20-F 1 elpform20f_2014.htm FORM 20-F elpform20f_2014.htm - Generated by SEC Publisher for SEC Filing

 

As filed with the Securities and Exchange Commission on April 28, 2015

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 20-F

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2014

Commission file number: 001-14668

                                                

COMPANHIA PARANAENSE DE ENERGIA – COPEL

(Exact Name of Registrant as Specified in its Charter)

 

Energy Company of Paraná

(Translation of Registrant’s Name into English)

The Federative Republic of Brazil

(Jurisdiction of Incorporation or Organization)

Rua Coronel Dulcídio, 800

80420-170 Curitiba, Paraná, Brazil

(Address of Principal Executive Offices)

Luiz Fernando Leone Vianna

+55 41 3222 2027 – ri@copel.com

Rua Coronel Dulcídio, 800, 3rd floor – 80420 – 170 Curitiba, Paraná, Brazil

(Name, telephone, e-mail and/or facsimile number and address of company contact person)

Securities registered or to be registered pursuant to Section 12(b) of the Act:

 

Title of Each Class

Name of Each Exchange on Which Registered

Preferred Class B Shares, without par value*

New York Stock Exchange

American Depositary Shares (as evidenced by American Depositary Receipts),

each representing one Preferred Class B Share

New York Stock Exchange

 

* Not for trading, but only in connection with the listing of American Depositary Shares on the New York Stock Exchange.

Securities registered or to be registered pursuant to Section 12(g) of the Act: None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None

Indicate the number of outstanding shares of each of the Issuer’s classes of capital or common stock as of December 31, 2014:

145,031,080 Common Shares, without par value

380,291 Class A Preferred Shares, without par value

128,244,004 Class B Preferred Shares, without par value

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes x   No ¨

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

Yes ¨   No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

Yes x   No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

N/A

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Securities Exchange Act of 1934. (Check one):

Large accelerated filer x   Accelerated filer ¨   Non-accelerated filer ¨

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

U.S. GAAP               ¨                             IFRS         x                            Other ¨

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

N/A

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).

Yes ¨  No x

 

                                                                      


 

 

Table of Contents

Presentation of Financial and Other Information

2

Forward-Looking Statements

2

Item 1.

Identity of Directors, Senior Management and Advisers

3

Item 2.

Offer Statistics and Expected Timetable

3

Item 3.

Key Information

4

Selected Financial Data

4

Exchange Rates

6

Risk Factors

7

Item 4.

Information on the Company

17

The Company

17

The Brazilian Electric Power Industry

46

Item 4A.

Unresolved Staff Comments

60

Item 5.

Operating and Financial Review and Prospects

60

Item 6.

Directors, Senior Management and Employees

80

Item 7.

Major Shareholders and Related Party Transactions

86

Related Party Transactions

88

Item 8.

Financial Information

88

Legal Proceedings

89

Dividend Payments

90

Item 9.

The Offer and Listing

93

Item 10.

Additional Information

95

Memorandum and Articles of Association

95

Material Contracts

97

Exchange Controls

97

Taxation

98

Dividends and Paying Agents

104

Documents on Display

104

Item 11.

Quantitative and Qualitative Disclosures about Market Risk

104

Item 12.

Description of Securities Other than Equity Securities

104

Item 12A.

Debt Securities

104

Item 12B.

Warrants and Rights

104

Item 12C.

Other Securities

104

Item 12D.

American Depositary Shares

104

Item 13.

Defaults, Dividend Arrearages and Delinquencies

105

Item 14.

Material Modifications to the Rights of Security Holders and Use of Proceeds

105

Item 15.

Controls and Procedures

105

Item 16A.

Audit Committee Financial Expert

107

Item 16B.

Code of Ethics

107

Item 16C.

Principal Accountant Fees and Services

107

Item 16D.

Exemption from the Listing Standards for Audit Committees

108

Item 16E.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

108

Item 16F.

Changes in Registrant’s Certifying Accountant

108

Item 16G.

Corporate Governance

109

Item 17.

Financial Statements

110

Item 18.

Financial Statements

110

Item 19.

Exhibits

110

Technical Glossary

111

Signatures

117

 

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PRESENTATION OF FINANCIAL AND OTHER INFORMATION

In this annual report, we refer to Companhia Paranaense de Energia ‒ Copel, and, unless the context otherwise requires, its consolidated subsidiaries as “Copel”, the “Company”, “we” or “us”.

References to (i) the “real”, “reais” or “R$” are to Brazilian reais (plural) and the Brazilian real (singular) and (ii) “U.S. dollars”, “dollars” or “US$” are to United States dollars. We maintain our books and records in reais. Certain figures included in this annual report have been subject to rounding adjustments.

Our consolidated financial statements as December 31, 2014, 2013 and 2012, of and for each of the three years ended December 31, 2014, have been audited, as stated in the report appearing herein, and are included in this annual report. We prepared our consolidated financial statements included in this annual report in accordance with International Financial Reporting Standards, or IFRS, as issued by the International Accounting Standards Board, or IASB.

References in this annual report to the “Common Shares”, “Class A Shares” and “Class B Shares” are to our common shares, class A preferred shares and class B preferred shares, respectively. References to “American Depositary Shares” or “ADSs” are to American Depositary Shares, each representing one Class B Share. The ADSs are evidenced by American Depositary Receipts (“ADRs”).

Certain terms are defined the first time they are used in this annual report. As used herein, all references to “GW” and “GWh” are to gigawatts and gigawatt hours, respectively, references to “kW” and “kWh” are to kilowatts and kilowatt hours, respectively, references to “MW” and “MWh” are to megawatts and megawatt hours, respectively, and references to “kV” are to kilovolts. These and other technical terms are defined in the “Technical Glossary” that begins on page 111.

 

FORWARD-LOOKING STATEMENTS

This annual report contains forward-looking statements. We may also make written or oral forward-looking statements in our annual report to shareholders, in our offering circulars and prospectuses, in press releases and other written materials and in oral statements made by our officers, directors or employees. These statements are not historical facts and are based on management’s current view and estimates of future economic circumstances, industry conditions, company performance and financial results. The words “anticipates”, “believes”, “estimates”, “expects”, “plans” and similar expressions, as they relate to the company, are intended to identify forward-looking statements. Statements regarding the declaration or payment of dividends, the implementation of principal operating and financing strategies and capital expenditure plans, the direction of future operations and the factors or trends affecting financial condition, liquidity or results of operations are examples of forward-looking statements. Forward-looking statements speak only as of the date they are made, and we undertake no obligation to update publicly any of them in light of new information or future events.

Forward-looking statements involve only the current view of management and are subject to a number of inherent risks and uncertainties. There is no guarantee that the expected events, trends or results will actually occur. We caution you that a number of important factors could cause actual results to differ materially from those contained in any forward-looking statement. Such factors include, but are not limited to:

·         Brazilian political and economic conditions;

·         economic conditions in the State of Paraná;

·         developments in other emerging market countries;

·         our ability to obtain financing;

·         lawsuits;

 

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·         technical and operational conditions related to the provision of electricity services;

·         changes in, or failure to comply with, governmental regulations;

·         competition;

·         electricity shortages; and

·         other factors discussed below under “Item 3. Key Information―Risk Factors”

All forward-looking statements are expressly qualified in their entirety by this cautionary statement, and you should not place undue reliance on any forward-looking statement contained in this annual report.

Item 1. Identity of Directors, Senior Management and Advisers

Not applicable.

Item 2. Offer Statistics and Expected Timetable

Not applicable.

 

3


 

Item 3. Key Information

SELECTED FINANCIAL DATA

The information set forth in this section should be read in conjunction with our consolidated annual financial statements (including the notes thereto) and “Presentation of Financial and Other Data” and “Item 5. Operating and Financial Review and Prospects”.

We have included information with respect to the dividends and interest attributable to shareholders’ equity paid to holders of our common shares and preferred shares since January 1, 2010 under “Item 8. Financial Information—Dividend Payments—Payment of Dividends”.

 

As of and for the year ended December 31,

 

2014

2013

2012

2011

2010(1)

 

(R$ million)

Statement of income data:

 

 

Operating revenues

13,919

9,180

8,493

7,776

6,901

Cost of sales and services provided

(11,165)

(7,038)

(6,540)

(5,457)

(4,976)

Gross profit

2,754

2,142

1,953

2,319

1,925

Operational expenses/income

(1,044)

(916)

(953)

(961)

(893)

Profit before financial results and taxes

1,710

1,226

1,000

1,358

1,032

Financial results

148

280

(27)

226

348

Profit before income tax and social contribution

1,858

1,506

973

1,584

1,380

Income tax and social contribution on profit

(522)

(405)

(246)

(407)

(370)

Net income for the year

1,336

1,101

727

1,177

1,010

Statement of financial position data:

 

 

 

 

 

Current assets

5,218

4,680

4,682

3,700

4,158

Recoverable rate deficit (CRC)(2)

1,344

1,381

1,384

1,346

1,341

Non-current assets

8,261

7,224

6,297

5,656

4,805

Property, plant and equipment, net

8,304

7,984

7,872

7,209

6,664

Total assets

25,618

23,111

21,209

18,837

17,859

Loans and financing and debentures (current)

1,299

1,015

274

116

704

Current liabilities

4,055

3,348

2,833

2,058

2,537

Loans and financing and debentures (non-current)

4,755

3,517

2,988

2,058

1,281

Non-current liabilities

7,880

6,835

6,014

4,701

4,027

Equity

13,683

12,929

12,362

12,078

11,296

Attributable to controlling shareholders

13,331

12,651

12,097

11,835

11,030

Attributable to non-controlling interest

352

277

265

243

266

Share capital

6,910

6,910

6,910

6,910

6,910

           

                                                                      

(1) Not comparable with the current GAAP. Data for 2010 has not been restated in application of IAS 19 – Employee Benefits (as revised in 2011) and IFRS 11 – Joint Arrangements. In particular, data for 2010 reflects the results of the joint-venture Dominó Holdings S.A through proportional consolidation in 2010, as opposed to the equity method of accounting applicable in 2014, 2013, 2012 and 2011.

(2) Amounts due from the State of Paraná that were included in current assets totaled R$94.6 million in 2014, R$85.5 million in 2013, R$75.9 million in 2012, R$65.9 million in 2011 and R$58.8 million in 2010. Amounts due from the State of Paraná that were included in long-term assets totaled R$1,249.5 million in 2014, R$1,295.1 million in 2013, R$1,308.4 million in 2012, R$1,280.6 million in 2011 and R$1,282.4 million in 2010. See Note 8 to our consolidated financial statements. This item includes both current and non-current CRC Account receivables.

 

4


 

 

 

 

2014

2013

2012

2011

2010

 

(R$)

Basic and diluted earnings per share:

 

 

Common Shares

4.21

3.74

2.44

4.04

3.45

Class A Preferred Shares

4.63

4.49

4.17

5.33

5.20

Class B Preferred Shares

4.63

4.12

2.69

4.44

3.79

Number of shares outstanding at year end (in thousands):

 

 

 

 

 

Common Shares

145,031

145,031

145,031

145,031

145,031

Class A Preferred Shares

380

381

381

384

390

Class B Preferred Shares

128,244

128,243

128,243

128,240

128,234

Total

273,655

273,655

273,655

273,655

273,655

Dividends per share at year end:

 

 

 

 

 

Common Shares

2.17

1.96

0.94

1.47

0.98

Class A Preferred Shares

2.53

2.53

2.53

2.53

2.53

Class B Preferred Shares

2.39

2.15

1.03

1.62

1.08

           
 

5


 
Exchange Rates

 

The following table provides information on the selling exchange rate, expressed in reais per U.S. dollar (R$/US$), for the periods indicated.

 

Exchange rate of Brazilian currency per US$1.00

Year

Low

High

Average(1)

Year-end

2010

1.6554

1.8811

1.7589

1.6662

2011

1.5345

1.9016

1.6709

1.8758

2012

1.7024

2.1121

1.9588

2.0435

2013

1.9528

2.4457

2.1741

2.3426

2014

2.1974

2.7403

2.3599

2.6562

                                                                      

Source: Central Bank.

(1) Represents the average of the exchange rates on the last day of each month during the relevant period.

 

 

Month

Low

High

December 2014

2.5607

2.7403

January 2015

2.5754

2.7107

February 2015

2.6894

2.8811

March 2015

2.8655

3.2683

April 2015 (until April 14, 2014)

3.0466

3.1556

                                                                      

Source: Central Bank.

 

 

6


 

Risk Factors

Risks Relating to Brazil

Brazilian political and economic conditions could affect our business and the market price of the ADSs and our common shares. In addition, uncertainty regarding such changes could affect our business and the market price of the ADSs and our common shares.

The Brazilian government’s economic policies have in the past involved, among other measures, price controls, currency devaluations, capital controls and limits on imports. Our business, financial condition and results of operations may be adversely affected by these economic policies in case they are reinstated. These and other measures could also affect the market price of the ADSs and our common shares.

The Brazilian government has exercised, and continues to exercise, significant influence over the Brazilian economy. Frequent and significant intervention by the Brazilian government has often changed monetary, tax, credit, tariff and other policies to influence the course of Brazil’s economy. The Brazilian government’s actions to control inflation and implement other policies have at times involved wage and price controls, devaluation of the real in relation to the U.S. dollar, changes in tax policies as well as other interventionist measures, such as nationalization, raising interest rates, freezing bank accounts, imposing capital controls and inhibiting international trade in Brazil. Changes in policy involving tariffs, exchange controls, regulations and taxation could have an adverse effect on our business and financial results of the ADSs and our common shares.

Fluctuations in the value of the Brazilian real against foreign currencies may result in uncertainty in the Brazilian economy and the Brazilian securities market, and they could have a material adverse effect on our net income and cash flow.

In recent years, the Brazilian real has fluctuated against foreign currencies, and the value of the real may rise or decline substantially from current levels. For instance, depreciation of the real increases the cost of servicing our foreign currency-denominated debt and the cost of purchasing electricity from Itaipu, a hydroelectric facility that is one of our major suppliers and that adjusts electricity prices based in part on its U.S. dollar costs. Depreciation of the real also creates additional inflationary pressures in Brazil that may negatively affect us. Depreciation generally curtails access to international capital markets and may prompt government intervention. It also reduces the U.S. dollar value of our dividends and the U.S. dollar equivalent of the market price of our common shares and the ADSs. For additional information about historical exchange rates, see “Exchange Rates”.

If Brazil experiences substantial inflation in the future, our margins and the market price of the Class B Shares and ADSs may be reduced.

Brazil has in the past experienced extremely high rates of inflation. More recently, Brazil’s annual rates of inflation, measured in accordance with the variation of the Índice Geral de Preços - Disponibilidade Interna (“IGP-DI”) index, were 2.4% for the three months ended March 31, 2015, 3.7% in 2014, 5.5% in 2013 and 8.1% in 2012. The Brazilian government has in the past taken measures to combat inflation, and public speculation about possible future government actions has had significant negative effects on the Brazilian economy. Although our concession contracts provide for annual readjustments based on inflation indexes, if Brazil experiences substantial inflation in the future, and the Brazilian government adopts inflation control policies similar to those adopted in the past, our costs may increase faster than our revenues, our operating and net margins may decrease and, if investor confidence lags, the price of the Class B Shares and ADSs may fall. Inflationary pressures may also curtail our ability to access foreign financial markets and could lead to further government intervention in the economy, including the introduction of government policies that may adversely affect the overall performance of the Brazilian economy.

Allegations of political corruption against the Brazilian federal government and the Brazilian legislative branch could create economic and political instability.

In the past, members of the federal government and of the Brazilian legislative branch have faced allegations of political corruption. As a result, a number of politicians, including senior federal officials and congressman, resigned and/or have been arrested. Currently, several members of the Brazilian executive and legislative branches of government are being investigated as a result of allegations of unethical and illegal conduct identified by the Car Wash Operation (Operação Lava-Jato) being conducted by the Office of the Brazilian Federal Prosecutor. The potential outcome of these investigations is unknown, but they have already had an adverse impact on the image and reputation of the investigated companies, in addition to adversely impacting general market perception of the Brazilian economy, and the conclusion of these proceedings or further allegations of illicit conduct could have additional adverse effects in the Brazilian economy. We cannot predict whether such allegations will lead to further instability or whether new allegations against key Brazilian government officials will arise in the future. In addition, we cannot predict the outcome of any such allegations and their effect on the Brazilian economy.

7


 

Changes in Brazilian tax policies may have an adverse effect on us.

The Brazilian government has in the past changed its tax policies in ways that affect the electricity sector, and it may do so again in the future. These changes include increases in the tax rates affecting energy companies and, occasionally, the collection of temporary taxes related to specific governmental purposes. If we are unable to adjust our tariffs accordingly, we may be adversely affected.

Negative developments in other national economies, especially those in developing countries, may negatively impact foreign investment in Brazil and the country’s economic growth.

International investors generally consider Brazil to be an emerging market. Historically, adverse developments in the economies of emerging markets have resulted in investors’ perception of greater risk from investments in such markets. Such perceptions regarding emerging market countries have significantly affected the market value of securities of Brazilian issuers. Furthermore, although economic conditions are different in each country, investors’ reactions to developments in one country can impact the prices of securities in other countries, including those in Brazil and this may diminish investors’ interest in securities of Brazilian issuers, including ours.

 

Risks Relating to Our Company and our Operations

We are controlled by the State of Paraná, the policies and priorities of which directly affect our operations and may conflict with the interests of our investors.

We are controlled by the State of Paraná, which holds 58.6% of our outstanding common voting shares as of the date of this annual report, and whose interests may differ from other shareholders. As a major shareholder, the State of Paraná has the power to control all of our operations, including the power to elect a majority of the members of our Board of Directors and determine the outcome of any action requiring common shareholder approval, including transactions with related parties and corporate reorganizations.

The operations of the Company have had and will continue to have an important impact on the commercial and industrial development of the State of Paraná. In the past, the State of Paraná has used, and may in the future use, its status as our controlling shareholder to decide whether we should engage in certain activities and make certain investments aimed, principally, to promote its public polices or social objectives and not necessarily to meet the objective of improving our business and/or operational results.

We are largely dependent upon the economy of the State of Paraná.

Our distribution market for the majority of our sales of electricity is located in the State of Paraná. Although a more competitive market involving possible sales to customers outside Paraná might develop in the future, our business depends and is expected to continue to depend to a very large extent on the economic conditions of Paraná. We cannot assure you that economic conditions in Paraná will be favorable to us in the future. The GDP (gross domestic product) of the State of Paraná increased 0.8% in 2014, while Brazil’s GDP increased 0.1% during the same period.

 

8


 

Deteriorating economic conditions in the State of Paraná and increasing energy prices may affect both the ability of our distribution costumers to pay amounts they owe us, as well as the amounts of our commercial losses. An increase in our commercial losses or uncollected receivables could materially adversely affect our business, financial condition and results of operations.

The general economic performance of Brazil and of the State of Paraná have declined recently. In addition, the price of electricity paid by our distribution customers has been increasing. An increase in electricity prices, as well as poor economic performance in the State of Paraná generally, would in each case affect the ability of some of our distributions customers to pay amounts owed to us. As of December 31, 2014, our past due receivables with final customers were approximately R$393.3 million in the aggregate, or 9.0% of our revenues from electricity sales to final customers for the year ended December 31, 2014, and our allowance for doubtful accounts related to these receivables was R$158.2 million. See Note 7 to our audited consolidated financial statements.

In addition, increased prices and a deteriorating economy could result in a greater number of our distribution customers connecting illegally to our distribution grid, which would decrease our revenue from electricity sales to final customers. Furthermore, energy we lose to these illegal connections is considered a commercial loss, and we may incur regulatory penalties if our commercial losses exceed certain established regulatory thresholds.

We are involved in several lawsuits that could have a material adverse effect on our business if their outcome is unfavorable to us.

We are the defendant in several legal proceedings, mainly relating to civil, administrative, labor and tax claims. The outcome of these proceedings is uncertain and, if determined against us, may result in obligations that could materially affect our results of operations. At December 31, 2014 our provisions for probable and reasonably estimated losses were R$1,546.6 million. For additional information, see “Item 8. Financial Information—Legal Proceedings”.

The construction and expansion of our transmission and power generation projects involve significant risks that may have an adverse effect on us.

In connection with the development of transmission and generation projects, we generally must obtain feasibility studies, governmental concessions or authorizations, permits and approvals, condemnation agreements, equipment supply agreements, engineering, procurement and construction contracts, sufficient equity and debt financing and site agreements, each of which involves the consent of third parties over which we have no control. In addition, project development is subject to environmental, engineering and construction risks that can lead to cost overruns, delays and other impediments to timely complete within a project’s budget. We cannot assure you that all required permits and approvals for our projects will be obtained, that we will be able to secure private sector partners for any of our projects, that we or any of our partners will be able to obtain adequate financing for our projects or that financing will be available on a non-recourse basis to us.

If we are unable to complete a project, whether at the initial development phase or after construction has commenced, or if the completion of a project is delayed, this may decrease our expected financial return from the project, which may lead to impairment. If we experience these or other problems relating to the expansion of our electricity transmission and power generation capacity, we may be exposed to increased costs, or we may fail to achieve the revenues we planned in connection with such expansion projects, which may have an adverse effect on our financial condition and results of operations.

We are subject to limitations regarding the amount and use of public sector financing, which could prevent us from obtaining financing and implanting our investment plan.

Our current budget anticipates capital expenditures for expansion, modernization, research, infrastructure and environmental projects of approximately R$2,476.9 million in 2015. As a state- controlled company, we are subject to certain National Monetary Council (Conselho Monetário Nacional - “CMN”) and Brazilian Central Bank (Banco Central do Brasil) limitations regarding the level of credit financial institutions may offer to public sector entities. As a result, we may have difficulty in obtaining financing from Brazilian and international financial institutions, which could create difficulties in the implementation of our investment plan. As a result of these regulations, our capacity to incur debt is limited, which could negatively affect the implementation of our investment plan.

 

9


 

Security breaches and other disruptions could compromise our data centers and operations and expose us to liability, which would cause our business and reputation to suffer.

In our ordinary course of business, we collect and store personal data of our customers in our data centers. Despite our security measures, our information technology and infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance or other disruptions. Any such breach could compromise our networks and the information stored there could be accessed, publicly disclosed, lost or stolen. Any such access, disclosure or loss of information could affect our operations and could result in legal claims or proceedings under Brazilian laws that protect the privacy of personal information (among others) and damage our reputation.

Risks Relating to the Brazilian Electricity Sector

We are uncertain as to the renewal of certain of our concessions, some of which are due to expire in 2015.

Under the 2013 Concession Renewal Law, we may only renew our concessions that were in effect as of 1995 (and, in the case of generation facilities, generation concession contracts entered into prior to 2003) for an additional 30-year period (or an additional 20-year period in the case thermal plants), if we agree to amend the terms of the concession contract that is up for renewal to reflect certain new terms and conditions imposed by the 2013 Concession Renewal Law, which vary depending on whether the concession is for generation, transmission or distribution. If we do not agree to amend the concession contract to reflect these new conditions, the concession contract cannot be renewed and will be subject to a competitive bidding process upon its expiration, which we might not win. Up to now, we have decided not to renew our generation concession contracts that are set to expire by 2015 and are therefore subject to competitive bidding processes pursuant to the 2013 Concession Renewal Law, and we decided to renew pursuant to the 2013 Concession Renewal Law our one transmission concession contract that is set to expire by 2015.

For distribution concessions, we are unsure of the conditions that the Ministry of Mines and Energy, or Ministério de Minas e Energia (“MME”), and the Brazilian Electricity Regulatory Agency, or the Agência Nacional de Energia Elétrica (“ANEEL”), will require in order to renew these concession contracts, and we cannot assure you that we will be able to renew our main distribution contract, which expires on July 7, 2015, on terms that are favorable to us. The request for extension of our main distribution concession was presented to ANEEL on May 31, 2012 and we confirmed our request for renewal as required under the 2013 Concession Renewal Law. In January 2014, we received a response letter from ANEEL stating that it had analyzed our request, but that it had not made a final determination. If we do not renew our main distribution concession or if it is renewed under less favorable conditions, our financial condition and results of operations could be materially adversely affected.

For more information, see “Item 4. Information on the Company—Concessions”.

Our operating results depend on prevailing hydrological conditions, which have been deteriorating recently. The impact of water shortages and resulting measures taken by the government to conserve energy may have a material adverse effect on our business, financial condition and results of operations.

We are dependent on the prevailing hydrological conditions throughout Brazil and in the geographic region in which we operate. According to data from ANEEL, approximately 66% of Brazil’s installed capacity currently comes from hydroelectric generation facilities. Our region, and Brazil in general, is subject to unpredictable hydrological conditions because of non-cyclical deviations in average rainfall. In the years prior to 2001, we have experienced a period of low rainfall, which led the Brazilian government to institute a mandatory rationing program to reduce electricity consumption, which was in effect from June 1, 2001 to February 28, 2002.

 

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Brazil has recently been experiencing a period of similarly low rainfall. Like in 2001, the current hydrological conditions could lead the Brazilian government to institute a rationing program, which would require that our distribution business distribute less energy to final customers. Our distribution business would be adversely affected by a mandatory rationing program because its revenues are partially based on the volume of electricity it provides through our distribution grid to final customers. However, a mandatory rationing program involves a predictable decrease in energy, which would allow our distribution business to better estimate the amount of electricity it must purchase in order to sell to final customers. In addition, in the context of a formal rationing program, our distribution business would be fully compensated for the amount of energy that it purchased prior to the rationing period in excess of the amount of energy it is allowed to distribute under the rationing program, through automatic adjustment in its energy supply contracts.

In contrast, until now the Brazilian government has reacted to the current poor hydrological conditions not by implementing a formal rationing program, but rather by seeking to reduce the consumption of electricity by final customers by other means, for example through general conservation campaigns to raise public awareness. The effect of these campaigns is less predictable, making it difficult for our distribution business to accurately estimate the volume of energy it needs to purchase for sale to final customers. Furthermore, in the absence of a formal rationing program, our distribution business is not compensated for the amount of energy it had previously contracted that now exceeds the newly-depressed final customer demand. Even after a conservation or rationing program ends, it may take several years for demand by final customers to fully recover, if at all. Deteriorating hydrological conditions may therefore have a material adverse effect on our distribution business.

                In 2014, the Brazilian Federal Government provided and facilitated various forms of assistance to distribution concessionaires experiencing cash flow difficulties arising from poor hydrological conditions, which had increased their energy acquisitions costs thereby resulting in mismatches of cash flow in the short-term. These forms of assistance included funding from the CDE Account, credit facilities contracted by the CCEE through the ACR Account and the new “Bandeira Tarifária” system. There can be no assurance that the Federal Government will continue this assistance, that will continue it on favorable terms or that it will be sufficient to cover our losses. See “Item 4. Information on the Company—Energy Sector Regulatory Charges—CDE” and Item 4. Information on the Company—Energy Sector Regulatory Charges— Regulated Market Account – ACR Account”.

With respect to our generation business, in order to compensate for poor hydrological conditions and to maintain adequate water levels in reservoirs, the ONS may order the reduction of generation from hydroelectric power plants, which would be partially compensated by increased generation by thermoelectric plants. This mechanism for replacing hydroelectric production with thermoelectric production may not provide all of the energy we need to fulfill our obligations under existing energy supply contracts. To compensate for this deficit, our generation business can be required to purchase energy in the spot market, typically at higher prices, and we would not be able to pass on these increased costs. This mechanism impacts all generation companies in Brazil regardless of whether the geographical region in which a specific generator is located is experiencing low rainfall, and could have a material adverse effect on our generation business.

In addition, if a shortage of natural gas were to occur, this would increase the general demand for energy in the market and therefore increase the risk that a rationing program would be instated.

Our operating revenues could be adversely affected if ANEEL makes decisions relating to our tariffs that are unfavorable to us.

The tariffs that we charge for sales of electricity to captive customers are determined pursuant to a concession agreement with the Brazilian government through ANEEL. ANEEL has substantial discretion to establish the tariff rates we charge our customers, which are determined pursuant to a concession agreement with ANEEL and in accordance with ANEEL’s regulatory decision-making authority.

Our distribution concession agreement and Brazilian law establish a price cap mechanism that permits three types of tariff adjustments: (i) annual readjustment (reajuste anual), (ii) periodic revision (revisão periódica), and (iii) extraordinary revision (revisão extraordinária). We are entitled to apply each year for the annual readjustment, which is designed to offset some effects of inflation on tariffs and pass through to customers certain changes in our cost structure that are beyond our control, such as the cost of electricity we purchase from certain sources and certain other regulatory charges, including charges for the use of transmission facilities. In addition, ANEEL carries out a periodic revision every four years that is aimed at identifying variations in our costs as well as setting a factor based on our operational efficiency that will be applied against the index of our ongoing annual tariff readjustments, the effect of which is to ensure that we share the benefits of improved economies of scale with our customers. At any time, we may also request an extraordinary revision of our tariffs in the case of a significant and unexpected event, including if such an event significantly alters our cost structure.

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We cannot assure you that ANEEL will establish tariffs at rates that are favorable to us. To the extent that any of our requests for adjustments are not granted by ANEEL in a timely manner, our financial condition and results of operations may be adversely affected. In addition, ANEEL’s decisions relating to our tariffs may be contested by public authorities or by our customers. Administrative and judicial decisions resulting from these challenges may modify ANEEL’s decisions in a manner that is unfavorable to us, which may adversely affect our financial condition and results of operations.

We are subject to comprehensive regulation of our business, which fundamentally affects our financial performance.

Our business is subject to extensive regulation by various Brazilian legal and regulatory authorities, particularly the MME and ANEEL, which regulate and oversee various aspects of our business and establish our tariffs. Changes to the laws and regulations governing our operations, which have occurred in the past, could adversely affect our financial condition and results of operations.

For example, the Brazilian government has taken action to reduce tariffs in recent years. In order to substantially reduce the price paid by Final Customers for electricity, the Brazilian government enacted the 2013 Concession Renewal Law, which significantly changed the conditions under which concessionaires are able to renew concession contracts. Under the 2013 Concession Renewal Law, most generation, transmission and distribution concessionaires may be renewed at the request of the concessionaire for an additional period of 30 years, but only if the concessionaire agrees to amend the terms of the concession contract to reflect certain new terms and conditions. See “Item 4. Information on the Company—Concessions”.

If any further regulations or new laws are passed by the Brazilian government to lower electricity prices, these new laws and regulations could have a material adverse effect on our results of operations. If we are required to conduct our business in a manner substantially different from our current operations as a result of regulatory changes, our results of operations and financial condition may be adversely affected.

Certain customers in our distribution concession area may cease to purchase energy from our distribution business.

Our distribution business generates a large portion of its revenues by selling energy that it purchases from generation companies. Large electricity customers within the geographic area of our concession that meet certain regulatory requirements may qualify as Free Customers (“Free Customers”). A Free Customer in our distribution concession area is entitled to purchase energy directly from generation companies rather than through our distribution business, in which case that Free Customer would cease to pay our distribution business for that energy that we previously supplied. Therefore, if the number of Free Customers within the geographic area of our concession increases, the revenues and results of operations of our distribution business would be adversely affected.

We generate a portion of our operating revenues from Free Customers who may seek other energy suppliers upon the expiration of their contracts with us.

As of December 31, 2014, we had 29 Free Customers, representing approximately 3.7% of our consolidated operating revenues and approximately 14.2% of the total volume of electricity we sold to final customers. From January 1, 2015 until March 31, 2015, we had 2 (two) agreements with Free Customers that expired and were not renewed. Our contracts with Free Customers are typically for periods ranging between two years and five years.

 

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Approximately 6.1% of the megawatts sold under contracts to such customers are set to expire in 2015. In addition, as of December 31, 2014, we had 53 customers that were eligible to purchase energy as Free Customers. These customers represented approximately 4.6% of the total volume of electricity we sold in 2014, and approximately 7.6% of our operating revenues from energy sales for that year. There can be no assurance that Free Customers will enter into contracts or extend their current contracts to purchase energy from us.

Additionally, it is possible that our large industrial clients could be authorized by ANEEL to generate electric energy for their own consumption or sale to other parties, in which case they may obtain an authorization or concession for the generation of electric power in a given area, which could adversely affect our results of operations.

The regulatory framework under which we operate is subject to legal challenge.

The Brazilian government implemented fundamental changes in the regulation of the electric power industry under the 2004 legislation known as the New Industry Model Law (Lei do Novo Modelo do Setor Elétrico) and, recently, under the 2013 Concession Renewal Law. Challenges to the constitutionality of both laws are still pending before the Brazilian Supreme Court. If all or part of these laws were held to be unconstitutional, it would have uncertain consequences for the validity of existing regulation and the further development of the regulatory framework. The outcome of the legal proceedings is difficult to predict, but they could have an adverse impact on the entire energy sector, including our business and results of operations.

We may be forced to purchase energy in the spot market at higher prices if our forecasts for energy demand are not accurate, if there is a shortage of energy supply available in the regulated market, or if energy we contract is not delivered, and we may not be entitled to pass on any increased costs to our Final Customers in a timely manner, or at all.

Under the New Industry Model Law, electric energy distributors, including us, must contract to purchase, through public bids conducted by ANEEL, 100% of the forecasted electric energy demand for their respective distribution concession areas, up to five years prior to the actual delivery of electric energy. We cannot guarantee that our forecasts for energy demand in our distribution concession area will be accurate, particularly given the recent conservation campaigns by the Brazilian government in response to deteriorating hydrological conditions. If our forecasts fall short of actual electricity demand, or if we are unable to purchase energy through the regulated market due to lack of energy supply in the market, or if a generation company fails to deliver energy that was previously contracted, we may be forced to make up for the shortfall by entering into short-term agreements to purchase electricity in the spot market where we may pay significantly more for energy without being able to pass on these increased costs to our Final Customers. In addition, if we underestimate our distribution energy needs, we may be subject to penalties imposed by the Electric Energy Trading Chamber (Câmara de Comercialização de Energia Elétrica, or “CCEE”). In addition, if our forecasts surpass actual demand by more than the allowed margin (105% of actual demand), including where demand is depressed due to government campaigns in response to poor hydrological conditions, we will not be able to pass on to our Final Customers the cost of the excess energy that we acquire.

Our equipment, facilities and operations are subject to numerous environmental and health regulations, which may become more stringent in the future and may result in increased liabilities and increased capital expenditures.

Our distribution, transmission and generation activities are subject to comprehensive federal, state and local legislation, as well as supervision by Brazilian governmental agencies that are responsible for the implementation of environmental and health laws and policies. These agencies could take enforcement action against us for our failure to comply with their regulations and with requirements established for the maintenance of our environmental licenses. These actions could result in, among other things, the imposition of fines and revocation of licenses, which could have a material adverse effect on our financial condition and results of operations. It is also possible that enhanced environmental and health regulations will force us to allocate capital towards compliance, and consequently, divert funds away from planned investments. Such a diversion could have a material adverse effect on our financial condition and results of operations.

 

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ANEEL could penalize us for failing to comply with the terms of our concessions or with applicable laws and regulations, and we may not recover the full value of our investment in the event that any of our concessions are terminated.

Our concessions are for terms of 20 to 35 years and may be extended if certain conditions are met. In the event that we fail to comply with any term of our concessions or applicable law or regulation, ANEEL may impose penalties on us, which may include warnings, the imposition of potentially substantial fines (in some instances, up to 2% of our revenues in the fiscal year immediately preceding the assessment) and restrictions on our operations, among others. ANEEL may also terminate our concessions prior to the expiration of their terms if we fail to comply with their provisions or if ANEEL determines, through an expropriation proceeding, that terminating our concession would be in the public interest. If ANEEL terminates any of our concessions before its expiration, we would not be able to operate the segment(s) of our business that had been authorized by the concession. Furthermore, any compensation that we may receive from the federal government for the unamortized portion of our investment may not be sufficient for us to recover the full value of our investment. The early termination or non-renewal of any of our concessions or the imposition of severe fines or penalties by ANEEL could have a material adverse effect on our financial condition and results of operations. See “Item 4. Information on the Company—The Brazilian Power Industry—Concessions”.

The construction, expansion and operation of our generation, transmission and distribution facilities and equipment involve significant risks that may cause loss of revenues or increase of expenses.

The construction, expansion and operation of our generation, transmission and distribution of electricity facilities and equipment involve many risks, including the inability to obtain required governmental permits and approvals, supply interruptions, strikes, climate and hydrological interference, unexpected environmental and engineering problems, increase in losses of electricity (including technical and commercial losses), the unavailability of adequate financing and the unavailability of equipment.

In the event we experience these or other problems, we might not be able to generate, transmit and distribute electricity in favorable quantities and on favorable terms, which may adversely affect our financial condition and the results of our operations.

If we are unable to conclude our investment program on schedule, the operation and development of our business could be adversely affected.

In 2015, we plan to invest approximately R$1,300.1 million in our generation and transmission activities (including Baixo Iguaçu HPP, Colíder HPP and SPCs of transmission lines), R$162.6 million in Wind Farms, R$784.7 million in our distribution activities and R$107.7 million in our telecommunications activities. Our ability to complete this investment program depends on multiple factors, including our ability to charge sufficient fees for our services and a variety of regulatory and operational contingencies. There is no assurance that we will have the financial resources to complete our proposed investment program, and our inability to do so may adversely affect the operation and development of our business leading to the imposition of fines levied by ANEEL as well as reduction in tariff levels.

We are strictly liable for any damages resulting from inadequate provision of electricity services and our insurance policies may not fully cover such damages.

We are strictly liable under Brazilian law for damages resulting from the inadequate provision of electricity distribution services. In addition, our distribution, transmission and generation utilities may be held liable for damages caused to others as a result of interruptions or disturbances arising from the Brazilian generation, transmission or distribution systems, whenever these interruptions or disturbances are not attributed to an identifiable member of the National Electric System Operator, the Operador Nacional do Sistema Elétrico (“ONS”). We cannot assure you that our insurance policies will fully cover damages resulting from inadequate rendering of electricity services, which may have an adverse effect on us.

 

 

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Table of Contents

 

Risks Relating to the Class B Shares and ADSs

As a holder of ADSs you will generally not have voting rights at our shareholders’ meetings.

In accordance with Brazilian Corporate Law and our bylaws, holders of the Class B Shares, and thus of the ADSs, are not entitled to vote at our shareholders’ meetings except in limited circumstances. That means, among other things, that you, as a holder of the ADSs, are not entitled to vote on corporate transactions, including any proposed merger.

In addition, in the limited circumstances where the holders of Class B Shares are entitled to vote, holders may exercise voting rights with respect to the Class B Shares represented by ADSs only in accordance with the provisions of the deposit agreement relating to the ADSs. There are no provisions under Brazilian Corporate Law or under our bylaws that limit ADS holders’ ability to exercise their voting rights through the Depositary with respect to the underlying Class B Shares. However, the procedural steps involved create practical limitations on the ability of ADS holders to vote. For example, holders of our Class B Shares will be able to exercise their voting rights by either attending the meeting in person or voting by proxy. In accordance with the Deposit Agreement, we will provide the notice to the Depositary, which will in turn, as soon as practicable thereafter, mail to holders of ADSs the notice of such meeting and a statement as to the manner in which instructions may be given by holders. To exercise their voting rights, ADS holders must then instruct the Depositary how to vote their shares. Because of this extra procedural step involving the Depositary, the process for exercising voting rights will take longer for ADS holders than for direct holders of Class B Shares. ADSs for which the Depositary does not receive timely voting instructions will not be voted.

As a holder of ADSs you will have fewer and less well-defined shareholders’ rights in Brazil than in the United States and certain other jurisdictions.

Our corporate affairs are governed by our bylaws and Brazilian Corporate Law, which may differ from the legal principles that would apply if we were incorporated in a jurisdiction in the United States or in certain other jurisdictions outside Brazil. Under Brazilian Corporate Law, you and the holders of the Class B Shares may have fewer and less well-defined rights to protect your interests in connection with actions taken by our Board of Directors or the holders of Common Shares than under the laws of the United States and certain other jurisdictions outside Brazil.

Although Brazilian law imposes restrictions on insider trading and price manipulation, the Brazilian securities markets are not as highly supervised as the United States securities markets or markets in certain other jurisdictions outside Brazil. For instance, rules and policies against self-dealing and regarding the preservation of minority shareholder interests may be less developed and not as robustly enforced in Brazil as in the United States and certain other jurisdictions outside Brazil, which could potentially disadvantage you as a holder of the preferred shares and ADSs. In addition, shareholders in Brazilian companies must hold 5% of the outstanding share capital of a corporation in order to have standing to bring shareholders’ derivative suits, and shareholders in Brazilian companies ordinarily do not have standing to bring a class action suit.

You may be unable to exercise preemptive rights relating to the preferred shares.

You will not be able to exercise the preemptive rights relating to the Class B Shares underlying your ADSs unless a registration statement under the United States Securities Act of 1933, as amended (“Securities Act”) is effective with respect to those rights or an exemption from the registration requirements of the Securities Act is available. Therefore, the Depositary will not offer rights to you as a holder of the ADSs unless the rights are either registered under provisions of the Securities Act or are subject to an exemption from the registration requirements. We are not obligated to file a registration statement with respect to the shares or other securities relating to these rights, and we cannot assure you that we will file any such registration statement. Accordingly, you may receive only the net proceeds from the sale of your preemptive rights by the Depositary or, if the preemptive rights cannot be sold, they will be allowed to lapse. If you are unable to participate in rights offerings, your holdings may also be diluted.

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Holders of our ADSs may be unable to enforce judgments against our directors or officers

All of our directors and officers named in this annual report reside in Brazil. Substantially all of our assets, as well as the assets of these persons, are located in Brazil. As a result, it may not be possible for holders of our ADSs to effect service of process upon us or our directors and officers within the United States or other jurisdictions outside Brazil, attach their assets, or to enforce against us or our directors and officers judgments obtained in the United States or other jurisdictions outside Brazil. Because judgments of U.S. courts for civil liabilities based upon the U.S. federal securities laws may only be enforced in Brazil if certain requirements are met, holders of ADSs may face greater difficulties in protecting their interest in actions against us or our directors and officers than would shareholders of a corporation incorporated in a state or other jurisdiction of the United States.

If you exchange your ADSs for Class B Shares, you risk increased taxes and the inability to remit foreign currency abroad.

Brazilian law requires that parties obtain a registration before the Central Bank in order to be allowed to remit foreign currencies, including U.S. dollars, abroad. For the ADSs, the Brazilian custodian for the Class B Shares has obtained the necessary certificate from the Central Bank for the payment of dividends or other cash distributions relating to the preferred shares or upon the disposition of the preferred shares. If you exchange your ADSs for the underlying Class B Shares, however, you must obtain your own certificate of registration or register in accordance with Central Bank and CVM rules in order to obtain and remit U.S. dollars abroad upon the disposition of the Class B Shares or distributions relating to the preferred shares. If you do not obtain a certificate of registration, you may not be able to remit U.S. dollars or other currencies abroad and may be subject to less favorable tax treatment on gains with respect to the preferred shares. Pursuant to Central Bank rules, obtaining this registration requires exchange transactions, which are subject to taxes in Brazil. For more information, see “Item 10. Additional Information—Taxation—Brazilian Tax Considerations—Other Brazilian Taxes”.

 

If you attempt to obtain your own registration, you may incur expenses or suffer delays in the application process, which could delay your ability to receive dividends or distributions relating to the preferred shares or the return of your capital in a timely manner. The custodian’s registration before the Central Bank and any certificate of foreign capital registration you obtain may be affected by future legislative changes. Additional restrictions may be imposed in the future on the disposition of the underlying Class B Shares or the repatriation of the proceeds from disposition.

The Brazilian government may impose exchange controls and restrictions on remittances abroad which may adversely affect your ability to convert funds in reais into other currencies and to remit other currencies abroad.

In the past, the Brazilian government has imposed restrictions on the remittance to foreign investors of the proceeds of their investments in Brazil and the conversion of Brazilian currency into foreign currencies. The Brazilian government could again choose to impose this type of restriction if, among other things, there is deterioration in Brazilian foreign currency reserves or a shift in Brazil’s exchange rate policy. Reimposition of these restrictions would hinder or prevent your ability to convert dividends, distributions or the proceeds from any sale of Class B Shares, as the case may be, from reais into U.S. dollars or other currencies and to remit those funds abroad. We cannot assure you that the Brazilian government will not take similar measures in the future.

The relative volatility and illiquidity of the Brazilian securities markets may impair your ability to sell the Class B Shares underlying the ADSs.

The Brazilian securities markets are substantially smaller, less liquid, more concentrated and more volatile than major securities markets in the United States and certain other jurisdictions outside Brazil, and are not as highly regulated or supervised as some of these other markets. The illiquidity and relatively small market capitalization of the Brazilian equity markets may cause the market price of securities of Brazilian companies, including our ADSs and Class B Shares, to fluctuate in both the domestic and international markets, and may substantially limit your ability to sell the Class B Shares underlying your ADSs at a price and time at which you wish to do so.

 

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Item 4. Information on the Company

The Company

We are engaged in the generation, transmission, distribution and sale of electricity mainly in the Brazilian State of Paraná, pursuant to concessions granted by the Brazilian regulatory agency for the electricity sector, ANEEL. We also provide telecommunications and other services.

At December 31, 2014, we generated electricity from 18 (eighteen) hydroelectric plants, 1 (one) wind plant and 1 (one) thermoelectric plant, for a total installed capacity of 4,754.4 MW, approximately 99.6% of which is derived from renewable sources. Including the installed capacity of generation companies in which we have an equity interest, our total installed capacity is 5,360.4 MW. Our electric power business is subject to comprehensive regulation by ANEEL.

We hold concessions to distribute electricity in 394 of the 399 municipalities in the State of Paraná and in the municipality of Porto União in the State of Santa Catarina. At December 31, 2014, we owned and operated 2,174 km of transmission lines and 189,925.4 km of distribution lines, constituting one of the largest distribution networks in Brazil. Of the electricity volume we supplied to our Final Customers during 2014:

·        38.4% was to industrial customers;

·        25.8% to residential customers;

·        19.4% to commercial customers; and

·        16.4% to rural and other customers.

Key elements of our business strategy include the following:

·        expanding our power generation, transmission, distribution, and telecommunication systems;

·        expanding our generation business’ sales to Free Customers both inside and outside the State of Paraná;

·        seeking productivity improvements in the short term and sustained growth in the long term;

·        striving to keep customers satisfied and our workforce motivated and prepared;

·        seeking cost efficiency and innovation;

·        achieving excellence in data, image, and voice transmission; and

·        researching new technologies in the energy sector in order to expand power output with renewable and non-polluting sources.

Historical Background

We were formed in 1954 by the State of Paraná to engage in the generation, transmission and distribution of electricity, as part of a plan to bring the electric energy sector under state control. We acquired the principal private power companies located in the State of Paraná in the early 1970s. During the period from 1970 to 1977, we significantly expanded our transmission and distribution grid and worked to increase the connectivity of our network to networks in other Brazilian states. In 1979, a change in state law permitted us to extend our generating activities to include production from sources other than hydroelectric and thermal power plants.

 

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Currently, we are the largest energy company in the State of Paraná. We are a corporation incorporated and existing under the laws of Brazil, with the legal name Companhia Paranaense de Energia – Copel. Our head offices are located at Rua Coronel Dulcídio, 800, CEP 80420-170 Curitiba, Paraná, Brazil. Our telephone number at the head office is (55-41) 3322-3535 and our website is www.copel.com.

Relationship with the State of Paraná

The State of Paraná owns 58.6% of our Common Shares and, consequently, has the ability to control the election of the majority of the members of our Board of Directors, the appointment of senior management and our direction, future operations and business strategy.

Corporate Structure

Prior to 2001, we operated as a single corporation engaged in the generation, transmission and distribution of electricity and in certain related activities. In compliance with the changed regulatory regime, we transferred our operations to four wholly-owned subsidiaries one each for generation, transmission, distribution and telecommunications and our investments in other companies to a fifth wholly-owned subsidiary. This corporate restructuring was completed in July 2001.

In 2007, to comply with energy sector legislation, we divided the assets of our transmission business (“Copel Transmissão S.A.”) between our distribution business (“Copel Distribuição S.A.”) and our generation business, (“Copel Geração S.A.”). As a result, we changed the name of the latter entity to Copel Geração e Transmissão S.A. We also liquidated Copel Participações S.A. and distributed the equity interests it held in our controlled companies between Copel Geração e Transmissão and our holding company.

In 2013, the Company was restructured in order to enhance the efficiency of our corporate structure and reduce our operating costs.

Copel has fourteen wholly-owned subsidiaries, the most significant of which are Copel Geração e Transmissão, Copel Distribuição, Copel Telecomunicações, Copel Participações and Copel Renováveis.

The current organization of the group as of December 31, 2014 is as described below:

Business

In the past, our generation and distribution businesses were integrated, and we sold most of the electricity we generated to the customers of our distribution business. This changed as a result of the implementation of the New Industry Model Law, enacted in 2004. Today, open auctions on the regulated market are the primary channel by which our generation business sells energy, and they are one of the primary channels by which our distribution business purchases energy to resell to captive customers. Our generation business only sells energy to our distribution business through auctions in the regulated market. Our distribution business, like certain other Brazilian distribution companies, is also required to purchase energy from Itaipu Binacional (“Itaipu”), a hydroelectric facility equally owned by Brazil and Paraguay, in an amount determined by the Brazilian government based on our proportionate share in the Brazilian electricity market. Itaipu has an installed capacity of 14,000 MW. Pursuant to a 1973 treaty between Brazil and Paraguay, Brazilian companies purchase the substantial majority of the electricity generated by Itaipu. For more information, see “Item 4. Information on the Company—The Brazilian Power Industry”.

 
 

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The following table sets forth the total electricity we generated and purchased in each of the last five years, by showing the total amount of electricity generated and purchased by Copel Geração e Transmissão and the total amount of electricity purchased by Copel Distribuição.

 

 

Year ended December 31,

 

2014

2013

2012

2011

2010

 

(GWh)

Copel Geração e Transmissão

 

 

 

 

 

Electricity generated

24,605

24,420

18,181

25,789

24,321

Electricity purchased from others(1)

612

2,505

3,981

952

696

Total electricity generated and purchased by Copel Geração e Transmissão

25,217

26,925

22,162

26,741

25,017

Copel Distribuição

 

 

 

 

 

Electricity purchased from Itaipu(2)

5,870

5,193

5,256

5,278

5,306

Electricity purchased from Auction – CCEAR – affiliates

411

832

1,316

1,327

1,230

Electricity purchased from Auction – CCEAR – other

16,281

14,715

17,457

16,771

15,405

Electricity purchased from other(3)

6,171

6,149

3,267

3,106

3,090

Total electricity purchased by Copel Distribuição

28,733

26,889

27,296

26,482

25,031

Total electricity generated and purchased by Copel Geração e Transmissão and Copel Distribuição

53,950

53,814

49,458

53,223

50,048

           

                                                                      

(1) Includes capacity made available but not fully delivered (including energy from MRE and CCEE).

(2) Distribution companies operating under concessions in the Midwest, South and Southeast regions of Brazil purchase electricity generated by Itaipu.

(3) Includes capacity made available but not fully delivered (including energy from Elejor and CCEE).

 

 

The following table sets forth the total electricity we sold to Free Customers, captive customers, distributors, energy traders and other utilities in the south of Brazil through the Interconnected Transmission System that links the states in the south and southeast of Brazil, by showing the total amount of electricity sold by Copel Geração e Transmissão and Copel Distribuição in the last five years.

 

 

Year ended December 31,

 

2014

2013

2012

2011

2010

 

(GWh)

Copel Geração e Transmissão

 

 

Electricity delivered to Free Customers

4,016

4,082

1,404

919

1,054

Electricity delivered to bilateral agreements

7,392

5,233

1,367

1,051

1,455

Electricity delivered to Auction – CCEAR – affiliates

411

832

1,316

1,327

1,230

Electricity delivered to Auction – CCEAR – other

4,695

6,389

13,780

14,139

13,405

Electricity delivered to the Interconnected System(1)

7,970

9,796

3,856

8,625

7,233

Total electricity delivered by Copel Geração e Transmissão

24,484

26,332

21,723

26,061

24,377

Copel Distribuição

 

 

Electricity delivered to captive customers

24,208

22,926

23,248

22,454

21,304

Electricity delivered to distributors in the State of Paraná

699

620

635

600

568

Spot Market – CCEE

362

43

36

341

61

Total electricity delivered by Copel Distribuição

25,269

23,589

23,919

23,395

21,933

Subtotal

49,753

49,921

45,645

49,456

46,310

Losses by Copel Geração e Transmissão and Copel Distribuição

4,197

3,893

3,816

3,767

3,738

Total electricity delivered by Copel Geração e Transmissão and Copel Distribuição, including losses

53,950

53,814

49,458

53,223

50,048

           

                                                                      

 (1) Includes capacity made available but not fully delivered.

 

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Generation

 

As of December 31, 2014, we operated and sold energy through 18 (eighteen) hydroelectric plants, 1 (one) wind plant and 1 (one) thermoelectric plant, with a total installed capacity of 4,754.4 MW. On February 14, 2014, upon the expiration of the concession agreement of one of our hydroelectric plants (Rio dos Patos), we ceased to sell the energy produced by this plant but we continue to operate and maintain it until the winner of a new competitive bidding process to be conducted by ANEEL assumes the plant. If we include the installed capacity of the generation companies in which we have an equity interest, our total installed capacity as of December 31, 2014 was 5,360.4 MW. We produce electricity almost exclusively through our hydroelectric plants. Our assured energy totaled 2,067.6 average MW in 2014. Our generation varies year by year as a result of hydrological conditions and other factors. We generated 24,604.8 GWh in 2014, 24,420.4 GWh in 2013, 18,180.9 GWh in 2012, 25,789 GWh in 2011, and 24,321 GWh in 2010.

The generation of electrical energy at our power plants is supervised, coordinated and operated by our Generation and Transmission Operation Center in the city of Curitiba. This operation center is responsible for coordinating the operations related to approximately 99.9% of our total installed capacity, including some of the plants in which we hold only partial ownership interests.

 

Hydroelectric Generation Facilities

 

The following table sets forth certain information relating to our main hydroelectric plants in operation at December 31, 2014:

Plant

Installed capacity

Assured energy (1)

Placed in service

Concession expires

 

(MW)

(GWh/yr)

 

 

Foz do Areia

1,676

5,045.8

1980

2023

Segredo

1,260

5,282.3

1992

2029

Salto Caxias

1,240

5,299.8

1999

2030

Capivari Cachoeira

260

954.8

1970

2015

Mauá

185(2)

876.0

2012

2042

                                                                      

(1) Values used to determine volumes committed for sale.

(2) Corresponds to 51% of the installed capacity of the plant (363 MW) as we operate this plant through a consortium.

 

 

Governador Bento Munhoz da Rocha Netto (“Foz do Areia” Plant). The Foz do Areia Hydroelectric Plant is located on the Iguaçu River, approximately 350 kilometers southwest of the city of Curitiba.

 

Governador Ney Aminthas de Barros Braga (“Segredo” Plant). The Segredo Hydroelectric Plant is located on the Iguaçu River, approximately 370 kilometers southwest of the city of Curitiba.

Governador José Richa (“Salto Caxias” Plant). The Salto Caxias Hydroelectric Power Plant is located on the Iguaçu River, approximately 600 kilometers southwest of the city of Curitiba.

Governador Pedro Viriato Parigot de Souza (“Capivari Cachoeira” Plant). The Capivari Cachoeira Hydroelectric Plant is the largest underground hydroelectric plant in Brazil. The reservoir is located on the Capivari River, approximately 50 kilometers north of the city of Curitiba, and the power station is located on the Cachoeira River, approximately 15 kilometers from the reservoir.

Mauá. The Mauá Hydroelectric Plant is located on the Tibagi River, in the State of Paraná. It was constructed between 2008 and 2012 by Consórcio Energético Cruzeiro do Sul, in which Copel has a 51.0% interest and Eletrosul Centrais Elétricas S.A. (“Eletrosul”) holds the remaining 49.0%. It is located approximately 250 kilometers from Curitiba, in the Municipality of Telêmaco Borba.

 

21


 

In addition to our generation facilities, we have ownership interests in several other hydroelectric generation companies. Between 2004 and 2010, we were required by law to retain a majority of the voting shares of any company in which we obtained an ownership interest. Starting in 2010, it became possible for us to hold non-controlling interests in companies.

The following table sets forth information regarding the hydroelectric generation plants in which we had a partial equity interest as of December 31, 2014:

 

Plant

Installed

capacity

Assured

energy

Placed in service

Our ownership

Concession

expires

 

(MW)

(GWh/yr)

 

(%)

 

Elejor Facility (Santa Clara and Fundão)

246.4

1,229.0

July 2005
June 2006

70.0

2036

Dona Francisca

125.0

683.3

February 2001

23.0

2033

Foz do Chopim

29.1

178.7

October 2001

35.8

2030

Lajeado (Investco S.A)

902.5

4,613.0

December 2001

0.8

2032

 

Elejor Facility. The Elejor Facility consists of the Santa Clara and Fundão Hydroelectric Plants, both of which are located on the Jordão River in the State of Paraná. The aggregate total installed capacity of the units is 246.4 MW, which includes two smaller hydroelectric generation units installed in the same location. Centrais Elétricas do Rio Jordão S.A. (“Elejor”) signed a concession agreement with a term of 35 years for the Santa Clara and Fundão plants in October 2001. As of December 31, 2014, we own 70.0% of the common shares of Elejor, and Paineira Participações owns the remaining 30.0%.

Elejor is required to make monthly payments to the federal government for the use of hydroelectric resources, with total annual payments of R$19.0 million. This amount is adjusted on an annual basis by the Brazilian General Market Price Index, Índice Geral de Preços do Mercado (“IGP-M Index”).

We have a power purchase agreement with Elejor that provides that we will purchase all of the energy produced by the Santa Clara and Fundão facilities at a set rate until April 2019, to be adjusted annually in accordance with the IGP-M Index. In 2014, Elejor’s net revenues and net profits were R$241.2 million and R$19.2 million, respectively, while in 2013 its net revenues and net profits were R$217.4 million and R$41.9 million, respectively.

Dona Francisca. We own 23.03% of the common shares of Dona Francisca Energética S.A. (“DFESA”). The other shareholders are Gerdau S.A. with a 51.82% interest, Celesc S.A. with a 23.03% interest and Desenvix S.A. with a 2.12% interest. DFESA Hydroelectric Power Plant is located on the Jacuí River in the State of Rio Grande do Sul. The plant began full operations in 2001. As of December 31, 2014, DFESA had loans and financing in the total amount of R$5.1 million. The debt is secured by a pledge of shares of DFESA. Until March 2015, we had a power purchase agreement with DFESA, valued at R$81.3 million annually, under which Copel Geração e Transmissão purchased 100% of DFESA’s assured energy. In April 2015, we signed a new ten year power purchase agreement with DFESA, valued at R$18.9 million annually, under which Copel Geração e Transmissão purchases 23.03% of DFESA’s assured energy (proportional to Copel’s stake).

In 2014, DFESA’s net revenues and net profits were R$109.9 million and R$43.8 million, respectively, while in 2013 its net revenues and net profits were R$104.4 million and R$39.0 million, respectively.

Foz do Chopim. The Foz do Chopim Hydroelectric Plant is located on the Chopim River in the State of Paraná. We own 35.77% of the common shares of Foz do Chopim Energética Ltda., the entity that owns the Foz do Chopim Hydroelectric Plant. Silea Participações Ltda. owns the remaining 64.23%. The operation and maintenance of Foz do Chopim Hydroelectric Plant is performed by Copel Geração e Transmissão S.A. Energy supply agreements were executed at an average tariff of R$202.56/MWh. Foz do Chopim Energética Ltda. also has the authorization to operate Bela Vista SHP, a hydroelectric power plant which is located in the same river and has similar capacity. The process for obtaining the necessary environmental license is ongoing. In 2014, Foz do Chopim’s net revenues and net profits were R$40.2 million and R$23.7 million, respectively, while in 2013 its net revenues and net profits were R$38.8 million and R$28.8 million, respectively.

 

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Wind Farm Generation Facilities

Since 2013 we have been expanding our energy generation capacity and diversifying our energy matrix through the development of renewable energy sources, like the construction of wind farms in the State of Rio Grande do Norte.

The following table sets forth certain information relating to our wind farm plants in operation:

Plant

Installed capacity

Assured Power

Placed in Service

Concession Expires

 

(MW)

(Average MW)

 

 

São Bento Energia(1)

94.0

46.3

February 2015

2046

Boa Vista

14.0

6.3

-

-

Olho d'Água 

30.0

15.3

-

-

São Bento do Norte

30.0

14.6

-

-

Farol

20.0

10.1

-

-

Palmas

2.5

0.5

February 1999

2029

                                                                      

(1) São Bento started its operations on February 26, 2015.

 

São Bento Energia. On February 26, 2015, the four wind farms (Boa vista, Olho d’Água, São Bento do Norte and Farol) included in São Bento Wind Farm Complex, located in the State of Rio Grande do Norte began operations. With an installed capacity of 94 MW and assured energy of 46.3 average-MW, the project is the first of a series of five complexes to be built by us in the State of Rio Grande do Norte until 2019. In August 2010, an average of 43.7 MWs of energy generated at a weighted average price of R$134.4/MWh (annually adjusted by IPCA index) was sold to fifteen distribution concessionaires in ANEEL public auctions. The energy to be generated by these wind farms was sold through 20-year term contracts.

Thermoelectric Generation Facilities

The following table sets forth certain information relating to our thermoelectric plants in operation at December 31, 2014:

Plant

Installed

capacity

Assured

energy

Placed in service

Our ownership

Concession

expires

 

(MW)

(GWh/yr)

 

(%)

 

Araucária

484.1

3,199.2(1)

September 2006

80.0

2029

Figueira

20.0

90.2

March 1969

100.0

2019

                                                                      

(1) The assured energy of thermal plants such as Araucária varies depending on the price of natural gas, according to criteria established by the MME.

Araucária. We have an 80.0% interest in UEG Araucária Ltda., which owns the Araucária Thermoelectric Plant. In December 2006, UEG Araucária Ltda. entered into a lease agreement under which it leased the plant to Petróleo Brasileiro S.A. - Petrobras, and Petrobras entered into an operation and maintenance agreement with our subsidiary Copel Geração e Transmissão under which Copel Geração e Transmissão agreed to operate and maintain the plant. Both agreements expired on January 31, 2014. Therefore, as of February 1, 2014, UEG Araucária Ltda. is responsible for selling the energy produced by the Araucária Thermoelectric Plant. This energy is currently not sold in long-term contracts, but rather is distributed in the spot market as directed by the ONS.

 

23


 

Expansion of Generating Capacity

We expect to spend R$929.2 million in 2015 to expand our generation capacity, including participation in new businesses, of which R$345.1 million will be invested in the Colíder Hydroelectric Power Plant, R$158.5 million will be invested in the Baixo Iguaçu Hydroelectric Power Plant and R$221.4 million will be invested in wind power plants. The remaining amount will be spent on equipment maintenance, the modernization of the Foz de Areia Hydroelectric power plant, among other projects.

Hydroelectric Power Plant Projects

We have interests in several hydroelectric generation projects. The following table sets forth information regarding our planned major hydroelectric generation projects and recent acquisitions of hydroelectric generation facilities.

Facility

Installed capacity

Estimated

assured energy (1)

Budgeted completion cost

Beginning of operation (expected)

Our ownership

Status

 

(MW)

(GWh/year)

(R$ million)

 

(%)

 

Colíder HPP

300.0

1,573

1,800

April 2016

100.0

Concession granted

Baixo Iguaçu HPP

350.2

1,514

1,600

December 2017 (2)

30.0

Concession granted

                                                                      

(1) Values used to determine volumes committed for sale.

(2) The expected commercial operation in 2016 has changed because the environmental installation license has been suspended (Generating unit 1 is now scheduled to go into commercial operation on December 31, 2017 and generating units 2 and 3 in January and February 2018, respectively).

 

Colíder. In July 2010, we won an ANEEL auction for a 35-year concession to construct and operate the Colíder Hydroelectric Power Plant on the Teles Pires River in the State of Mato Grosso. The Colíder facility will have an installed capacity of 300.0 MW and will be located in the municipalities of Nova Canaã do Norte, Colíder, Itaúba and Cláudia. Construction began in 2011. The project is in its final stage of construction. The construction of the dam is on its final stage, with coating being applied and drainage system has been installed. The electromechanical equipment is being installed in the powerhouse. The first generating unit is in an advanced stage. Due to fortuitous events in early 2013, the original construction schedule has been hampered. Copel GeT is requesting ANEEL to recognize an exclusion of liability for the delay in the power plant’s start-up and has been delivering energy in accordance with the terms of Colíder’s CCEAR since January 1, 2015, with energy from its own generation complexes. The commercial generation is scheduled to begin in April 2016. From the facility’s assured energy of 179.6 average MW, 125.0 average MW are committed under a 30-year contract to distributors at a price of R$103.40/MWh, as of July 1, 2010 (adjusted annually in accordance with the IPCA inflation index). The remaining 54.6 average MW power not sold under this contract has yet to be contracted for and is still available for sale to large customers in the free market.

Baixo Iguaçu. In June 2013, we acquired a 30% equity interest in the Baixo Iguaçu HPP through a consortium, with no premium payment. Baixo Iguaçu is the last energy project planned for the main river in the state of Paraná (Iguaçu River) and will be located around 30 km downstream from Governador José Richa HPP - the Salto Caxias Hydroelectric Power Plant, which is 100% owned by Copel. The Baixo Iguaçu facility will have an installed capacity of 350.2 MW and will be located in the municipalities of Capanema, Capitão Leonidas Marques, Planalto, Realeza and Nova Prata do Iguaçu. From the facility’s assured energy of 172.8 average MW, 120.96 average MW are committed under a 30-year contract to distributors at a price of R$98.98/MWh, as of July 1, 2008 (adjusted annually in accordance with the IPCA inflation index), with supply starting in December 2017. The remaining 51.84 average MW power not sold under this contract has yet to be contracted for and is still available for sale to large customers in the free market.

 

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Construction began in 2013. The expected commercial operation in 2016 has changed because the environmental installation license has been suspended since June 2014 due to judicial disputes. The 4th Regional Federal Court determined the suspension of its construction works, as it understood that the construction did not have the approval of the ICMBio, the environmental agency responsible for the Iguaçu National Park (Parque Nacional do Iguaçu) (the natural reserve is located 500 meters from the plant). Generating unit 1 is now scheduled to go into commercial operation on December 31, 2017 and generating units 2 and 3 in January and February 2018, respectively.

Wind Farm Projects

                Currently, we hold 100% of the equity interest of 20 (twenty) wind power plants under construction, totaling 528.1 MW of installed capacity and we also hold 49.0% of the equity interest of the Wind Complex São Miguel do Gostoso, composed of 4 (four) wind power plant with 108.0 MW of installed capacity. All the energy to be produced from these wind farms was sold to distribution concessionaires through 20-year agreements. The following table sets forth information regarding our wind farm projects:

 

Wind Farm

Installed capacity (1)

Estimated Assured Power

Budgeted completion cost

Beginning of operation (expected)

Our ownership

Status

 

(MW)

(Average MW)

(R$ million)

 

(%)

 

Copel Brisa Potiguar

196.1

92.9

972.5

2015

100.0

Concession granted

Nova Eurus IV

30.0

13.7

-

-

-

-

Nova Asa Branca I

30.0

13.2

-

-

-

-

Nova Asa Branca II

30.0

12.8

-

-

-

-

Nova Asa Branca III

30.0

12.5

-

-

-

-

Santa Maria

30.0

15.7

-

-

-

-

Santa Helena

30.0

16.0

-

-

-

-

Ventos de Santo Uriel

16.1

9.0

-

-

-

-

Cutia

332.0

126.2

1,310.7

-

100.0

Concession granted

Dreen Cutia

25.2

9.6

-

2017

-

-

Dreen Guajiru

21.6

8.3

-

2017

-

-

Esperança do Nordeste

30.0

9.1

-

2017

-

-

GE Jangada

30.0

10.3

-

2017

-

-

GE Maria Helena

30.0

12.0

-

2017

-

-

Paraíso dos Ventos do Nordeste

30.0

10.6

-

2017

-

-

Potiguar

28.8

11.5

-

2017

-

-

São Bento do Norte I

24.2

9.7

-

2019

-

-

São Bento do Norte II

24.2

10.0

-

2019

-

-

São Bento do Norte III

22.0

9.6

-

2019

-

-

São Miguel I

22.0

8.7

-

2019

-

-

São Miguel II

22.0

8.4

-

2019

-

-

São Miguel III

22.0

8.4

-

2019

-

-

São Miguel do Gostoso

108.0

57.1

513.9

2015

49.0

Concession granted

Carnaúbas

27.0

13.1

-

-

-

-

Reduto

27.0

14.4

-

-

-

-

Santo Cristo

27.0

15.3

-

-

-

-

São João

27.0

14.3

-

-

-

-

                                                                      

(1)The installed capacity for our wind farm projects can be reduced during the implementation of the projects.

Copel Brisa Potiguar. In August 2013, we acquired 100% of the generation assets of Salus Fundos de Investimento em Participações, a company that owned seven wind farm special purposes entities located in the State of Rio Grande do Norte, with total installed capacity of 196.1MW. An average of 92.9 MW (from WPPs Asa Branca I, Asa Branca II, Asa Branca III and Eurus IV), was committed under contract to electric power distributors in the alternative energy auction in August 2010, at a weighted average price of R$135.40/ MWh (adjusted annually by IPCA inflation index). An average of 40.7 MW (from WPPs Santa Helena, Santa Maria and Santo Uriel), was committed under contract in the reserve energy auction in August 2011, at a weighted average price of R$101.98/MWh (annually adjusted by the IPCA inflation index). The energy to be generated was sold through 20-year term contracts, with payments beginning in April 2015.

 

25


 

Cutia. On October 31, 2014, in the 6th Reserve Energy Auction (LER), we sold 71.2 average MW from the Cutia Wind Farm Complex (Dreen Cutia, Dreen Guajiru, Esperança do Nordeste, GE Jangada, GE Maria Helena, Paraíso dos Ventos do Nordeste and Potiguar) for R$144.00/MWh (maximum price in the auction). These seven wind farms have a combined capacity of 195.6 MW, assured energy of 71.4 average-MW and will be built in the cities of Pedra Grande and São Bento do Norte, in the State of Rio Grande do Norte.

Additionally, in the 20th New Energy Auction (A-5), held on November 28, 2014, we sold an additional 54.8 average-MW of wind power energy (for R$136.97/MWh), through Availability Agreements with a 20-year supply term. With a total capacity of 136.4 MW and assured energy of 54.8 average MW, the newest six wind farms (São Bento do Norte I, São Bento do Norte II, São Bento do Norte III, São Miguel I, São Miguel II and São Miguel III) belonging to the Cutia Wind Farm Complex, will be built in São Bento do Norte, in the State of Rio Grande do Norte, in the same region of the other Wind Farm Complexes belonging to Copel.

São Miguel do Gostoso. On June 05, 2014, we negotiated with Voltalia Energia do Brasil Ltda. (Voltalia), the acquisition of a 49% interest in the São Miguel do Gostoso Wind Farm Complex, in the state of Rio Grande do Norte (Brazil). The São Miguel do Gostoso wind farm complex, which is already under implementation, comprises four wind farms, 108 MW installed capacity, whose energy was sold in the Fourth Reserve Energy Auction by average price R$98.92 MWh, through 20-year term contracts, with supply beginning in April 2015.

Proposed Projects

We are involved in various initiatives to study the technical, economic and environmental feasibility of certain hydroelectric, wind power plant and thermoelectric generation projects. These proposed generation projects would have a total of 876.2 MW of installed capacity. The following table sets forth information regarding our proposed generation projects.

 

Proposed Projects

Estimated Installed

Capacity

Estimated Assured

Energy

Our ownership

 

(MW)

(GWh/yr)

(%)

HPP São Jerônimo

331.0

1,560

41.2

SHP BelaVista

29.0

157.4

36

SHP Dois Saltos

25.0

119.1

30

SHP Pinhalzinho

10.9

52.1

30

SHP Burro Branco

10.0

45.1

30

SHP Foz do Turvo

8.8

41.2

30

SHP Foz do Curucaca

29.5

142.2

15

SHP Salto Alemã

29.0

139.7

15

SHP São Luiz

26.0

125.3

15

SHP Alto Chopim

20.3

98.0

15

SHP Rancho Grande

17.7

85.3

15

WPP Complexo Alto Oriente

60.0

247.5

100

WPP Complexo Jandaia

99.0

428.2

100

TPP Norte Pioneiro

180.0

1,190.2

100

TOTAL

876.2

4,458.3

-

 

In 2015, we plan to bid for concessions to construct and operate new hydroelectric power plants in power auctions in the regulated market for new generation projects. We are studying the feasibility of our participation in the hydroelectric and wind farms projects planned to be listed in the A-5 Auctions of 2015. We will also conduct studies of new hydroelectric power plants.

 

26


 

In addition, we are also conducting studies related to future government auctions for wind farms, small hydroelectric plants and thermoelectric power plants in which we may eventually participate.

Other renewable energy projects under study or development include the use of municipal solid waste in power generation, cultivation of micro algae for energy production, wind energy, solar photovoltaic energy, energy from the crude vegetable oil and biogas production from micro algae.

Transmission and Distribution

General

Electricity is transferred from power plants to customers through transmission and distribution systems. Transmission is the bulk transfer of electricity from generating facilities to the distribution system by means of the Interconnected Transmission System, in tension greater than or equal to 230 kV. Distribution is the transfer of electricity to Final Customers, in tension lesser or equal to 138 kV.

The following table sets forth certain information concerning our transmission and distribution grids at the dates presented.

 

At December 31,

 

2014

2013

2012

2011

2010

Transmission lines (km):

 

 

 

 

 

230 kV and 500 kV

2,197.3

2,160.9

2,010.7

2,016.3

1,900.4

138 kV

7.2

7.2

7.2

7.2

7.2

69 kV(1)

-

5.4

5.4

5.4

5.4

Distribution lines (km):

 

 

 

 

 

230 kV

123.5

63.3

68.3

66.1

66.1

138 kV

5,153.5

5,054.7

4,880.1

4,705.3

4,586.3

69 kV

727.2

932.5

968.5

1,003.5

981.5

34.5 kV

82,232.5

81,546.1

81,253.3

80,662.2

79,496.2

13.8 kV

101,688.7

100,279.8

99,195.1

97,981.0

96,863.6

Transformer capacity (MVA):

 

 

 

 

 

Transmission and distribution substations (69 kV – 500 kV)(2)

21,649.7

20,576.5

19,454.8

19,415.3

18,398.6

Generation (step up) substations

6,312.4

5,006.8

5,006.8

5,006.8

5,006.8

Distribution substations (34.5 kV)

1,545.0

1,480.2

1,504.8

1,539.6

1,533.7

Distribution transformers

11,278.2

10,882.2

10,325.3

9,961.6

9,312.4

Total energy losses

7.0%

7.2%

7.7%

7.1%

7.5%

           

                                                                         

 (1) As approved by ANEEL in 2008, these 69 kV transmission lines held by Copel Distribuição were transferred to Copel Geração e Transmissão, since they were part of our transmission business segment.

 (2) This figure includes transformers with primary tensions of 69 kV and 138 kV which belong to Copel Distribuição but are implemented in 230 kV and 525 kV substations, which belong to Copel Geração e Transmissão.

 

Transmission

Our transmission system consists of all our assets of 230 kV and greater and a small portion of our 69 kV and 138 kV assets, which are used to transmit the electricity we generate and the energy we receive from other sources. In addition to using our transmission lines to provide energy to customers in the State of Paraná, we also transmit energy through the Interconnected Transmission System. Two companies owned by the federal government, Eletrosul and Furnas Centrais Elétricas S.A. (“Furnas”), also maintain significant transmission systems in the State of Paraná. Furnas is responsible for the transmission of electricity from Itaipu, while Eletrosul’s transmission system links the states in the south of Brazil. Copel, like all other companies that own transmission facilities, is required to allow other parties access to its transmission facilities in exchange for a compensation at a level set by ANEEL.

 

27


 

Currently, we carry out the operation and maintenance of 2,204 km of transmission lines, 32 (thirty-two) substations in the State of Paraná and 1 substation in the State of São Paulo. In addition, we have partnerships with other companies to operate 1,442 km of transmission lines and 4 substations through special purpose companies (SPCs).

The table below sets forth information regarding our transmission assets in operation:

Subsidiary / SPC

Transmission Lines

TL Extension (km)

Number of Substations

Concession Expiration Date

COPEL GeT

Main Transmission Concession(1)

1,919

32

Dec-42

COPEL GeT

TL Bateias - Jaguariaiva

137

-

Jul-31

COPEL GeT

TL Bateias - Pilarzinho

32

-

Mar-38

COPEL GeT

TL Foz - Cascavel Oeste

116

-

Nov-39

COPEL GeT

Cerquilho III Substation

-

1

Oct-40

Subtotal Copel GeT

 

2,204

33

-

Costa Oeste
Copel GeT - 51%
Eletrosul - 49%

LT Cascavel Oeste - Umuarama Sul
SE Umuarama Sul

143

1

Jan-42

Transmissora Sul Brasileira
Copel GeT - 20%
Eletrosul - 80%

Nova Sta Rita - Camaquã

798

1

May-42

Caiuá Transmissora
Copel GeT - 49%
Elecnor - 51%

TL Guaíra - Umuarama Sul
TL Cascavel Norte - Cascavel Oeste
Santa Quitéria Substation / Cascavel Norte Substation

136

2

May-42

Subtotal SPCs

 

1,442

4

 

Total

 

3,616

37

 

                                                                      

(1) Our main transmission concessions encompasses several transmission lines.

The construction of new transmission facilities of 230 kV and higher must be awarded in a bidding process or otherwise authorized by ANEEL. We are permitted by ANEEL to make minor improvements to some of the existing 230 kV and 500 kV facilities.

In June 2010, Copel won a public auction for the construction and operation of two facilities, both located in the State of São Paulo. The first is the transmission line Araraquara II - Taubaté which is a 356 km transmission line of 500 kV. We expect to complete the construction work of these facilities by March 2016.

In December 2011, SPC Marumbi Transmissora, a strategic agreement between Copel (80%) and Eletrosul (20%) won an ANEEL auction for the construction and operation of 28 km of transmission lines and one substation in the State of Paraná. The start of operation of these assets is scheduled for April 2015.

In March 2012, Copel (49%), together with State Grid Brazil Holding (51%), through the SPC Matrinchã Transmissora and Guaraciaba Transmissora, won an ANEEL public auction for the construction and operation of 1,605 km of new transmission lines and four new substations that will transmit energy produced by five new hydroelectric plants that are planned to be constructed in Teles Pires River, in the North of Mato Grosso State, to the Southeast region of Brazil. These lines and substations are scheduled to enter into operation in July 2015.

 

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In June 2012, Copel won a public auction for the construction and operation of 98 km of transmission lines. The concession won by Copel is for the construction of 230 kV transmission lines that will link substations Londrina and Figueira (88km), located in northern Paraná, and Foz do Chopim and Salto Osório  power plants (10 km), both located in southwest Paraná. Construction of these lines began in 2013. The transmission line Foz do Chopim - Salto Osório (10 km) started commercial operation on March 29, 2015. The transmission line Londrina - Figueira (88 km) is scheduled to become operational in May 2015.

In December 2012, a strategic agreement between Copel (24.5%), Furnas (24.5%) and State Grid Brazil Holding (51%), SPC Paranaíba Transmissora, won a public auction for the construction and operation of 967 km of transmission lines in the States of Goiás, Minas Gerais and Bahia. The corresponding concession agreement was signed in May 2013 and these transmission lines are scheduled to become operational in May 2016.

In the same public auction, Copel won the right to construct and operate 37 km of transmission lines in the State of São Paulo, between the municipalities of Assis and Paraguaçu Paulista. The corresponding concession agreement was signed in February 2013 and these transmission lines are scheduled to become operational in September 2015.

In November 2013, Copel won a ANEEL public auction for the construction and operation of 33 km of transmission lines and one substation in the State of Paraná. The corresponding concession agreement was signed in January 2014, and these transmission lines are scheduled to become operational in January 2016.

In the same auction, SPC Mata de Santa Genebra Transmissora, a strategic agreement between Copel (50.1%) and Furnas (49.9%), won the right to build and operate 847 km of transmission lines and three substations in the States of Paraná and São Paulo. The corresponding concession agreement was signed in May 2014, and these transmission lines are scheduled to become operational in October 2017.

In May 2014, Copel won a ANEEL public auction for the construction and operation of two lots of transmission lines, the first lot composed of 53 km of transmission lines and one substation in the State of Paraná and the second lot composed of 120 km of transmission lines in the States of Paraná and São Paulo. The corresponding concession agreements were signed in September 2014 and these facilities are scheduled to become operational in March and September 2017, respectively.

In the same public auction, a strategic agreement between Copel (49%) and Elecnor (51%) won the right to construct and operate 328 km of transmission lines in the States of São Paulo and Minas Gerais. The corresponding concession agreement was signed in September 2014, and these transmission lines are scheduled to become operational in March 2018.

 

 

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Table of Contents

The table below summarizes information regarding our transmission assets currently under construction:

Subsidiary / SPC

Transmission Lines

State

Km

Number of Substations

Our Ownership

Beginning of Operation (expected)

COPEL GeT

TL Araraquara II — Taubaté

SP

356

-

100%

Mar/2016

COPEL GeT

TL Londrina - Figueira

 

PR

88

-

100%

May/2015

COPEL GeT

TL Assis — Paraguaçu Paulista II

Substation Paraguaçu Paulista II

SP

37

1

100%

Sep/2015

COPEL GeT

TL Bateias - Curitiba Norte

PR

33

1

100%

Jan/2016

COPEL GeT

TL Foz do Chopim - Realeza

PR

53

1

100%

Mar/2017

COPEL GeT

TL Assis – Londrina

SP / PR

120

-

100%

Sep/2017

Subtotal Copel Get

 

 

697

3

 

 

Marumbi

TL Curitiba - Curitiba Leste

PR

28

1

80%

 

Apr/2015

Matrinchã

TL Paranaíta - Ribeirãozinho

MT

1.005

3

49%

 

Jul/2015

Guaraciaba

TL Ribeirãozinho - Marimbondo

MT / GO / MG

600

1

49%

 

Jul/2015

Paranaíba

TL Barreiras II - Pirapora II

BA / MG / GO

967

-

24,5%

May/2016

Mata de Santa Genebra

TL Araraquara II - Bateias

SP / PR

847

3

50,1%

Oct/2017

Cantareira

TL Estreito - Fernão Dias

SP / MG

328

-

49%

Mar/2018

Subtotal SPC

 

 

3,775

8

 

 

Total

 

 

4,472

11

 

 

             

 

Distribution

Our distribution system consists of a widespread network of overhead lines and substations with voltages up to 138 kV and a small portion of our 230 kV assets. Higher voltage electricity is supplied to bigger industrial and commercial customers and lower voltage electricity is supplied to residential, small industrial, commercial customers and other customers. At December 31, 2014, we provided electricity in a geographic area encompassing approximately 98% of the State of Paraná and served 4.3 million customers.

Our distribution grid includes 189,925.4 km of distribution lines, 388,883 distribution transformers and 230 distribution substations of 34.5 kV, 35 substations of 69 kV and 96 substations of 138 kV. During 2014, 145,477 new customers were connected to our network, including customers connected through the rural and urban electrification programs. We are continuing to implement compact grid design distribution lines in urban areas where there is a large concentration of trees in the vicinity of the distribution grid.

We have 28 customers that are directly supplied with energy at a high voltage (69 kV and above) through connections to our distribution lines. These customers accounted for approximately 2.9% of the total volume of electricity sold by Copel Distribuição or 1.5% of our total volume of electricity sold in 2014.

We are responsible for expanding the 138 kV and 69 kV distribution grid within our concession area.

 

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System Performance

We determine the energy losses of our distribution system separately from those of our transmission system. The total losses from our distribution grid are calculated by taking the difference between the energy allocated to the system and the energy supplied to the customers.

Our energy distribution losses (including technical and commercial losses) totaled 12.1% of our available energy in 2014, and include our distribution business’ share of losses from the basic transmission grid (which are allocated between our distribution and transmission businesses).

Information regarding the duration and frequency of outages for our customers is set forth in the following chart for the years indicated.

 

 

Quality of supply indicator

2014

2013

2012

2011

2010

DEC – Duration of outages per customer per year (in hours)

14h06min

11h37min

10h15min

10h38min

11h28min

FEC – Frequency of outages per customer per year (number of outages)

9.08

8.06

7.84

8.26

9.46

We outperformed the quality target indicator established by ANEEL for 2014, which penalize power outages in excess of an average frequency of outages and we underperformed the quality target indicator established by ANEEL for 2014 which penalize power outages in excess of an average number of hours per customer, in each case calculated on an annual basis. These limits vary depending on the geographic region, and the average limit established by ANEEL for our distribution company was 12 hours and 14 minutes of outages per customer per year, and a total of 10.02 outages per customer per year. Failure to comply with these predetermined standards with a final customer results in a reduction of the amount we can charge such final customers in future periods.

In addition, quality target indicators are taken into consideration by ANEEL during distribution concession renewal proceedings, and also influence ANEEL’s calculation of our tariff adjustments. For more information, see “Distribution Tariffs”.

Purchases

The following table contains information concerning volume, costs and average tariffs for the main sources of the electricity we purchased in the last three years.

Source

2014

2013

2012

Itaipu

 

 

 

Volume (GWh)

5,870

5,193

5,256

Cost (R$ millions)

756.1

610.4

503.3

Average tariff (R$/MWh)

128.81

117.54

95.76

Angra (1)

 

 

 

Volume (GWh)

1,046

1,050

-

Cost (R$ millions)

156.2

142.5

-

Average tariff (R$/MWh)

149.31

135.67

-

CCGF

 

 

 

Volume (GWh)

1,315

1,272

-

Cost (R$ millions)

42.5

40.8

-

Average tariff (R$/MWh)

32.34

32.07

-

Auctions in the regulated market

 

 

 

Volume (GWh)

16,281

15,645

19,003

Cost (R$ millions) (2)

3,394.2

2,305.8

1,927.9

Average tariff (R$/MWh)

208.48

147.38

101.45

(1) Prior to 2013, purchases from Angra were made through auctions in the regulated market.

(2) These numbers do not include short-term energy purchased through the Electric Energy Trading Chamber ‒ CCEE.

 

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Itaipu

We purchased 5,870 GWh of electricity from Itaipu in 2014, which constituted 20.4% of our total available electricity in 2014 and 10.9% of Copel Distribuição’s total available electricity in 2014. Our purchases represented approximately 9.1% of Itaipu’s total production. Distribution companies operating under concessions in the Midwest, South and Southeast regions of Brazil are required by law to purchase Brazil’s portion of the energy generated by Itaipu in a proportion that correlates with the volume of electricity that they provide to customers. The rates at which these companies are required to purchase Itaipu’s energy are fixed to cover Itaipu’s operating expenses and payments of principal and interest on Itaipu’s U.S. dollar-denominated borrowings, as well as the cost of transmitting the power to their concession areas. These rates are denominated in U.S. dollars, and have been set for 2015 at US$38.07 per kW per month.

In 2014, we paid an average tariff of R$125.49 per MWh for energy from Itaipu, compared to R$117.5 per MWh during 2013. These figures do not include the transmission tariff that distribution companies must pay for the transmission of energy from Itaipu.

ANGRA

Because Eletronuclear renewed the generation concession of Angra under the 2013 Concession Renewal Law, the energy generated by Angra is no longer sold in auctions in the regulated market. Rather, under the 2013 Concession Renewal Law, this energy is sold to distributors in accordance with the quota system established by that law, such that Copel Distribuição was obligated to purchase 1,046 GWh from Angra in 2014 and 1,050 GWh in 2013.

Assured Power Quota Contract – CCGF

Under the 2013 Concession Renewal Law, certain generation concessionaires renewed their concession contracts, and therefore these concessionaires no longer sell the energy produced by these generation facilities in auctions in the regulated market. Rather, this energy is sold to distribution companies in accordance with the quota system established by the 2013 Concession Renewal Law. For more information, see “item 4. The Brazilian Electric Power Industry”. Copel Distribuição is obligated to purchase energy from these generation concessionaires that have renewed generation concessions under this quota system. As a result, Copel Distribução was obligated to purchase 1,315 GWh in CCGF contracts in 2014 and 1,272 GWh in 2013.

Auctions in the Regulated Market

In 2014, we purchased 16,692 GWh of thermoelectric and hydroelectric energy through auctions in the regulated market. This energy represents 67.0% of the total electricity we purchased. For more information on the regulated market and the free market, see “The Brazilian Power Industry—The New Industry Model Law”.

Sales to Final Customers

During 2014, we supplied approximately 97% of the energy distributed directly to captive customers in the State of Paraná. Our concession area includes 4.3 million customers located in the State of Paraná and in one municipality in the State of Santa Catarina, located south of the State of Paraná. We also sold energy to a total of 29 (twenty-nine) Free Customers, 4 (four) of which were located outside of our concession area. During 2014, the total power consumption of our captive customers and Free Customers was 28,224 GWh, a 4.5% increase as compared to 27,008 GWh during 2013. The following table sets forth information regarding our volumes of energy sold to different categories of purchasers for the periods indicated.

 

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Year ended December 31,

Categories of purchaser

2014

2013

2012

2011

2010

 

(GWh)

Industrial customers

10,841

10,675

8,799

8,377

8,146

Residential

7,267

6,888

6,559

6,224

5,925

Commercial

5,482

5,086

5,058

4,778

4,466

Rural

2,252

2,081

2,025

1,872

1,774

Other(1)

2,382

2,279

2,211

2,122

2,048

Total(2)

28,224

27,008

24,652

23,373

22,359

           

                                                                         

(1) Includes public services such as street lighting, electricity supply for municipalities and other governmental agencies, as well as our own consumption.

(2) Total GWh does not include our energy losses.

 

 

The following table sets forth the number of our Final Customers in each category at December 31, 2014.

 

 

Category

Number of Final Customers

Industrial

91,096

Residential

3,437,030

Commercial

369,206

Rural

372,464

Other(1)

57,203

Total

4,326,999

                                                                         

 (1) Includes street lighting, as well as electricity for municipalities and other governmental agencies, public services and own consumption.

 

 

Industrial and commercial customers accounted for approximately 31% and 21%, respectively, of our total revenues from sales to final customers during 2014. In 2014, 35% of our total revenues from energy sales were from sales to residential customers.

Tariffs

Retail Tariffs. We classify our customers in two groups (“Group A Customers” and “Group B Customers”), based on the voltage level at which electricity is supplied to them and on whether they are considered as industrial, commercial, residential or rural customers. Each customer falls within a certain tariff level defined by law and based on the customer’s classification, although some flexibility is available according to the nature of each customer’s demand. Under Brazilian regulation, low voltage customers such as residential customers (other than Low Income Residential Customers, as defined below) pay the highest tariff rates, followed by 13.8 kV and 34.5 kV voltage customers, usually commercial customers and 69 kV and 138 kV voltage customers, usually industrial customers.

Group A Customers receive electricity at 2.3 kV or higher and the tariffs applied to them are based on the actual voltage level at which energy is supplied and the time of day the energy is supplied. Tariffs are comprised of two components: a “capacity charge” and an “energy charge”. The capacity charge, expressed in reais per kW, is based on the higher of (i) contracted firm capacity and (ii) power capacity actually used. The energy charge, expressed in reais per MWh, is based on the amount of electricity actually consumed as evidenced by our metering.

Group B Customers receive electricity at less than 2.3 kV, and the tariffs applied to them are comprised solely of an energy charge and are based on the classification of the customer.

 

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ANEEL restates our tariffs annually, generally in June. For more information about the distribution tariff adjustments that have been made by ANEEL in recent years, see “Item 5. Operating and Financial Review and Prospects—Overview—Rates and Prices”.

The following table sets forth the average tariffs for each category of Final Customer in effect in 2014, 2013 and 2012.

Tariffs

2014

2013

2012

 

(R$/MWh)

Industrial

236.35

202.68

220.00

Residential

292.99

257.92

293.62

Commercial

269.00

234.05

265.67

Rural

178.48

157.28

178.04

Other customers

208.73

180.89

206.89

All Final Customers

252.63

219.94

245.80

       

 

Low Income Residential Customers. Under Brazilian law, we are required to provide discounted rates to certain low income residential customers (“Low Income Residential Customers”). In 2014, we served about 408,251 low income residential customers. For servicing these customers, in 2014 we received a R$69.5 million grant, which was approved by ANEEL, from the Brazilian Federal Government.

The following table sets forth the current minimum discount rates approved by ANEEL for each category of Low Income Residential Customer.

Consumption

Discount from base tariff

Up to 30 kWh per month

65%

From 31 to 100 kWh per month

40%

From 101 to 220 kWh per month

10%

 

 

Special Customers. A customer of our distribution business that consumes at least 500 kV (a “Special Customer”) may choose its energy supplier if that supplier derives its energy from alternative sources, such as small hydroelectric plants, wind plants or biomass plants. A Special Customer that chooses to purchase energy from a supplier other than Copel Geração e Transmissão continues to use our distribution grid and pay our distribution tariff. However, as an incentive for Special Customers to purchase from alternative sources, we are required to reduce the tariff paid by Special Customers by 50%. This discount is subsidized by the Brazilian federal government, and therefore does not impact the revenues of our distribution business.

Transmission Tariffs. A transmission concessionaire is entitled to annual revenues based on the transmission network it owns and operates. These revenues are annually readjusted according to criteria stipulated in the concession contract. We are directly a party to eleven transmission concession contracts, five of which are in the operational stage and six of which are in construction. Not all of the transmission concession contracts employ the same revenue model. 9.1% of our transmission revenues are updated on an annual basis by the IGP-M and the other 90.9% are subject to the tariff review process.

Of all our transmission concessions in operational stage, our main transmission concession (which involves our main transmission facilities) accounted for about 82.6% of our gross transmission revenues in 2014.

 

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The first periodic revision related to our main transmission concession scheduled for 2005 was only carried out in 2007, at which point ANEEL reduced the tariffs by 15.08%. This adjustment was applied retroactively to July 2005, and was passed on to our Final Customers until June 2009. In addition, in July 2010 pursuant to a second periodic revision of our principal concession, ANEEL granted provisional approval of a reduction in our transmission tariff by 22.88%, applied to the revenues of new installations in the Interconnected Transmission System, and applied retroactively from July 1, 2009 onward. In June 2011, ANEEL reviewed the figures of the second periodic revision and reduced the annual revenues by 19.94%. The remainder of our annual revenues was subject to adjustment by IGP-M or IPCA, as applicable.

By late 2012, Copel decided to anticipate the extension of its main transmission concession agreement (corresponding to 87% of the Company’s transmission lines in operation) that would expire in 2015, pursuant to the new rules of the 2013 Concession Renewal Law. On December 2012, Copel executed the Third Addendum to the Concession Agreement 060/2001, extending this transmission concession agreement until December 31, 2042. In order to adjust these assets’ annual permitted revenue to the new rules of 2013 Concession Renewal Law, ANEEL reduced the transmission tariffs we charged by 38.0%.

In addition, we have other 4 (four) concession agreements for transmission lines and substations in operation, which correspond to an aggregate of 17.4% of our transmission revenues. The amount of revenues we are entitled to receive pursuant to one of these contracts is updated on an annual basis by the IGP-M and is not subject to the tariff review process. However, this amount will be reduced by 50% from the 16th year forward, as of 2016. Other three agreements revenues are subject to the tariff review process and adjustments by the IPCA.

In 2013, our main transmission concession agreement was adjusted by the IPCA, and improvements to the system were approved by ANEEL (increase of 8.9%). Out of the other three transmission concession agreements that were operational in 2013, one was adjusted by the IPCA (increase of 6.5%), another by the IGP-M (increase of 6.2%), and the last one had a first tariff review (decrease of 8.9%). As a result, the annual permitted revenues for the 2013/2014 cycle for our transmission assets reflected an 8.4% net increase over our annual permitted revenues following the renewal of our main transmission concession in 2012.

In 2014, (i) two of our transmission concession agreements (including our main transmission concession agreement), were adjusted by the IPCA and improvements to the system were approved by ANEEL (average increase of 18.2%), (ii) one was adjusted by the IPCA (6.4%), (iii) another one was adjusted by the IGP-M (7.8%) and (iv) one became operational on July 28, 2014, adding R$4.2 million to our annual permitted revenues. As a result, the annual permitted revenues for the 2014/2015 cycle for our transmission assets reflects an increase of 19.9% over our annual permitted revenues for the 2013/2014 cycle.

The table below shows our RAP (R$ million) for the last four cycles of transmission lines over which we hold an 100% ownership:

 

Contract

Transmission Line /

Substation

Jul.2014

Jun.2015

Jul.2013

Jun.2014

Jan.2013

Jun.2013

Jul.2012

Dec.2012

 

 

Annual Permitted Revenues (R$ million)

060/2001

Main Transmission Concession(1)

150.1

126.4

116.1

304.8

075/2001

Bateias – Jaguariaiva

16.5

15.3

14.4

14.4

006/2008

Bateias – Pilarzinho

0.9

0.8

0.9

0.9

027/2009

Foz do Iguaçu - Cascavel Oeste

10.1

9.1

8.5

8.5

015/2010

Cerquilho III

4.2

-

-

-

Total

 

181.8

151.6

139.9

328.6

           

                                                                         

 (1) Our main transmission concessions encompasses several transmission lines.

 

 

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Other Businesses

Telecommunications

Copel Telecomunicações S.A. Pursuant to an authorization from the Brazilian National Telecommunication Agency, Agência Nacional de Telecomunicações (“ANATEL”), we provide telecommunication services within the States of Paraná and Santa Caratina. We have been offering these services since August 1998 through the use of our fiber optics network (totaling 25,425 thousand km of fiber optic cables by the end of 2014). In 2014, we served the 399 municipalities in the State of Paraná and two additional municipalities in the State of Santa Catarina (attending a total number of 21,761 clients) and we have also been involved in an educational project aimed at providing public elementary and middle schools in the State of Paraná with broadband internet access.

We provide services to most of the major Brazilian telecommunication companies that operate in the State of Paraná. In total, we have 21,761 clients (4,227 corporate clients which include supermarket, universities, banks, internet service providers and television network and 17,534 retail clients). We also provide a number of different telecommunication services to our subsidiaries.

Sercomtel. We own 45.0% of the stock of Sercomtel Telecomunicações S.A. (“Sercomtel”). Sercomtel holds concessions to provide fixed and mobile telephone services in the municipalities of Londrina and Tamarana in the State of Paraná and has obtained ANATEL’s authorization to provide telephone services to all other cities in the State of Paraná. Currently, Sercomtel operates under an authorization regime with its own network in 11 (eleven) cities of the State of Paraná. Through an alliance with us, in force since March, 2012 Sercomtel has been providing telephone services to other 63 (sixty-three) cities within the State of Paraná, including Curitiba. Sercomtel has concessions from ANATEL to provide cable television in São José in the State of Santa Catarina and Osasco in the State of São Paulo and radio-wave television transmission in Maringá in the State of Paraná.

As of December 31, 2014, Sercomtel, in its concessions area for fixed telephone services, had a total of 202,423 telephone lines installed, of which 166,358 were in operation. As of December 31, 2014, Sercomtel had an installed capacity of 85,000 terminals in its Global System for Mobil Communications GSM system, of which 32,585 were in operation. In December 2009, Sercomtel started providing 3G services with a capacity of 20,000 lines, of which 19,937 are currently installed. Sercomtel 2014 net revenues were R$145.4 million, with net income of R$7.1 million.

Water and Sewage

In January 2008, Copel bought the 30% stake in Dominó Holdings S.A. (“Dominó Holdings”) held by Sanedo Ltda., a wholly-owned subsidiary of Grupo Veola, for R$110.2 million.

In March, 2014, we have completed a corporate restructuring of our equity interest in Dominó Holdings and its subsidiary Companhia de Saneamento do Paraná Sanepar (“Sanepar”), a public utility company that provides 345 urban and rural municipalities and approximately 10.4 million people in the State of Paraná with water distribution services and 6.7 million with sewage services.

Upon the completion of this restructuring, Daleth Participações S.A. no longer holds any Dominó Holdings’s equity and we now directly hold (i)14.86% of Sanepar’s preferred shares or 7.63% of its total capital and (ii) 49.0% of the total outstanding share capital of Dominó Holdings, while Andrade Gutierrez Concessões holds the remaining 51%. Dominó Holdings remains with 24.7% of the voting stock or 12.2% of the total capital of Sanepar. Considering the interest held through Dominó Holdings, COPEL’s direct and indirect interest in Sanepar represents 13.58% of its share capital. The State of Paraná owns 75.0% of the outstanding voting or 51.4%  of the total capital of Sanepar.

Dominó Holdings’ net income in 2014 was R$83.1 million.

 

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Gas

Gas Distribution

We are engaged in the distribution of natural gas through Companhia Paranaense de Gás (“Compagas”), the company that holds the exclusive rights to supply piped gas in the State of Paraná. Compagas operates the gas distribution grid in the State of Paraná, which covered 726 kilometers in 2014, an increase of 12.8% compared to 646 kilometers covered in 2013. In 2014, Compagas’s net revenues were R$1,664.6 million, an increase of 336%, compared to 2013, and its net income was R$60.4 million, an increase of 226% compared to 2013. Compagas’s customers include thermoelectric plants, cogeneration plants, gas stations, other businesses and residences. Compagas is focusing its business strategy on increasing the volume of gas it distributes to customers by marketing the benefits of substituting gas for oil and other fuels as a means of achieving greater energy efficiency. Compagas’ customer base increased 24%, to 26,052 in 2014 from 21,018 in 2013.

Compagas recorded an increase of 2% in the average daily volume of natural gas distributed to final customers, to 1,058,697 cubic meters per day in 2014 (not including the volume of gas supplied to UEG Araucária Thermal Power Plant) from 1,042,124 cubic meters per day in 2013. In addition, Compagas makes available its distribution grid to transport natural gas to UEG Araucária. In 2014, Petrobras S.A. delivered 636.7 million cubic meters of gas to UEG Araucária, compared to 477.6 million cubic meters in 2013.

As of December 31, 2014, we owned 51.0% of the capital stock of Compagas and accounted for this interest through consolidation, since we control this company. The minority shareholders of Compagas are Petrobras and Mitsui Gás, each of which owns 24.5% of the capital stock of Compagas.

Gas Exploration

On November 28, 2013, the National Petroleum, Natural Gas and Biofuels Agency announced that the consortium composed of Copel (30%), Tucumann Engenharia (10%), Bayar Participações (30%) and Petra Energia (30%)  won the right to explore, develop and produce natural gas in four blocks located in the central-south region of the State of Paraná (Paraná Basin), an area of 11,297 km², equivalent to 7% of the total auctioned area. The consortium offered a signing bonus of R$12.5 million for these four blocks and a minimum exploratory program, which envisages investments of R$78.1 million. This concession has a term of four years from the execution of the agreement and may be extended for 2 years, totaling six years. The operator of the consortium will be Petra Energia. The acquisition of these blocks are in accordance with Copel’s strategies, and allows the access to gas production, which may be used in thermal generation plants to be constructed alongside the gas wells. As of April 28, 2015, our consortium has only executed concession agreements for two of these blocks and no exploratory program has been initiated.

Services

We own 40.0% of the share capital of Escoelectric Ltda. (“ESCO”), a company that assists customers with their electricity needs through the provision of consulting services, planning and project implementation, automation services, operation, maintenance, training and technical assistance. The Instituto de Tecnologia para o Desenvolvimento – LACTEC owns the remaining 60.0% of the share capital. ESCO also markets products and services aimed at obtaining greater energy efficiency and energy conservation. All operations of this company were discontinued in 2008, and we plan to liquidate ESCO in the coming years.

Concessions

We operate under concessions granted by the Brazilian government for our generation, transmission and distribution businesses. Under Brazilian law, concessions are subject to competitive bidding processes at the end of their respective terms.

 

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2013 Concession Renewal Law

Until recently, the Brazilian rules governing generation concessions gave concessionaires the right to renew for an additional 20 years concession contracts that were entered into prior to 2003. For transmission and distribution concessions granted after 1995, concessionaires had the right to renew these contracts for an additional 30 years.

On September 11, 2012, the Brazilian government enacted a law (“2013 Concession Renewal Law” which had been preceded by a provisional measure (medida provisória), which significantly changed the conditions under which concessionaires are able to renew concession contracts. Under the 2013 Concession Renewal Law, generation, transmission and distribution concessionaires may renew the concessions that were in effect as of 1995 (and, in the case of generation facilities, generation concession contracts entered into prior to 2003) for an additional period of 30 years (or an additional 20-year period in the case thermal plants), provided that the concessionaire agrees to amend the concession contract to reflect a series of new conditions. The purpose of this new regime was to substantially reduce the cost of electricity paid by Final Customers and to stimulate economic growth. Under the 2013 Concession Renewal Law, concessionaires must decide 60 months before the end of each concession term whether to amend and renew a concession contract or to terminate each concession contract at the end of its respective term. For concession contracts expiring within 60 months of September 12, 2012, concessionaires were required to make this decision by October 15, 2012. So far, for our contracts expiring within this period, we have decided not to renew our generation contracts, and we decided to request the renewal of our transmission and distribution contracts.

For concessionaires of existing generation facilities, the 2013 Concession Renewal Law changes the scope of these concession contracts. Previously, a generation concessionaire had the right to sell the energy generated by the facilities subject to its concession for profit. In contrast, generation concessions renewed pursuant to the 2013 Concession Renewal Law will not grant concessionaires the right to sell the energy generated by these facilities. Instead, these concessions will only cover the operation and maintenance of the generation facilities. The energy generated by these facilities will be allocated by the Brazilian federal government in quotas to the regulated market, for purchase by distribution concessionaires. For new generation facilities, on the other hand, the concessionaire will still have the right to sell the energy produced by the generation facility.

In addition to changing the scope of generation concessions, the 2013 Concession Renewal Law establishes a new tariff regime that significantly affects the treatment of amounts to be invested by concessionaires to improve and maintain generation plants. Because the 2013 Concession Renewal Law requires that ANEEL pre-approve investments made by generation concessionaires in order to receive compensation, the new law substantially increases the risk that a generation concessionaire either will not be able to make certain investments in a timely manner, or will not be able to recover the amounts invested. These changes are expected to materially reduce the margins of generation concessionaires and negatively affect their financial condition. In addition, ANEEL is expected to issue further regulations for generation concessions under the 2013 Concession Renewal Law, and it is not clear what the consequences of these regulations will be.

The 2013 Concession Renewal Law affects transmission and distribution concessions differently. The principal change is that amounts invested related to modernization projects, structural reforms, equipment and contingencies will be subject to prior ANEEL approval. However, the 2013 Concession Renewal Law does not affect the manner in which distribution and transmission concessionaires may recover amounts invested in transmission infrastructure.

The 2013 Concession Renewal Law applies to all generation, transmission and distribution contracts that were in effect as of 1995 (and, in the case of generation concessions, entered into prior to 2003), regardless of whether a contract grants to the concessionaire the right to renew a concession on its original terms. For example, several of our concession contracts contain provisions allowing us to renew these concessions for a period of 20 years. Under the 2013 Concession Renewal Law, in order to renew these contracts, we nonetheless would be required to accept the application of the conditions imposed by the 2013 Concession Renewal Law to the contract, and the concession contract would then be renewed for 30 years, rather than 20. If we choose to renew a concession contract that contains a renewal provision, we would be indemnified by the Brazilian government using funds from the RGR Fund (see Energy Sector Regulatory Charges) in an amount equal to the portion of our investments related to the concession that have not yet been amortized or depreciated, as calculated by ANEEL.

 

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If a concessionaire decides not to accept the new tariff regime with respect to a concession contract and therefore decides not to renew the contract, the concession will terminate at the end of its original term, and the Brazilian government will conduct a new competitive bidding process for the concession. The original concessionaire may participate in the new competitive bidding process.

Generation Concessions

                Out of our 18 generation concessions, we have three generation concessions (Capivari Cachoeira, Mourão and Chopim I, with respective installed capacity of 260.0 MW, 8.2 MW and 1.8MW) set to expire in 2015, which we have decided not to renew. Also, we decided to not renew a concession agreement of one of our hydroelectric plants (Rio dos Patos, with installed capacity of 1.8 MW) that was set to expire on February 14, 2014. While we ceased to sell the energy produced by this plant, we continue to operate and maintain it until the winner of a new competitive bidding process to be conducted by ANEEL assumes the plant. Our management determined that renewal of these generation concessions under the terms of the 2013 Concession Renewal Law would be disadvantageous to our generation business. Therefore, our management decided to allow these concession contracts to expire, and to participate in the subsequent competitive bidding process for these concessions. However, we will continue to be responsible for the operation and maintenance of these plants until the winner of a competitive bidding process assumes the plant. Until then, Copel will receive a pre-established tariff to operate and maintain the plant, as defined by MME 170/2014 resolution.

Under the rules in effect prior to the enactment of the 2013 Concession Renewal Law, 13 of our generation plants have had their concessions extended by Brazilian authorities since 1999, in each case for the 20-year term allowed by previous regulation. Under the previous law, these concessions were not eligible for a second extension. However, as described above, the 2013 Concession Renewal Law now allows extension of these concessions for an addition 30 years period if we choose to accept the application of the new tariff regime.

Concessions for generation projects, granted after 2003, such as the Mauá Hydroelectric Plant, are non-renewable, meaning that upon expiration of their 35-year term, the concession will be granted subject to a competitive bidding process. The 2013 Concession Renewal Law does not impact generation concessions granted after 2003.

The following tables sets forth information relating to the terms as well as the renewals of our main generation hydroelectric, thermoelectric and wind farm concessions (all of which we hold a direct ownership interest):

 

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Hydroelectric Plants

Initial concession date

First expiration date

Extension Date

Final expiration date

Rio dos Patos(1)

February 1984

February 2014

Not subject to extension

February 2014

Capivari Cachoeira

April 1965

May 1995

June 1999

July 2015

Mourão

January 1964

January 1994

June 1999

July 2015

Chopim I

March 1964

March 1994

June 1999

July 2015

Foz do Areia

May 1973

May 2003

January 2001

May 2023

São Jorge

December 1974

December 2004

April 2003

December 2024

Apucaraninha

October 1975

October 2005

April 2003

October 2025

Guaricana

August 1976

August 2006

August 2005

August 2026

Chaminé

August 1976

August 2006

August 2005

August 2026

Segredo

November 1979

November 2009

September 2009

November 2029

Derivação do Rio Jordão

November 1979

November 2009

September 2009

November 2029

Salto Caxias

May 1980

May 2010

September 2009

May 2030

Cavernoso

January 1981

January 2011

September 2009

January 2031

Marumbi

March 1956

Under review by ANEEL

Under review by ANEEL

Under review by ANEEL

Melissa

May 2002

Indefinitely

-

-

Pitangui

May 2002

Indefinitely

-

-

Salto do Vau

May 2002

Indefinitely

-

-

Mauá (2)

June 2007

July 2042

Not extendable

July 2042

Colíder(3)

January 2011

January 2046

Not extendable

January 2046

Cavernoso II

February 2011

February 2046

Not extendable

February 2046

Baixo Iguaçu(4)

August 2012

August 2047

Not extendable

August 2047

                                                                         

(1) The concession for Rio dos Patos expired in February 2014 and was not renewed. Until a new competitive bidding process is concluded with respect to this facility, we will continue to operate it under the terms and conditions of the 2013 Concession Renewal Law.

(2) Mauá was constructed by Consórcio Energético Cruzeiro do Sul, of which Copel owns 51.0% and Eletrosul owns the remaining 49.0%

(3) Expected to begin operations in April 2016.

(4) Under construction by Consórcio Empreendedor Baixo Iguaçu, of which Copel owns 30% and Geração Céu Azul the remaining 70%. It is expected to begin operations in 2017.

 

 

Thermoelectric Plants

Initial concession date

First expiration date

Extension date

Final expiration date

Figueira

March 1969

March 1999

June 1999

March 2019

 

 

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Wind Plants

Initial concession date

First expiration date

Asa Branca I(1)

April 26, 2011

April 25, 2046

Asa Branca II(1)

June 1, 2011

May 31, 2046

Asa Branca III(1)

June 1, 2011

May 31, 2046

Nova Eurus IV(1)

April 28, 2011

April 27, 2046

Santa Maria(1)

May 9, 2012

May 8, 2047

Santa Helena(1)

April 10, 2012

April 9, 2047

Ventos de Santo Uriel(1)

April 10, 2012

April 9, 2047

Boa Vista

April 28, 2011

April 27, 2046

Farol

April 20, 2011

April 19, 2046

Olho D'Água

June 1, 2011

May 31, 2046

São Bento do Norte

May 19, 2011

May 18, 2046

São João(2)

March 26, 2012

March 25, 2047

Carnaúbas(2)

April 9, 2012

April 8, 2047

Reduto(2)

April 16, 2012

April 15, 2047

Santo Cristo(2)

April 18, 2012

April 17, 2047

Cutia(3)

Waiting publication of the authorization award(4)

35 years(5)

Guariju(3)

Waiting publication of the authorization award(4)

35 years(5)

Jangada(3)

Waiting publication of the authorization award(4)

35 years(5)

Maria Helena(3)

Waiting publication of the authorization award(4)

35 years(5)

Potiguar(3)

Waiting publication of the authorization award(4)

35 years(5)

Esperança do Nordeste(3)

Waiting publication of the authorization award(4)

35 years(5)

Paraíso dos Ventos do Nordeste(3)

Waiting publication of the authorization award(4)

35 years(5)

São Bento do Norte I(3)

Waiting publication of the authorization award(6)

35 years(5)

São Bento do Norte II(3)

Waiting publication of the authorization award(6)

35 years(5)

São Bento do Norte III(3)

Waiting publication of the authorization award(6)

35 years(5)

São Miguel I(3)

Waiting publication of the authorization award(6)

35 years(5)

São Miguel II(3)

Waiting publication of the authorization award(6)

35 years(5)

São Miguel III(3)

Waiting publication of the authorization award(6)

35 years(5)

                                                                         

 

(1) Wind plants located at Copel’s Brisa Potiguar wind farm complex under construction.

(2) Under construction by Voltália Energia do Brasil S.A. Copel holds a 49% interest. Expected to begin operations in April 2015.

(3) Wind plants located at Copel’s Cutia wind farm complex under construction.

(4) Auctioned on ANEEL’s auction No. 08/2014 as of October 31, 2014. The authorization award is expected to be issued within 180 days from the auction date.

(5) The authorization granted expires 35 years after the publication of the authorization award.

(6) Auctioned on ANEEL’s auction No. 06/2014 as of November 28,2014. The concession award is expected to be issued within 180 days from the auction date.

 

We also have ownership interests in five other generation projects. The following table sets forth information relating to the terms of the concessions of the generation facilities in which we had such partial ownership interest as of December 31, 2014.

 

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Generation Facility

Company

Initial concession date

Expiration date

Extension

Dona Francisca hydroelectric power plant

Dona Francisca Energética SA ‒ DFESA

July 1979

August 2033

Possible

Santa Clara and Fundão hydroelectric power plant

Centrais Elétricas do Rio Jordão S.A. - ELEJOR

October 2001

October 2036

Possible

Araucária thermoelectric power plant

UEG Araucária Ltda.

December 1999

December 2029

Possible

Foz do Chopim hydroelectric power plant

Foz do Chopim Energética

April 2000

April 2030

Possible

Voltália São Miguel do Gostoso wind farms

 

 

 

 

Carnaúbas

São Miguel do Gostoso I

April 2012

April 2047

Not possible

Reduto

São Miguel do Gostoso I

April 2012

April 2047

Not possible

Santo Cristo

São Miguel do Gostoso I

April 2012

April 2047

Not possible

São João

São Miguel do Gostoso I

March 2012

March 2047

Not possible

 

Transmission Concessions

Pursuant to the 2013 Concession Renewal Law and the terms of our transmission concessions, we have the right to request 30-year extensions of the concessions from ANEEL, provided that such request is delivered within 60 months prior to the expiration of the contract in question. Our principal transmission concession, from which we derived 82.6% of our transmission revenues in 2014, has been renewed pursuant to the 2013 Concession Renewal Law, and will therefore now expire in December 2042.

In addition, we have four other concession contracts for transmission lines and substations that are currently in operation, and are set to expire in July 2031, March 2038, November 2039 and October 2040, respectively. We derived an aggregate of 17.4% of our transmission revenues from these three contracts in 2014. In accordance with the 2013 Concession Renewal Law, each of these contracts can be extended for an additional 30-year period.

We intend to continue requesting extensions for all of our transmission concessions.

The following table sets forth certain information relating to the terms and extension terms of our main transmission concessions (all of which we hold a direct ownership interest):

Transmission

Facility

Initial concession

Date

First expiration

Date

Possibility of extension

Expected (or final) expiration date

Main transmission concession

July 2001

July 2015

Extended

December 2042

Bateias – Jaguariaíva

August 2001

August 2031

Possible

August 2061

Bateias – Pilarzinho

March 2008

March 2038

Possible

March 2068

Foz do Iguaçu – Cascavel Oeste

November 2009

November 2039

Possible

November 2069

Substation Cerquilho III

October 2010

October 2040

Possible

October 2070

Araraquara 2 – Taubaté(1)

October 2010

October 2014

Possible

October 2070

Foz do Chopim - Salto Osorio(1)

August 2012

August 2042

Possible

August 2072

Assis – Paraguaçu Paulista II(1)

February 2013

February 2043

Possible

February 2073

Bateias – Curitiba Norte(1)

January 2014

January 2044

Possible

January 2074

Estreito – Fernão Dias (1)

September 2014

September 2044

Possible

September 2074

Assis - Londrina(1)

September 2014

September 2044

Possible

September 2074

                                                                         

(1) Facility under construction.

 

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We have ownership interests in ten other transmission projects, through special purpose companies. The following table sets forth information relating to the terms of the concessions of the transmission facilities in which we had such partial ownership interest as of December 31, 2014:

Transmission Facility

Special Purpose Company (SPC)

Initial concession date

First Expiration date

Possibility of Extension

Expected (or final) expiration date

Cascavel Oeste – Umuarama

Costa Oeste Transmissora de Energia S.A

January 2012

January 2042

Possible

January 2072

Nova Santa Rita -

Camaquã 3

Transmissora Sul Brasileira de Energia S.A

May 2012

May 2042

Possible

May 2072

Umuarama -

Guaira

Caiuá Transmissora de Energia S.A

May 2012

May 2042

Possible

May 2072

Açailândia

Miranda II

Integração Maranhense Transmissora de Energia S.A.

May 2012

May 2042

Possible

May 2072

Curitiba -

Curitiba Leste(1)

Marumbi Transmissora de Energia S.A.

May 2012

May 2042

Possible

May 2072

Paranaíta –

Ribeirãozinho(1)

Matrinchã Transmissora de Energia S.A.

May 2012

May 2042

Possible

May 2072

Ribeirãozinho – Marimbondo II(1)

Guaraciaba Transmissora de Energia S.A

May 2012

May 2042

Possible

May 2072

Barreiras II – Pirapora II(1)

Paranaíba Transmissora de Energia S.A

May 2013

May 2043

Possible

May 2073

Itatiba – Bateias(1)

Mata de Santa Genebra Transmissora S.A

May 2014

May 2044

Possible

May 2074

Estreito – Fernão Dias(1)

Cantareira Transmissora de Energia S.A.

September 2014

September 2044

Possible

September 2074

                                                                         

(1) Facility under construction.

 

Distribution Concessions

We operate our distribution business pursuant to a concession contract that was signed on June 24, 1999, and is set to expire on July 7, 2015. Under the 2013 Concession Renewal Law, we have the right to renew this concession for an additional 30-year period by accepting an amendment to the concession contract. Notwithstanding the changes introduced by the 2013 Concession Renewal Law, we concluded that the renewal of our distribution concession in accordance with the 2013 Concession Renewal Law would not materially affect our results of operations. Accordingly, after a careful evaluation of the conditions imposed by the Brazilian federal government for the extension of our distribution concession, we decided to request the renewal of this contract. However we have not yet received the amendment to be proposed by the granting authority. Therefore, we cannot guarantee that we will be able to renew our distribution concession contract on terms that are favorable to us.

The granting authority must issue its decision on this matter no later than 18 months before the concession’s expiration date. Under our main distribution contract, ANEEL should have responded to our request by January 7, 2014, but the fact that we did not receive a response from ANEEL by this deadline does not itself impact our ability to renew this contract under the 2013 Concession Renewal Law.

Competition

We have concessions to distribute electricity in substantially all of the State of Paraná, and we do not face competition from the five utilities that have been granted concessions for the remainder of the state. As a result of legislation passed in 2004, however, other suppliers are able to offer electricity to our existing Free Customers at prices lower than those we currently charge. However, when a captive customer becomes a Free Customer, it is still required to pay to use our distribution grid. The reduction in net revenue of our distribution business is therefore compensated with a reduction in our costs for energy that we would otherwise acquire to sell to these customers.

Furthermore, under certain circumstances, Free Customers may be entitled to connect directly to the Interconnected Transmission System rather than our distribution grid. Unlike a Free Customer’s choice of another energy supplier, in which case that customer must still use our distribution grid and thus pay us the appropriate tariff, our distribution business ceases to collect tariffs from a customer that connects directly to the Interconnected Transmission System. The migration of customers from the distribution grid to the transmission network therefore results in the loss of revenues for our distribution business.

 

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Distribution and transmission companies are required to permit the use of their lines and ancillary facilities for the distribution and transmission of electricity by other parties upon payment of a tariff.

Free Customers are limited to:

·       existing customers (those connected to the distribution grid before July 1995) with demand of at least 3 MW and supplied at voltage levels equal to or greater than 69 kV;

·       new customers (those connected to the distribution grid after July 1995) with demand of at least 3 MW at any voltage; and

·       customers with demand of at least 500 kW that opt to be supplied energy by means of alternative sources, such as wind power projects, small hydroelectric power plants or biomass projects.

As of December 31, 2014, we had 29 (twenty-nine) Free Customers, representing approximately 3.7% of our consolidated operating revenue and approximately 8.1% of the total quantity of electricity sold by us. Through March 31, 2015, we had 2 (two) agreements with Free Customers, that expired and were not renewed. Our contracts with Free Customers are typically for periods of greater than two and less than five years.

Approximately 6.1% of the megawatts sold under contracts to such customers are set to expire in 2015. In addition, as of December 31, 2014, we had 53 customers that were eligible to purchase energy as Free Customers. These customers represented approximately 4.6% of the total volume of electricity we sold in 2014, and approximately 7.6% of our total operating revenue from energy sales for that year.

In the generation business, any producer may be granted a concession to build or manage thermoelectric and small hydroelectric generating facilities in the State of Paraná. Brazilian law provides for competitive bidding for generation concessions for hydroelectric facilities with capacity higher than 30 MW.

In the transmission business, Brazilian law provides for competitive bidding for transmission concessions for facilities with voltage of 230 kV or greater that will form part of the Interconnected Transmission System.

Brazilian law requires that all of our generation, transmission and distribution concessions be subject to a competitive bidding process upon their expiration. We may face significant competition from third parties in bidding for renewal of such concessions or for any new concessions. The loss of certain concessions could adversely affect our results of operations.

Environment

Our construction and operation activities for the generation, transmission and distribution of electric energy, distribution of natural gas and our telecommunications operations are subject to federal, state and municipal environmental regulations.

All of our activities follow our Sustainability and Corporate Citizenship Policy, which integrates corporate planning and sustainability management in order to optimize our financial, social and environmental performance.

We request and renew our environmental licenses in accordance with the environmental regulation issued by applicable federal, state and municipal level authorities. We are in compliance with all material environmental regulations and our more recent (post-1986) generation, transmission and distribution projects are in compliance with federal, state and municipal regulations.

 

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To comply with the environmental licensing of transmission facilities predating the 1986 environmental licensing requirements, we and the environmental regulator for the State of Paraná (“Instituto Ambiental do Paraná – IAP”) executed in 2010 a conduct adjustment term – TAC, agreement in which we committed to complete an environmental licensing process for these facilities by 2012. This environmental licensing process for all of our transmission facilities is complete since 2012.

In 2014, 4 (four) compulsory environmental audits (Auditorias Ambientais Compulsórias – AACs) were performed, 3 (three) of which were of a substation and 1 (one) of which was of transmission line. Starting in 2012 these compulsory environmental inspections were required by law as a condition for the renewal of environmental licenses, however, since August, 2014 we are no longer required to perform such inspections as a condition for the renewal of our environmental licenses.

 In December 2010, we received the site licenses to begin construction of the Colíder Hydroelectric Plant. These licenses were granted after we received approval of Colíder Basic Environmental Plan, which contains thirty-two programs and sub-programs designed to prevent, mitigate and offset any negative environmental and social impact of this project, while enhancing the positive effects of the project. During 2014 we continued to implement the programs contained in the Colíder Basic Environmental Plan.

We are involved in environmental and social programs including the “Social and Environmental Reservoirs Management Program” (Programa de Gestão Socioambiental de Reservatórios). The Social and Environmental Reservoirs Management Program aims to improve the quality and availability of water in Copel’s reservoirs through managing and monitoring of watersheds.

To reinforce our commitment to environmental, social and economic sustainability, we are signatories to the United Nations Global Compact, and we actively seek to implement the principles of the Global Compact in our daily activities and our corporate culture.

Plant, Property and Equipment

Our principal properties consist of the generation and telecommunications facilities described in “Business—Generation and Purchasers of Energy”. Of the net book value of our total property, plant and equipment at December 31, 2014 (including construction in progress), generation facilities represented 72.6%, wind farms represented 11.6%, telecommunications represented 5.3%, Elejor represented 5.4%, and Araucária Thermoelectric Plant represented 5.1%. We believe that our facilities generally are adequate for our present needs and suitable for their intended purposes.

The Expropriation Process

Although we receive concessions from the Brazilian government to construct hydroelectric facilities, we do not receive title to the land on which the facilities are to be located. In order for us to construct, the land must be expropriated. The land required for the implementation of a hydroelectric facility may only be expropriated pursuant to specific legislation. We generally negotiate with communities and individual owners occupying the land so as to resettle such communities in other areas and to compensate individual owners. Our policy of resettlement and compensation generally has resulted in the settlement of expropriation disputes. At December 31, 2014, we estimated our liability related to the settlement of such disputes to be approximately R$52.8 million. This amount is in addition to amounts for land expropriation included in each of our hydroelectric facility budgets.

 

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The Brazilian eLECTRIC Power Industry

General

In December 2014, the MME approved a ten-year expansion plan under which Brazil’s installed power generation capacity is projected to increase to 195.9 GW by 2023, of which 59.7% is projected to be hydroelectric, 14.5% is projected to be thermoelectric, 1.7% is projected to be nuclear and 24.1% is projected to be from alternative energy sources such as wind, biomass and small hydroelectric plants.

Approximately 34% of the installed power generating capacity of Brazil is currently owned by Eletrobras (including its wholly-owned subsidiary Eletronuclear and its 50.0% participation interest in Itaipu). Through its subsidiaries, Eletrobras is also responsible for 55% of the installed transmission capacity equal or above 230 kV within Brazil. In addition, some Brazilian states control entities involved in the generation, transmission and distribution of electricity. They include Companhia Energética de São Paulo – CESP, Companhia Energética de Minas Gerais – CEMIG and us, among others.

Principal Regulatory Authorities

Ministry of Mines and Energy – MME

The MME is the primary regulator of the power industry and acts as the Brazilian governmental authority empowered with policymaking, regulatory and supervisory powers.

National Energy Policy Council – CNPE

The National Energy Policy Council (Conselho Nacional de Política Energética - “CNPE”), created in August 1997, provides advice to the President of the Republic of Brazil regarding the development and creation of a national energy policy. The CNPE is chaired by the MME and is composed of six ministers of the Federal Government and three members chosen by the President of Brazil. The CNPE was created in order to optimize the use of energy resources in Brazil and ensure the national supply of electricity.

National Electric Energy Agency – ANEEL

The Brazilian power industry is regulated by ANEEL, an independent federal regulatory agency. ANEEL’s primary responsibility is to regulate and supervise the power industry in accordance with the policies set forth by the MME and to respond to matters which are delegated to it by the Brazilian government and the MME. ANEEL’s current responsibilities include, among others, (i) administering concessions for electric energy generation, transmission and distribution, including the approval of electricity tariffs, (ii) enacting regulations for the electric energy industry, (iii) implementing and regulating the utilization of energy sources, including the use of hydroelectric power, (iv) promoting, monitoring and managing the public bidding process for new concessions, (v) settling administrative disputes among electricity sector entities and electricity purchasers, and (vi) defining the criteria and methodology for the determination of transmission and distribution tariffs.

National Electric System Operator – ONS

The ONS (Operador Nacional do Sistema Elétrico) is a non-profit, private entity comprised of electric utilities engaged in the generation, transmission and distribution of electric energy, in addition to other private participants such as importers, exporters and Free Customers. The primary role of the ONS is to coordinate and regulate the generation and transmission operations in the Interconnected Transmission System, subject to the ANEEL’s regulation and supervision. The objectives and principal responsibilities of the ONS include, among others, operational planning for the generation industry, organizing the use of the domestic Interconnected Transmission System and international interconnections, ensuring that industry participants have access to the transmission network in a non-discriminatory manner, assisting in the expansion of the electric energy system, proposing plans to the MME for extensions of the Interconnected Transmission System, and formulating regulations regarding the operation of the transmission system for ANEEL’s approval.

 

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Electric Energy Trading Chamber – CCEE

The CCEE (Câmara de Comercialização de Energia Elétrica) is a non-profit, private entity subject to authorization, inspection and regulation by ANEEL. The CCEE is responsible for, among other things, (i) registering all energy purchase agreements in the regulated market, Contratos de Comercialização de Energia no Ambiente Regulado (“CCEAR”), and registering the agreements resulting from market adjustments and the volume of electricity contracted in the free market, and (ii) accounting for and clearing short-term transactions. The CCEE is composed of holders of concessions, permissions and authorizations in the electricity industry and Free Customers, and its board of directors is composed of four members appointed by these agents and one by the MME, who is the chairman of the board of directors.

Energy Sector Monitoring Committee – CMSE

The CMSE (Comitê de Monitoramento do Setor Elétrico) was created by the New Industry Model Law to monitor service conditions and to recommend preventative measures to ensure energy supply adequacy, including demand-side action and contracting of energy reserves.

Energy Research Company – EPE

In August 2004, the Brazilian government created the Energy Research Company (Empresa de Pesquisa Energética - “EPE”), a federal public company responsible for conducting strategic studies and research in energy sector, including the industries of electric power, petroleum, natural gas, coal and renewable energy sources. The studies and research conducted by the EPE subsidize the formulation of energy policy by the MME.

Eletrobras

Eletrobras serves as a holding company for the following federally-owned energy companies: Companhia Hidro Elétrica do São Francisco – CHESF, Furnas, Eletrosul, Centrais Elétricas do Norte do Brasil S.A. – Eletronorte, Companhia de Geração Térmica de Energia Elétrica – CGTEE and Eletrobras Termonuclear S.A. Eletronuclear. Eletrobras manages funds generated by some of the regulatory charges, as well as the commercialization of energy from Itaipu and from alternative energy sources, under the Proinfa Program.

Historical Background of Industry Legislation

The Brazilian constitution provides that the development, use and sale of electric energy may be undertaken directly by the Brazilian government or indirectly through the granting of concessions, permissions or authorizations. Historically, the Brazilian electric energy industry has been dominated by generation, transmission and distribution concessionaires controlled by the federal or state governments. Since 1995, the Brazilian government has taken a number of measures to reform the Brazilian electric energy industry. in general, these measures were aimed at increasing the role of private investment and eliminating foreign investment restrictions in order to increase overall competition and productivity in the industry.

The following is a summary of the principal developments in the regulatory and legal framework of the Brazilian electricity sector:

·        In 1995, (i) the Brazilian constitution was amended to authorize foreign investment in power generation; (ii) the Concessions Law was enacted, requiring that all concessions for energy related services be granted through public bidding processes, providing for the creation of independent producers and Free Customers and granting electricity suppliers and Free Customers open access to all distribution and transmission systems; and (iii) a portion of the controlling interests held by Eletrobras and various Brazilian states in generation and distribution companies were sold to private investors.

·        In 1998, the Power Industry Law was enacted, providing for, among other things, the creation of the ONS and the appointment of Banco Nacional de Desenvolvimento Econômico e Social (“BNDES”), a development bank wholly owned by the Brazilian government, as the financing agent of the power industry, especially to support new generation projects.

 

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·        In 2001, Brazil faced a serious energy crisis that lasted through February 2002. During this period, the Brazilian government implemented an energy-rationing program in the most adversely affected regions, namely the southeast, central-west and northeast regions of Brazil. In April 2002, the Brazilian government for the first time implemented the extraordinary tariff readjustment to compensate the electricity suppliers for financial losses incurred as a result of the rationing period.

·        In 2004, the Brazilian government enacted the New Industry Model Law, in an effort to further restructure the power industry with the ultimate goal of providing customers with a stable supply of electricity at reasonable prices.

·        In 2012, the Brazilian government enacted two Provisional Measures that brought important changes to the Brazilian electricity regulatory framework: (i) Provisional Measure no. 577, dated as of August 29, 2012 (converted into Law no. 12,767 dated as of December 27, 2012); and (ii) Provisional Measure no. 579, dated September 11, 2012 (converted into the 2013 Concession Renewal Law). Provisional Measure no. 577 established the obligation of the granting authority to render electricity services in the event of termination of an electricity concession, as well as new rules related to the intervention by the granting authority in electricity concessions to ensure adequate performance of utility services. The 2013 Concession Renewal Law established new rules that changed concessionaires’ ability to renew concession contracts. Under this Law, generation and distribution concessionaires may renew their concession contracts that were in effect as of 1995 and transmission concessionaires may renew their concession contracts that were in effect prior to and as of 1995 for an additional period of 30 years, provided that the concessionaires agree to amend the concession contracts to reflect a new tariff regime to be established by ANEEL.

Concessions

The companies or consortia that wish to build or operate facilities for generation, transmission or distribution of electricity in Brazil must participate in a competitive bidding process or must apply to the MME or to ANEEL for a concession, permission or authorization, as the case may be. Concessions grant rights to generate, transmit or distribute electricity in a specific concession area for a specified period. This period is 35 years for generation concessions granted after 2003, and 30 years for new transmission or distribution concessions. In accordance with the 2013 Concession Renewal Law, generation and distribution concessionaires may renew their concession contracts that were in effect as of 1995 and transmission concessionaires may renew their concession contracts that were in effect prior to and as of 1995 for an additional period of 30 years, provided that the concessionaires agree to amend the concession contracts to reflect certain new terms and conditions established by the law. The 2013 Concession Renewal Law does not impact generation concessions granted after 2003, as they are non-renewable.

The Concessions Law establishes, among other things, the conditions that the concessionaire must comply with when providing electricity services, customers’ rights and the respective rights and obligations of the concessionaire and the granting authority. In addition to the Concessions Law, the concessionaire must also comply with the general regulations governing the electricity sector. The main provisions of the Concessions Law and related ANEEL regulations are summarized as follows:

Adequate service. The concessionaire must render adequate service to all customers in its concession and must maintain certain standards with respect to regularity, continuity, efficiency, safety and accessibility.

Use of land. The concessionaire may use public land or request that the granting authority expropriate necessary private land for the benefit of the concessionaire. In the latter case, the concessionaire must compensate the affected private landowners.

 

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Strict liability. The concessionaire is strictly liable for all damages arising from the provision of its services.

Changes in controlling interest. The granting authority must approve any direct or indirect change in the concessionaire’s controlling interest.

Intervention by the granting authority. The granting authority may intervene in the concession, through ANEEL, to ensure the adequate performance of services, as well as the full compliance with applicable contractual and regulatory provisions. Once ANEEL determines the intervention, limited to one year, but extendable for additional two years, it must designate a third party to manage the concession. Within 30 days of the determination of the intervention, the granting authority’s representative must commence an administrative proceeding in which the concessionaire is entitled to contest the intervention. The administrative proceeding must be completed within 1 year. The shareholders of the concessionaire under intervention must submit to ANEEL, within 60 days of the determination of the intervention, a recovery and correction plan. If ANEEL approves such plan, the intervention is terminated. In the event ANEEL does not approve the plan, the granting authority may: (i) declare forfeiture of the concession; (ii) determine the spin-off, incorporation, merger or transformation of the concessionaire, incorporation of a subsidiary or assignment of quotas/shares to a third party; (iii) determine the change of control of the concessionaire; (iv) determine a capital increase of the concessionaire; or (v) determine the incorporation of an special purpose company.

Termination of the concession. The termination of the concession agreement may occur by means of expropriation and/or forfeiture. Expropriation is the early termination of a concession for reasons related to the public interest. An expropriation must be specifically approved by law or decree. Forfeiture must be declared by the granting authority after ANEEL or the MME has made a final administrative ruling that the concessionaire, among other things, (i) has failed to render adequate service or comply with an applicable law or regulation, (ii) no longer has the technical, financial or economic capacity to provide adequate service, or (iii) has not complied with penalties assessed by the granting authority. The concessionaire may contest any expropriation or forfeiture in the courts.

A concession agreement may also be terminated (i) through the mutual agreement of the parties, (ii) upon the bankruptcy or dissolution of the concessionaire, or (iii) following a final, non-appealable judicial decision rendered in a proceeding filed by the concessionaire.

When a concession agreement is terminated, all assets, rights and privileges that are materially related to the rendering of electricity services revert to the Brazilian government. Following termination, the concessionaire is entitled to indemnification for its investments in assets that have not been fully amortized or depreciated, after deduction of any amounts due by the concessionaire related to fines and damages.

Expiration. When the concession expires, all assets, rights and privileges that are materially related to the rendering of the electricity services revert to the Brazilian government. Following the expiration, the concessionaire is entitled to indemnification for its investments in assets that have not been fully amortized or depreciated as of the expiration.

Penalties. ANEEL regulations govern the imposition of sanctions against electricity sector participants and determine the appropriate penalties based on the nature and importance of the breach (including warnings, fines, temporary suspension from the right to participate in bidding procedures for new concessions, licenses or authorizations and forfeiture). For each infraction, the fines can be up to 2% of the revenue (net of value-added tax and services tax) of the concessionaire in the 12-month period preceding any penalty notice. Some infractions that may result in fines relate to the failure to request ANEEL’s approval to, among other things: (i) execute certain contracts between related parties; (ii) sell or assign the assets related to services rendered as well as impose any encumbrance (including any security, bond, guaranty, pledge and mortgage) on these or any other assets related to the concession or the revenues from electricity services; (iii) effect a change in the controlling interest of the holder of the authorization or concession; and (iv) make certain changes to the bylaws. In the case of contracts executed between related parties that are submitted for ANEEL’s approval, ANEEL may seek to impose restrictions on the terms and conditions of these contracts and, in extreme circumstances, require that the contract be rescinded.

 

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The New Industry Model Law

The New Industry Model Law introduced material changes to the regulation of the electric energy industry, in order to (i) provide incentives to private and public entities to build and maintain generation capacity, and (ii) ensure the supply of electricity in Brazil at low tariffs through a competitive electricity public bidding process. The key elements of the New Industry Model Law include:

·        Ensuring the existence of two markets: (i) the regulated market, a more stable market in terms of supply of electricity, and (ii) a market specifically addressed to certain participants (i.e., Free Customers and energy-trading companies), called the free market, that permits a certain degree of competition vis-à-vis the regulated market.

·        Restrictions on certain distribution activities, including requiring distributors to focus on their core business of distribution activities in order to promote more efficient and reliable services to captive customers.

·        Elimination of self-dealing by providing an incentive for distributors to purchase electricity at the lowest available prices rather than buying electricity from related parties.

·        Upholding contracts executed prior to the New Industry Model Law, in order to provide regulatory stability for transactions carried out before its enactment.

The New Industry Model Law excludes Eletrobras and its subsidiaries from the National Privatization Program, which was created by the Brazilian government in 1990 to promote the privatization process of state-owned companies.

For concessionaires of existing generation facilities, the 2013 Concession Renewal Law changes the nature of these concession contracts. Previously, a generation concessionaire had the right to sell the energy generated by the facilities subject to its concession for profit. In contrast, generation concessions for existing generation facilities (including those renewed pursuant to the 2013 Concession Renewal Law) will not grant concessionaires the right to sell the energy generated by these facilities. Instead, these concessions will only cover the operation and maintenance of the generation facilities. The energy generated by these facilities will be allocated by the Brazilian federal government in quotas to the regulated market, for purchase by distribution concessionaires. For new generation facilities, the concessionaire will have the right to sell the energy produced by the facility.

Parallel Environment for the Trading of Electric Energy

Under the New Industry Model Law, the purchase and sale of electricity is carried out in two different segments: (i) the regulated market, which contemplates that distribution companies will purchase by public auction all the electricity they need to supply their customers; and (ii) the free market, which provides for the purchase of electricity by non-regulated entities (such as the Free Customers and energy traders).

However, the electricity arising from the following is subject to specific rules different from the rules applicable to the regulated market and to the free market: (i) low capacity generation projects located near consumption points (such as certain co-generation plants and small hydroelectric power plants), (ii) plants qualified under the Proinfa Program, an initiative established by the Brazilian government to create incentives for the development of alternative energy sources, such as wind power projects, small hydroelectric power plants and biomass projects, (iii) Itaipu, (iv) Angra 1 and 2 as from 2013 and (v) those generation concession contracts extended or subject to a new bidding process in accordance with the 2013 Concession Renewal Law.

The electricity generated by Itaipu will continue to be sold by Eletrobras to the distribution concessionaires operating in the South, Southeast and Midwest portions of the Interconnected Transmission System. The rates at which Itaipu-generated electricity is traded are denominated in U.S. dollars and established pursuant to a treaty between Brazil and Paraguay. As a consequence, Itaipu rates rise or fall in accordance with the variation of the real/U.S. dollar exchange rate. Changes in the price of Itaipu-generated electricity are, however, subject to the Parcel A cost recovery mechanism discussed below under “Distribution Tariffs”.

 

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Beginning January 2013, the energy generated by nuclear plants Angra 1 and 2 started to be sold by Eletronuclear to the distribution concessionaires at a rate calculated by ANEEL.

The New Industry Model Law does not affect bilateral agreements entered into before 2004.

The Regulated Market

In the regulated market, distribution companies must purchase their expected electricity requirements for their captive customers in the regulated market through a public auction process. The auction process is administered by ANEEL, either directly or through the CCEE, under certain guidelines provided by the MME.

Electricity purchases are made through two types of bilateral agreements: Energy Agreements (Contratos de Quantidade de Energia) and Availability Agreements (Contratos de Disponibilidade de Energia). Under an Energy Agreement, a generator commits to supply a certain amount of electricity and assumes the risk that its electricity supply could be adversely affected by hydrological conditions and low reservoir levels, among other conditions, which could interrupt the supply of electricity. In such case, the generator would be required to purchase electricity elsewhere in order to comply with its supply commitments. Under a Availability Agreement, a generator commits to make a certain amount of capacity available to the regulated market. In such case, the generator’s revenue is guaranteed and the distributors must bear the risk of a supply shortage.

The estimate of demand from distributors is the principal factor in determining how much electricity the system as a whole will contract. A distributor is obligated to contract all of its projected electricity needs. A deviation in actual demand from projected demand could result in penalties to distributors. In the event of under-contracting, the distributor is penalized directly in an amount that increases as the difference between the amount of energy contracted for and actual demand increases. An under-contracting distributor must also pay to meet its demand by purchasing energy in the spot market.

In the event of over-contracting, where the contracted volume falls between 100% and 105% of actual demand, the distributor is not penalized and the additional costs are compensated through increases in its customers’ tariffs. Where the contracted volume is over 105% of actual demand, the distributor must sell energy in the spot market. If the contract price proves lower than the current spot market price, the distributor sells its excess energy for a profit. On the other hand, if the contract price is higher than the spot market price, the distributor sells its excess energy at a loss.

With respect to the granting of new concessions, the newly enacted regulations provide that bids for new hydroelectric generation facilities may include, among other things, the minimum percentage of electricity to be supplied in auctions in the regulated market. Concessions for new generation projects, such as Mauá and Colíder, in our case, are non-renewable, meaning that upon expiration, the concessionaire must again complete a competitive bidding process.

The Free Market

The free market covers transactions between generation concessionaires, Independent Power Producers – IPPs, self-generators, energy traders, exporters and importers of electric energy and Free Customers. The free market also covers bilateral agreements between generators and distributors signed under the old model, until they expire. Upon expiration, such contracts must be executed under the New Industry Model Law guidelines.

A consumer that is eligible to choose its supplier may only do so upon the expiration of its contract with the local distributor and with advance notice or, in the case of a contract with no expiration date, upon 15 days’ notice in advance of the date on which the distributor must provide MME with its estimated electricity demand for the year. In the latter case, the contract will only be terminated in the following year. Once a consumer has chosen the free market, it may only return to the regulated system with five years prior notice to its regional distributor, provided that the distributor may reduce such term at its discretion. This extended period of notice seeks to assure that, if necessary, the distributor can buy additional energy in auctions on the regulated market without imposing extra costs on the captive market.

 

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Private generators may sell electricity directly to Free Customers. State-owned generators may sell electricity directly to Free Customers but are obligated to do so only through private auctions carried out by the state-owned generators exclusively to Free Customers or by the Free Customers.

Regulation under the New Industry Model Law and further rules enacted

A July 2004 decree governs the purchase and sale of electricity in the regulated market and the free market, as well as the granting of authorizations and concessions for electricity generation projects. This decree includes, among other items, regulations relating to auction procedures, the form of power purchase agreements and the mechanism for passing costs through to Final Customers.

These regulations establish the guidelines under which electricity-purchasing agents must contract their electricity demand. Electricity-selling agents must show that the energy to be sold comes from existing or planned power generation facilities. Agents that do not comply with such requirements are subject to penalties imposed by ANEEL.

These regulations also require electricity distribution companies to contract for 100% of their energy needs primarily through public auctions. In addition to these auctions, distribution companies can purchase limited amounts (up to 10% of their demand) from: (i) generation companies that are connected directly to the distribution company (except for hydroelectric power plants with capacity higher than 30 MW and certain thermoelectric power plants) (ii) electricity generation projects participating in the initial phase of the Proinfa Program, (iii) the Itaipu Power Plant and (iv) quotas from those generation concession contracts extended or subject to a new competitive bidding process in accordance with the 2013 Concession Renewal Law.

The MME establishes the total amount of energy that will be contracted in the regulated market, the number and the type of generation projects that will be auctioned each year.

All electricity generation, distribution and trading companies, independent producers and Free Customers are required to notify MME, by August 1 of each year of their estimated electricity demand or estimated electricity generation, as the case may be, for each of the subsequent five years. In advance of each electricity auction, each distribution company is also required to inform MME of the amount of electricity that it intends to contract in the auction. In addition, distribution companies are required to specify the portion of the contracted amount they intend to use to supply potentially Free Customers.

Auctions in the Regulated Market

Electricity auctions for new generation projects are held (i) in the fifth year before the initial delivery date of electricity (as “A-5 Auctions”), and (ii) in the third year before the commencement of commercial operation (“A-3 Auctions”). Existing power generators hold auctions (i) in the year before the initial delivery date (“A-1 Auctions”), and (ii) up to four months before the delivery date (“Adjustment Auctions”).

New and existing power generators may participate in the reserve energy auctions as long as these generators increase the power system capacity or they did not achieve commercial operation by January 2008. Invitations to bid in the auctions are prepared by ANEEL in accordance with guidelines established by the MME, including the requirement that the lowest bid wins the auction. Each generation company that participates in the auction executes a contract for purchase and sale of electricity with each distribution company, in proportion to the distribution companies’ respective estimated demand for electricity, except for the market adjustment and reserve energy auctions.

The contracts for both A-5 and A-3 Auctions have a term of between 15 and 30 years, and the contracts for A-1 Auctions have a term between 5 and 15 years. Contracts arising from market Adjustment Auctions are limited to a two-year term. The reserve energy contracts are limited to a 35-year term.

The quantity of energy contracted from existing generation facilities may be reduced for three reasons: (i) to compensate for captive customers that become Free Customers; (ii) to compensate for market deviations from the estimated market projections (up to 4% per year of the annual contracted amount, beginning two years after the initial electricity demand is estimated); and (iii) to adjust the quantity of contracted energy in bilateral agreements entered into prior to the enactment of the New Industry Model Law.

 

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With regard to (i) above, the reduction in net revenue caused when a captive customer becomes a Free Customer is compensated by the increased amounts that Free Customers are required to pay to use our distribution system. However, a Free Customer may disconnect from our distribution grid (and therefore cease to pay us a distribution tariff) if it chooses to connect directly to the Interconnected Transmission System or if it generates energy for self-consumption and transports this energy without using our distribution grid. Because a Free Customer that connects directly to the Interconnected Transmission System no longer pays us a distribution tariff, we might not be able to fully recover this loss in revenues.

Since 2004, CCEE has conducted twenty auctions for new generation projects, fourteen auctions for energy from existing power generation facilities, six auctions for reserve energy in order to increase energy supply security and eighteen auctions for market adjustments. No later than August 1 of each year, the generators and distributors provide their estimated electricity generation or estimated electricity demand for the five subsequent years. Based on this information, MME establishes the total amount of electricity to be traded in the auction and determines which generation companies will participate in the auction. The auction is carried out electronically in two phases.

After the completion of the auction (except in the case of reserve energy auction), generators and distributors execute the CCEAR, in which the parties establish the price and amount of the energy contracted in the auction. The price is adjusted annually based on price variations published by the IPCA. The distributors grant financial guarantees to the generators (mainly receivables from the distribution service) to secure their payment obligations under the CCEAR.

Also after completion of the auction, the generation concessionaire and the CCEE execute the Contrato de Energia de Reserva, in which the parties establish the price and amount of the energy contracted for in the auction. The distributors, Free Customers and self-producing customers then execute the Contrato de Uso da Energia de Reserva (“CONUER”) with CCEE, in order to provide for the terms of the use of the reserve energy. The reserve energy customers grant financial guarantees to CCEE to secure their payment obligations under CONUER.

The Annual Reference Value

Brazilian regulation establishes a mechanism ( “Annual Reference Value”) that limits the costs that can be passed through to Final Customers. The Annual Reference Value corresponds to the weighted average of the electricity prices in the A-5 and A-3 Auctions (excluding alternative energy auctions), calculated for all distribution companies.

The regulation establishes the following permanent limitations on the ability of distribution companies to pass-through costs to customers: (i) no pass-through of costs for electricity purchases that exceed 105% of actual demand; (ii) limited pass-through of costs of the acquisition of electricity in the A-3 Auctions, if the amount of purchased energy exceeds 2% of the amount of electricity contracted in the A-5 Auctions; (iii) if the volume contracted from existing generation projects decreases by over 4%, new contracts from new generation projects are afforded limited pass-through.

The MME establishes the maximum acquisition price for electricity generated by existing projects. If distributors do not comply with the obligation to fully contract their demand, the pass-through of costs from energy acquired in the short-term market is the lower of the spot market price and the Annual Reference Value.

Electric Energy Trading Convention

The Electric Energy Trading Convention (Convenção de Comercialização de Energia Elétrica) regulates the organization and functioning of the CCEE and defines, among other things, (i) the rights and obligations of CCEE participants, (ii) the penalties to be imposed on defaulting agents, (iii) the means of dispute resolution, (iv) trading rules in the regulated and free markets, and (v) the accounting and clearing process for short-term transactions.

 

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Restricted Activities of Distributors

Distributors in the Interconnected Transmission System are not permitted to (i) engage in activities related to the generation or transmission of electric energy, (ii) sell electric energy to Free Customers, except for those in their concession area and under the same conditions and tariffs maintained with respect to captive customers, (iii) hold, directly or indirectly, any interest in any other company, corporation or strategic agreement, or (iv) engage in activities that are unrelated to their respective concessions, except for those permitted by law or the relevant concession agreement. A generator is not allowed to hold more than a 10% equity interest in any distributor.

Elimination of Self-Dealing

Since the purchase of electricity for captive customers is now performed through auctions in the regulated market, “self-dealing” (under which distributors were permitted to meet up to 30.0% of their energy needs using energy that was either self-produced or acquired from affiliated companies) is no longer permitted.

Challenges to the Constitutionality of the New Industry Model Law

The New Industry Model Law is currently being challenged on constitutional grounds before the Brazilian Supreme Court. The Brazilian government moved to dismiss the actions, arguing that the constitutional challenges were moot because they related to a provisional measure that had already been converted into law. To date, the Supreme Court has not reached a final decision and we do not know when such a decision may be reached. While the Supreme Court is reviewing the law, its provisions have remained in effect. Regardless of the Supreme Court’s final decision, certain portions of the New Industry Model Law relating to restrictions on distributors performing activities unrelated to the distribution of electricity, including sales of energy by distributors to Free Customers and the elimination of self-dealing, are expected to remain in full force and effect.

Challenges to the Constitutionality of the 2013 Concession Renewal Law

The 2013 Concession Renewal Law is currently being challenged on constitutional grounds before the Brazilian Supreme Court by the National Confederation of Industry Workers – CNTI (Confederação Nacional dos Trabalhadores na Indústria). It is not possible to predict whether the 2013 Concession Renewal Law shall remain valid in the future. While the Supreme Court is reviewing the law, its provisions remain in full force and effect.

Tariffs for the Use of the Distribution and Transmission Systems

ANEEL regulates access to the distribution and transmission systems and establishes tariffs for the use of these systems. The tariffs are (i) network usage charges, which are charges for the use of the proprietary local grid of distribution companies (“TUSD”) and (ii) tariffs for the use of the transmission system, which is the Interconnected Transmission System and its ancillary facilities (“TUST”).

TUSD

Users of a distribution grid pay the distribution concessionaire a tariff known as the TUSD (Tarifa de Uso dos Sistemas Elétricos de Distribuição). The TUSD is divided into two parts: one related to the contracted power in R$/kW and other related to the regulatory charges in R$/kWh. The amount paid by the users of a distribution grid is calculated by multiplying the maximum contracted power for each of the customer’s points of connection to the concessionaire’s distribution grid, by the tariff in R$/kW, plus the product of the power consumption by the tariff in R$/kWh, per month.

In relation to the captive customers, the TUSD is part of the supp