performance Indicators 5.16 Annex 5.9 contains a representative selection of indicators of COPEL's operating and financial performance (other than those covered by proposed covenants) through the year following project completion. Performance as measured by these indicators would be monitored during project execution.

32 ECONOMIC ANALYSIS Least-Cost Solution 6.01 The subtransmission and JLstribution expansion program was designed oa the basis of a load forecast covering the period (para. 3.04). However, in order to confirm long-range adequacy of the fundamental configuration of the subtransmission grid, the study period was extended to Final arrangement of this system was defined by economic comparisons of several subtransmission schemes considering different voltage levels, substation siting, and line routes. In all comparisons COPEL selected least-cost solutions (using an 11% discount rate). Under the comprehensive planning performed, improvements in system communications and control equipment were incorporated to achieve higher economic system operation and reductions in reserve capacity without impairing reliability. For the project period ( ), the average system transformer reserve capacity would be about 10%. Return on Investment 6.02 The return on investment was estimated as the discount rate that equates the present values of the benefits and costs associated with the investment program. Benefits were measured by the forecast revenues from the sales of electricity at the average retail level, using the tariff in effect in December 1978, plus the sole tax. The return for the program is about 14% which compares somewhat favorably with the opportunity cost of capital for Brazil, estimated to be 11% (the return figure would be 12% if program costs increase by 15%). If program costs do not increase but benefits decrease instead by 10% or 20%, the return on investment would be 12% and 11%, respectively. A sensitivity analysis was performed to determine the effect of exchange ratesl/ different from the June 1979 (US$1 = Cr$18.0) figure used. The results indicate that the return on investment would not be significantly affected by the foreign exchange rate. It should be noted that on recent similar projects in Brazil, return figures have been significantly higher than that obtained for this investment program, thus permitting the conclusions that tariff levels may need to be raised (para. 1.18). The tariff study currently being carried out by DNAEE and expected to be completed by mid-1979 should provide a more definitive basis to determine the appropriate act*ons that would need to be taken bv sector authorities on this important 1/ Undervaluation of the Cruzeiro by 26% in 1980, 23% in 1981, 19% in 1982 and 15% in 1983 and subsequent years.

33 AGREEMENTS REACHED AND RECOMMENDATION 7.01 During negotiations agreements were reached with the Federal Government, the State Government of Parana, and COPEL on the following principal matters. With COPEL, to: (a) implement, during project execution, a program to provide electricity services to at least 45,000 low-income household (para. 3.07); (b) prepare a program to provide electricity services to at least 50,000 new rural consumers. The program would be presented for Bank review by November 30, 1979 and implementation completed by June 30, 1983 (para. 3.08); (c) have a signed cofinancing agreement, satisfactory to the Bank (as a condition of effectiveness of the proposed loan), for the entire US$60 million (para. 5.09); and (d) not incur, during project execution, any long-term debt without the Bank's concurrence if its forecast annual debt service coverage ration falls below 1.5 (or, 1.3 in 1979, 1.2 in 1980, 1.4 in 1982 and 1983 (para. 5.14)). With the Government of the State of Parana, to: (e) reinvest in the capital stock of COPEL all the dividends received from the utility up to December 31, 1983 (para. 5.11); and (f) provide, in the event of COPEL's fund insufficiency, all the funds which may be required to carry out the project to be financed with the proposed loan (para. 5.11); With the Federal Government, to: (a) make arrangements satisfactory to the Bank for the provision of funds to carry out the project, in the event that the funds available to COPEL, included those provided by the State Government, are insufficient for said purpose (para. 5.16).

34 The following provisions of Loan 1257-BR would be repeated under the proposed loan: (a) COPEL should: (i) maintain its earnings (including transfers from the Global Guarantee Fund) at levels consistent with sound financial public utility practices and in accordance with existing legislation; to maintain its eligibility under norms prescribed by DNAEE in the event COPEL requires transfers from the Fund; (ii) not incur debt with an original term of less than 8 years if by so doing the total outstanding principal of such debt would exceed 5% of its total fixed assets; and (iii) not to carry out any major expansion without giving the Bank evidence that such expansion is economically justified, that adequate financial resources are available, and that it is in accordance with plans for the Southern and Southeastern regions endorsed by ELETROBRAS. (b) The Federal Government would allow COPEL to obtain a return (together with transfers from the Global Guarantee Fund, if required) of at least 10% on its remunerable investment The project would constitute a suitable basis for a Bank loan of US$109 million equivalent. The loan would be repaid over a period of 15 years, including 3 years of grace. May 3, 1979

35 ANNEX 1 COPEL SECOND POWER DISTRIBUTION PROJECT Energy Utilizationl/ Estimated 2 / Forecast Brazil: All forms of energy: Total utilization3/ 109, , ,100 Average annual growth (%) Population (106 inhabitants) Per capita utilization Distribution of total utilization by primary sources (%) Oil products Hydroelectric Wood products and wastes Coal: mineral vegetable Alcohol Natural gas Uranium Electric power generation (GWh) 110, , ,680 Hydro 96, , ,380 Thermal 13,162 15,710 12,460 Nuclear ,840 Parana: All forms of energy: Total utilization 5,912 6,390 7,710 Average annual growth / Population (106 inhabitants) Per capita utilization Distribution of total utilization by primary sources (%) Oil products Hydroelectric Wood products and wastes Alcohol Coal: mineral vegetable Electric power generation (GWh) 4,940 5,982 9,788 Hydro 4,880 5,922 9,728 Thermal / Balango Energetico Nacional, prepared by the Ministry of Energy and Mines (1978). 2/ Estimated year-end 1978 figures. 3/ M.T.o.e. = 1000 tons of oil equivalent. 4/ Slightly lower than country's average due to lower expected energy-intensive industrial growth, compared to other states.

36 ANNEX COPEL SECOND POWER DISTRIBUTION PROJECT ORGANIZATION CHART GENERAL ASSEMBLY ADMINISTRATIVE L COUNCI L I L PRESIDENT DEPARTMENTS 1 [ ~~~ECONOMIC EGNRING ADMINISTRATION AND DISTRIBUTION OPERATIONS AND FlONANCE CONSTRUCTION DIVISIONSI l SY~STM SYSTEM ENGINEERING ADMINISTRATION _ AND _ CURITIBA _ OPERATION _ AND PROCESSING CONSTRUCTION RESOURCES FINANCE PONTA GROSSA AND SYSTEMS PROCURW CASCAVEL B 0 ~4 MARINGA LONDRINAIi - TECHNICAL World Bank

37 COPEL SECOND POWER DISTRIBUTION PROJECT Energy Balance (GWh) COPEL System Other Required Purchases Losses Captive Small Total Generation Year Generation COPEL ANDEl/ CESP2/ ELETROSUL3/ RFFSA4/ Total (%) Sales Plants Utilities State of Parana Actual ,288 2, , , ,977 2, , , , , ,445 1, , , ,9735/ , Forecast ,487 2, , , , , ,058 2, , , , , ,990 6, , , ,014 7, , , ,293 7, , , , , ,344 7, , , , , ,517 7, , , , ,012 1/ Administraci6n Nacional de Electricidad (Paraguay). 2/ Companhia Energetica de Sao Paulo. 3/ Centrais Eletricas do Sul do Brasil. 4/ Rede Ferroviaria Federal S.A. 5/ 1978 year-end figure; lower by 6% than forecast prepared in June 1978, due to rationing (see para. 3.09).

38 ANNEX COPEL SECOND POWER DISTRIBUTION PROJECT Investment Program (million Cr9) TOTAL Generation: Foz do Areia hydroelectric plant 2, ,339 Subtransmission Substations: Curitiba Parigot de Souza (230 kv), expansion - 5 MVA, 34.5/13.8 kv Centro (69 kv), 3 feeder circuits at 13.8 kv Rio Branco do Sul (69 kv), 1-69 kv circuit /13.8 kv, various expansions; and Curitiba S.S. improvements Ponta Crossa Socorro (69 kv), 12.5 MVA 2/ 34.5/13.8 kv - initial stage Uniao da Vitoria (69 kv), expansion 41 MVA2/, 34.5/13.8 kv, initial stage /13.9 kv, various expansions; and Ponta Grossa S. S. improvements Londrina Ivaipora (138 kv), expansion - 20 HVA 2 / 34.5/13.8kV, initialstage /13.8 kv, various expansions; and Londina S.S. improvements Msringa Campo Murao (230 kv), 230, 34.5, and 13.8 kv switching, initial stage Cianorte (138 kv), 69, 34.5 and 13.8 kv switching, initial stage /13.8 kv, various expansions; and Maringa S.S. improvements Cascavel 34.5/13.8 kv, various expansions, and Cascavel S.S. improvements _ 5 6 Lines: Subtotal (Substations) Curitiba Atuba-Rio Branco do Sul, 2nd circuit at 69 kv - 27 km; and Curitibe line improvements Ponta Grossa Areia - Salto Grande do Igua,u, 1st circuit at 230 kv - 42 km; and Ponta Grossa line impro-ements Londrina Apucarana - Ivaipora, 1st circuit at 138 kv km, initial stage; and Londina line improvements Subtotal (Lines) Distribution 1, ,503 Communications and Systems Control: (VHF, UHF, SHF, carrier, switching, and supervisory control systems) Curitiba Ponta Grossa Londrina Maringa Cascavel Subtotal (Communications) General Plant: (buildings, vehicles, office equipment, and maintenance and operations equipment) Rural Electrification ,330 The Project Subtotal-/ 3,876 1, ,147 7,901 Subtransmission ,588 Distribution ,977 Auxiliary Facilities Engineering and Administration Consultant Services (bid documents preparation and fabrication inspections) Physical Contingencies Subtotal (Project) - 1,435 1,118 1, ,068 Total Program 3,876 2,990 1,874 2,279 1,950 12,969 1/ Includes engineering and administration cost plus physical contingencies, but not price contingencies. 2/ From relocation; does not involve increase in system capacity.

39 ANNEX 4.2 Page 1 of 4 COPEL SECOND POWER DISTRIBUTION PROJECT Project Coat and Izple,antation Schedula Tr-n-f orie Capacity (MVA) Coatssad Line million CrS million n- US Damt of Installatioo Length (ka) Foraign Local Totsi Fornign LooI Total Com.encone.t Conpiction REGION CURITIBA Sobt-roon=ision: - Substations kv Campo Cooprido, expansiox Ix /83 Posto 5/83 Fiscal, ne- lo75 l /81 Ub-roba, expansion 10/82 Ix150, x /82 Uobara, 6/82 lt stage 2 capaccion /80 Ubara, od 12/80 stage expansion 1x /83 6/ kv Aloiro-te T-nandare, 1ew li /82 Atoba, 6/83 esp--sion /83 Bac-h-eri, nec 6/83 1x /82 Bariqoi, 6/83 expansion 1.252/ /82 Campo 6/82 Ltrgo, expansion 2x /82 Ce-tro, 2Sd 3/82 stage expansion Cidode 8/82 Indostrial, expansion 11/ /82 Colombo, 6/82 ne1 Ix252/ /81 Matinbos, 6/82 lea Ix202/ /81 Morrete-, 10/82 espansion 1x12.5i /82 P-aranagu, 12/82 let stage, expansion IX25 2 / /80 P-runagua, 12/80 2Sd stege, -. pacs.oo 2x /82 Pinheirinbo, 8/82 nxpaoslon 1x /82 Rio Branco 12/82 do Slo, -xpancioc ix.10,./ 1x71 / /81 Sao lose dos 12/81 Pinhais, expansion 1x201/ /80 Tarooa, 6/80 0ew 1x /82 12/82 kv Various 34.5/13.8 kv cxpansions /80 6/83 Lines Sob-total (Sobetotions) P. Soosa-Ub-raba-Posto Fiosal (230 kv) /82 10/ kv lndostrial Ring, 2nd stago /80 12/80 A'uba-Rio Bronco do Sol /82 6/82 Paranag- a-mctinhos-posto Fistal /82 10/82 Morretes-Paranagua-Posto Fistol /82 10/82 Uberaba-Atuba-T-ruoa /82 12/82 Rio Bronco do Sol-Alnirante Tmanodare /83 6/83 Atoba-B-cocheri (2 circoits) /82 6/83 Sub-total (Lines) Sub-total (Sobt-anaeisxion) Distribution: Q-antity Unit Feeder- 118 km /80 6/83 Circoics, new 450 unita /80 6/83 tircoics, inpronemenan 100 anits /80 6/83 Circuit e-tensions 2,225 ouits /80 6/83 Line e-ten-ions 255 kb /80 6/83 Street lights 34,350 units /80 6/83 Transformers 142 MVA /80 6/83 Sub-total (Distribotion) Ttonls (CURITIBA) PONTA GROSSA Subt-rnsissito: Substations kv t Figue-ia, expansion Ixs.s2/ /82 5/82 Guarapuava, ne /82 6/83 Ponto Grossa North, expansion lo5ot2/ /82 12/82 Ponta Grosso South, e-pansion 1x /82 6/ kvt Castro, ncw 1x /82 12/82 Telenoco Borbo, expansion 1x /82 5/ kv Irati, expansion 1x12.52/ /80 11/80 UGioa do Vitor-a, e-pansion, Ist stage 1x412/ /80 6/80 Uniao da Vito-ia, expansion, 2nd stagn Ix /83 5/ kv Various 34.5/13.8 kv expansions /80 6/83 Sob-total (Sabatatia.a) / 1ocludes ngin-aring and odoiniatrati-n coats plus physical.onntigencies but not pri-c onting-nies. 2/ Fron relocati-n; does not involva increase is system capa-ity.

40 ANNEX Page 2 of 4 Transformer )C Capacity (MVA) Coats 1 ' and Line illion Cr$ illion US$ Date of Installation Length (kh) Foreign Local Totai Foreign Local Total Co=enoenent Completion REGION (Cootinned) PONTA GROSSA (Continued) Line 230 kv lo-; Grds do Igoocu-Union do Vitonio /80 6/80 Areia-Guar-puana /82 6/ kv Ponta Oros...o-Co-r /80 12/80 Cstnro-Pirai do Slo /83 5/ kv Areie-G-arapuao-S-ocorro /80 3/80 Salto G-rnde do Iguacu-Uniao do Vit-ria /8g 6/8l Loron-jiro Sul-Garapu /83 6/83 Sub-totol (Lines) Sub-total (Subtroneeission) Distribution: Quantity Unit Feedern 63 km /80 6/83 Circuits, ne- 130 units /80 6/83 Circuits, inpronnoncts 200 units /80 6/83 Circuit ententinon 375 uits /80 6/83 Line not-ntions 445 kh /80 6/83 Street lights 11,250 onits /80 6/83 Transformers 41 MVA /80 6/83 Sub-total (Distnibuti-n) Totols (PONTA GR0SSA) LONDRINA - Substations kv Apucaro.., onpan-ion, lt stagn / /81 5/81 Apocarana, eopansion, 2nd stags /82 6/82 Lo-drina, e-ponsion lx /82 6/ kv 0 Arapongac, new 2x /82 12/82 Ivaipora, coo 1o /80 12/80 J-rdim B-ndoirante, ne1 lx /82 6/83 Rolando Davis, enpancion /81 12/81 Vera Cro /83 5/83 kv Varicus 34.5/13.8kV e-pansions /80 6/83 Linen Sub-total (Substotions) kv Apucarane-Inaiporo /80 10/80 Ariacanduva-Ar-p-ngas /80 11/80 I-oipcra-Pitanga /82 12/82 Londrina-Jardin Bandeirante /83 6/83 Sub-total (Linen) Sob-total (Subtransmissi-n) Dintribution: Quantity Unit Feedern 170 kh /80 6/83 Circuitn, ceo 245 units /80 6!83 Circuits, inpronvoente 280 -nits /80 6/83 Circuit e-t-nti-ns 670 uits /80 6/83 Lino xtnentions 385 kh /80 6/83 Street light 19,300 units /80 6/83 Tran-forners 81 MVA /80 6/83 Sub-totol (Distribution) Totals (LONDRINA) MAR0INGA Subtronsnissio-: - Sobstatio.s kv Conpo Murao, -ew 1o25 2 / /81 5/82 Moringa, oxp-nsicn 2x150, /82 12/ kv Cianocte, expansion 1o412/ /80 12/80 Goioere, neo I1202/ /82 2/83 Ipror, -ew 1n202/ /82 6/83 J-rdim Alvorada, e-pansion /81 12/81 Loada, coo 2x9.42/ /81 12/81 Mondoguori, new / /81 12/81 Umuaoroa, enpan-ion /82 3/83 1/ Includes engineering and administrotion custn pine physical conting-ncies but not price contingencies. 2/ Fron rel-oation; done not in-ol-e increase in syste- caponity.

41 ANNEX Page 3 of 4 Transformer C / Capacity (MVA) costsand Line million Cr$ million U5$ Date of Installatin Length (ki) Foreign Local Total Foreign Local Total Commencement Completion REGION MARINGA (Continued) (Continued) kv BarbosaFerraz, expansion /83 3/83 Mambore, expansion, Ist stage lx12.52/ /80 12/80 Mambore, expansion, 2nd stage /81 11/81 Ubirata, expansion lwi 2 / /81 5/81 - -_ kv Various 34.5/13.8 kv expansions /80 6/83 Sob-total (Substations) Lines kv6--- Ipora-Altonia /83 6/83 Sub-total (Subtransmission) Distribution: Quantity Unit Feeders 100 km /80 6/83 Circuits, new 260 units /80 6/83 Circuits, improvements 150 units /80 6/83 Circuit extentions 700 units /80 6/83 Line extentions 455 km /80 6/83 Street lights 18,750 units /80 6/83 Transformers 60 MVA /80 6/83 Sub-total (Distribution) Totals (MARINGA) CASCAVEL Subtransmission: _ Substations kv Cascavel, expansion, 1st stage 1x150-2 / /80 12/80 Cascavel, expansion, 2nd stage /83 5/83 Fo- do Iguacu, expansion, 1st stage lx41j/ /80 5/80 Foz do Iguacu, expansion, 2nd stage 2x752/ /82 5/83 Poto Branco 2x /82 11/ kv Ceu Azul, ne- lx /82 6/83 Cuaira, new Ix20 2 / /81 12/81 Palotina, expansion _ /83 2/83 Pinheiros, expansion lx /83 5/83 Toledo, expansion x /82 10/ kv _ Catanduvas, new lx20 2 / /82 6/83 Clevelandia, -ew 1x20j/ /82 12/82 Dois Vizinhos, expansion /82 6/82 Francisco Beltrao, expansion lx20,3/ lx /82 6/82 Laranjeiras do Sul, expansion /83 6/83 Marechal Candido Rondon, expansion lx202! /82 10/82 Quedas do Iguacu, expansion /81 12/81 Realeza, expansion / /82 11/ kv Various 34.5/13.8 kv expansions /80 6/83 Sub-total (Substations) Lines kv Salto Osorio-Cascavel /80 12/80 Cascavel-Palotina /80 7/ kv Umuarama-Palotina /82 2/83 Pinheiro-Ceu Azul /83 6/ kv Pats Branco-Palmas /80 12/80 Julio Mesquita-Catanduvas /83 6/83 Sob-total (Lines) Sub-total (Subtransmission) / Includes engineering and administration costs plus physical continge-cies but not price contingencies. 2/ From relocation: does not involve increase in system capacity.

42 ANNEX Page 4 of 4 Transformer Capacity (MVA) Costs-/ and Line ----million Cr$ million UJS$ --- Date of Installation Length (km) Foreign Local Total Foreign Local Total Commencement Completion REGION (Continued) CASCAVEL (Continued) Distribution: Quantity Unit Feeders 142 km /80 6/83 Circuits, new 275 units /80 6/83 Circuits, improvements 550 units /80 6/83 Circuit extentions 850 units /80 6/83 Line extentions 715 km /80 6/83 Street lights 18,650 units /80 6/83 Transformers 84 MVA /80 6/83 Sub-total (Distribution) Totals (CASCAVEL) General Plant Quantity Meters, single phase 317, /80 6/83 Meters, polyphase 96, /80 6/83 Metering transformers 17, /80 6/83 Metering auxiliaries: Phase shifting transformers and teat switches 11, /80 6/83 Sets /80 6/83 Miscellaneous Lot /80 6/83 Sub-total (Meters) Laboratory testing equipment Lot /80 1/81 System maintenance and operation equipment Lot /80 6/83 Line maintenance equipment Lot /80 1/81 Distribution energized line maintenance equipment Lot /81 6/83 Administrative support equipment (microfilming, computer printer and control equipment) Lot /80 9/80 Equipment for electromechanical shops Lot /80 3/81 Substation metering protection and control equipment Lot /80 3/81 Buildings to house above equipment Various /80 6/83 Sub-total (Other) Sub-total (General Plant) Consultants services (bid documents preparation and fabrication inspections) /79 3/81 Total (Project) / Includes engineering and administration costs plus physical contingencies but not price contingencies. 2/ From relocation; does not involve increase in system capacity.

43 ANNEX 4.3 COPEL SECOND POWER DISTRIBUTION PROJECT Procurement Schedule Completion Bid Advertisement Preparation of Issuance of Bid Bid Contract Expected Initial No. Quantities Publication Bidding Documents Bid Invitation Opening Evaluation Signing Delivery of Gouds Dates 1. Cables: ACS 2,090 tons ) 6/79 6/79 8/79 10/79 12/79 1/80 8/80 ACSR 1,552 tons Insulated aluminum 3,130 tons Galvanized steel 157 tons Copper 110 tons Insulated copper 71 km 2. Meters: Single phase 158,900 ) 6/79 6/79 8/79 10/79 12/79 2/80 7/80 Polyphase 46,400 Demand/Ammeter 2, Power transformers: 62 6/79 6/79 7/79 9/79 11/79 3/80 4/81 4. Distribution transformers: 3,500 6/79 6/79 8/79 10/79 12/79 1/80 10/80 5. Protection equipment: Circuit breakers 140 ) 6/79 7/79 10/79 12/79 1/80 4/80 10/80 Disconnecting switches 3,520 Potential transformers 210 Current transformers 910 Lightning arresters 1,240 Discharge counters Control equipment: 6/79 8/79 10/79 1/80 3/80 5/80 1/81 Reclosers 240 ) Voltage regulators 160 Capacitors 2, Relays (Miscellaneous) 6/79 9/79 11/79 1/80 3/80 5/80 1/81 8. Lightning arresters: 30,700 6/79 10/79 12/79 2/80 3/80 5/80 2/81 9. Switches: 6/79 10/79 12/79 2/80 3/80 5/80 12/80 Fuse cut-out 37,120 ) Disc 1,250 ) 10. Transformers: 6/79 11/79 1/80 3/80 4/80 6/80 1/81 Potential 2,260 ) Current 15,630 ) Metering 11,100 Meter sets Insulators: 91,000 6/79 11/79 1/80 3/80 4/80 6/80 1/ Energized line equipment (Miscellaneous) Lot 6/79 1/80 3/80 4/80 5/80 7/80 2/ Oil purifiers and special tanks Lot 6/79 1/80 3/80 4/80 5/80 7/80 2/ Meters (sectnd lot): Single phase 158,900 ) 6/79 3/80 6/80 8/80 9/80 11/80 4/81 Polyphase 46,400 ) Demand 1,650 ) 15. Cables (second lot): 6/79 5/80 7/80 10/80 11/80 1/81 9/81 ACS 2,090 tons) ACSR 1,530 tons) Galvanized steel 160 tons Insulated aluminum 3,130 km 16. Distribution transformers: 3,500 6/79 4/80 8/80 10/80 11/80 1/81 8/81 DIRECT PURChASES: Microfilming, computer printer and control equipment Lot /80 8/E0 Line maintenance equipment Lot /80 9/80 Substation maintenance and operation equipment Lot /80 10/80 Tests equipment Lot /80 11/80 Chemistry laboratory equipment Lot /80 11/80 Miscellaneous substation control equipment Lot /80 12/80 Distribution system maintenance and control equipment Lot /80 1/81 Metering laboratory equipment Lot /80 11/80 1/ End of month/year.

44 ANNEX COPEL SECOND POWER DISTRIBUTION PROJECT Cost of Service Forecast Remunerable Assets (In millions of June 1978 Cr-seiros) pl Cross Fixed Assets f/ 10,027 11,567 13,081 19,010 26,556 30,056 32,214 34,353 MNterials ond Sopplies W-rking Capital ci Subtotal 10,206 11,689 13,218 19,155 26,715 30,236 32,407 34,559 Accueclated Depreciation II 1,356 1,777 2,145 2,762 3,626 4,605 5,654 6,774 Amortizetion d/ Contribotiocs e/ ,242 1,509 1,787 2,076 Cost of Service Subtotal 1,856 2,468 3,049 3,915 5,036 6,282 7,609 9,018 Remunerable Assets 8,350 9,221 10,169 15,240 21,679 23,954 24,798 25,541 Return cn Resunerable Assets if ,017 1,742 2,168 2,395 2,480 2,554 Personnel - / ,073 1,137 1,212 laterial and Others 4/ Porchased Pwer i/ 757 1,062 1, ,140 Total 1,717 2,151 2,496 1,293 1,615 2,074 2,444 2,857 Depreciation i/ ,064 1,134 Rverslion and Globe 1 Guorsntee Quco- 3/ ,065 1,130 Fuel Cocnumption Account I/ Interest nd Taxes Exchonge Difference Cost of Seroice 3,279 3,872 4,413 4,606 5,591 6,511 7,109 7,737 Soles Reov-ue 2,977 3,522 3,890 4,490 5,152 5,975 6,652 7,405 Other R-venuen/ Receipts from Global Guarontoe Fund o/ Soles (GWh) 4,216 4,891 5, ,156 8,299 9,238 10,285 Average Price - Cr5$MWh Returo on Renurable Assets f/ o/ The oalue of gross fixed assets used to determioe renunerable investment for the year is the soeroge of the mcnthly balances with net additions te fised assets proratsd. The values of oross fined assets shtwn in this toble are therefore Iueer than tho-e in the balonce sheet (Annes 5-4) which reflect year end fienres. i/ Racer ila and supplies for opersticns hone been calculated us opproxinately 30% of the beginninr and year end values shoan in the balance sheet. of Th. allowance fur ncrkins capitol is Se- annually by DNAEE. The ftrecasts hboe been based on current regnlation- which define wcrking capital as the sun of the monthly average of cash plus ourrent assets less current liabilitieo. Negative values are set at -er. d/ The amortieationresere isno lcn1 er provided for although the roeaining bolano- is subject cc monetary correction. / In socordancewi th esisting regulations, oustomer contributions in aid o construction are nout remunerable. / Enoept for 1981, the forecasts have been based on COPEL earning the statutory minimum 10% return on remunerable invettment. With the entering into servic of the Foz-do-Areia hydro plant (ehich could meault in anear dobling of COPEL's reounernhlesssecs frcn the 1978 value) COPEL would be able to exceed the statutsry mieinum return as-aning enisting tariff level- are maintained in real term.. COPEL has forecasted its labcr related expenses by correhlting tbe number of employees with the number of -onnumers and several physical variables of its system (no. of grid circuits, kh of lines, MVA of substaticcs). The fore-cs s recont in a 77. average annual increase in labcr costs for growth in personnel ax well as for wage increases due to senicrity, etc. This rote cf increase is reasonable. Actual and f-e-cast somber af emplypee. and unit lahbr -cots are as follow: Year Ns. of employees 6,382 6,656 7,025 7,301 7,671 8,044 8,348 8,64 Av. labor.. st (CrS000) h/ Materials and other e-pensee have been forecast by correlation with the physical variables in the preceding footnote. m i/ The forecast of purchased ener8y has been derived frcm the market fcrec-ste and energy balance (see Annex 3) ossumine tariffs in effect as of June COPEL purchases over 96% of its purchased energy fron ELETROSUL. It purchases the remainder from forcee Lu de Irati S.A. (a sma11 private utility in which the stat f Parana has some interest), CESP and the Adninistra-icn Nacional da Electricidad (ANDE), a utility in neaihbbring Paraguay. if/ Dpr-ciation rates used in the for-ests are those contained in the guidelines issued by DNAEE. The oaximm depreciativn rates currently allowed by DNAEE are 37 for on- thernal plant, 4. for distribution plant and 5% fir therml plant. As is the case with additions to fixed assets, depreciatios on assets entering into service duins the year are pro-rated. k/ As di-sconed in para thy Bra-ilian poer tariff legislation includes a provision for revereion reserve used so co-pe-sate utilitie whose assets are taken ever by the gvnernent. Currently, the sesen qu-ta for the utilities is set up to a maxinum of 3% of their rever-ible fieed assets (defined as gr... fixed assets Ease extsnr contribut ons in aid of construction) The legislation also has a provision fur a Glohbl Guarantee reserve- a tariff equalization fund. Fr 1981, hen COPELRI earnings are espected to exceed the statutory milnimum, the comined reversion/clobal Guarantee quota was calculated at the masimum legal limit of 57 of ie reversible ssnts (3. becin for rever-io and the remaining 2% for the Global Guarantee Fund). For other forecast years, the combined quota eas set at the 1978 level of / COPEL's cntribution tc the fuel consumption occount is set by the COI in proportion to its rket. For the forecast pericd COPEL's contribution to this acconct has been assumed to grox in proportion with the mar-et gro-th. o/ Per DNARE regalstion, beginning in 1978, tth aceumulated depreciation.ed in the cf - lti f the tt s-ci-e i the year end value. This differs frs the treatment of gexs flied assets in foonote a/ sabve. n/ Other revenues are niecellaneous non-operating revenues conis-ting principally of penalties for late payments and charges to the telepho-e company for the use of poles owned by COPEL. 2/ The values of the transfer frum the Glohal Guarantee Fund are those necessary to maintain the statutory mininum 10% return on re-onerable assets. C OPEL's actual 1970 cot of service calculation (ohich is subject to approval by DNAEE) is e.e.rally consistent with the forecast, except as noted in Annec 3, Note 5/ and A-nee 5.2, NoEt g/

45 ANNEX 5.2 COPEL SECOND POWER DISTRIBUTION PROJECT Actual and Forecast Income Statements " In Cr$ million ACTUAL (CoUII PRInnS) FORECAST (IN JUS 1978 PRICES) L/ Sales Revenue 928 1,307 2,072 2,977 3,522 3,890 4,490 5,152 5,975 6,652 7,405 Other Revenue Total Operating Revenue 941 1,336 2,ii6 3,041 3,613 3,990 4,606 5,285 6,129 6,823 7,596 Operating Costs Labor ,073 1,137 1,212 Materials Other Operating Costs Subtotal Operating Costa ,089 1,188 1,274 1,381 1,502 i,6o4 1,717 DepreciAtion ,064 1,134 Purchased Power ,062 1, ,140 Other Operating Expense SC Total Operating Expense ,454 2,105 2,563 2,964 1,963 2,537 3,117 3,564 4,053 Operating Income ,050 1,o26 2,643 2,748 3,012 3,259 3,543 Receipts from GG Fund Non-Operating Income _/ (41) (35) (215) (44) (44) (44) (44) (44) Reversion (102) (163) (239) (339) (387) (432) (901) (886) (999) (1,065) (1,130) Income Before Interest and Taxes ,698 2,124 2,351 2,436 2,510 Accrued Interest , 909 1,106 1,226 1,180 1,240 1,14,036 Less Interest Charged to Constructioni/ , Net Interest Expense ; ,062 1,1'1 1, Provision for Income Tax c/ Net Income ,247 i,oo6 1,i68 1,307 -,480 Less Participation _d Net Income (after participation) , ,040 1,176 1,335 last Period Balance p 1,418 1,673 1,995 2,354 TOTAL y06 1,063 1,290 1,981 2,301 2,713 3,171 3,689 Appropriations Dividends e/ legal Reserve L/ Subtotal Net Income End Balance ,4tl8 1,673 1,995 2,354 2,759 a/ This account represents miacellaneoos income and expenses unrelated to operations such as interest on rever-sin reserve, losses (gain) on disposal of fixed assets, earnings on short term investments, etc. In 1980, it includes loss on flooding of the Salto Grande do Iguacu power plant. b/ In accordance with existing legislation (Decree 1506/76) interest charged to construction has been cllculated as io0 of work in progress (pro rata tempore). c/ COPEL is subject to the payment of income tax at the rate of 6% of net profit after deducting interest charged to construction and employee profit sharing (with the latter estimated at about the equivalent of 1 months payroll) d/ Elployee participation in profit sharing is estimated at the equivalent of 1$ months payroll. i/ Beginning in 1978 dividenda are charged to income during the period they are declared rather than a year later as was the former practice. Therefore in 1978 the dividend charged to income includes about Cr$200 million declared in Dividends are declared at the rate of 6% and 10% respectively o paid-in common and preference shares respectively. As shown in Annex 5.3, EI1TRORRAS and the state and municipal governments of Parana would reinvest moat of their dividends in COPEL. f/ The annual appropriation for the legal reserve is 5% of net income after participation and taxes. L/ Audited results for 1978 are gener-lly close to the forecast, with the exception of purchased power, depreciation and receipts from the Global Guarantee Fund, which were somewhat higher and interest expense, which was lower then forecast. The net effect of these changes is to improve the 1978 financial performance with respect ti that which was forecast.

46 ANNEX COPEL SECOND POWER DISTRIBUTION PROJECRT Forecast Source and Appllcations of Funds SOURCES OF FUNDS INTERNAL CASH GENERATION In million of June 1978 Coss.iro Total Total 1978 _ Net Inc. fef. Interest and T0x-c ,698 2,124 2,351 2,436 2,510 6,975 7,862 Depreciation ,064 1,134 2,940 3,324 Others 0/ Gross Internal Gosh Generation 1,176 1,323 1,521 2,388 3,062 3,402 3,558 3,702 10,373 11,69n DEBT SERVICE AND OThER DEDUCTIONS Anrictooo Deht ,9,5,5,2 Interest Fold' h 1, 106 1,7381 1,18 0 1,240 1, ,75, Groso Debt Sernios 1,272 1,387 1,709 1,890 0,140 2,364 2,332 2,292 6,103 9,490 (-) In-terss Charged to Gonetruotion , ,044 2,801 Net Deht lemvice ,O65 2,022 2,235 2,228 2,189 6,048 6,689 Olnidends Payahle ,838 2,083 (-) ceinoested 5/ ,762 1,999 Net Dloidends Statutory Participation Tones - - _ Total DOdoctl..e ,373 2,205 2,457 2,473 2,456 6,70C 7,j52 NET INTERNAL CASH GENERATION o6 1, ,085 1,246 3,667 4,248 G onao,e contrihbtions for construction d/ ,014 EQUITY INVESTMENT State 4 Municipal Gov't. from.einonstoent of Sole Too c/ ,935 2,285 For Itoipa - ERloted oorh For t do -rela (Stoe Go't.) From Manioipoliti_e Fron Others I/ Call of Capitol - ELETROBRAS e/ _ - - _ BORROWING Totol Equity Invoetnent 856 1,065 1, ,884 3,952 Foe do Arolo - IDB BADEP ELET O'RAS 1,052 1, ,058 Fed. Agoncies Other Others ELETROBRAS/EXIMBANK IBRD I (Loan 1257-DO) ELETROBRAS (urol El-ctrifi-tin f/ ZOO IBRD II jes I; 04 Other A/ Other 7Proposed cofi.onciog) k/ Totol Borrootios 2,536 2,875 2,052 1, ,711 7,586 TOTAL SOURCES 3,825 4,665 3,978 3,361 2,493 2,303 2,328 2,577 12,135 16,80O APPLICATIONS OF FUNDS CONSTRUCTION EXPENDITURES F.o do Arela Project 1,839 2, ,138 3,339 DIctrbiu-ion Projoct (IBRD BR) 1,004 1, ,038 Outrl trtifiotio ,000 2,330 Other -rke ,516 1, ,196 Ne- Frograoo OIRE II - - 1,435 1,118 1, ,068 5,068 Future Projects (to be defined) ,000 ',000 Interest Charged to Constructio , ,055 2,801 OTHER APPLICATIONS Totol Construction 3,735 4,622 3,594 3,420 2,456 2,280 2,295 2,539 12,150 16,772 Increase in Op-ratioool Gosh (9) (62) (40) (9) Cuotomer REce-vablen Other R-cel-ohlna nocercois ond Supylloi (94) (1) Other Net Applioationa (72) Increase in Accounts Payable (43) (379) Oth-r Current Liabiliti-a TOTAL OThER APPLICATIONS CGoh (dsfinit)/uetplus - - (141) (129) (124) 12 (8) (390) (382) (382) 4 TOTAL APPLICATIONS 7,825,665 3,978 3,361 2,4y3 2,30S 2,J27 2,577 12,135 16, Gonsists- - aolny of losses on -ole of fined a.sets. En 1980, tho Valno shoon refors to loso of the Salto Grands do Iguacu po-er station uhich oill be flooded ohen ths Foe do Areia hydro po-er atoti-o enters inno s-rvic-. h/ Di-idenda fron ELETROBRAS ood the stats government are assumed to be reln-sstd. The forecasts assume thot the stats ond ounicipal governments.ould continos to Invest thlir share of the sole ton in C0P1L in occordance oith eoioting dispositions. Al In accordonce i t existing practice tho forecosts aoo,mn that ohout 407. of tho coot of investments Inrural electrification ond about 57. of the cost of distribhtion invesmoents ould be contributed by consumers. Municipalities are assuned to contributo Cr$40 million onnually toa.rdo the rorol elotnrification progrtm. e/ Financial arrangements consected oith the Foe do Ar-i project pronide for ELETROBRAS to maintain its shore of COPELts equity at 157. during the construction of the hydro project. The call of capitol fran ELETROBRAS, necessary to naintain this 157. (after reinneoten-t of dividends), Is reflected In the forecants. f/ The on-go log rural elecirifictioc prograo is opproved on an annual hausi by ELETROBRAS which cootribhtes 607. of the financing. COPEL had estimoted an annual inoest-ent progrtm In coral eloctrificti-on of Cr$500 million ohich I modest. It Is expected that COPEL would foroulate ano epaded rural olectrificatlin program Consists of loans contracted but not folly drown down from the City Blok, Bank of Nova Scotia, FINAME and FINEP. h/ p-c do istereust.- reversr reserve 'Cr7$14 ni-ioc onnoally) i/ Gonsiscs of relohurconent fran the St.te of Parona highway dopar-tent for construction of the Foe do Arla - G-arapuava rod.,/see nne. 2, Note 5 Et 1/ Terms assumed are: 10 years maturity (Including 5 of grace) and interest at 127..

47 ANNEX 5.4 COPEL SECOND POWER DISTRIBUTION PROJECT Actual and FPseac.t Balance Sheets in CS million ACTUAL (CURRENT PRTCES) FORECAST (IN JUNE 1978 PRICES) / FIXED ASSETS Gross Fccnd Assets in Operation a/ 3,536 5,112 7,598 10,837 12,320 13,864 24,179 28,955 31,179 33,271 35,456 Depreciation and Anortioation h/ ,578 1,946 2,313 2,930 3,794 4,773 9,822 6,942 Net Fined Assets in Opertion 3,138 4,1i7 6,62'0 9,295i 1U,374 11, , ,494 27,449 28,0214 Works in Pro8CS 916 2,U11 3,472 6,23 9, ,2 19 1,UU ,U28 Works in Progreos (Fotsre Projects) ,000 1,179 1,382 Total Ficed Assets 4,054 6,528 10,092 15,472 19,658 22,933 25,663 27,180 28,408 29,580 30,924 INVESTMENTS CURRENT ASSETS Cash and Banks of Account Reocivable Custoners (Net) d/ ,016 1,131 Other Akcounts Rece-iable Maceri I cod Supplics e/ Total Current Assets ,240 1,383 1,9570 1,719 1,738 1,957 2,102 2,271 2,458 OTHER ASSETS Total Assets 4,964 7,495 11,635 17,255 21,582 24,885 27,634 29,370 30,743 32,084 33,615 EQUITY Share CopiEa f 1,600 2,122 2,788 3,741 4,961 6,145 7,197 8,193 9,342 10,635 12,088 Reserves end Surplus FA 1,134 1,764 2,961 4,482 4,781 5,032 1,772 6,166 6,744 7,394 8,104 Total Equity 2,734 3,864 5,749 8,223 9,742 11,085 12,772 14,067 15,590 17,300 20,192 LONG TERM DENT hi/ 1,636 2,412 3,998 6,481 8, ,485 10,224 9,534 8,580 7,706 CURRENT LIABILITIES Current Portion of Long T-rn Debt , ,254 1,174 Accounts Fayhble i/ ,007 1,139 1, Others I/ Short Tern Debt Total Corrent Liubilitirs ,229 1,721 2,075 2,401 2,868 3,308 3,576 3,878 3,095 OTHER LIA8ILITIES k/ ,011 1,257 1,509 1,771 2,043 2,326 2,622 Total Liabilities and Capital 4,964 7,495 11,635 17,255 21,582 24,885 27,634 29,370 30,743 32,084 33,615 a/ Thr balunce sh-on for 1078 includes nonetury corrnction for Oncicutic in Jtnuary 1978,Decree - La 1598 of Dccer-ee 26, 1977 requires Br-clian otlittes to keep two cots of Sake for fn aed es--n asd on oct nius nonetee carrt tionts end the other based on constent (ORTN) currency units. The ORTN b.esd aci nne arc then concerted to current cr_eairos et year end to reflect pciei ch-nges during the year. This nethod of accounting for monetary correcteon differs fron the pre practice under whcht the -- netary correction for any year cat reflected in the hooks witha one-year lug. Monetary coereotion foe 1978 is estimatad to increase COPEI's total fied assets as of Decemobr 31, 1978 by otsca Hnowver, this adju-t-ent is not reflected in the forenasts chich are bhsed on constant June 1978 pyeen. FPrencst changes in fined unsetn, uccunulated docrociation and work in prooress ore shoot in Ann b/ Amortiztion isnto longer proided for aithtogh the existing reserve is still ihbject to monetary correction. The blotnce as of the end of 1978 can Cr$293 million. cf In accordance with pact caperlence, COPEL based its cash forecast on the requiremen_s to cover the equivalent of 10 days of cash operating e-pens-s cod dobtereoice. d/ Costoner accounts receoi Iabe err furnosst to decline fron the equivalent of 68 days sates in 1978 to 55days sales In The appaeent Increase It collection period fran 67 days in 1977 to 68 days in 1978 is doe to. cehnge in accounting practice (Inclasion of unbilled revenue). of Up no 1980, feke the Foe do Aela enters in to operation, eaterials and eupplies was es tiated at 3.5% of genss fixed assets in operation chich Is coneietent with COPELrE history. After 1980, eoterials and supplies tee estinated to bs 2% of grace fiord core. f/ COPELt's shkreholder as of Decenber 31, 1977 cere as foliawe: C$ milli ~ Co-n % Preferred % ToEtd % State of Parnan ELETROBRAS Fondo de Deseccoltieento Eonoulco Others do P.arun S 2 Bearer Shares - I T otal Preferred Stock, both nminative and hearer, h.s no vating rights but Is entt-led tc a mininun dividend of 10% before any dicidend nay be paid the consen ctock. The shores 'hkn- Include about Cr942 dillon of tupital su-crihed but nor psid in. f/ Includes the legal reserve ap priated at 5T. of net intone after tunes and interest (1978 balance Cr$451 nilioc). Also iicluded is ESe reserve for future capital increase wlth a 1978 balance of CrS3942 2illioo. h/ See Annex 5.7 for details on debt outstanding on Decehber 31, Foreign cuerency loans are stated in c-n-il-os at the ochkange rates in force -n the balunce sheer date. Local coer-no poans (except foe ELETBOBBAR loans fi r era Ielectrification) see subject to -onetary correction. The net effect of the.n.etary re-tatenett of utility plant, accu_ulated dopreciltion, an0rtioutian and reve- slon reserve and long tera debt Is credited Eu the reserve for future c-pital increase. if PFojected through 1984 as one.. nth of co..truction enpenditures le-cludin interest) and puechased pocer, plus an 0 ancuna for the paybleaess od to grow at 15% P.a. fran Cr2458 nillion I Pf roectted aa ace conth of aic tax collecticce of reenues ) plus one q-arte- of accrued interest plns in aonnt fee other curent Iibiliti.. a...d to gina at 152% p.a fron Ce$ 2 91 nilici ton kf Consists neatly of cot ster toner ibtlont in aid of construntron. I/ The audited balonce sheet for 1978 differs coosiderably fera the forecast b-cauee of the change eplained in Note af nd I lge n o, of eeciass ifications required and-eraew chart of accounts prescribed by NAE.E.

48 COPEL SECOND POWER DISTRIBUTION PROJECT Estimated Debt Amortization Schedule In I. Millions of June 1978 Cruzeiros EXISTING DEBT FOREIGN CURRENCY LOANS - NORMAL PROGRAM Agency for International Development (AID) Intera-erican Development Bank (IDB) B IBRD Loan 476-BR IBRD Loan 1257-BR Through ELETROBRAS - IDB EXIMBANK AMFORP Nova Scotia Co-f inancing Commercial Banks Suppliers _ - _ - SUBTOTAL Foreign Debt (Normal Program) FOREIGN CURRENCY LOANS- FOZ DO AREIA PROGRAM Interamerican Development Bank (IDB) 300/OC-BR Suppliers SUBTOTAL Foreign Debt (Fo- do Areia) f TOTAL FOREIGN DEBT LOCAL CURRENCY LOANS - NORMAL PROGRAM Through ELETROBRAS Calxs Economica Federal - CEF BADEP/FINAME Banco do Brasil S. A Others SUBTOTA Local Debt (Normal Program) LOCAL CURRENCY LOANS - FPO DO AREIA PROGRAM ELETROBRAS Repassed from BNH badep/finami/finep SUBTOTA Local Debt (Fun do Areia) TOTAL LOCAL DEBT TOTAL EXISTING DEBT ,039 1,004 PROPOSED DEBT - NORMAL PROGRAM IBRD ELETROBRAS - Rural Electrification a/ _ Others to be negotiated I 109 S - _- _ - - TOTAL PROPOSED DEBT (Normal Program) GRAND TOTAL ,124 1,183 1_254 / Amortization payments on bhrro-ings from ELETROBRAS for rural electrification, empress d in constant prices, are expected to be negligible as a resalt of the absence of monetary correction on these loans and their estended grace periods (5 years) and maturities (15 years). œs r t

49 * a COPEL SECOND POWER DISTRIBUTION PROJECT Estimated Interest Schedule EXISTING DEBT FOREIGN CURRENCY LOANS - NORMAL PROGRAM _-_ In Millions of June 1978 Cru-eiro Agency for International Development (AID) Inter-merica- Development Book (IDB) IBRD Loas 476-BR IBRD Loan 1257-BR Through ELETROBRAS - IDB EXIMBANK AMFORP Nova Scotia - co-f inancing Co=erciol Banks Suppliers SUBTOTAL Foreign Debt (Normal Program) FOREIGN CURRENCY LOAN - FOZ DO AREIA PROGRAM Interamerican Developme-t Bank (IDB) 300/OC-BR Suppliers SUBTOTAL Foreign Debt (FPu do Are-a) TOTAL FOREIGN DEBT LOCAL CURRENCY LOANS - NORMAL PROGRAM Through ELETROBRAS Caixa Economica Federal - CEF BADEP/FINAME Banco do Brail S. A Others SUBTOTAL Local Debt (NormaI Program) LOCAL CURRENCY LOANS - FOZ DO AREIA PROGRAM ELETROBRAS ELETROBRAS Repassed from BNH RADEP/FINAME/FINEP SUBTOTAL Local Debt (Foe do Are-a) TOTAL LOCAL DEBT TOTAL EXISTING DEBT PROPOSED DEBT - NORMAL PROGRAM IBRD ELETROBRAS - Rural Electrification 2/ Others to be negotiated c o 1 o TOTAL PROPOSED DEBT (Normal Program) GRAND TOTAL ,Z ,185 1, Interest financed by loans Interest not financed by loans ,242 1,226 1,135 1,022 / Since ELETROBRAS loans for RMral Electrification are expected to o.ntinue to be made at 12% nominal interest in oroneiros, interest payments in constant prices have been computed on a balance equal to the previous year's balaoce deflated by 25%, plus one-half of the year's disbursements. o Interest on IDB and ELETROBRAS loans for Fo- do Areia are financed during the construzti,n period. 'a

50 COPEL SECOND POWER DISTRIBUTION PROJECT Long-Term Debt Outstanding at December 31, 1977 (M) (Cr$ millions) Date of Repayment Annual T 0 T A L FOREIGN LOANS Loan Period Interest Rate Currency Outstanding Balance Agency for International Development - AID US$ Inter-American Development Bank - IDB US$ and YEN 52.9 IDB Loan 300/OC-BR Various 24.3 IBRD Loan 476-BR US$ 93.2 IBRD Loan 1257-BR Various 44.5 ELETROBRAS Repassed from IDB US$ 0.7 Repassed from IDB US$ Repassed from AMFORP and others 1965/ US$ 51.5 Repassed from EXIMBANK (2) US$ 64.6 Repassed from AID 1967/ US$ 1.0 Repassed from EXIMBANK (2) US$ a, Commercial Banks 1975/ (1) US$ Suppliers Credits DM 3.8 Total Foreign Debt 1,104.3 FINANCING IN LOCAL CURRENCY ELETROBRAS Own Resources various to 12.0 Cr$ 2,503.4 Repassed from Banco Nacional de Habitarao (BNH) Cr$ Repassed from BNH Cr$ 93.5 Banco Nacional de Desenvolvimento Economico - BNDE () 9M5 Cr$ 14.3 Caixa Economica Federal - CEF Cr$ 29.9 Banco de Desenvolvimento (Parana) (BADEP) various " and 9.0 Cr USAID Cr$ 3.4 Inst. Nacional de Reforma Agraria (INCRA) various Cr$ 1.1 Banco do Brasil S. A Cr$ 66.4 Total Local Debt 3,245.0 Total Long-Term Debt 4,349.3 Less: Current Portion Long-Term Debt (net) 3,998.1 (1) 1.5% to 2.25b over LIBOR. Provided by First National City Bank (USS 3 m); LLOYDS Bank International (US$ 7 m), Banco Nacional, Banco Real, The Chase Manhattan Bank (US$ 5 m each); Bradesco, Banestado (US$ 2 m each); and Banco Bamerindus do Brasil (US$ 4 m). (2) USS 3 m as in (1) and US$ 3 m at 0.75% over prime rate. (b -

51 t ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ COPEL SECOND POWER DISTRIBUTION PROJECT Statement of Changes in Net Fixed Assets In Millions of June 1978 Cru7eiros W GROSS FIXED ASSETS Starting Balance 7,598 10,837 12,320 13,864 24,179 28,955 31,179 33, Revaluation 2, Additions 1,316 1,551 1,896 10,388 4,850 2,297 2,165 2,258 Retirements (79) (68) (352)3/ (73) (74) (73) (73) (73) Ending Balance 10,837 12,320 13,864 24,179 28,955 31,179 33,271 35,456 DEPRECIATION AND AMORTIZATION Starting Balance 978 1,578 1,946 2,313 2,930 3,794 4,773 5, Revaluation Charged in year ,064 1,135 Retirements (19) (16) (69) (15) (15) (15) (15) (15) Ending Balance 1,578 1,946 2,313 2,930 3,794 4,773 5,822 6,942 WORK IN PROGRESS Starting Balance 3,472 6,213 9,284 11,382 3,672 1,219 1, Revaluation _ Construction Expenditure 3,250 3,876 2,990 1,874 2,279 1,951 2,015 2,229 Interest Charged to Construction , Retirements J/ (199) - Additions to Plant in Operation (1,316) (1,551) (1,896) (10,388) (2,297 (2,165) (2,258) Ending Balance 6,213 9,284 11,382 3,672 1,219 1, ,028 GRAND TOTAL 15,472 19,658 22,933 24,921 26,408 27,408 28, a/ Includes retirement of Salto Grande do Iguacu plant. b Includes portion of the Guarapuava/Foz do Areia highway taken over by the State Highway Department.

52 COPEL SECOND POWER DISTRIBUTION PROJECT Performance Indicators Actual Estimated Forecast Service Net Generation, own plants (GWh) 2,657 2,076 1,460 2,240 2,875 6,882 7,100 7,100 7,100 7,100 Energy purchases (GWh) 631 1,091 2,985 3,247 3, ,193 3,244 4,417 Losses (% net generation and purchases) Sales, total (GWh) 2,888 3,540 3,973 4,891 5,404 6,235 7,156 8,299 9,238 10,285 Number of Consumers, total 641, , , , ,993 1,055,268 1,157,629 1,283,810 1,390,366 1,516,423 Cumulative connections in project period of: Rural consumers 1/ ,000 28,300 43,700 50,000 1/ N/A N/A Low income households ,600 25,200 38,000 45,000 1/ Number of employees 6,077 6,029 6,382 6,656 7,025 7,300 7,670 8,045 8,350 8,635 Consumers per employee v 2. Financial Rate of return (.) 2/ Operating ratio (%) 3/ Average revenue (US cents/kwh) 4/ Interest coverage by income before initerest (times) 5/ Debt service coverage (times) 6/ Long-term debt equity plus long-term debt ( Total liabilities/net fixed assets (7) Net receivables (days) 7/ Depreciation (.) 8/ / Mid-year figures (Project completion, 6/30/83). 2/ Operating income as a percentage of average net fixed assets in operation (excluding reversion and transfers). 3/ Operating revenue (including transfers from Global Guarantee Fund) divided by total operating expenses (including depreciation). 4/ From 1978 onward, in constant June 1978 prices. 5/ Income before interest and taxes divided by accrued interest (see Annex 5.2). 6/ Gross internal cash generation divided by the sum of amortization and interest not financed by loans. 7/ From 1978 on, receivables include unbilled revenues (see Annex 5.4). 8/ Percentage of average gross fixed assets in operation. I.

53 COPEL SECOND POWER DISTRIBUTION PROJECT Cost and Benefit Streams - Rate of Return 1/ Operation and Maintenance2/ Investments- Operation andmaintena Purchasedd41 Total Year Generation Subtransmission Distribution Other!/ Sub-total Generation Subtransmission Distribution Energy Sub-total Costs I. COSTS (in million US$) Increase in Total Increase in Sales Sales through Project Total SalesS/ Sales over 1979 Over Previous Year Benefits./ (GWh) (GWh) (GWh) (7) (GWh) US$ x 106 II. BENEFITS , ,235 2, ,156 2, ,299 4,083 1, ,238 5, ,285 6,069 1, , ,262 7, , / Net of taxes and duties. Detail of costs appears on Annex / Associated only to program facilities and based on COPEL's annual costs by categories shown. 3/ General plant, e.g. buildings, laboratory equipment and new equipment for system operation and control. 4/ Based on average rates in 1978 charged by ELETROSUL, the principal (95%) bulk supplier; purchased amount proportionate to supply by project. 5/ See forecast appearing on Annex 3. Growth rate after 1985 at 9.5% p.a. / Based on average COPEL tariff at year-end 1978 (US$0.04, equivalent), plus the sole tax, estimated at 16.5% of the average retail tariff.a

54 _O ANNEX 7 COPEL SUBTRANSMISSION AND DISTRIBUTION PROJECT Selected Documents and Data Available in the Project File A. REPORTS AND STUDIES ON THE SECTOR A.1 Balanro Energetico Nacional , by the Ministry of Energy and Mines of Brazil. A.2 Portaria (Regulation) No. 046 of April 17, 1978, which establishes certain electricity service reliability standards (outages). A.3 Portaria (Regulation) No. 047 of April 17, 1978, which establishes certain electricity service standards (voltage regulation). B. REPORTS AND STUDIES ON THE PROJECT B.1 COPEL Subtransmission and Distribution Program, dated September 1978 and prepared by COPEL (4 volumes). B.2 COPEL Subtransmission and Distribution Program ( ) dated September 1978 and prepared by COPEL (5 volumes). B.3 Subtransmission and Distribution Program, Participasao de Materiais no Programa, dated October 1978 and prepared by COPEL - a comprehensive study on the breakdown of local and foreign costs of the project (54 pages). B.4 Special Reports and Documents - Relatorio sobre a SituaqS'o dos Transformadores no Sistema COPEL - Analise das Unidades de Reserva, dated May 6, 1977 (Study on Transformer Conditions - Analysis on Reserve Capacity (24 pages). - Relatorio sobre a Situargo dos Transformadores no Sistema COPEL, dated June 30, 1978 (Study on Transformer Conditions - 15 pages). - AplicaqZo do Terminal IBM-3270 a Distribuigao of November 1978 (Computer program for distribution planning - 21 pages). - Posiao de Entrega de'materiais e de Baixa Renda, dated November 1978 and prepared by COPEL (Status on Delivery of Materials and Low Income Service Program - 60 pages). C. WORKING PAPERS PREPARED BY BANK STAFF C.1 Miscellaneous working papers, covering cost analysis, economic comparisons, and financial analysis, September March 1979, by C. F. Mena (Power Engineer, LCPEl)and P. Owusu (Financial Analyst, LCPE1); bound volume.

55 EIRTSA-253 MET1 R0POLITAN 4 a ~ ~ ~ BRA PEEk 0 / "-~~~~~~~~~~~~~~~~~~~~~~~~~~~~. 0TOOlN ( dsor " ",. V Slra STATE OF PARANA- POWER SYSTEM IBRD Pl o/aiono \ JtnFo ectservice AREA AND MAIN INSTALLATIONS COMPANHIA PARANAENSE DE ENERGIA ELETRICA-COPEL MARINGA ON ~~~~~~~~~~~499 33,9 0,03-3,9393,3) '3, EXISTIN NOM ' " OT(\S-X> 93.J SU\aRN j/ee ) A7 d n-/ < S J1 (\ ar Idrda dn Bu ' I 39O9333bat T 09-1 I C0-L trz t>g -- ~~~~~~~~~~~ <, / ~~~~~PONTA GROSSA REGION Frnu tl < (0 < 1 - ~~~~~~~~~~ == u 0 X / / f / / a s zess ' CU~~~~~~~~~~~~~~~~~~~LRITIBA REGION ' g r,ov9f3 < + o \ e ond ) ; 2 > C 5 2 \ 12~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~0 9/ / \K~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~p " ]a >; y.t_ ' I T1-4 H; RT Anso Z L F- o-- - J t X \,t \ S A NT < \. 5C A T A R I N Ao f MF;\ N 0 E