As filed with the Securities and Exchange Commission on April 26, 2019
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, 2018
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)
Daniel Pimentel Slaviero
+55 41 3331 4011 – 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, 2018:
145,031,080 Common Shares, without par value
328,627 Class A Preferred Shares, without par value
128,295,668 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.
Yesx 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¨ Nox
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.
Yesx No¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).
N/A
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” and ”emerging growth company” in Rule 12b-2 of the Securities Exchange Act of 1934. (Check one):
Large accelerated filerx Accelerated filer¨
Non-accelerated filer¨ Emerging growth company¨
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.¨
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¨ Nox
Table of Contents
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$” are to Brazilianreais (plural) and the Brazilianreal (singular) and (ii) “U.S. dollars”, “dollars” or “US$” are to United States dollars. We maintain our books and records inreais. Certain figures included in this annual report have been subject to rounding adjustments.
Our consolidated financial statements as of December 31, 2018 and 2017, and for each of the years ended December 31, 2018, 2017 and 2016, 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” (or “Class A”) and “Class B Shares” (or “Class B”) 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 represented 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 169.
3
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 the 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;
· technical and operational conditions related to the provision of electricity services;
· lawsuits;
· our ability to obtain financing;
· developments in other emerging market countries;
· 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.
4
Item 3. Key Information
SELECTED FINANCIAL DATA
This section contains selected consolidated financial data presented inreais and derived from our consolidated financial statements that were prepared in accordance with IFRS as of and for each of the five years ended December 31, 2018, 2017, 2016, 2015 and 2014.
The following selected financial data should be read in conjunction with our audited financial statements (including the notes thereto), “Presentation of Financial and Other Information”, “Item 5. Operating and Financial Review and Prospects” and “Item 8. Financial Information”.
The selected financial data as of December 31, 2018 and 2017 and for the years ended December 31, 2018, 2017 and 2016 have been derived from our audited financial statements, prepared in accordance with IFRS, and included in this annual report. The selected financial data as of December 31,2016,2015 and 2014 and for the years ended December 31,2016, 2015 and 2014, have been derived from our audited financial statements, prepared in accordance with IFRS, which are not included in this annual report.
As of January 1, 2018, IFRS 9 and IFRS 15 took effect on the opening balance, but without restatement of the balances as of December 31, 2017 and earlier. The application of these standards needs to be taken into account in the comparability of the balances presented below. For further details see "Item 5. Operating and Financial Review and Prospects - Critical Accounting Policies" and Note 4.17 from our audited financial statements, prepared in accordance with IFRS.
5
| As of and for the year ended December 31, | ||||
| 2018 | 2017 | 2016 | 2015 | 2014 |
| (R$ million) |
| |||
Statement of income data(1): |
|
| |||
Operating revenues | 14,935 | 14,025 | 13,102 | 14,946 | 13,996 |
Cost of sales and services provided | (11,502) | (10,666) | (10,234) | (11,799) | (11,289) |
Gross profit | 3,433 | 3,359 | 2,868 | 3,147 | 2,707 |
Operational expenses/income | (1,039) | (1,218) | (879) | (1,025) | (903) |
Profit before financial results and taxes | 2,394 | 2,141 | 1,989 | 2,121 | 1,804 |
Financial results | (438) | (748) | (595) | (428) | 54 |
Profit before income tax and social contribution | 1,956 | 1,393 | 1,394 | 1,694 | 1,858 |
Income tax and social contribution on profit | (512) | (275) | (520) | (532) | (522) |
Net income for the year | 1,444 | 1,118 | 874 | 1,162 | 1,336 |
Statement of financial position data: |
|
|
|
|
|
Current assets | 6,678 | 5,702 | 4,237 | 6,822 | 5,218 |
Recoverable rate deficit (CRC)(1) | 1,445 | 1,516 | 1,523 | 1,383 | 1,344 |
Non-current assets | 10,014 | 8,608 | 8,313 | 4,952 | 8,261 |
Property, plant and equipment, net | 10,841 | 9,829 | 8,934 | 8,693 | 8,304 |
Total assets | 35,930 | 33,162 | 30,289 | 28,844 | 25,618 |
Loans and financing and debentures (current) | 3,298 | 2,417 | 2,602 | 1,233 | 1,299 |
Current liabilities | 6,695 | 6,110 | 5,656 | 4,789 | 4,055 |
Loans and financing and debentures (non-current) | 8,268 | 7,414 | 6,235 | 6,528 | 4,755 |
Non-current liabilities | 12,899 | 11,542 | 9,655 | 9,574 | 7,880 |
Equity | 16,336 | 15,510 | 14,978 | 14,480 | 13,683 |
Attributable to controlling shareholders | 16,033 | 15,208 | 14,718 | 14,162 | 13,331 |
Attributable to non-controlling interest | 303 | 302 | 260 | 318 | 352 |
Share capital | 7,910 | 7,910 | 7,910 | 6,910 | 6,910 |
(1)This item includes both current and non-current CRC Account receivables. Amounts due from the State of Paraná that were included in current assets totaled R$190.9 million in 2018, R$167.1 million in 2017, R$111.7 million in 2015 and R$94.6 million in 2014. Amounts due from the State of Paraná that were included in long-term assets totaled R$1,254.2 million in 2018, R$1,349.3 million in 2017, R$1,522.7 million in 2016, R$1,271.6 million in 2015 and R$1,249.5 million in 2014. In 2016 the entire amount due by the State of Paraná was included in long-term assets due to the negotiation of the Amendment to the CRC Agreement. See Note 8 to our audited consolidated financial statements.
6
| 2018 | 2017 | 2016 | 2015 | 2014 |
| (R$, except for number of shares) |
| |||
Basic and diluted earnings per share: |
|
| |||
Common Shares | 4.91 | 3.61 | 3.13 | 3.87 | 4.21 |
Class A Preferred Shares | 5.40 | 3.97 | 3.44 | 4.26 | 4.63 |
Class B Preferred Shares | 5.40 | 3.97 | 3.44 | 4.26 | 4.63 |
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 | 329 | 329 | 349 | 380 | 380 |
Class B Preferred Shares | 128,295 | 128,295 | 128,275 | 128,244 | 128,244 |
Total | 273,655 | 273,655 | 273,655 | 273,655 | 273,655 |
Dividends per share at year end: |
|
|
|
|
|
Common Shares | 1.32 | 1.01 | 0.99 | 1.14 | 2.17 |
Class A Preferred Shares | 2.89 | 2.89 | 2.89 | 2.53 | 2.53 |
Class B Preferred Shares | 1.45 | 1.11 | 1.08 | 1.25 | 2.39 |
| 2018 | 2017 | 2016 | 2015 | 2014 |
| (US$¹, except for number of shares) |
| |||
Basic and diluted earnings per share: |
| ||||
Common Shares | 1.27 | 1.09 | 0.97 | 0.99 | 1.58 |
Class A Preferred Shares | 1.39 | 1.20 | 1.06 | 1.09 | 1.74 |
Class B Preferred Shares | 1.39 | 1.20 | 1.06 | 1.09 | 1.74 |
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 | 329 | 329 | 349 | 380 | 380 |
Class B Preferred Shares | 128,295 | 128,295 | 128,275 | 128,244 | 128,244 |
Total | 273,655 | 273,655 | 273,655 | 273,655 | 273,655 |
Dividends per share at year end: |
|
|
|
|
|
Common Shares | 0.34 | 0.31 | 0.30 | 0.29 | 0.82 |
Class A Preferred Shares | 0.75 | 0.87 | 0.89 | 0.65 | 0.95 |
Class B Preferred Shares | 0.37 | 0.34 | 0.33 | 0.32 | 0.90 |
(1)This information is presented in U.S. dollars at the exchange rate in effect as of the end of each year.
7
Risk Factors
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.
Our operations 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 policies or social objectives and not necessarily to meet the objective of improving our business and/or operational results.
In October 2018, an election was held to appoint the governor and members of the legislature of the State of Paraná. It is not possible to predict whether this election will result in changes to the interests and decisions of the majority shareholder with respect to the Company's goals.
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 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. On December 31, 2018, our provisions for probable (more likely than not) and reasonably estimated losses were R$1,664.8 million. For additional information, see “Item 8. Financial Information—Legal Proceedings”.
We are subject to limitations regarding the amount and use of public sector financing, which could prevent us from obtaining financing and implementing our investment program.
8
Our current budget anticipates capital expenditures for expansion, modernization, research, infrastructure and environmental projects of approximately R$1,993.5 million in 2019. As a state-controlled company, we are subject to Brazilian Central Bank Resolution no. 4,589/2017(Resolução nº 4,589/2017 do Banco Central do Brasil), which defines the limit of exposure and the annual global limit of credit to public sector entities to be observed by financial institutions and other institutions authorized to operate by the Brazilian Central Bank. The annual global limit that can be contracted in credit operations, with and without guarantee of the Union, by the bodies and entities of the public sector with the financial institutions and other institutions authorized to operate by the Brazilian Central Bank is defined by the National Monetary Council by means of inclusion of an annex to Brazilian Central Bank Resolution no. 4,589/2017, establishing, until the end of each fiscal year, the limit for the following year. The maximum amounts defined for the 2019 financial year are up to R$13.5 billion forUnion guaranteed operations and up to R$11.0 billion for operations without Union guarantee. As a result of these limits, we may have difficulty in obtaining financing from financial institutions and other institutions authorized to operate by the Brazilian Central Bank, which could create difficulties in the implementation of our investment program.
Additionally, some of our concession contracts have provisions that limit our permitted level of indebtedness, which could also affect our ability to obtain necessary financing. Furthermore, the requirements and other criteria adopted by financial institutions when approving new financing transactions may be related to certain Brazilian macroeconomic scenarios, as well as to our financial indicators, such as our indebtedness levels and other indicators usually considered by financial institutions in their credit risk assessments. We cannot ensure you that these requirements and criteria will be met. As a result of these regulations and provisions, our capacity to incur debt from certain sources is limited, which could negatively affect the implementation of our investment program.
Cyber attacks or breach of security of our data center may result in disruption of our operations or leakage of confidential information of the Company, our customers, third parties or interested parties and may cause financial losses, legal exposures and damage to our reputation.
We are the managers and owners of various confidential information related to our business and operations. 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 (i) attacks by hackers, which can access our safety net and steal our information, paralyze our operations or even cause power outages, or (ii) breaches 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.
Brazilian Federal Law No. 13,709/2018 (known asLei Geral de Proteção de Dados Pessoais) was enacted on August 15, 2018 and applies to any data processing operation performed by an individual or by a public or private entity, regardless of the environment where this operation is carried out. This statute provides the legal principles and requirements for the processing of personal data, as well as liabilities and penalties that data processing agents are subject to. These agents must be able to demonstrate the measures they adopted to comply with personal data protection rules, as well as the effectiveness of such measures. This statute will come into force in August 2020 and provides a deadline for the data processing agents to meet its requirements. As a result of any violations to this statute, including any leakage of our clients’ private data in connection with a cyber attack, we may be subject to penalties, such as (i) warning, with indication of a term for adoption of corrective measures; (ii) simple fine of up to 2% of the Company’s revenue in Brazil, limited to R$ 50 million per infringement; (iii) daily fine, limited to R$ 50 million per infringement; (iv) disclosure of the infringement after it has been duly confirmed; and (v) elimination of the personal data to which the infringement relates. These penalties may only be imposed as a result of an administrative proceeding, where we must be given the opportunity to present our defense, in accordance with the peculiarities of the case. These administrative sanctions can be imposed in addition to any other applicable civil and criminal penalties.
9
If we are unable to conclude our investment program on schedule, the operation and development of our business could be adversely affected.
In 2019, we plan to invest approximately R$794.8 million in our generation and transmission activities (including Baixo Iguaçu HPP, Colíder HPP and SPCs of transmission lines), R$66.4 million in wind farms, R$835.0 million in our distribution activities, R$290.2 million in our telecommunications activities and R$7.1 million in others investments. Our ability to complete this investment program depends on multiple factors, including our ability to charge sufficient fees for our services and to obtain sufficient financing 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 a reduction in tariff levels.
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 decreased 0.6% in 2018, while Brazil’s GDP increased 1.1% during the same period.
The recessive economic environment of recent years led to the reduction of energy consumption in the State of Paraná and in Brazil as a whole, resulting in leftover energy in the interconnected system, consequently reducing (i) short-term prices and (ii) prices negotiated in the free market. At the same time, prices in the regulated market have risen steadily as a result of supply deficiencies on the part of contracted energy by distributors and high prices in the short-term market in previous years. As a result, consumers consistently migrated into the free market and, therefore, the captive market of distributors suffered a reduction in 2016, 2017 and 2018.
On December 28, 2018, the MME enacted the Ministerial Ordinance No. 514, lowering the minimum energy amounts that consumers may purchase in the Free Market and, consequently, authorizing more consumers to access the Free Market. Even though this ordinance enabled more consumers to migrate from the captive market to the Free Market, we cannot predict its impact.
A reduction in the captive market often leads to distributors selling excess contracted energy in the short-term market. This short-term market is subject to relevant price fluctuations. Whenever the price in the short-term market is lower than the price paid by the distributor in its long-term energy purchase agreement, the sale of energy in the short-term market is made at a loss, which may not be recovered in the future.
Unfavorable 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 increase the number 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.
An increase in electricity prices, as well as poor economic performance in the State of Paraná, would affect the ability of some of our distributions customers to pay amounts owed to us. As of December 31, 2018, our past due receivables with Final Customers were approximately R$659.5 million in the aggregate, or 11.9% of our revenues from electricity sales to Final Customers for the year ended December 31, 2018, and our allowance for doubtful accounts related to these receivables was R$186.3 million. See Note 7 to our audited consolidated financial statements.
In addition, in the event of an economic recession combined with high energy prices, the number of our distribution customers connecting illegally to our distribution grid may increase, which would then decrease our revenue from electricity sales to Final Customers. Furthermore, energy we lose to theseillegal connections is considered a commercial loss, and we may incur regulatory penalties if our commercial losses exceed certain established regulatory thresholds calculated by ANEEL. If ANEEL determines that we were not efficient in inspecting and controlling the non-technical losses in the distribution grid, the agency may limit the transfer of such losses to the Final Customers.
10
Disruptions in the operation of, or deterioration of the quality of, our services, or those of our subsidiaries, could have an adverse effect on our business, financial condition and results of operations.
The operation of complex electricity generation, transmission and distribution systems and networks involves various risks, such as operational setbacks and unexpected interruptions, caused by accidents, breakdown or failure of equipment or processes, performance below expected levels of availability and efficiency of assets, or disasters (such as explosions, fires, natural phenomena, landslides, sabotage, vandalism, and similar events). In addition, operational decisions by authorities responsible for the electricity network, environment matters, operations and other issues affecting the electricity generation, transmission or distribution could have an adverse effect on the performance and profitability of the operations of our generation, transmission and distribution systems. If these issues occurred, our insurance may be insufficient to wholly account for the costs and losses that we may incur as a result of the damages caused to our assets, or due to outages.
Further, the revenues that our subsidiaries generate from establishing, operating and maintaining their facilities are related to the availability of equipment and assets, and to the quality of the services (continuity and service in accordance with levels demanded by regulations). Under the related concession contracts, we and our subsidiaries are subject to: (i) a reduction of the distributor revenue as a result of the reduction of the so-called “Portion B” allocation in the revenue calculation formula; (ii) a reduction of the Permitted Annual Revenue - APR (Receita Anual Permitida, or RAP), for the transmission companies; (iii) the effects of the Availability Factor (Fator de Disponibilidade, or FID) and the offtake guarantee levels for the generation facilities; and (iv) the application of penalties and payment of compensation amounts, depending on the scope, severity and duration of non-availability of the services and equipment. Under Brazilian Law, we are strictly liable for direct and indirect damages resulting from the inadequate supply of electricity such as abrupt interruptions arising from the generation, transmission or distribution systems. Therefore, outages or stoppages in our generation, transmission and distribution facilities, or in substations or networks, may cause a material adverse effect on our business, financial situation and results of operations.
We are subject to risks related to social and environmental impacts of our projects.
The construction and operation of our assets may modify the ecosystem, particularly the natural state of the water resources and of the vegetation of the flooded river basin in the case of hydroelectric power plants. Our projects may cause direct and indirect impacts in the local communities, such as housing displacement. Moreover, they may affect the economic outputs of the local communities, lead to the loss of cultural identity or increase the demand for government services. In these eventualities, we may implement specific plans in order to minimize and mitigate those impacts.
Failures in dams under our responsibility may cause serious damages to the affected communities, to our results and to our reputation.
Dams are important infrastructures to our business, and are fundamental components of our hydroelectric power plants for the purposes of diking and storing water, accounting for the majority of our energy generation capacity. However, in any dam, there is an intrinsic risk of ruptures caused by different internal or external factors. Therefore, we are subject to the risk of a dam failure that could have repercussions much greater than just the loss of hydroelectric power generation capacity. A dam failure may result in economic, social, regulatory and environmental damages and potential loss of human life in the communities downstream from the dams, which may have a material adverse effect in the image, business, operational results and financial conditions of the Company.
11
We are exposed to behaviors that are incompatible with our ethical and compliance standards, and we may be unable to prevent, detect or remediate them in time, which may cause material adverse effects in our operational results, financial condition and reputation.
We have a range of internal rules and controls, including a Governance, Risk and Compliance Office, with the aim to guide ourdirectors, officers,managers, employees and third-party contractors, and to reinforce our ethical principles and rules of professional conduct. However, due to the wide distribution and outsourcing of the production chains of our suppliers, we are not able to control all possible irregularities of the latter and we are not able to ensure that our selection processes will be sufficient to avoid that our suppliers have problems related to compliance with applicable law, sustainability or outsourcing of the production chain under inadequate safety conditions.
Furthermore, we are subject to the risk that ourdirectors, officers, managers,employees, contractors or any person that may do business with us may involve themselves in fraudulent activities, corruption or bribery, circumventing our internal controls and procedures, misappropriating our assets or using them for private benefit to the detriment of the Company’s interests.We are also subject to the risk that any other material violations of applicable laws by our directors, officers, managers, employees,or any person that may do business with us, or any material legal or administrative proceeding, arbitration or investigation in connection with those violations, may adversely affect our reputation.These risks are increased by the fact that our portfolio includes affiliated companies, such as special purpose companies, some of which we do not hold a controlling interest in.
Our systems may not be effective in all circumstances. Any failure in our capacity to prevent or detect noncompliance with the applicable governance rules or regulatory obligations may cause damages to our reputation or other material adverse effects to our results of operation or financial condition.
The rules for electricity trading and market conditions may affect the sale prices of electricity.
Our energy trading business is strongly affected by regulatory changes that impact the methodology used for short term energy price formation.
We perform trading activities through power purchase and sale agreements, mainly in the Free Market,through our generation and trading companies. Agreements in the Free Market may be entered into with other generation and trading entities andmainly withFreeCustomers.
Energy trading is affected by changes in the methodology used to calculate energy price in the short-term (Preço de Liquidação de Diferenças, orPLD). PLD is determined by the results of optimization models of operation of the interconnected systems used by the ONS and byElectric Energy Trading Chamber (Câmara de Comercialização de Energia Elétrica, or“CCEE”). In such determination, there may be data entry errors or errors in the model, which may lead to an unexpected change of the PLD and possible future republications of the PLD. Thus, there is a risk for the commercial business with respect to the alteration of these models, data entry errors and republishing of the PLD, which may cause market uncertainty, reduction of liquidity, and financial losses with unexpected price variation.
Additionally, any change in the energy trading rules related to the increase of restrictions for the entry of new consumers in the Free Marketmay affect the expansion of our energy trading business.
On December 28, 2018, the MME enacted the Ministerial Ordinance No. 514, lowering the minimum energy amounts that consumers may purchase in the Free Market. Even though this ordinance enabled more migration from the captive market to the Free Market, we cannot predict its effect. As a Free Costumer is responsible for contracting its own consumption directlywith a generation or trading company,an increase of the number of Free Customers may increase the trading in the Free Market and consequently affect energy prices. In parallel,distribution companiesmayface energy contract surpluses and have to participate in the Mechanism for Compensation of Surpluses and Deficits (Mecanismo de Compensação de Sobras e Déficits, or MCSD) to mitigate financial losses.
Our energy trading companies,Copel Comercialização and Copel GeT, thatoperate in the Free Market may decide, based on market conditions, to operate in long and short positions and may present financial losses for certain periods.To operate in long positionsmeans thatwe buy electricitythat will be delivered to us only in the future andsell it before the deliveryis due, expectingthe pricetogo up in the short-term market.To operate in short positions means thatwe sell electricitythat needs to be deliveredonly in the future, butbuy it before the deliveryis dueexpectingthe pricetogo down in the short-term market.
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We assess the market exposure risk of our commercialization company on a weekly basis, based on risk limits and methodology approved by the board of directors of Copel. Our methodology for calculating the risk of market exposure was developed internally using financial market concepts.
Our management has identified a material weakness in our internal controls and has concluded that our internal controls over financial reporting, with respect to the issues classified as a material weakness, were not effective as of December 31, 2018, which may adversely affect our business and our operating results.
Our management, Supervisory Board and internal auditors assess the effectiveness of our controls framework and reporting procedures in accordance with SEC rules, including the effectiveness of our internal controls over financial reporting. This analysis adopts the criteria established in the Internal Control - Integrated Framework (2013) published by the Committee of Sponsoring Organizations of the Treadway Commission – COSO.
During this evaluation, our management identifiedamaterial weakness in our internal controls in 2018. This material weakness refers to our internal controls over the revenues of Copel GeT and Copel Telecom. In view of this weakness, our management concluded that our internal control over financial reporting was not effective as of December 31, 2018 with respect to the items classified asamaterial weakness.
Although we have developed plans to remedy this material weakness, we cannot be certain that there will be no other material weaknesses in our internal control over financial reporting in the future. Therefore, we may be unable to report our results of operations for future periods accurately and in a timely manner and make our required filings with government authorities, including the SEC. Any of these occurrences could adversely affect our business and operating results and could generate negative market reactions, potentially leading to a decline in the price of our shares, ADSs and debt securities.
Our affiliated companies may not be successful in their businesses.
There is no assurance that our investments in affiliated companies will have the expected outcome. Our activities and financial and operational conditions may be affected as a result of (i) regulatory, economic, environmental matters, among other issues, or (ii) corporate disputes.
The lack of equipment and workforce in the appropriate timeframe may affect our business.
We cannot assure that the equipment and services hired from third parties will be timely delivered. If they are delivered with delay, we may incur in additional costs and fines.
The services and equipments hired from third parties may not have the expected quality.
Being a mixed capital publicly-held company,the acquisition of equipments, materials and services are subject to Brazilian Federal Law No. 8,666/1993, Paraná State Law No. 15,340/2006 and Brazilian Federal Law No. 13,303/2016.Therefore, we are legally obliged to engage a bidding process, which may not guarantee the best quality of services, equipments and materials.
Our wind farms’ operations are subject to climate factors and to uncertainties related to the speed of wind and non-compliance withminimum performance covenants set forth in our authorization agreements may adversely impact ourresults.
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The authorization agreements that govern our power generation activities in wind farms set forth certain performance covenants, which require us to generate minimum amounts of energy on annual and four-year bases in accordance with the energy amounts sold in the correspondent auctions. The operations of our wind farms are subject to climate factors and to uncertainties related to the speed of wind and non-compliance with the above mentioned agreements may adversely impact our results.
We may acquire other companies in the electric sector or new energy concessions, as we already did in the past, which may increase our financial leverage and adversely affect our consolidated performance.
We constantly prospect for businesses that are related to our corporate purpose and aligned with our strategic plan. To expand our business, we may participate in auctions for the construction and operation of new power generation and transmission ventures, as well as invest in other companies from the energy sector, as we have done in the past. These acquisitions can increase our financial leverage or reduce our profits. In addition, the integration of the new businesses may not result in the synergy we expect in terms of efficiency gains and economies of scale for our operations, which may adversely affect our operational and financial performance.
Strikes, work interruptions or other events carried out by our employees or by the employees of our suppliers or contractors, may adversely affect our operating results and our businesses.
Our employees are represented by unions. Disagreements regarding issues related to divestitures, changes to our business strategy, and reductions in the professional staff may lead to employee reactions. Strikes, work interruptions, or other forms of protests in any of our major suppliers or contractors or at their facilities may undermine our ability to complete relevant projects on time, negatively impacting our results of operations, and affect our ability to achieve long-term strategic goals.
Risks Relating to the Brazilian Electricity Sector and Other Sectors that We Operate
We are uncertain as to the renewal of certain of our generation and transmission concessions.
Under Federal Law No. 12,783/2013, or 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 of 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. If we do not renew our generation and transmission concessions or if they are 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”.
The concession agreement of our controlled company Compagas is under discussion with the granting authority.
Compagas has entered into a concession agreement with the State of Paraná, as granting authority, pursuant to which the concession shall expire on July 6, 2024. The purpose of this concession is to provide piped gas distribution services and other related activities, to all segments of the consumer market, either as raw material or for the purpose of power generation or other uses made possible by technological advances.
The gas concession agreement is part of the so called “bifurcated model”, where part of the investments made by the concessionaire is paid by the users of the public service and the remaining part is indemnified by the granting authority, the State of Paraná, at the end of the concession.
On December 7, 2017, the State of Paraná enacted Complementary Law No. 205, setting forth a new interpretation regarding the expiration date of the concession, leading to the understanding that the new expiration date was January 20, 2019. The management of Compagas, its controlling shareholder and other shareholders are analyzing and questioning the effects of such law, as they understand that these effects are not consistent with the terms set forth in the current concession agreement.
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Compagás filed a lawsuit challenging the early termination of the concession and, on October 30, 2018, a preliminary injunction was granted, which can be subject to an appeal by the State of Paraná. The Company is awaiting the trial of the merit of the case.
Therefore, in the event of non-extension of the concession, even if Compagas is entitled to compensation for the investments made in the last 10 years prior to the end of the concession, the financial condition and results of operations of our controlled company may be adversely affected. For more information see Note 2.1.1 to our Consolidated Financial Statements.
Our operating results depend on prevailing hydrological conditions, which have been volatile 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 64.0% of Brazil’s installed capacity currently comes from hydroelectric generation facilities. Hydrological conditions in our region, and Brazil in general, are frequently subject to changes because of non-cyclical deviations in average rainfall.
From 2012 to 2015, Brazil experienced a period of low rainfall. Poor 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, the Brazilian federal government in the past has reacted to 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 and 2015 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 is no assurance that the Federal Government will continue this assistance, or that the Federal Government 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”.
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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.
The Generation Scaling Factor, or GSF, is a factor used to adjust the guaranteed power output and represents the ratio between the total power produced by the hydroelectric plants that integrate the Energy Reallocation Mechanism (Mecanismo de Realocação de Energia, or MRE) and their guaranteed power outputs. This represents, on average, the amount of energy committed to energy generation contracts. If there are excessively low flow rates, the GSF equals to less than 1 and the hydroelectric generators that contracted their guaranteed power outputs have to incur additional costs to acquire energy in the spot market to fulfill their obligations. As Brazil experienced an unusually severe drought between 2012 and 2015, its energy generation was below its expected levels.
In 2015, the financial effects of the GSF on the generation companies were discussed. There was a broad sector debate on the effects of, and solutions for the GSF from an administrative, regulatory, business and legal perspective. Accordingly, Law No. 13,203, dated December 8, 2015, and ANEEL Resolution No. 684, dated December 11, 2015, established the criteria for the approval and the conditions for the renegotiation of the hydrological risks borne by certain hydroelectric generation companies. Pursuant to such new rules, the generators could share their hydrologic risks with consumers, through the payment of a “risk premium”. Copel Geração e Transmissão and Elejor filed a request for the renegotiation of the hydrological risk of HPPs Mauá, Foz do Areia, Santa Clara and Fundão, which was consented through ANEEL Decisions No. 84/2016 and 43/2016, respectively. Subsequently, in 2017 Copel Geração e Transmissão filed another request for the renegotiation of the hydrological risk of HPPs Cavernoso II e Baixo Iguaçu, which was consented through ANEEL Decision No. 4,101/2017, and, in 2018, ANEEL approved the renegotiation of the hydrological risk of HPP Colíder through ANEEL Decision No. 2,889/2018. For more information, see Note 14.1 to our audited consolidated financial statements.
In addition, in an extreme scenario, given the increased presence of thermal generation in the national electric matrix, if a shortage of natural gas were to occur, this would increase the general demand for hydroelectric energy in the market and therefore increase the risk that a rationing program would be instated.
Regarding our energy trading business, the effect of volatility in hydrological conditions is the increase of the variation of energy price , which in turn increases the spot market volatility, thus affecting our operating results.
Spot price (PLD) is determined by mathematical models that consider the prevalence of hydroelectric plants in the Brazilian generation context, hydrological conditions, energy demand, fuel prices, deficit costs, the entry of new projects and the availability of generation and transmission equipment, and aim to find an optimal balance between the present benefit of water usage and the future benefit of its storage, measured in terms of the expected economy of the fuels in thermoelectric plants. The energy spot prices are calculated by CCEE every week and are set for each region.
When there is great availability of hydrological resources, the spot price tends to remainat lower levels, which may not be enough to (i) cover the generation costs of this very same energy (when related to our generation business) and (ii) cover the cost of the power purchase and sale agreement in our energy trading business.
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Conversely, if hydrological availability is affected, spot prices tend to increase significantly, in addition to occasionally impacting the GSF, which may adversely impact our costs of energy purchases, as the price set forth in power purchase and sale agreements may not be sufficient.
The construction, expansion and operation of our generation, transmission and distribution facilities and equipment involve significant risks that may cause the 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 theinability 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 andthe 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.
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 they determine that terminating our concessions would be in the public interest, in both cases through an expropriation proceeding. In particular, our renewed distribution concession agreement contains both quality and financial metrics that become more restrictive over time, and that we must meet to ensure that our distribution concession agreement is not terminated. 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 Electric Power Industry—Concessions”.
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.
It is also incumbent upon ANEEL to determine the revenues to be charged by the generating companies, holding assets with renewed concession agreements or resulting from concessions auctions (both cases in accordance with 2013 Concession Renewal Law). The Annual Generation Revenue (RAG) is the amount which the generating companies are entitled to in accordance with the physical guarantee of a hydroelectric plant that is allocated to the regulated/quota market. RAG is calculated taking into account the regulatory costs of operation, maintenance, administration, compensation and amortization of the hydroelectric plant, being adjusted annually, in addition to being reviewed every 5 years.
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Our distribution concession agreement and Brazilian law establish a price cap mechanism thatpermits three types of tariff adjustments: (i) annual adjustment (reajuste anual), (ii) periodic revision (revisão periódica), and (iii) extraordinary revision (revisão extraordinária). We are entitled to apply each year for the annual revision, 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 five 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 revision, 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.
As is the case for distribution companies, the regulation mechanisms for transmission companies are the tariff review, which occurs every five years, and the annual tariff readjustment, which is a monetary adjustment of the tariffs charged. These mechanisms depend on the concession agreement of each company. At the time of the tariff review, the objective of ANEEL is to recalculate the costs for the efficient operation and maintenance of the system managed by the transmission company.
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. For more information, 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.
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). Challenges to the constitutionality of New Industry Model Law are still pending before the Brazilian Supreme Court. If all or part of this statute 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.
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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 and energy trading 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 and these Free Customers purchase energy from sources other than our generation and trading companies, our revenues and results of operations would be adversely affected. Furthermore, prices in the free market have recently been lower than those in the regulated market in the past years, which has been leading to an increase in the number of Free Customers within the geographic area of our concession.
In addition, ANEEL has recently improved regulations related to micro and mini distributed generation, which has been facilitating customers to purchase or to lease power generation equipment, specially solar photovoltaic modules, to produce energy for their own consumption. Therefore, if the number of customers with micro and mini distributed generation within the geographic area of our concession increases, our revenues and results of operations could also 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, 2018, we had 345 Free Customers, representing approximately 6.8% of our consolidated operating revenues and approximately 23.6% of the total volume of electricity we sold to Final Customers.
Until March 31, 2019, Copel GeT signed 1 additional agreement with Free Customers in our generation business. Our contracts with Free Customers are typically for periods ranging between two years and five years in our generation business.
Approximately 5.2% of the megawatts-hours sold under contracts to such customers by Copel GeT expired in 2018. These customers represented approximately 1.5% of the total volume of electricity we sold in 2018, and approximately 1.7% of total net operating revenue 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.
Regarding our energy trading company, as of December 31, 2018, we had 292 Free Customers, representing approximately 2.5% of our consolidated operating revenues.
We may be forced to purchase or sell energy in the spot market at higher or lower 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 or incurred losses 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 seven 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. 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 CCEE. Moreover, 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 or due to reduced economic activity, we will not be able to pass on to our Final Customers the cost of the excess energy that we acquire.
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In 2016, as a consequence of the country’s economic crisis and the increase in the number of Free Customers who were attracted by lower prices in the free market, several distribution companies, including Copel Distribuição, were contracted above 105% of their actual demand. As a result, those companies may incur losses due to sale of the excess energy at lower prices in the spot market. On the other hand, facing this same scenario in 2017, Copel Distribuição and other distribution companies sold the surplus energy at a higher price in the spot market, resulting in the possibility of earnings. On August 28, 2017, Brazilian Decree No. 9,143/2017 recognized the involuntary nature of energy surplus arising from the migration of consumers to the Free Market. However, we cannot guarantee the results of such rules and their impact on our future operations.
In 2018, purchases made by Copel Distribuição did not exceed the regulatory margin of 105% of the forecasted energy amount. Even though Copel Distribuição plans on adopting the same strategies onwards, we cannot ensure you that it will be able to comply with the regulatory requirements in the future.
We are subject to a counterparty’s credit risk, and, in case the purchasers or sellers that are parties to power purchase and sale agreements entered into with Copel Comercialização default on their obligations, we may have to sell or purchase energy at a different base price.
Copel Comercialização is subject to a counterparty’s credit risk. When Copel Comercialização sells energy, the counterparties to power purchase agreements may default on their contractual obligations, which may cause Copel Comercialização to sell energy at a different base price. In cases where Copel purchases energy, the selling counterparties may also default on the relevant contracts, and, consequently, Copel Comercialização may have to buy energy at a different base price and be subject to regulatory penalties imposed by CCEE due to insufficient contractual guarantees. Even though the Company performs credit analyses in accordance with market standards and requires its counterparties to provide guarantees in connection with the power purchase and sale agreements, we cannot guarantee that our counterparties will not fail to comply with their payment obligation or with their obligation to deliver energy to Copel, as the case may be, which may adversely affect our results.
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, embargoes 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.
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, theOperador 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.
We are the controlling shareholders of a company that operates a gas distribution business (Compagas) and we are consequently exposed to risks inherent to this sector.
We control a business in the gas distribution sector, which is operated by Companhia Paranaensede Gas – Compagas. This company is entitled to exclusive rights with respect to the supply of piped gas in the State of Paraná. The clients of this business are thermoelectric plants, cogeneration plants, gas stations, other companies and residences.
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Businesses in the gas distribution sector are subject to a broad set of risks inherent to its operation, including among the main ones:
• Regulatory instability,
• Shortage of natural gas,
• Depending on a single supplier in Brazil,
• Capacity of financing expansion,
• Operational failures and accidents in distribution,
• Performance of outsourced service providers,
• Alternative energy sources,
• Quality in service.
As a result of these uncertainties, there is no guarantee that the purposes of our gas distribution business will be achieved, which may have an adverse effect on our results of operations and our business.
We are the controlling shareholders of a company that operates a telecommunications business (Copel Telecomunicações S.A.) and we are consequently exposed to the risks inherent to this sector.
We control a business in the telecommunications sector under an authorization granted by the National Telecommunications Agency (Agência Nacional de Telecomunicações– ANATEL). This business provides telecommunications services through the use of fiber optics. It also provides a number of telecommunicationsservices to other companies of the Copel group.
Businesses in the telecommunications sector are subject to a broad set of risks inherent to its operation, such as:
• Regulatory instability,
• Increase in competition,
• Technological changes,
• Capacity of financing our expansion,
• Failures in technological systems and information security,
• Performance of outsourced service providers,
• Exchange rate fluctuations,
• Variation in operating costs,
• Operational failures,
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• Quality in service.
As a result of these uncertainties, there is no guarantee that the purposes of our telecommunications business will be achieved, which may have an adverse effect on our results of operations and our business.
We are uncertain as to the outcome of the administrative proceeding brought by ANATEL against Sercomtel S.A. Telecomunicações to terminate concessions and authorizations previously awarded to this company.
We own 45% of the stock of Sercomtel Telecomunicações S.A. ("Sercomtel"). Sercomtel holds a concession to provide fixed telephony services and an authorization to provide mobile services in the municipalities of Londrina and Tamarana, located in the State of Paraná. In addition, Sercomtel has two (2) other authorizations from ANATEL that allow it to provide fixed telephony and broadband internet services in all other municipalities of the State of Paraná. Currently, Sercomtel operates with its own network in fifteen (15) municipalities of the State of Paraná, providing voice services and fixed broadband. In September 2017, ANATEL determined that Sercomtel was not in compliance with certain financial indicators set forth by the agency in connection with the concessions granted to Sercomtel and required for the company's operations to continue. As a consequence of this determination, ANATEL brought an administrative proceeding against Sercomtel to assess whether the concession and the authorizations granted to this company should be terminated. In March 2019, ANATEL decided to suspend the above mentioned proceeding for a 120-day period, so that Sercomtel could present to the agency alternative plans for meeting the relevant regulatory indicators. The process for determining whether the concession and authorizations granted to Sercomtel should be terminated is carried out by ANATEL and will be resumed once the suspension period elapses. We are not certain as to the outcome of this administrative proceeding. If ANATEL determines the termination of the concession held by Sercomtel, we may be adversely affected in accordance with our stake in this company's capital stock.
We cannot assure the speed of our innovation capacity and our responses in view of the changes the energy sector has been going through as a result of technology advances.
The electric energy sector has been going through changes driven by (i) the decentralization of the power generation systems; (ii) advances in energy storage technologies; (iii) dissemination of digital technologies that improve the efficiency of energy generation, transmission and consumption; (iv) increase of renewable energy sources, such as wind and solar energy; and (v) a tendency of reducing carbon footprints in the energy system, as part of the global efforts to mitigate the effects of climate change. These changes present many challenges and we may not be able to keep up with the effects of the increasing adoption of digital technologies in the electric energy sector and the significant potential of new technology solutions (both with respect to the improvement of processes and services provided to consumers and with respect to the development of new products that may lead to higher productivity gains, more affordable prices, higher competition and the creation of new markets). Investments in research and development may contribute to mitigate the risks related to the transformations of the energy sector and create new opportunities.
Risks Relating to Brazil
The Brazilian Government has significant influence over the Brazilian economy. Brazilian economic and political conditions - and investor perception of these conditions - have a direct impact on our business, financial condition, results of operation and prospects.
Historically, the country’s political situation has influenced the performance of the Brazilian economy, and political crises have affected the confidence of investors and the general public, which resulted in economic deceleration, the downgrading of credit ratings of the Brazilian government and Brazilian issuers, and heightened volatility in the securities issued abroad by Brazilian companies. In August 2016, the Brazilian Congress approved the impeachment of the Brazilian president. Also, ongoing corruption investigations have led to charges against former and current public officials, members of several major political parties and directors and officers of many Brazilian companies. In addition, Brazil’s elected a new president and members of the federal legislature in October 2018. We cannot predict whether these elections will result in changes in Brazilian governmental and economic policies or in the Brazilian energy industry. Political instability and the upcoming elections may aggravate economic uncertainties in Brazil and increase volatility of securities of Brazilian issuers.
Additionally, the Brazilian government has exercised, and continues to exercise, significant influence over the Brazilian economy and often changes monetary, credit, exchange and other policies to influence Brazil’s economy. Our business, financial condition, results of operations and prospects may be adversely affected by changes in government policies, as well as other factors including, without limitation:
• fluctuations in the exchange rate;
• inflation;
• changes in interest rates;
• exchange control policies;
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• fiscal policy and changes in tax laws;
• other political, diplomatic, social and economic developments that may affect Brazil or the international markets;
• controls on capital flows; and/or
• limits on foreign trade.
In the last few years, Brazil faced an economic recession, adverse fiscal developments and political instability. Brazilian GDP grew by 1.1% in 2018, grew by 1.0% in 2017 and declined by 3.5% in 2016. Unemployment rate was 11.6% in 2018, 12.7% in 2017 and 11.5% in 2016. Inflation, as reported by the consumer price index (IPCA), was 3.75% in 2018, 2.95% in 2017 and 6.29% in 2016. The Brazilian Central Bank's base interest rate (SELIC) was 6.5% on December 31, 2018, 7.00% on December 31, 2017 and 13.75% on December 31, 2016. Future economic, social and political developments in Brazil may impair our business, financial condition or results of operations, or cause the market value of our securities to decline.
Changes in, or uncertainties regarding the implementation of, the policies above, might generate or contribute to uncertainties in the Brazilian economy. This would increase the volatility of the domestic capital market and the value of Brazilian securities traded abroad, and adversely affect our business, results of operations and financial condition.
Moreover, taking into account the Brazilian presidential system of government, and the considerable influence of the executive power, it is not possible to predict whether the present government or any successive governments will have an adverse effect on the Brazilian economy, and consequently on our business.
Fluctuations in the value of the Brazilian real against foreign currencies may result in uncertainty in the Brazilian economy and the Brazilian securities market, which could have a material adverse effect on our net income and cash flow.
In recent years, the Brazilianrealhas fluctuated in value against foreign currencies, and the value of therealmay rise or decline substantially from current levels. Over the course of 2015, the value of the Brazilianreal declined more than 48% against the U.S. Dollar. In contrast, in the course of 2016, the Brazilian real appreciated 16.5% against the U.S. Dollar, following a year of intense volatility. In 2017, the Brazilian real was subject to relative stability. As of December 31, 2018, thereal vs. U.S. dollar exchange rate recorded was R$3.87 to US$1.00, depreciating 17.2% against the U.S. Dollar, compared to the exchange rate recorded on December 31, 2017. Depreciation of therealincreases the cost of servicing our foreign currency-denominated debt and the cost of purchasing electricity from the Itaipu – a hydroelectric facility which is one of our major suppliers and adjusts its electricity prices based in part on its U.S. dollar costs. Depreciation of therealalso creates additional inflationary pressure in Brazil that may negatively affect us. Indeed, 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.
Inflation and governmental measures to curb inflation may contribute to economic uncertainty in Brazil, and could reduce our margins and the market price of the Class B Shares and ADSs.
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 theÍndice Geral de Preços - Disponibilidade Interna (“IGP-DI”) index, were 2.4% for the three-month period ended March 31, 2019, 7.1% in the year 2018, (0.4)% in the year 2017, 7.2% in 2016 and 10.7% in 2015. 2018 was a year of stabilizing inflation rates. Brazilian inflation rates observed in 2018 were below the government’s desired rate, but this scenario can change abruptly as a consequence of facts beyond our control. The Brazilian government has in the past taken measures to combat inflation, such as raising the basic Selic interest rateto elevated levels, and public speculation about possible future government actions has had significant negative effects on the Brazilian economy. Although our concession contracts provide for annual adjustments 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.
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Allegations of political corruption against the Brazilian federal government and the Brazilian legislative branch could create economic and political instability.
Currently, several former and current 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 Operation Car Wash (Operação Lava-Jato) being conducted by the Office of the Brazilian Federal Prosecutor, and a number of politicians and businessmen have been arrested. 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, including our business, financial condition and results of operations, as well as the trading price of our common shares and ADSs. Moreover, the conclusion of these proceedings or further allegations of illicit conduct could have additional adverse effects on 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.
In addition Jair Bolsonaro was elected as the new President of Brazil in October 2018, but political uncertainty has remained. We cannot predict the effects of these recent developments and the current ongoing political uncertainties on the Brazilian economy.
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 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.
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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 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.
Sales of a substantial number of shares, or the perception that such sales might take place, could adversely affect the prevailing market price of our shares or ADSs.
As a consequence of the issuance of new shares, sales of shares by existing share investors, or the perception that such a sale might occur, the market price of our shares and, by extension, of the ADSs may decrease significantly.
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Future equity issuances may dilute the holdings of current holders of our shares or ADSs and could materially affect the market price for those securities.
We may in the future decide to offer additional equity to raise capital or for other purposes. Any such future equity offering could reduce the proportionate ownership and interests of holders of our shares and ADSs, as well as our earnings and net equity value per share or ADS. Any offering of shares and ADSs by us or our main shareholders, or a perception that any such offering is imminent, could have an adverse effect on the market price of these securities.
You may not receive dividend payments if we incur net losses or our net profit does not reach certain levels.
Under Brazilian Corporate Law and our by-laws, we must pay our shareholders a mandatory distribution equal to at least 25% of our adjusted net profit for the preceding fiscal year, with holders of preferred shares having priority of payment. According to our bylaws, Class A Shares and Class B Shares are entitled to receive annual, non-cumulative minimum dividends, which dividend per share shall be at least 10% higher than the dividends per share paid to the holders of the Common Shares. Class A Shares have a dividend priority over the Class B Shares, and Class B Shares have a dividend priority over the Common Shares.
If we realize a net profit in an amount sufficient to make dividend payments, at least the mandatory dividend is payable to holders of our preferred and common shares. After payment of the mandatory dividend, we can retain profits as statutory profit reserves for investments or capital reserves. If we incur net losses or realize net profits in an amount insufficient to make dividend payments, including the mandatory dividend, our management may recommend that dividend payments be made using the statutory profit reserve after accounting for the net losses for the year and any losses carried forward from previous years. In the event that we areunable to declare dividends, our management may nevertheless decide to defer payment of dividends or, in limited circumstances, not to declare dividends at all. We cannot make dividend payments from our legal reserve and capital reserve accounts.
Additionally, in accordance with Brazilian Corporate Law, in fiscal years in which the amount of mandatory dividends exceeds the amount of realized net profits, according to the parameters set forth in this law, management may suggest the formation of a reserve for realizable profits. This reserve can be offset with any losses and then used for paying mandatory dividends.
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 enforce against us or our directors and officers judgments obtained in the United States or other jurisdictions outside of 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.
Judgments of Brazilian courts with respect to our shares will be payable only in reais.
If proceedings are brought in the courts of Brazil seeking to enforce our obligations in respect of our shares, we will not be required to discharge any such obligations in a currency other than reais (R$). Under Brazilian exchange control limitations, an obligation in Brazil to pay amounts denominated in a currency other than reais (R$) may only be satisfied in Brazilian currency at the exchange rate, as determined by the Central Bank, in effect on the date the judgment is obtained, and any such amounts are then adjusted to reflect exchange rate variations through the effective payment date. The then prevailing exchange rate may not afford non Brazilian investors with full compensation for any claim arising out of, or related to, our obligations under our shares.
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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. Reintroduction 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, fromreaisinto 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.
Instability of the exchange rate could adversely affect the value of remittances of dividends outsideofBrazil and also the market price of the ADSs.
Many Brazilian and global macroeconomic factors have an influence on the exchange rate. In this context, the Brazilian federal government, through the Central Bank, has in the past occasionally intervened for the purpose of controlling unstable variations in exchange rates. We cannot predict whether the Central Bank or the federal government will continue to allow the real to float freely or whether it will intervene through a system involving an exchange rate band, or the use of other measures.
As a result, the real might fluctuate substantially in relation to the United States dollar, and other currencies, in the future. That instability could adversely affect the equivalent in US dollars of the marketprice of our shares, and as a result the prices of our ADSs and also outward dividends remittances from Brazil.
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Changes in economic and market conditions in other countries, especially Latin American and emerging market countries, may adversely affect our business, results of operations and financial condition, as well as the market price of our shares, preferred ADS and common ADSs.
The market value of the securities of Brazilian companies is affected to varying degrees by economic and market conditions in other countries, including other Latin American countries and emerging market countries. Although the economic conditions of such countries may differ significantly from the economic conditions of Brazil, the reactions of investors to events in those countries may have an adverse effect on the market value of the securities of Brazilian issuers. Crises in other emerging market countries might reduce investors’ interest in the securities of Brazilian issuers, including our Company. In the future, this could make it more difficult for us to access the capital markets and finance our operations on acceptable terms or at all. Due to the characteristics of the Brazilian power industry (which requires significant investments in operating assets) and due to our financing needs, if access to the capital and credit markets is limited, we could face difficulties in completing our investment program and refinancing our obligations, and this could adversely affect our business, results of operations and financial condition.
Changes in Brazilian tax laws may have an adverse impact on the taxes applicable to a disposition of our shares or ADS.
Law No. 10,833 of December 29, 2003, provides that the disposition of assets located in Brazil by a non resident to either a Brazilian resident or a non-resident is subject to taxation in Brazil, regardless of whether the disposition occurs outside or within Brazil. This provision results in the imposition of income tax on the gains arising from a disposition of our common or preferred shares by a nonresident of Brazil to another non-resident of Brazil. There is no judicial guidance as to the application of Law No. 10,833 and, accordingly, we are unable to predict whether Brazilian courts may decide that it applies to dispositions of our ADS between nonresidents of Brazil. However, in the event that the disposition of assets is interpreted to include a disposition of our ADS, this tax law would accordingly result in the imposition of withholding taxes on the disposition of our ADS by a non-resident of Brazil to another non-resident of Brazil.
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Item 4. Information on the Company
The Company
We engage in the generation, transmission, distribution and sale of electricity mainly in the Brazilian State of Paraná, pursuant to concessions granted by ANEEL, the Brazilian regulatory agency for the electricity sector. We also provide telecommunications and other services. While our activities are more concentrated in the Brazilian State of Paraná, we also operate in 10 different Brazilian states through our generation and transmission businesses.
As of December 31, 2018, we generated electricity from seventeen (17) hydroelectric plants, eighteen (18) wind plants and one (1) thermoelectric plant, for a total installed capacity of 5,135.3 MW, of which, approximately 99.6% is derived from renewable sources. Including the installed capacity of generation companies in which we have an equity interest, our total installed capacity is 5,787.2 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. As of December 31, 2018, we owned and operated 3,214.3 km of transmission lines and 198,373.6 km of distribution lines, constituting one of the largest distribution networks in Brazil. Of the electricity volume we supplied in 2018 to our Final Customers:
· 33.7% was to industrial customers;
· 28.2% was to residential customers;
· 19.4% was to commercial customers; and
· 18.7% was 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 energy sales to Free Customers both inside and outside of 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 to expand power output with renewable and non-polluting sources.
Our revenues for each of the last three (3) financial years by activity are described in “Item 5. Operating and Financial Review and Prospects — Results of operations for the years ended December 31, 2018, 2017 and 2016”.
Historical Background
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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. 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.
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) 3331-4011. Our website iswww.copel.com and any filings we make electronically with the SEC will be available to the public over the Internet at the SEC’swebsite. The commercial name of each of our businesses is provided as follows.
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, members of our Supervisory Board, 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 new 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.
In 2013, the Company was restructured in order to enhance the efficiency of our corporate structure and reduce our operating costs.
On January 28, 2016, our board of directors approved the amendment of the bylaws of Copel Participações S.A., in order to change its corporate purpose and denomination to Copel Comercialização S.A. The corporate purpose of this company is the sale of energy and rendering of related services. The restructuring that created Copel Comercialização S.A. is aimed at strengthening Copel’s positioning in the energy trading market and to improve its efficiency, allowing for greater agility and flexibility in the sale of energy.
In September 2017, in order to optimize the management of operating activities, the Company carried out an organizational restructuring of its wholly-owned subsidiary Copel Renováveis S.A., whose activities were absorbed by Copel Geração e Transmissão S.A.
On August 30, 2018, Copel GeT signed a Share Exchange Agreement with Eletrosul with respect to the joint ventures Costa Oeste Transmissora de Energia S.A. (51% - Copel GeT and 49% - Eletrosul), Marumbi Transmissora de Energia S.A. (80% - Copel GeT and 20%- Eletrosul) and Transmissora Sul Brasileira de Energia S.A. (20% - Copel GeT and 80% - Eletrosul). Under this agreement, Copel GeT started holding share of interest of 100% in the joint ventures Costa Oeste and Marumbi, in addition Eletrosul started to hold share of interest of 100% in Transmissora Sul Brasileira. The business combinations occurred on August 31, 2018, date of transfer of the shares. For additional information, seeNote 1.2 to our audited consolidated financial statements.
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Copel currently has five wholly-owned subsidiaries, which are Copel Geração e Transmissão S.A., Copel Distribuição S.A., Copel Telecomunicações, Copel Comercialização S.A. and Copel Renováveis S.A.
Copel also holds 100% shareholding stake in several Special Purpose Companies (SPC).
The current organization of the group is as described as follows. All of our subsidiaries are incorporated in the Federative Republic of Brazil and subject to the Brazilian law.
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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 still one of the primary channels by which our distribution business purchases energy to resell to Captive Customers and one of the channels by which our generation business generates revenues. Our generation business only sells energy to our distribution business through auctions in the regulated market. Moreover, our distribution business, like other certain Brazilian distribution companies, is also required to purchase energy from Itaipu, in an amount determined by the Brazilian government based on our proportionate share in the Brazilian electricity market. For more information, see “Item 4. Information on the Company—The Brazilian Electric Power Industry”.
The following table shows the total electricity we (i) generated through entities in which we hold a 100.0% shareholding stake and the 51.0% of energy generated by Mauá Hydroelectric Plant (corresponding to the interest we hold in this asset) and (ii) purchased in the last five years, broken down by the total amount of electricity generated and purchased by Copel Geração e Transmissão and our wind farm generation facilities described bellow (“Wind Farms”) and the total amount of electricity purchased by Copel Distribuição and Copel Comercialização.
| Year ended December 31, | ||||
| 2018 | 2017 | 2016 | 2015 | 2014 |
| (GWh) |
| |||
Copel Geração e Transmissão(1)
|
|
|
|
|
|
Electricity generated(2) | 18,029 | 19,583 | 25,319 | 24,494 | 24,232 |
Electricity purchased from others | 321 | 1,055 | 141 | 257 | 612 |
Electricity received from the Interconnected System | 142 | 425
| 2 | 7 | 91 |
Total electricity generated and purchased by Copel Geração e Transmissão | 18,492 | 21,063 | 25,462 | 24,758 | 24,935 |
Wind Farms(1)(3) |
|
|
|
|
|
Electricity generated(2) | 1,067 | 989 | 1,175 | 621 | - |
Electricity purchased from others | - | - | - | 295 | - |
Total electricity generated and purchased by Wind Farms | 1,067 | 989 | 1,175 | 916 | - |
Copel Distribuição |
|
|
|
|
|
Electricity purchased from Itaipu(4) | 5,726 | 5,934 | 5,958 | 5,941 | 5,870 |
Electricity purchased from Auction – CCEAR – affiliates | 92 | 87 | 157 | 215 | 411 |
Electricity purchased from Auction – CCEAR – other | 10,691 | 9,860 | 13,387 | 14,419 | 16,281 |
Electricity purchased from others(5) | 9,242 | 10,209 | 10,361 | 8,419 | 6,171 |
Total electricity purchased by Copel Distribuição | 25,751 | 26,090 | 29,863 | 28,994 | 28,733 |
Copel Comercialização |
|
|
|
|
|
Electricity purchased from others | 6,525 | 2,671 | 59 | - | - |
Total electricity purchased by Copel Comercialização | 6,525 | 2,671 | 59 | - | - |
Total electricity generated and purchased by Copel Geração e Transmissão, Copel Distribuição, Wind Farms and Copel Comercialização | 51,835 | 50,813 | 56,559 | 54,668 | 53,668 |
(1) | In 2018, Copel adopted the criteria set forth by the CCEE to determine the energy flows in sale and purchase transactions. The energy amounts reflected in this table, even with respect to past years, were calculated in accordance with the criteria adopted by the CCEE. |
(2) | Includes the electrical losses of wiring and interconnecting station and technical losses by delivering energy to the Interconnected System. |
(3) | Electricity generated and purchased by our wind farm generation facilities which were under the supervision of Copel Renováveis until 2015. In December 2015, Copel Geração e Transmissão became responsible for the operation of these facilities. |
(4) | Distribution companies operating under concessions in the Midwest, South and Southeast regions of Brazil purchase electricity generated by Itaipu. |
(5) | These numbers do not include assignments related to the Mechanism for Compensation of Surpluses and Deficits of New Energy (Mecanismo de Compensação de Sobras e Déficits de Energia Nova, or MCSD-EN). |
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The following table shows the total electricity we sold to Free Customers, Captive Customers, distributors, energy traders and other utilities service providers in the south of Brazil through the Interconnected Transmission System in the last five years.
| Year ended December 31, | ||||
| 2018 | 2017 | 2016 | 2015 | 2014 |
|
|
| (GWh) |
|
|
Copel Geração e Transmissão(1) |
|
|
|
|
|
Electricity delivered to Free Customers | 3,960 | 3,860 | 3,600 | 3,921 | 4,018 |
Electricity delivered toBilateral Agreements | 8,795 | 8,504 | 7,908 | 6,675 | 7,392 |
Electricity delivered under auction – CCEAR – affiliates | 92 | 86 | 157 | 215 | 411 |
Electricity delivered under auction – CCEAR – other | 876 | 838 | 3,154 | 4,391 | 4,677 |
Electricity delivered to Spot Market – CCEE(2) | 213 | 1,246 | (252) | (640) | 101 |
Electricity delivered to the Interconnected System | 4,556 | 6,529 | 10,895 | 10,196 | 8,336 |
Total electricity delivered by Copel Geração e Transmissão | 18,492 | 21,063 | 25,462 | 24,758 | 24,935 |
Wind Farms(1)(3) |
|
|
|
|
|
Electricity delivered under auction – CCEAR – other | 840 | 840 | 842 | 724 | - |
Electricity delivered under auction – CER – other | 334 | 357 | 358 | 337 | - |
Total electricity delivered by Wind Farms | 1,174 | 1,197 | 1,200 | 1,061 | - |
Copel Distribuição |
|
|
|
|
|
Electricity delivered to Captive Customers | 19,594 | 19,743 | 22,328 | 24,043 | 24,208 |
Electricity delivered to distributors in the State of Paraná | 279 | 521 | 614 | 699 | 699 |
Spot Market – CCEE(4) | 2,401 | 2,510 | 3,611 | 910 | 368 |
Total electricity delivered by Copel Distribuição | 22,274 | 22,774 | 26,553 | 25,652 | 25,275 |
Copel Comercialização |
|
|
|
|
|
Electricity delivered to Free Customers | 2,096 | 771 | 58 | - | - |
Electricity delivered to Bilateral Agreements | 4,403 | 1,882 | - | - | - |
Electricity delivered to Spot Market – CCEE | 26 | 18 | 1 | - | - |
Total electricity delivered by Copel Comercialização | 6,525 | 2,671 | 59 | - | - |
Subtotal | 48,465 | 47,705 | 53,274 | 51,471 | 50,210 |
Losses by Copel Distribuição and Wind Farms(5) | 3,370 | 3,108 | 3,285 | 3,197 | 3,458 |
Total electricity delivered by Copel Geração e Transmissão, Copel Renováveis, Copel Distribuição and Copel Comercialização, including losses | 51,835 | 50,813 | 56,559 | 54,668 | 53,668 |
(1) | In 2018, Copel adopted the criteria set forth by the CCEE to determine the energy flows in sale and purchase transactions. The energy amounts reflected in this table, even with respect to past years, were calculated in accordance with the criteria adopted by the CCEE. |
(2) | Amounts indicated as less than zero (negative numbers) refer to the consolidated purchase of electricity from the Spot Market along the year. |
(3) | Electricity generated and purchased by our wind farm generation facilities which were under the supervision of Copel Renováveis until 2015. In December 2015, Copel Geração e Transmissão became responsible for the operation of these facilities. |
(4) | Includes the MCSD. |
(5) | Includes Technical, Non-technical and Basic network losses of Copel Distribuição and losses related to the Wind Farms. |
33
Generation
As of December 31, 2018, considering only the entities in which we hold a 100.0% shareholding stake and 51.0% of the energy generated by Mauá Hydroelectric Plant (corresponding to the interest we hold in this asset), we operated and sold energy through seventeen (17) hydroelectric plants, eighteen (18) wind plants and one (1) thermoelectric plant, with a total installed capacity of 5,135.3 MW. Our assured energy totaled an average of 2,262.4 MW in 2018. Our generation varies yearly as a result of hydrological conditions and other factors. We generated 19,159 GWh in 2018, 20,891 GWh in 2017, 27,068 GWh in 2016, 25,960 GWh in 2015 and 24,605 GWh in 2014.
Considering the installed capacity of all of the generation companies in which we have an interest (equity or otherwise), our total installed capacity as of December 31, 2018, was 5,787.2 MW.
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 related to our main hydroelectric plants in operation during 2018:
Plant | Installed capacity | Assured energy(1) | Placed in service | Concession expires |
| (MW) | (GWh/yr) |
|
|
Foz do Areia | 1,676.0 | 5,284.91 | 1980 | September, 2023 |
Segredo | 1,260.0 | 5,067.66 | 1992 | November, 2029 |
Salto Caxias | 1,240.0 | 5,305.06 | 1999 | May, 2030 |
Capivari Cachoeira(2) | 260.0 | 954.84 | 1971 | January, 2046 |
Mauá | 185.2(3) | 883.24 | 2012 | July, 2042 |
Others | 102.7 | 556.30 | N/A | N/A |
(1) | Values used to determine volumes committed for sale. |
(2) | On January 5, 2016, Copel Geração e Tramissão executed a concession agreement with ANEEL so that it will continue to operate this plant under an operation and maintenance regime until 2046. |
(3) | Corresponds to 51.0% of the installed capacity of the plant (363.0 MW), corresponding to the interest we hold in this plant, as we operate this plant through a consortium. |
34
Governador Bento Munhoz da Rocha Netto (“Foz do Areia” Plant).The Foz do Areia Hydroelectric Power 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 Power 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 Power Plant is the largest underground hydroelectric plant in Southern 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.
Our concession agreement for the Capivari Cachoeira Plant expired on July 7, 2015. Although Copel Geração e Transmissão did not elect to renew the original concession pursuant the 2013 Concession Renewal Law, it participated in the new competitive bidding process and won. On January 5, 2016, Copel GeT executed a concession agreement with ANEEL, allowing it to continue to operate this plant under an operation and maintenance regime until January 5, 2046. We paid a total of R$574.8 million as the signing bonus for this concession and we received an annual generation revenue (AGR) of R$144.1 million from January 5, 2016 to December 31, 2016. This AGR is subject to an annual tariff adjustment. In July 2017, the AGR was adjusted to R$114.1 million for the period from July 2017 to June 2018 pursuant to the ANEEL Resolution No. 2,265/2017, and in 2018 the AGR was adjusted to R$119.2 million for the period from July 2018 to June 2019 pursuant ANEEL Resolution No. 2,421/2018.
The Capivari Cachoeira Plant has 260.0 MW of installed capacity and assured energy of 954.8 GWh/year. 100.0% of the energy generated by this plant in 2016 was allocated in quotas to the regulated market and as of January 1, 2017, this percent was reduced to 70.0%. Copel GeT will no longer bear the hydrological risk for the energy allocated in quotas under the MRE associated with the Capivari Cachoeira Plant.
Mauá.The Jayme Canet Júnior Hydroelectric Power Plant (Mauá 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 we hold a 51.0% interest and Eletrosul holds the remaining 49.0%. The facility is located approximately 250 kilometers from Curitiba, in the Municipality of Telêmaco Borba.
In addition to our generation facilities, we have ownership interests in several other hydroelectric generation companies as detailed below.
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, 2018:
35
Plant | Installed capacity | Assured energy | Placed in service | Our ownership | Concession expires |
| (MW) | (GWh/yr) |
| (%) |
|
Elejor Facility (Santa Clara and Fundão) | 246.5 | 1,229.0 | July, 2005 | 70.0 | May, 2037(1) December, 2032 |
Dona Francisca | 125.0 | 664.9 | February, 2001 | 23.0 | August, 2033 |
SHP Arturo Andreoli (Foz do Chopim) | 29.1 | 178.6 | October, 2001 | 35.8 | April, 2030 |
(1)Elejor Facility adhered on January 14, 2015, with the renegotiation of the hydrological risks, which caused the expiration date to be extended from 2036 to 2037.
Elejor Facility. The Elejor Facility consists of the Santa Clara and Fundão Hydroelectric Power Plants, both of which are located on the Jordão River in the State of Paraná. The aggregate total installed capacity of the units is 246.5 MW, which includes two smaller hydroelectric generation units installed in the same location. 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, 2018, 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, which in 2001 totaled R$19.0 million. This amount is adjusted on an annual basis by the IGP-M Index.
We have a power purchase agreement with Elejor, which 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 2018, Elejor’s net revenues and net profits were R$293.9 million and R$76.3 million, respectively, while in 2017 its net revenues and net profits were R$291.6 million and R$96.2 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. In April 2015, we signed a new ten year power purchase agreement with DFESA, valued at R$17.0 million annually, under which Copel purchases 23.03% of DFESA’s assured energy (proportional to Copel’s stake).
In 2018, DFESA’s net revenues and net profits were R$70.7 million and R$43.3 million, respectively, while in 2017 its net revenues and net profits were R$70.7 million and R$38.5 million, respectively.
SHP Arturo Andreoli (“Foz do Chopim” Hydroelectric Plant).The Foz do Chopim Hydroelectric Plant is located on the Chopim River in the State of Paraná. We own 35.8% of the common shares of Foz do Chopim Energética Ltda., the entity that owns the Foz do ChopimHydroelectric Plant. Silea Participações Ltda. owns the remaining 64.2%. 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$220.07/MWh. Foz do Chopim Energética Ltda. also has the authorization to operate Bela Vista SHP, a Hydroelectric Power Plant that is located on the same river and has similar capacity. The process for obtaining the necessary installation environmental license is ongoing. In 2018, Foz do Chopim’s net revenues and net profits were R$46.6 million and R$36.9 million, respectively, while in 2017 its net revenues and net profits were R$40.5 million and R$18.6 million, respectively.
36
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 and acquisition 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 as of December 31, 2018:
37
Plant | Installed capacity | Assured Power | Placed in Service | Concession Expires |
| (MW) | (Average MW) |
|
|
São Bento Energia | 94.0 | 46.3 |
|
|
Boa Vista | 14.0 | 6.3 | February, 2015 | April, 2046 |
Olho d'Água | 30.0 | 15.3 | February, 2015 | May, 2046 |
São Bento do Norte | 30.0 | 14.6 | February, 2015 | May, 2046 |
Farol | 20.0 | 10.1 | February, 2015 | April, 2046 |
Palmas | 2.5 | 0.5 | November, 1999 | September, 2029 |
Copel Brisa Potiguar Wind Complex | 183.6 | 98.4 |
|
|
Asa Branca I | 27.0 | 14.2 | August, 2015 | April, 2046 |
Asa Branca II | 27.0 | 14.3 | September, 2015 | May, 2046 |
Asa Branca III | 27.0 | 14.5 | September, 2015 | May, 2046 |
Eurus IV | 27.0 | 14.7 | August, 2015 | April, 2046 |
Santa Maria | 29.7 | 15.7 | April, 2015 | May, 2047 |
Santa Helena | 29.7 | 16.0 | May, 2015 | April, 2047 |
Ventos de Santo Uriel | 16.2 | 9.0 | May, 2015 | April, 2047 |
São Miguel do Gostoso I(1) | 108.0 | 57.1 |
|
|
Carnaúbas | 27.0 | 13.1 | June, 2015 | April, 2047 |
Reduto | 27.0 | 14.4 | June, 2015 | April, 2047 |
Santo Cristo | 27.0 | 15.3 | June, 2015 | April, 2047 |
São João | 27.0 | 14.3 | June, 2015 | March, 2047 |
Cutia(2) | 153.3 | 60.8 |
|
|
Dreen Cutia | 23.1 | 9.6 | December, 2018 | January, 2042 |
Dreen Guajiru | 21.0 | 8.3 | December, 2018 | January, 2042 |
Esperança do Nordeste | 27.3 | 9.1 | December, 2018 | May, 2050 |
GE Jangada | 27.3 | 10.3 | December, 2018 | January, 2042 |
GE Maria Helena | 27.3 | 12.0 | December, 2018 | January, 2042 |
Potiguar | 27.3 | 11.5 | December, 2018 | May, 2050 |
(1)Copel has a 49.0% interest in São Miguel do Gostoso I.
(2) In December 2018, Dreen Cutia, Dreen Guajiru and Esperança do Nordeste began their operations with 100% of their installed capacity, while the Jangada, Maria Helena and Potiguar parks began their commercial operations with 85%, 54% and 77% of their installed capacity respectively.
São Bento Energia. On February 25, 2015, the four wind farms (Boa Vista, Olho d’Água, São Bento do Norte and Farol) which are part of the 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. In August 2010, 43.7 average-MW of the energy generated at a weighted average price of R$134.40/MWh (annually adjusted by IPCA index) was sold to fifteen distribution concessionaires in ANEEL public auctions. The energy generated by these wind farms is sold through 20-year term contracts.
Copel Brisa Potiguar Wind Complex. On September 15, 2015, Copel concluded the installation of the Brisa Potiguar Wind Complex with an installed capacity 183.6 MW and assured energy of 92.6 average-MW. An assured energy of 52.2 average-MW (from Asa Branca I, Asa Branca II, Asa Branca III and Eurus IV wind farms) was committed under contract to electric power distributors in the alternativeenergy auction in August 2010 at a weighted average price of R$135.40/MWh (adjusted annually by IPCA inflation index) and an average of 40.7 MW (from WPPs Santa Helena, Santa Maria and Ventos de Santo Uriel) was committed under contract in the 6th Reserve Energy Auction held 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.
38
São Miguel do Gostoso I. In June 2014, we negotiated with Voltalia Energia do Brasil Ltda.(Voltalia) the acquisition of a 49.0% interest in the São Miguel do Gostoso I Wind Farm Complex, in the State of Rio Grande do Norte. The São Miguel do Gostoso wind farm complex has 108.0 MW of installed capacity and assured energy of 57.1 average-MW, and its energy was sold in the 4th Reserve Energy Auction at an average price of R$98.92/MWh through 20-year term contracts. In April 2015, we concluded the construction of this wind farm complex and ANEEL, in July and August 2015, classified it as ready for commercial operation. This wind farm complex began production in June 2017 after completion of the necessary transmission lines.
Cutia. Cutia Empreendimentos Eólicos, which is Copel’s largest wind farm business, is divided into two large complexes totaling 312.9 MW of installed capacity: (a) Cutia Complex, composed of seven wind farms (Guajiru, Jangada, Potiguar, Cutia, Maria Helena, Esperança do Nordeste and Paraíso dos Ventos do Nordeste), with a total installed capacity of 180.6 MW, 71.4 average MW of physical guarantee and located in the State of Rio Grande do Norte; and (b) Bento Miguel Complex, composed of 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) with 132.3 MW of total installed capacity, 58.7 average MW of physical guarantee and located in the State of Rio Grande do Norte, in the same region of other wind farm complexes that belong to us. On October 31, 2014, at the 6th Reserve Energy Auction, we sold 71.2 average MW from the Cutia Complex for R$144.00/MWh (maximum auction price). In addition, at the 20th New Energy Auction (A-5), held on November 28, 2014, we sold 54.8 average MW from the six Bento Miguel wind farms for R$ 136.97/MWh, through Availability Agreements with a 20-year term.
In December 2018, the wind farms of Cutia, Guajiru and Esperança do Nordeste, all part of the Cutia Complex, began their operations with 100% of their installed capacity, while the parks of Jangada, Maria Helena and Potiguar, also part of the Cutia Complex, began their commercial operations on the same date, with 85%, 54% and 77% of their installed capacity respectively. For additional information on the development of the Cutia wind farms, see “Item 4. Information on the Company – Business – Generation - Expansion and Maintenance of Generating Capacity - Wind Farm Projects”.
Thermoelectric Generation Facilities
The following table sets forth certain information about our thermoelectric plants in operation as of December 31, 2018:
Plant | Installed capacity | Assured energy | Placed in service | Our ownership | Concession/authorization expires |
| (MW) | (GWh/yr) |
| (%) |
|
TPPAraucária | 484.1 | 3,199.2(1) | September, 2002 | 80.0 | December, 2029 |
TPPFigueira | 20.0 | 90.2 | April, 1963 | 100.0 | March, 2019(2) |
(1) The annual assured energy of thermal plants such as Araucária varies depending on the price of natural gas, according to criteria established by the MME.
(2) We are currently waiting for thegranting authority to amend our concession agreement with respect to TPP Figueira, extending the concession of the thermoelectric plant for another 20 years, pursuant to the Concession Extension Law of 2013
39
Araucária. We have an 80.0% interest in UEG Araucária Ltda., which owns the Araucária Thermoelectric plant, a natural gas thermoelectric power plant, located in the state of Paraná. The Araucária Thermoelectric plant has 484.1 MW of installed capacity, does not have Availability Agreements currently in force and operates under a business model in which revenue depends on the plant’s operation. When produced, energy will be sold in the spot market as directed by the ONS.
Figueira. The Figueira plant is located in the city of Figueira, in the northeast of the state of Paraná (where the main coal basin of Paraná is located). This plant is currently in a modernization process, which consists of replacing the old equipment for new equipment. This process aims to make this plant more efficient, reduce emissions of gases and particles resulting from the burning of coal and comply with applicable environmental legislation.
The Figueira plant has an installed capacity of 20.0 MW, with two generating units of 10.0 MW and a physical guarantee of 10.3 average MW, as determined by Portaria No. 303/2004 issued by the Ministry of Mines and Energy of Brazil. The Figueira plant produces an average net energy of 8.6 MW (internal consumption of discount, recorded in Copel's Energy Balance Sheet). Due to the long period in which the Figueira plant was in operation and the use of outdated equipment, the maximum energy efficiency of this plant is approximately 13%.
After the modernization, the plant will maintain the installed capacity of 20.0 MW with only one generating unit and the physical guarantee of 17.7 MW, so that it is in compliance with Normative Resolution No. 801/2017, which defines a minimum efficiency of 25% for installations with installed capacity up to 50.0 MW.
The operation and maintenance of this facility is carried out by Companhia Carbonífera do Cambuí Ltda., a company also responsible for the supply of coal consumed in the plant. However, upon the completion of the modernization process, Copel GeT will be in charge of operating this plant for a period of up to 18 months. By the end of this period, the operation of this plant will be outsourced to a third-party chosen through a bidding process.
Expansion and Maintenance of Generating Capacity
We expect to spend R$464.1 million in 2019 to expand and maintain our generation capacity, including participation in new businesses, of which R$113.6 million will be invested in SHP Bela Vista, R$59.2 million will be invested in Complexo Eólico Cutia, R$59.3 million will be invested in the Colíder Hydroelectric Power Plant, R$18.1 million will be invested in the Baixo Iguaçu Hydroelectric Power Plant and R$6.0 million will be invested in the Brisa Potiguar Wind Complex. The remaining amount will be spent on equipment maintenance, the modernization of the HPP Foz do Areia, the modernization of the Figueira Thermal Power Plant and other projects.
Hydroelectric Power Plant Projects
We have interests in several hydroelectric generation projects. The following table sets forth information regarding our major hydroelectric generation projects under construction.
Facility | Installed capacity | Estimated assured energy(1) | Budgeted completion cost | Beginning of operation | Our ownership | Status |
| (MW) | (GWh/year) | (R$ million) |
| (%) |
|
HPPColíder | 300.0 | 1,560 | 2,364 | March, 2019(2) | 100.0 | Concession granted |
HPPBaixo Iguaçu | 350.2 | 1,501 | 2,346 | February, 2019 | 30.0 | Concession granted |
SHPBela Vista | 29 | 145 | 200 | January, 2024 | 99.9 | Concession granted |
(1) Values used to determine volumes committed for sale.
(2) The scheduled commencement of operations for the Colíder plant was delayed due to fortuitous events.
40
Colíder. In July 2010, we won an ANEEL bid for the 35-year concession to build and operate the Colíder Hydroelectric Power Plant on the Teles Pires River in the State of Mato Grosso. The Colíder plant will have an installed capacity of 300.0 MW and is located between the municipalities of Nova Canaã do Norte and Itaúba. The municipalities of Colíder and Cláudia are also affected by the reservoir. The construction of the plant began in 2011 and about 97% of the work was concluded in 2018. The reservoir and the spillway were already completed. Equipment manufacturing and electromechanical assemblies are underway, and generating unit 01 entered commercial operation on March 9, 2019. In February 2016, we started the construction of a 64-km-long transmission line that will connect the plant to the “Cláudia” substation.
As a result of fortuitous events, Copel GeT filed an application with ANEEL to excuse it from certain fines, penalties and charges incurred as a result of the delay in the beginning of operations of the plant, initially scheduled for December 31, 2014. The request filed by Copel GeT was not approved by ANEEL, so Copel GeT filed an administrative appeal, which was denied on March 14, 2017. Not agreeing with the decision, Copel GeT again requested the reconsideration of such decision by ANEEL, which was definitively denied on July 04, 2017. On December 18, 2017, we filed an ordinary lawsuit regarding the matter. On June 4, 2018, the Regional Federal Court of Appeals (Tribunal Regional Federal da 1ª Região) exempted Copel GeT from any liens or restrictions due to delays in implementation schedule of Colíder HPP.
Copel GeT has been honoring the energy supply commitments of the Colíder HPP (CCEAR), totaling 125.0 average MW, as follows:
(i) From January 2015 to May 2016: Copel GeT used leftover energy de-contracted in other generation facilities.
(ii) June 2016: partial reduction pursuant to a Bilateral Agreement.
(iii) From June 2016 to December 2018: reduction of all of the Energy Commercialization Contracts in the Regulated Environment - CCEARs, pursuant to a Bilateral Agreement and participation in the MCSD-EN or the so-called New Energy.
As a result of the above, the Colíder HPP obtained a release of its obligations to deliver energy in 2017 and 2018 under the contracted CCEARs (125.0 average-MW).
Ordinance MME No. 258, on December 21, 2016, required Copel GeT to ensure a 177.9 average MW for the plant, which was increased to 178.1 average MW by MME Ordinance No. 213 of July 14, 2017. Of this total, 125 average MW are committed under a 30-year contract, at a price of R$103.40/MWh, as of July 1, 2010 (adjusted annually for the variation of the IPCA rate). The remaining 53.1 average MW not sold under this agreement have not yet been contracted and are available for sale to large consumers in the free market. For more information, see Note 18.4 to our audited consolidated financial statements.
41
Baixo Iguaçu. In June 2013, we acquired a 30.0% equity interest in the Baixo Iguaçu HPP through a consortium, with no premium payment. Baixo Iguaçu is the last large energy project planned for the main Iguaçu River and will be located around 30 km downstream from Governador José Richa HPP - the Salto Caxias Hydroelectric Power Plant, which is 100.0% 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. Of the facility’s assured energy of 171.3 average MW (established by Ordinance MME No. 11, on January 18, 2017), 121 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 February 2019. The remaining 50.3 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.
The construction of this facility began in 2013 and its commercial operation (initially expected for 2016) was delayed after its environmental installation license was suspended in June 2014 due to judicial disputes. The 4th Regional Federal Court of Appeals determined the suspension of the construction, which had not been approved yet by ICMBio, the environmental agency responsible for the management of Iguaçu National Park (Parque Nacional do Iguaçu) (the natural reserve is located 500 meters from the plant).
On August 23, 2016, we entered into the 2nd Amendment to the Concession Agreement with respect to the Baixo Iguaçu HPP, with the purpose of formalizing the new work schedule and recognizing that we should not be held liable for the delay in the implementation of the project for a period corresponding to 756 days, which was considered as an extension of the concession period. Consequently, the concession period was extended from August 19, 2047 to September 14, 2049.
In November 2017, ANEEL acknowledged, through Order No. 3,770, a new 46-day period during which we should not be held liable for delays in implementing the project as a result of systematic invasions of the construction site, carried out by unofficial entities, in mid-May and October 2016.
The civil works and electromechanical assembly in the powerhouse allowed the installation and positioning of important parts of the turbine-generator set, from the first generating unit, in the months of October and November of 2017. In December 2018, the reservoir of Baixo Iguaçu HPP was filled up for operational tests.
The commercial operations of generation units 1, 2 and 3 of Baixo Iguaçu’s began in February 2019, Feburary 2019 and April 2019, respectively.
Bela Vista. In August 2018, we participated in the A-6 auction as a member of the Consórcio Bela Vista Geração and sold 14.7 MW of the SHP Bela Vista, at a price of R$195.70 / MWh. With an estimated investment of R$200.0 million, the Bela Vista SHP has 29 MW of installed capacity and 16.6 MW of assured power and will be built in the Chopim river, in the São João and Verê Municipalities, located in the southwest of the State of Paraná. The energy sales agreement will be in force as of January 1, 2024, for a 30-year term and will be subject to an annual readjustment by the IPCA. The construction of this facility is scheduled to start in the firstsemester of 2019.
Wind Farm Projects
The following table sets forth information regarding our wind farm projects, all of which currently refer to the Cutia wind farm (Cutia Empreendimentos Eólicos). We currently hold 100% equity interest in the Cutia wind farm, composed of the Cutia and Bento Miguel Complexes, totaling 312.9 MW of installed capacity. All the energy produced by these wind farms was sold to energy concessionaires through contracts subject to a 20-year term. As of March 31, 2019, 95% of the 149 wind turbines in the Cutia wind farm were in operation (127 of which were in commercial operation and 16 of which were subject to tests), and the remaining 6 wind turbines were expected to enter into operation on staggered form. Once these parks start operating wih total installed capacity, our Cutia wind farm business will be in full commercial operation. For additional information see: “Item 4. Information on the Company – Business - Generation – Wind Farm Generation Facilities.”
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Wind Farm | Installed capacity | Estimated Assured Power(1) | Budgeted completion cost | Beginning of commercial operation | Our ownership | Concession expires |
| (MW) | (Average MW) | (R$ million) |
| (%) |
|
Cutia | 312.9 | 130.1 | 2,003.8 | - | 100.0 |
|
GE Jangada(1) | 27.3 | 10.3 | - | December, 2018 | - | January, 2042 |
GE Maria Helena(2) | 27.3 | 12.0 | - | December, 2018 | - | January, 2042 |
Paraíso dos Ventos do Nordeste | 27.3 | 10.6 | - | January, 2019 | - | May, 2050 |
Potiguar(3) | 27.3 | 11.5 | - | December, 2018 | - | May, 2050 |
São Bento do Norte I | 23.1 | 10.1 | - | January, 2019 | - | August, 2050 |
São Bento do Norte II | 23.1 | 10.8 | - | January, 2019 | - | August, 2050 |
São Bento do Norte III(4) | 23.1 | 10.2 | - | April, 2019 | - | August, 2050 |
São Miguel I | 21.0 | 9.3 | - | February, 2019 | - | August, 2050 |
São Miguel II | 21.0 | 9.1 | - | February, 2019 | - | August, 2050 |
São Miguel III | 21.0 | 9.2 | - | February, 2019 | - | August, 2050 |
(1) The commercial operations of the Jangada park began in December 2018 with 85% of its installed capacity.
(2) The commercial operations of the Maria Helena park began in December 2018 with 54% of its installed capacity.
(3) The commercial operations of the Potiguar park began in December 2018 with 77% of its installed capacity.
(4) The assured power of São Bento Norte III was adjusted pursuant to Aneel Dispatch No. 1,387/2018 dated as of June 25, 2018.
Development Projects
We are involved in various initiatives to study the technical, economic and environmental feasibility of certain hydroelectric, wind, solar photovoltaic and thermoelectric generation projects. The following table sets forth information regarding our proposed generation projects that are considered feasible under a technical, economic, social, environmental and land-related perspective pursuant to the above-mentioned studies.
Proposed Projects(1) | Estimated Installed Capacity | Estimated Assured Energy | Our Ownership |
| (MW) | (GWh/yr) | (%) |
HPP São Jerônimo | 331.0 | 1,560.2 | 41.2 |
WPP Complexo Jandaíra | 99.0 | 428.2 | 100.0 |
WPP Complexo Alto Oriente | 60.0 | 247.5 | 100.0 |
HPP Salto Grande | 47.0 | 235.8 | 99.9 |
SHP Dois Saltos | 30.0 | 133.4 | 30.0 |
SHP Bela Vista | 29.0 | 145.8 | 99.9 |
SHP Salto Alemã | 29.0 | 173.8 | 19.0 |
TOTAL | 625.0 | 2,924.7 | - |
(1) Do not include other proposed projects of Copel whose technical, economic, social, environmental and land-related feasibility is still under analysis.
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Copel is also a member of Consortium Geração Luz Paranaense - CGLP, which was granted with exploration rights related to the following projects: (i) SHP Foz do Curucaca, (ii) SHP Salto Alemã, (iii) SHP Alto Chopim and (iv) SHP Rancho Grande.After obtaining the applicable authorization from ANEEL and evaluating the hydraulic potential of each project, the consortium decided to carry out the studies only with respect to SHP Salto Alemã and SHP Foz do Curucaca and to return the exploration rights for SHP Alto Chopim and SHP Rancho Grande projects to ANEEL.The basic design of SHP Salto Alemã had already been approved by ANEEL in 2017 and the environmental studies related to this project were registered in the competent entity for analysis in October 2018. In December 2018, the basic design of SHP Foz do Curucaca was submitted to ANEEL approval.
From November 1999 to August 2018, Copel Geração e Transmissão S.A. held a minority stake in Foz do Chopim Energética Ltda., which was controlled by SILEA Participações Ltda. and held exploration rights over SHP Bela Vista and HPP Salto Grande. In October 2017, SILEA Participações Ltda. presented to Copel Geração e Transmissão S.A. an offer to sell its rights in SHP Bela Vista and HPP Salto Grande. In March 2018, SILEA Participações Ltda. also offered to sale its rights in SHP Bela Vista and HPP Salto Grande pursuant to Copel´s Public Call No. 04/2018 (Acquisition of Transmission and Generation Assets that are in the design, construction or commercial operation phase). During 2018, several studies were carried out to assess whether SHP Bela Vista would be competitive in the energy auction no. 03/2018. In August 2018, Copel Geração e Transmissão S.A. and SILEA Participações Ltda. entered into a purchase agreement pursuant to which Copel Geração e Transmissão S.A. agreed to purchase both SHP Bela Vista and HPP Salto. As a condition precedent to closing of such transaction, SHP Bela Vista would have to win the auction for commercialization of energy, what actually occurred on August 31, 2018. The construction of SHP Bela Vista is planned to begin in the first semester of 2019.
Since 2017, Santa Clara Indústria de Pasta e Papel Ltda. (“Santa Clara”) had demonstrated that it had no interest in mantaining the partnership with COPEL in Dois Saltos Empreendimentos de Geração de Energia Elétrica Ltda.(“Dois Saltos”), a company that owns the rights to exploit SHP Dois Saltos. In October 2017, Santa Clara made an offer for the entire stake held by COPEL in Dois Saltos. After engaging an independent consulting firm in January 2018 and determining the fair value of its stake in Dois Saltos, COPEL presented to Santa Clara its terms for reaching an agreement. In October 2018, Santa Clara adjusted its proposal, based on the conditions and price requested by COPEL. This proposal was accepted by the Board of Directors of COPEL in November 2018, and a share purchase agreement was signed by the parties in December 2018. The closing of this transaction, however, is expected to occur in June 2019.
In 2019, 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, wind farms and solar photovoltaic projects planned to be listed in the auctions of 2019, or sell the energy in the unregulated electricity market (free market). We will also conduct studies of new hydroelectric power plants. For instance, we have partnered withBE - Empresa de Estudos Energéticos S.A.,Minas PCH S.A.andSILEA Participações Ltda.to develop studies in the lower region of the Chopim River, which may lead to the development of another four (4) hydroelectric projects.We are also conducting studies related to future government auctions for wind farms, solar photovoltaic and hydropower plants, small hydroelectric plants and thermoelectric power plants in whichwe may eventually participate. Other renewable energy projects under study or development include the use of municipal solid waste in power generation, and thermosolar energy. For instance, since 2017, Copel has conducted solarimetric measurements in two solarimetric stations located in areas leased by Copel Brisa Potiguar. The development of solar energy projects in such areas is still under analysis and the corresponding studies are expected to be concluded as to be able to submit such projects to energy auctions in 2019.
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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 on the dates presented.
| As of December 31, | ||||
| 2018 | 2017 | 2016 | 2015 | 2014 |
Transmission lines (km): |
|
|
|
|
|
230 kV and 500 kV | 3,206.8 | 2,691. 8 | 2,514.0 | 2,398.8 | 2,197.3 |
138 kV | 7.2 | 7.2 | 7.2 | 7.2 | 7.2 |
69 kV(1) | - | - | - | - | - |
Distribution lines (km): |
|
|
|
|
|
230 kV(2) | - | - | 165.5 | 129.6 | 123.5 |
138 kV | 6,264.8 | 5,935.0 | 5,970.3 | 5,866.6 | 5,153.5 |
69 kV | 751.2 | 866.4 | 695.4 | 695.3 | 727.2 |
34.5 kV | 85,172.4 | 84,639.2 | 84,071.3 | 83,347.4 | 82,232.5 |
13.8 kV | 106,172.4 | 105,510.6 | 104,556.0 | 103,488.2 | 101,688.7 |
Transformer capacity (MVA): |
|
|
|
|
|
Transmission and distribution substations (69 kV – 500 kV)(3) | 22,825.1 | 22,849.3 | 22,535.4 | 21,727.2 | 21,649.7 |
Generation (step up) substations | 6,355.0 | 6,335.0 | 6,335.0 | 6,312.4 | 6,312.4 |
Distribution substations (34.5 kV) | 1,502.3 | 1,537.9 | 1,488.5 | 1,517.2 | 1,545.0 |
Distribution transformers | 13,404.6 | 12,956.9 | 12,548.2 | 12,032.7 | 11,278.2 |
Total energy losses(4) (5) | 8.3% | 7.8% | 8.1% | 7.8% | 8.1% |
(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)Due to improvements to registration and control systems used by Copel Distribuição to classify and register its transmission lines, lines were classified pursuant to its insulation voltage, and not according to its structure and isolate components. Consequently, all lines previously registered by Copel Distribuição were reclassified and there are no lines classified as 230 kV anymore.
(3)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.
(4)Percentage of losses on the energy injected in the distributor (technical and non-technical losses on injected energy). Does not consider losses in the basic network.
(5)We note that percentages measured until 2016 and reported in previous reports of the Company reflected the amounts of physical losses (Technical), commercial losses (Non-Technical) and losses on the basic network (allocation of agreements on the gravity center of the submarket) of Copel Distribuição, as well as the losses related to the allocation of agreements of Copel GeT. Those percentages were calculated taking into account the total of power purchased and sale agreements entered into by both Copel Distribuição and Copel GeT. For a better representation and comparison of the percentage of losses, we considered the percentage obtained by dividing the total amount of technical and non-technical losses by the energy injected into the network of Copel Distribuição. This percentage may be compared to other companies and has a more accurate physical meaning as it utilizes the database of measured data and not information taken from agreements of the period being analyzed.
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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, 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 third party access to its transmission facilities in exchange for compensation at a level set by ANEEL.
Currently, we carry out the operation and maintenance of 3,214 km of transmission lines, thirty-seven (37) substations in the State of Paraná and two (2) substation in the State of São Paulo. In addition, we have partnerships with other companies to operate 3,401 km of transmission lines and six (6) substations through special purpose companies (SPCs).
The table below sets forth information regarding our transmission assets in operation:
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Subsidiary / SPC | Transmission Lines | TL Extension (km) | Number of Substations | Concession Expiration Date | Our Ownership | APR ¹ |
COPEL GeT | Main Transmission Concession(1) | 2,024 | 33 | December, 2042 | 100.0% | 473.9 |
COPEL GeT | TL Bateias - Jaguariaiva | 137 | - | August, 2031 | 100.0% | 18.3 |
COPEL GeT | TL Bateias - Pilarzinho | 32 | - | March, 2038 | 100.0% | 1.0 |
COPEL GeT | TL Foz - Cascavel Oeste | 116 | - | November, 2039 | 100.0% | 10.9 |
COPEL GeT | Cerquilho III Substation | - | 1 | October, 2040 | 100.0% | 4.5 |
COPEL GeT | TL Londrina – Figueira Foz do Chopim – Salto Osório | 102 | - | August, 2042 | 100.0% | 5.5 |
COPEL GeT | TL Assis – Paraguaçu Paulista Paraguaçu Paulista II Substation | 83 | 1 | February, 2043 | 100.0% | 7.6 |
COPEL GeT | Curitiba Norte Substation TL Bateias – Curitiba Norte | 31 | 1 | January, 2044 | 100.0% | 8.3 |
COPEL GeT | Realeza Sul Substation TL Foz do Chopim- Realeza Sul | 52 | 1 | September, 2044 | 100.0% | 7.2 |
COPEL GeT | TL Assis – Londrina | 122 | - | September, 2044 | 100.0% | 18.9 |
COPEL GeT | TL Araraquara II – Taubaté | 334 | - | October, 2040 | 100.0% | 30.0 |
Costa Oeste(Copel GeT – 100%)(2) | LT Cascavel Oeste - Umuarama Sul | 152 | 1 | January, 2042 | 100% | 9.1 |
Marumbi (Copel GeT – 100%)(2) | LT Curitiba – Curitiba Leste | 29 | 1 | May, 2042 | 100% | 18.1 |
Subtotal Copel GeT | 3,214 | 39 |
| 613.3 | ||
Caiuá Transmissora | TL Guaíra - Umuarama Sul | 136 | 2 | May, 2042 | 49.0%(3) | 9.5 |
Integração Maranhense | LT Açailandia-Miranda II | 365 | - | May, 2042 | 49.0%(3) | 15.2 |
Matrinchã | TL Paranaíta - Ribeirãozinho | 1,005 | 3 | May, 2042 | 49.0%(3) | 92.8 |
Guaraciaba | TL Ribeirãozinho - Marimbondo | 600 | 1 | May, 2042 | 49.0%(3) | 48.7 |
Paranaíba | TL Barreiras II - Pirapora II | 953 | - | May, 2043 | 24.5%(3) | 30.1 |
Cantareira | TL Estreito – Fernão Dias | 342 | - | September, 2044 | 49.0%(3) | 47.6 |
Subtotal SPCs | 3,401 | 6 |
| 243.9 | ||
Total | 6,615 | 45 |
| 857.2 |
(1)Our main transmission concessions encompasses several transmission lines.
(2)On August 30, 2018, Copel GeT entered into an exchange agreement with Eletrosul for the exchange of shares issued by Costa Oeste Transmissora de Energia S.A. (51% Copel GeT and 49% Eletrosul), Marumbi Transmissora de Energia S.A. (80% Copel GeTand 20% Eletrosul) and Transmissora Sul Brasileira de Energia S.A. (20% Copel GeT and 80% Eletrosul). Pursuant to this agreement, Copel GeT now holds 100% interest in the Costa Oeste and Marumbi projects, while Eletrosul now holds a 100% stake in Transmissora Sul Brasileira.
(3)Refers to the equity interest held by Copel Geração e Transmissão.
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Expansion and Maintenance of Transmission Facilities
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 November 2013, SPC Mata de Santa Genebra Transmissora, a strategic partnership 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. On February 25, 2019, all the stages planned for the test run period of the Santa Bárbara d’Oeste substation (300MVar/-300MVar static compensator), belonging to the SPE Mata de Santa Genebra, were concluded, allowing the operation of this substation under the commercial operation regime. The Annual Permitted Revenue (APR) related to the Santa Bárbara d’Oeste substation is R$10.8 million. The project’s total expected APR is R$233.8 million, of which R$117.1 million related to COPEL's stake, and full receipt is subject to the startup of the other stages of the project. These transmission lines are scheduled to be in full operation in August 2019.
In November 2015, Copel GeT won ANEEL’s public auction No. 005/2015 for the construction and operation of 230 km of transmission lines in the States of Paraná and Santa Catarina, and three (3) substations in the State of Paraná, with a total capacity of 900 MVA. With an APR of R$108.6 million, the corresponding concession agreement was signed in April 2016, and these transmission lines are scheduled to become operational partly in September 2019 and partly in March 2021.
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 Curitiba Leste-Blumenau TL Baixo Iguaçu-Realeza | PR/SC | 189 | 3 | 100.0% | April, 2021 |
Subtotal Copel GeT |
| 189 | 3 |
|
| |
Mata de Santa Genebra | TL Araraquara II - Bateias | SP / PR | 885 | 1 | 50.1% | August, 2019 |
Subtotal SPC |
|
| 885 | 1 |
|
|
Total |
|
| 1,074 | 4 |
|
|
In September 2018, Copel GeT acquired Lot J of the Eletrobras Auction No. 01/2018 for R$105 million. This lot corresponded to 75% of Uirapuru Transmissora de Energia S.A. (“Uirapuru”), a special purpose company that is already under commercial operation and has an APR of R$32.4 million. The project developed by this entity corresponds to the transmission line LT Ivaiporã – Londrina, a 120 Km transmission line that crosses ten different cities in the Brazilian State of Paraná (Manoel Ribas, Ariranhado Ivaí, Ivaiporã, Grandes Rios, Cruzmaltina, Faxinal, Marilândia do Sul, Califórnia, Apucarana e Londrina), next to other projects developed by Copel GeT. As a result of this physical proximity, we expect to benefit from the synergy in connection with the use of operating and maintaince resources within the different projects developed by Copel GeT and we believe that this may also reduce our operational costs.
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The rules governing Eletrobras Auction No. 01/2018 entitled the existing shareholders of Uirapuru with a right of first refusal and a tag along right. As a consequence, as a shareholder of that company, Fundação Eletrosul de Previdência e Assistência Social – ELOS, had the right to purchase the stake subject to the auction under the same conditions offered by Copel GeT or could exercise a tag along right and sell its own stake (equivalent to the remaining 25% of Uirapuru) to the auction winner. In October 2018, ELOS exercised its tag along right, and in April 2019, the Brazilian Administrative Council for Economic Defense (Conselho Administrativo de Defesa Econômica, or CADE) approved the transaction. The closing of this transaction, comprising the acquisition of the entire 100% stake in Uirapuru, is expected to occur in the first semester of 2019, after the consent of the ANEEL is obtained.
Distribution
Our distribution system consists of a widespread network of overhead lines and substations with voltages up to 138 kV assets. Higher voltage electricity is supplied to bigger industrial and commercial customers and lower voltage electricity is supplied to residential, small industrial, and commercial customers in addition to other customers. As of December 31, 2018, we provided electricity in a geographic area encompassing approximately 97% of the State of Paraná and served 4.6 million customers.
Our distribution grid includes 198,373.6 km of distribution lines, 434,439 distribution transformers and 225 distribution substations of 34.5 kV, 35 substations of 69 kV and 109 substations of 138 kV. During 2018, 77,311 new captive 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 with large concentration of trees in the vicinity of the distribution grid.
We have seven (7) captive 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 1.1% of the total volume of electricity sold by Copel in 2018.
We are also responsible for expanding the 138 kV and 69 kV distribution grid within our concession area to meet any future demand growth.
Performance of the Distribution System
Total losses are commonly divided into a technical and non-technical component. Technical losses are inherent to the transportation of electricity and consist mainly of power dissipation in the line network. Non-technical (or commercial) losses are caused by actions external to the power system (for instance, electricity theft). Since total losses are comprised of both technical and non-technical parcels, the latter is easily calculated as the difference between total losses and the estimated technical losses inherent to the system.
Total losses in our distribution system are segmented between (i) losses in the basic network (tension equal to or greater than 230kV), which are external to our distribution grid and have a technical cause, and (ii) losses in the distribution network (internal to our distribution grid), which are usually caused by both technical and non-technical reasons.
Losses in the basic network are calculated monthly by the CCEE as the diference between thetotal generation and the energy effectively delivered to the distribution networks. The total losses from our distribution grid are calculated as the difference between the energy allocated to the system and the energy supplied to the customers.
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Our total energy distribution losses (including transmission system, technical and commercial losses) totaled 9.7% of the total energy amount available in 2018, being (i) 1.4% related to losses in the basic network, (ii) 5.9% of technical losses and (iii) 2.4% of non-technical losses.
ANEEL grants the transfer of all energy losses to the final consumers when the real losses are less than regulatory losses. The calculation is made within the regulatory period, that is different from a civil year, and thereby we will know the result just in the next tariff adjustment, in June 2019. But our simulation indicates that in the civil year, from January until December 2018, we will have all losses transferred to the final consumers.
Furthermore, ANEEL requires distributors to observe certain standards for “energy supply continuity”, namely (i) duration of outages per customer per year or DEC –Duração Equivalente de Interrupção por Unidade Consumidora and (ii) frequency of outages per customer per year or FEC –Frequência Equivalente de Interrupção por Unidade Consumidora. 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 | 2018 | 2017 | 2016 | 2015 | 2014 |
DEC – Duration of outages per customer per year (in hours) | 10h19min | 10h28min | 10h49min | 13h40min | 14h01min |
FEC – Frequency of outages per customer per year (number of outages) | 6.22 | 6.83 | 7.23 | 8.33 | 9.08 |
We comply with the quality indicators defined by ANEEL for 2018, which penalizes 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 11 hours and 14 minutes of outages per customer per year, and a total of 8.24 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 Customer 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 Concessions” and “Distribution Tariffs”.
Purchases
The following table contains information concerning volume, cost and average tariff for the main sources of the electricity we purchased in the last three years.
Source | 2018 | 2017 | 2016 |
Itaipu |
|
|
|
Volume (GWh) | 5,726 | 5,934 | 5,958 |
Cost (R$ millions) | 1,272.2 | 1,118.0 | 1,089.9 |
Average tariff (R$/MWh) | 222.18 | 188.41 | 182.91 |
Angra |
|
|
|
Volume (GWh) | 1,009 | 1,023 | 1,026 |
Cost (R$ millions) | 250.3 | 231.7 | 227.0 |
Average tariff (R$/MWh) | 248.07 | 226.49 | 221.25 |
CCGF |
|
|
|
Volume (GWh) | 6,520 | 7,271 | 7,553 |
Cost (R$ millions) | 593.0 | 447.5 | 499.9 |
Average tariff (R$/MWh) | 90.95 | 61.55 | 66.19 |
Auctions in the regulated market |
|
|
|
Volume (GWh)(1) | 10,783 | 9,860 | 13,387 |
Cost (R$ millions)(2) | 2,080.8 | 2,014.8 | 2,493.6 |
Average tariff (R$/MWh) | 192.97 | 204.34 | 186.27 |
(1) These numbers do not include assignments related to MCSD-EN.
(2) These numbers do not include short-term energy purchased through the CCEE.
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Itaipu
We purchased 5,726 GWh of electricity from Itaipu in 2018, which constituted 11.7% of our total available electricity in 2018 and 22.2% of Copel Distribuição’s total available electricity in 2018. Our purchases represented approximately 7.1% 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 2019 at US$27.71 per kW per month.
In 2018, we paid an average tariff of R$227.03/MWh for energy from Itaipu, compared to R$188.41/MWh in 2017. 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 said law. For more information, see “Item 4. Information on the Company - The Brazilian Electric Power Industry”. As a result, Copel Distribuição was legally required to purchase 1,009 GWh from Angra in 2018, 1,023 GWh in 2017 and 1,026 GWh in 2016.
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 at 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. Information on the Company - 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. Copel Distribução was legally required to purchase 6,520 GWh in CCGF contracts in 2018, 7,271 GWh in CCGF contracts in 2017 and 7,553 GWh in 2016.
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Auctions in the Regulated Market
In 2018, we purchased 10,783 GWh of thermoelectric and hydroelectric energy through auctions in the regulated market. This energy represents 39% of the total electricity we purchased. For more information on the regulated market and the free market, see “Item 4. Information on the Company - The Brazilian Electric Power Industry - The New Industry Model Law”.
Sales to Final Customers
During 2018, we supplied approximately 98.6% of the energy distributed directly to Captive Customers in the State of Paraná. Our concession area includes 4.6 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 three hundred, forty-five (345) Free Customers. During 2018, the total power consumption of our Captive Customers and Free Customers was 25,627 GWh, a 5.1% increase as compared to 24,374 GWh during 2017. The following table sets forth information regarding our volumes of energy sold to different categories of purchasers for the periods indicated.
| Year ended December 31, | ||||
Categories of purchaser | 2018 | 2017 | 2016 | 2015 | 2014 |
| (GWh) | ||||
Industrial customers | 8,641 | 7,689 | 9,574 | 10,823 | 10,841 |
Residential | 7,238 | 7,126 | 6,932 | 6,957 | 7,267 |
Commercial | 4,979 | 4,847 | 5,061 | 5,542 | 5,482 |
Rural | 2,288 | 2,257 | 2,180 | 2,256 | 2,252 |
Other(1) | 2,481 | 2,455 | 2,404 | 2,371 | 2,382 |
Total(2) | 25,627 | 24,374 | 26,151 | 27,949 | 28,224 |
(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 as of December 31, 2018.
Category | Number of Final Customers |
Industrial | 73,350 |
Residential | 3,754,598 |
Commercial | 400,266 |
Rural | 352,074 |
Other(1) | 57,853 |
Total | 4,637,804 |
(1) Includes street lighting, as well as electricity for municipalities and other governmental agencies, public services and own consumption.
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Industrial and commercial customers accounted for approximately 33.4% and 18.6%, respectively, of our total net revenues from sales to Final Customers during 2018. In 2018, 28.8% of our total net 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 as follows) 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 inreaisper kW, is based on the higher of (i) contracted firm capacity and (ii) power capacity actually used. The energy charge, expressed inreaisper 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.
ANEEL restates our tariffs annually, usually 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 2018, 2017 and 2016.
Tariffs | 2018 | 2017 | 2016 |
| (R$/MWh) | ||
Industrial | 767.87 | 389.04 | 398.35 |
Residential | 505.08 | 425.26 | 459.35 |
Commercial | 527.31 | 419.27 | 439.47 |
Rural | 345.80 | 286.96 | 302.47 |
Other customers | 375.99 | 311.37 | 331.85 |
All Final Customers | 514.94 | 387.90 | 410.08 |
Low-income Residential Customers. Under Brazilian law, we are required to provide low level rates to certain low-income residential customers (“Low-income Residential Customers”). In December2018, we served approximately 273,131 low-income residential customers. For servicing these customers, in 2018 we received an approximately R$73.4 million grant from the Brazilian Federal Government, which was approved by ANEEL.
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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 kW (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 twelve (12) transmission concession contracts, eleven (11) of which are in the operational stage and one (1) of which refers to a transmission line that is still under construction. Not all of the transmission concession contracts employ the same revenue model. 2.4% of our transmission revenues are updated on an annual basis by the IGP-M and the other 97.6% are subject to the tariff review process.
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 78% of the Company’s transmission lines then in operation) that would expire in 2015, pursuant to the new rules of the 2013 Concession Renewal Law. In 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 61.9%.
Of all our transmission concessions in operational stage, our main transmission concession (which involves our main transmission facilities) accounted for about 80.2% of our gross transmission revenues in 2018.
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In addition, we have ten (10) concession agreements for transmission lines and substations in operation, which correspond to an aggregate of 19.8% 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, but, pursuant to the terms set forth in this agreement, our revenues were reduced by 50% starting in June 2018. Other nine (9) 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.
In 2015, (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 15.6%), (ii) three transmission concession agreements were adjusted by the IPCA (8.5%), (iii) one transmission concession agreement was adjusted by the IGP-M (4.1%), and (iv) two transmission agreements became operational on June 28, 2015 and January 25, 2016, adding R$12.1 million of annual permitted revenues. As a result, the annual permitted revenues for the 2015/2016 cycle for our transmission assets reflects an increase of 21.0% over our annual permitted revenues for the 2014/2015 cycle.
In 2016, (i) four 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 9.5%), (ii) two transmission concession agreements were adjusted by the IPCA (9.3%), (iii) one transmission concession agreement was adjusted by the IGP-M (11.1%), and (iv) two transmission agreement became operational on May 16, 2016, and on January 15, 2017, adding R$15.4 million of annual permitted revenues. As a result, the annual permitted revenues for the 2016/2017 cycle for our transmission assets reflects an increase of 16.7% over our annual permitted revenues for the 2015/2016 cycle.
In relation to our main concession agreement, on April 22, 2016, Ordinance No. 120/2016 of the Ministry of Mines and Energy determined that the amounts ratified by ANEEL related to the non-depreciated transmission assets existing on May 31, 2000 (RBSE) should be incorporated to the Regulatory Remuneration Base, and that their cost of capital should be added to APR. The Ordinance also determined that the cost of capital would be composed of compensation and depreciation installments, plus related taxes, and recognized as of the 2017 tariff revision process, with adjustments and revisions in accordance with contractual conditions.
Also pursuant to the Ordinance, the cost of capital not incorporated between the concessions’ extensions and the 2017 tariff revision process should be restated at the real cost of own capital of thetransmission segment defined by ANEEL (10.4%) and, after the tariff revision process, it should be remunerated at the Weighted Average Cost of Capital (WACC) of 6.6%, also defined by that agency.
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On May 9, 2017, ANEEL approved the result of the inspection of the appraisal report of the transmission assets existing on May 31, 2000 (Existing Basic Network System - RBSE and Other Transmission Facilities - RPC) related to our main transmission concession agreement. The Agency recognized the amount of R$667.6 million as the net value of the assets for the purposes of indemnification as of December 31, 2012. As of December 31, 2017, the net value of those assets for the purposes of indemnification amounted to R$1,418.4 million.
On June 27, 2017, ANEEL approved the Annual Permitted Revenue (Receita Anual Permitida, or APR) of the transmission assets of Copel GeT for the 2017/2018 cycle, including the commencement of receipt of the RBSE indemnification of our main transmission concession agreement.
In 2017, (i) our main transmission concession agreement was adjusted by the IPCA and by the portion related the commencement of receipt of the RBSE indemnification (average increase of 151.3%) (ii) one of our transmission concession agreements was adjusted by the IPCA and improvements to the system were approved by ANEEL (average increase of 3.7%), (iii) six transmission concession agreements were adjusted by the IPCA (3.6%), (iv) one transmission concession agreement was adjusted by the IGP-M (1.6%), and (v) one transmission agreement became operational in August 2017, adding R$18.9 million of annual permitted revenues. As a result, the annual permitted revenues for the 2017/2018 cycle for our transmission assets reflected an increase of 121.2% over our annual permitted revenues for the 2016/2017 cycle.
In June 2018, ANEEL approved the APR for the 2018/2019 cycle, considering (i) an adjustment of relevant amounts by the IGP-M and IPCA indexes, and (ii) the expansion of our transmission system with strengthening works and revenues from other works classified as improvement measures.
Compared to our total APR for the 2017/2018 cycle, the APR of our main concession for the 2018/2019 cycle was reduced by 8.1%, as a result of the correction of a prior calculation made by ANEEL, which take into account certain financial and economic portions of unamortized and unrepaired assets related to the RBSE when determining the assets of the Regulatory Remuneration Base in the prior cycle.
The APR of concession No. 075/2001 was reduced by approximately 30.5%, as a result of a 50% reduction of the APR starting at the 16th anniversary of commercial operation, which will occur during the 2018/2019 cycle. Two of our concession agreements (022/2012 and 002/2013) were subject to a periodic review, which resulted in a lower APR in connection with increasing revenues related to strengthening works.
The table as follows shows our APR (R$ million) for the last four cycles of transmission lines over which we hold a 100% ownership:
Contract | Transmission Line / Substation | Jul. 2018 Jun. 2019 | Jul. 2017 Jun. 2018 | Jul.2016 Jun.2017 | Jul.2015 Jun.2016 |
|
|
| APR (R$ million) | ||
060/2001 | Main Transmission Concession(1) | 450.4 | 482.7 | 192.1 | 174.9 |
075/2001 | Bateias – Jaguariaiva | 13.5 | 19.4 | 19.1 | 17.2 |
006/2008 | Bateias – Pilarzinho | 1.1 | 1.0 | 1.0 | 0.9 |
027/2009 | Foz do Iguaçu - Cascavel Oeste | 11.9 | 11.6 | 11.2 | 10.2 |
015/2010 | Cerquilho III | 4.8 | 4.7 | 4.5 | 4.6 |
022/2012 | Foz do Chopim – Salto Osório | 5.8 | 5.8 | 5.6 | 5.1 |
002/2013 | Assis-Paraguaçu Paulista II SE Paraguaçu Paulista II | 7.9 | 7.7 | 7.7 | 7.0 |
005/2014 | Bateias – Curitiba Norte | 9.5 | 8.7 | 8.4 | - |
021/2014 | Foz do Chopim - Realeza(2) | 7.5 | 7.3 | 7.1 | - |
022/2014 | Assis – Londrina(3) | 19.5 | 18.9 | - | - |
010/2010 | Araraquara 2 – Taubaté(4) | 30.0 | - | - | - |
Total |
| 561.9 | 567.8 | 256.7 | 219.9 |
(1) Our main transmission concessions encompasse several transmission lines.
(2) This transmission line became operational in January 2017.
(3) This transmission line became operational in August 2017.
(4) This transmission line became operational in July 2018.
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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 Catarina. We have been offering these services since August 1998 through the use of our fiber optics network (totaling 34.2 thousand km of fiber optic cables by the end of 2018). In addition we have been involved in an educational project aimed at providing broadband internet access to public elementary and middle schools in the State of Paraná.
COPEL currently serves 399 municipalities in the State of Paraná. All of these municipalities are connected to COPEL’s optical backbone.
In addition to the high transmission capacity in its backbone, Copel Telecom serves 85 municipalities in the State of Paraná, with GPON (Gigabit-Capable Passive Optical Networks) access technology, providing several network services with symmetry rates, in different types of FTTx services.
We provide services to most of the major Brazilian telecommunication companies that operate in the State of Paraná. In total, we have corporate clients that include supermarkets, universities, banks, internet service providers and television networks in addition to retail clients. We also provide a number of different telecommunication services to our subsidiaries.
On April 17, 2019, Copel's Board of Directors resolved, unanimously, that we should continue to analyze alternatives for a potential transfer of control of Copel Telecomunicações S.A.
Sercomtel. We own 45% of the stock of Sercomtel Telecomunicações S.A. ("Sercomtel"). Sercomtel holds a concession to provide fixed telephony services and an authorization to provide mobile services in the municipalities of Londrina and Tamarana, located in the State of Paraná. In addition, Sercomtel has two (2) other authorizations from ANATEL that allow it to provide fixed telephony and broadband internet services in all other municipalities of the State of Paraná. Currently, Sercomtel operates with its own network in fifteen (15) municipalities of the State of Paraná, providing voice services and fixed broadband. Pursuant to a commercial agreement between COPEL and Sercomtel in force since March 2012, Sercomtel has been providing voice services over COPEL's network in one hundred and eighty three (183) cities within the State of Paraná, including Curitiba.
As of December 31, 2018, Sercomtel provided a total of 249,568 accesses in fixed telephone services, 62,185 mobile accesses and 109,011 fixed broadband accesses in operation.
In addition to the telecommunications business, Sercomtel currently holds 100% of the capital stock of three subsidiaries: (i) Sercomtel Participações, a company whose purpose is to provide added value services, design, deploy and maintain internet service providers, operate a service center for users of telecommunications services, offer integrated IT solutions, among others (ii) Sercomtel Contact Center, a company whose purpose is to operate call centers, develop and implement CRM - Customer Relation Management projects, provide customer service and relationship services, among others, and (iii) Sercomtel Iluminação, that provides maintenance services in public lighting in the city of Londrina, State of Paraná.
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Sercomtel has had losses in previous years and is facing financial difficulties for carrying out its operations, so it may need additional financial contributions from its shareholders.
In September 2017, pursuant to the Decision (Acórdão) no. 366, ANATEL determined that Sercomtel was not in compliance with certain financial indicators set forth by the agency in connection with the concessions granted to Sercomtel and required for the company's operations to continue. As a consequence of this determination, ANATEL brought an administrative proceeding against Sercomtel to assess whether the concession and the authorizations granted to this company should be terminated. In March 2019, ANATEL decided to suspend the above mentioned proceeding for a 120-day period, so that Sercomtel could present to the agency alternative plans for meeting the relevant regulatory indicators. The process for determining whether the concession and authorizations granted to Sercomtel should be terminated is carried out by ANATEL and will be resumed once the suspension period elapses.
In view of the accumulated losses and uncertainties regarding its operational feasibility, we carried out in 2013 the write-off of this investment in its financial statements.
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 under a concession agreement with a term of 30 years, with expiry on July 6, 2024. Such date has always been announced and considered for assessment of the balances of the prior-year financial statements. The concession agreement may be extended for an equal 30-year period upon request of the concessionaire.
On December 7, 2017, however, the State of Paraná published Supplementary Law 205, introducing a new interpretation of the expiry of the concession, which should have occured on January 20, 2019. Notwithstanding the new expiration date provided by the state law, this concession has not been subject to neither an extension nor a new bidding process. Pursuant to applicable law, Compagas, as the current concessionaire, may continue to operate the concession until a new concessionaire is appointed.
In addition, the management of Compagas, we and other shareholders are challenging the effects of the aforesaid law, understanding that it conflicts with the provisions of the concession agreement currently in force. Compagas filed a lawsuit challenging the anticipating of the expiration date of such concession and was granted with a provisional remedy on October 30, 2018. A final decision on this lawsuit is still pending. However, such discussion has not yet been concluded and that law continues in force, and the effects of such law on our financial statements for 2018 had to be taken into consideration. For more information, see Note 2.1.1 to our audited financial statements for December 31, 2018.
Management will continue to make its best efforts to protect the Company interests, aiming to appropriately settle the impacts of the new interpretation given by the concession grantor and find alternatives necessary to maintain the concession in a sustainable manner. For more information see Note 2.1.1 to our audited consolidated financial statements.
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Compagas covered 824 kilometers in 2018, an increase of 1.5% compared to 812 kilometers covered in 2017. Compagas’s net revenues were R$588.5 million, an increase of 14.1%, compared to 2017 (R$515.6 million), and its net income was R$59.6 million, an decrease of R$54.4 million or 47.7% compared to 2017. Compagas’ customers include industries, gas stations, other businesses and residences and Araucária Thermoelectric plan. Compagas is focusing its business strategy on increasing the volume of gas it distributes to customers by marketing the benefits of substituting oil and other fuels by gas as a mean of achieving greater energy efficiency. Compagas’ customer base increased 11.6%, to 43,943 customers in 2018 from 39,377 in 2017.
Compagas registered an increase of 2.9% in the average daily volume of natural gas distributed to Final Customers, to 1,190,302 cubic meters per day in 2018 (not including the volume of gas supplied to Araucária Thermoelectric plant) compared to 1,156,657 cubic meters per day in 2017 (not including the volume of gas supplied to Araucária Thermoelectric plant). In addition, Compagas makes its distribution grid available to transport natural gas to Araucária TPP. Petrobras delivered 42 million cubic meters of gas to Araucária TPP in 2017, but did not deliver any gas to Araucária TPP in 2018.
As of December 31, 2018, we owned a controlling stake (51%) of the capital stock of Compagas and consolidated this equity interest in our financial statements. The minority shareholders of Compagas are Petrobras and Mitsui Gás, each of which owns 24.5% of the capital stock of Compagas.
Gas Exploration
In the 12th bidding round of ANP (Agência Nacional do Petróleo), held at the end of 2013, the consortium formed by us (30%), Bayar Participações (30%), Tucumann Engenharia (10%) and Petra Energia (30%), the latter acting as operating company, won the right to explore, research, develop and produce oil and natural gas in four blocks located in the central southern region of the State of Paraná, in a 11,327 km² area. The minimum investment in the first phase of the research is approximately R$78.1 million for a 4-year term. We and our partners have signed the concession contracts for 2 blocks in May 2014. However, because of a public civil action, the first phase of exploration for these two blocks was halted and the signing of the other two concession contracts was prohibited. On June 7th, 2017, a court decision held that all the bidding round and the agreements related thereto should be deemed null and void. Moreover, the Government of the State of Paraná enacted Law No. 18,947 (December 22, 2016), suspending for ten years the exploration of shale gas through the drilling / fracking method. The suspension is intended to prevent environmental damage.
As a result of the above-mentioned events, our consortium requested ANP to release it from its contractual obligations, with no liabilities and with reimbursement of the signing bonuses, reimbursement of all costs incurred in connection with guarantees and release of such guarantees for the four blocks. Even though this request was submitted to ANP on September 6th, 2017, it is still subject to analysis. All the activities for the four blocks were interrupted due to the suspension of the effects of the12th bidding round of ANP because of an injunction granted in connection with the above mentioned public civil action, which awaits a decision from the Federal Court of Appeals of the 4th Region. For this reason, in October 2018, the consortium approved the establishment of an institutional arbitration procedure with the ANP for the four blocks awarded in the 12th bidding round of ANP, asking for the refund of the contributions made.
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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.
2013 Concession Renewal Law
Until 2013, 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 December 11, 2003. For transmission and distribution concessions granted after 1995, concessionaires had the right to renew these contracts for an additional 30-year period.
On September 11, 2012, the Brazilian federal government enacted the Provisional Measure No. 579, subsequently converted into 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, 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 that aim to ensure that services are provided in a continuous and efficient fashion and subject to low tariffs. 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 concessionaires of existing generation facilities, the 2013 Concession Renewal Law changed the scope of these concession contracts that are renewed. 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 do not grant concessionaires the right to sell the energy generated by these facilities. Instead, these concessions only cover the operation and maintenance of the generation facilities, subject to quality standards determined by Brazilian authorities. 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 still has 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. To this effect, several regulations were issued by MME and ANEEL to regulate the compensation due to concessionaires as a result of their investments to improve and maintain generation plants.
The 2013 Concession Renewal Law affects transmission and distribution concessions differently. The principal change is that amounts invested in modernization projects, structural reforms, equipment and contingencies are 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.
With respect to the transmission agreements, the conditions for renewal set forth in the 2013 Concession Renewal Law are the acceptance of a fixed income as determined by ANEEL and compliance with quality standards set forth in applicable regulation. With respect to distribution agreements, the conditions are set forth in the amendment to the concessionagreement and are related to compliance withquality standards, economic-financial sustainability indicators and corporate governanceas set forth in the amendment to the concession agreement according to the parameters provided in the 2013 Concession Renewal Law.
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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 years. 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.
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.
In the case of hydroelectric generation concessions with an installed capacity of more than 5,000 kW, upon the expiration of their original term and provided that the concessionaire does not request the extension of such term, the granting authority may submit the concession to a new bidding process. In the case of concessions for hydroelectric generation units with an installed capacity of 5,000 kW or less, upon the expiration of their original term, the concessions may be granted to the current concessionaire in the form of registration, for an indefinite term.
Generation Concessions
Of the seventeen (17) generation plants we operated in 2018, fourteen (14) were operated under the generation concession contracts that were in force prior to the 2013 Concession Renewal Law, and three (3) were operated in accordance with the 2013 Concession Renewal Law (UHE Capivari Cachoeira, UHE Chopim I and UHE Marumbi).12 of the 13 hydro and thermoelectric generation concessions operated by the Company in 2013 (exception made only HPP Rio dos Patos) were extended pursuant to the old regime and may be renewed again under the 2013 Concession Renewal Law. With respect to the concessions granted between 2011 and 2017 with no renewal right attached, we acquired the right to renew only one of the hydroelectric plants (HPP Cavernoso II) for a 30-year period, as a result of an amendment to the 2013 Concession Renewal Law by LawNo. 13,360, of November 17, 2016.
At the time the 2013 Concession Renewal Law was enacted, the Company elected not to renew the following generation concessions: Rio dos Patos (2014), Mourão I (2015), Chopim I (2015) and Capivari Cachoeira (2015), all of which had remaining terms of 60 months or less. In 2018, the Company chose not to extend the concession of Foz do Areia HPP (Governador Bento Munhoz da Rocha Netto), which will expire in 2023.
The concession of Rio dos Patos HPP was terminated and not submitted to a further bidding process due to the lack operational conditions. Thegranting authority submitted the concessions for HPP Capivari Cachoeira and Mourão I to new bidding processes, pursuant to which new agreements should be in force for a 30-year period. Copel was the winner in the bidding process related to HPP Capivari Cachoeira .
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With respect to Capivari Cachoeira, although Copel GeT did not elect to renew the original concession for the Capivari Cachoeira HPP, it participated in the new competitive bidding process and won. On January 5, 2016, Copel GeT executed a concession agreement with ANEEL so that it will continue to operate this plant under an operation and maintenance regime until 2046. We paid a total amount of R$574.8 million as signing bonus for this concession agreement. 100.0% of the energy generated by this plant in 2016 was allocated in quotas to the regulated market and reduced to 70.0% on January 1, 2017. Copel GeT can sell remaining amount of energy generated by this plant on the energy market.
As the installed capacity of HPP Chopin I does not exceed the 5,000 kW, the concession regime of this plant has been changed to a registration in favor of the Company, valid for an indefinite term.
Our concession for the Figueira TPP expired on March 26, 2019. We had filed an extension request with respect to this plant on May 24, 2017, but we are still waiting for thegranting authority to amend our concession agreement, extending its term for an additional 20-year period in accordance with the 2013 Concession Renewal Law. This plant has an installed capacity equivalent to 20 MW and subject to a modernization process.
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.
In accordance with the 2013 Concession Renewal Law, the Company may flag to the granting authority its intention to extend: (i) in 2019, the concession of HPP São Jorge; (ii) in 2020, the concession of HPP Apucaraninha; and (iii) in 2021, the concessions of HPP Guaricana and Chaminé. In the event the Company does not request the extension of the HPP São Jorge concession, its regime may be converted into a registration regime in favor of the Company. However, in the event the Company does not request the extension of the other concessions described above, they will be subject to new bidding processes conducted by the granting authority.
Currently, there are two bills that intend to amend the 2013 Concession Renewal Law, one of which intends to reduce the deadline available to concessionaires to request an extension of their concessions from 60 to 36 months, and another proposing to terminate the operation and maintenance regime set forth in such statute. For additional information, see: “Item 4. Information on the Company - The Brazilian Electric Power Industry – Historical Background of Industry Legislation.”
The following tables sets forth information relating to the terms as well as the renewals of our main generation hydroelectric, thermoelectric and wind farm plants and all of which we hold a direct ownership interest in:
Hydroelectric Plants | Initial concession date | First expiration date | Extension Date | Final expiration date |
Foz do Areia | May, 1973 | May, 2003 | January, 2001 | September, 2023 |
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 |
Mauá(1) | June, 2007 | July, 2042 | Not extendable | July, 2042 |
Colíder(2) | January, 2011 | January, 2046 | Not extendable | January, 2046 |
Cavernoso II | February, 2011 | February, 2046 | Not extendable | February, 2046 |
Baixo Iguaçu(3) | August, 2012 | August, 2047 | Not extendable | September, 2049 |
(1) Mauá was constructed by Consórcio Energético Cruzeiro do Sul, of which Copel owns 51.0% and Eletrosul owns the remaining 49.0%.
(2) The first generating unit, with 100 MW in installed capacity, began its commercial operations in March, 2019.
(3) Baixo Iguaçu was constructed by Consórcio Empreendedor Baixo Iguaçu, of which Copel owns 30% and Geração Céu Azul the remaining 70%.The commercial operations of generation units 1, 2 and 3 of Baixo Iguaçu’s began in February 2019, Feburary 2019 and April 2019, respectively.
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Thermoelectric Plants | Initial concession date | First expiration date | Extension date | Final expiration date |
Figueira | March 1969 | March 1999 | June 1999 | March 2019 |
Wind Plants | Initial concession date | First expiration date |
Asa Branca I | April, 2011 | April, 2046 |
Asa Branca II | May, 2011 | May, 2046 |
Asa Branca III | May, 2011 | May, 2046 |
Nova Eurus IV | April, 2011 | April, 2046 |
Santa Maria | May, 2012 | May, 2047 |
Santa Helena | April, 2012 | April, 2047 |
Ventos de Santo Uriel | April, 2012 | April, 2047 |
Boa Vista | April, 2011 | April, 2046 |
Farol | April, 2011 | April, 2046 |
Olho D'Água | June, 2011 | May, 2046 |
São Bento do Norte | May, 2011 | May, 2046 |
Cutia(1) | January, 2012 | January, 2042 |
Guariju(1) | January, 2012 | January, 2042 |
Jangada(1) | January, 2012 | January, 2042 |
Maria Helena(1) | January, 2012 | January, 2042 |
Palmas | September, 1999 | September, 2029 |
Potiguar(1) | May, 2015 | May, 2050 |
Esperança do Nordeste(1) | May, 2015 | May, 2050 |
Paraíso dos Ventos do Nordeste(1) | May, 2015 | May, 2050 |
São Bento do Norte I(1) | August, 2015 | August, 2050 |
São Bento do Norte II(1) | August, 2015 | August, 2050 |
São Bento do Norte III(1) | August, 2015 | August, 2050 |
São Miguel I(1) | August, 2015 | August, 2050 |
São Miguel II(1) | August, 2015 | August, 2050 |
São Miguel III(1) | August, 2015 | August, 2050 |
(1) Wind plants located at Copel’s Cutia wind farm complex.
The following table sets forth information relating to the terms of our generation hydroelectric plant, whose concession agreement has been executed under the terms and conditions of the 2013 Concession Renewal Law:
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Hydroelectric Plants | Initial concession date | First expiration date | Extension Date | Final expiration date |
Capivari Cachoeira (Gov Parigot de Souza) | January, 2016 | January, 2046 | Not subject to extension | January, 2046 |
The following table sets forth information relating to the terms of our generation hydroelectric plants which, once respective original concession period expires, will no longer be subject to a concession regime but rather to a registration proceeding with the ANEEL:
Hydroelectric Plants | Initial concession date | Concession expiration date | Final expiration date |
Chopim I(1) | March, 1964 | July, 2015 | Indefinitely |
São Jorge | December, 1974 | December, 2024 | - |
Cavernoso | January, 1981 | January, 2031 | - |
Melissa | May, 2002 | Undetermined | - |
Pitangui | May, 2002 | Indefinitely | - |
Salto do Vau | May, 2002 | Indefinitely | - |
Marumbi(1) | March, 1956 | May, 2018 | Indefinitely |
(1)Upon the expiration of concessions or authorizations for hydroelectric energy generation with installed capacity equal to or less than 5,000 KW, the relevant projects are subject to a registration regime in accordance with Brazilian Federal Law No. 9,074/1995, as amended by Brazilian Federal Law No. 13,360/2016. The operation of hydroelectric and thermoelectric plans with installed capacity of up to 5,000 KW are not subject to any concession, permission or authorization and require solely the registration with the granting authority.
We also have ownership interests in nine (9) 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, 2018.
Generation Facility | Company | Initial concession date | Expiration date | Extension |
HPP Dona Francisca | Dona Francisca Energética SA ‒ DFESA | July, 1979 | August, 2033 | Possible |
HPP Santa Clara and Fundão | Centrais Elétricas do Rio Jordão S.A. - ELEJOR | October, 2001 | May, 2037 | Possible |
TPP Araucária | UEG Araucária Ltda. | December, 1999 | December, 2029 | Possible |
HPP Arturo Andreoli | Foz do Chopim Energética | April, 2000 | April, 2030 | Possible |
WPP Carnaúbas | São Miguel do Gostoso I | April, 2012 | April, 2047 | Not possible |
WPP Reduto | São Miguel do Gostoso I | April, 2012 | April, 2047 | Not possible |
WPP Santo Cristo | São Miguel do Gostoso I | April, 2012 | April, 2047 | Not possible |
WPP São João | São Miguel do Gostoso I | March, 2012 | March, 2047 | Not possible |
SHP Bela Vista(1) | Bela Vista Geração de Energia | May, 2007 | January, 2041 | Not possible |
(1)The consortium CBVG, formed by Copel GeT and Foz do Chopim Energética Ltda., won ANEEL Auction No. 003/2018 for SHP Bela Vista and granting process is still ongoing.
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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. Our principal transmission concession, from which 84.4% of our transmission revenues in 2018 derived, has been renewed pursuant to the 2013 Concession Renewal Law, and will therefore now expire in December 2042.
In addition, in 2018, an aggregate of 15.6% of our transmission revenues derived from nine (9) other concession contracts for transmission lines and substations that are currently in operation and whose terms and extensions are set forth in the next table. 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), including the concession contracts for transmission lines and substations both in operation or under construction:
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 | October, 2010 | October, 2040 | Possible | October, 2070 |
Foz do Chopim - Salto Osorio | August, 2012 | August, 2042 | Possible | August, 2072 |
Assis – Paraguaçu Paulista II. | February, 2013 | February, 2043 | Possible | February, 2073 |
Bateias – Curitiba Norte | January, 2014 | January, 2044 | Possible | January, 2074 |
Realeza Sul – Foz do Chopim | September, 2014 | September, 2044 | Possible | September, 2074 |
Assis - Londrina | September, 2014 | September, 2044 | Possible | September, 2074 |
Curitiba Leste – Blumenau(1) | April, 2016 | April, 2046 | Possible | April, 2076 |
(1)Facility under construction.
We have ownership interests in nine (9) 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, 2018:
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 |
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 | Marumbi Transmissora de Energia S.A. | May, 2012 | May, 2042 | Possible | May, 2072 |
Paranaíta – Ribeirãozinho | Matrinchã Transmissora de Energia S.A. | May, 2012 | May, 2042 | Possible | May, 2072 |
Ribeirãozinho – Marimbondo II | Guaraciaba Transmissora de Energia S.A | May, 2012 | May, 2042 | Possible | May, 2072 |
Barreiras II – Pirapora II | 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 | Cantareira Transmissora de Energia S.A. | September, 2014 | September, 2044 | Possible | September, 2074 |
(1) Facility under construction.
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Distribution Concessions
We originally operated our distribution business pursuant to a concession contract that was signed on June 24, 1999 (retroactive to July 7, 1995), and was set to expire on July 7, 2015. Under the 2013 Concession Renewal Law, we had 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 and our renewal request was approved by the MME on November 11, 2015. On December 9, 2015, we have executed the fifth amendment to the public Electricity Distribution Service Concession Agreement No. 46/1999 of Copel Distribuição S.A.
This amendment imposes efficiency conditions to Copel Distribuição that are measured through two different metrics: quality of the service and economic-financial sustainability of the company. Failure to comply with any of these metrics (i) for two consecutive years within the first four years of this renewed concession or (ii) in the fifth year of this concession, may, in each case, result in the termination of our distribution concession. From January 1, 2021 on, failure to comply with the quality indicator for three consecutive years or the economic-financial sustainability indicator for two consecutive years may also result in the termination of the distribution concession.
Additionally, non-compliance with quality indicator targets for two consecutive years or three times in five years may lead to restrictions in the payment of dividends and interest on equity to the controlling shareholders of Copel Distribuição, while non-compliance with the economic-financial sustainability indicators may require capital contributions from Copel Distribuição controlling shareholders.
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The table below presents the economic and financial and quality indicators established for the first five (5) years after the execution of this amendment.
| Economic and Financial Indicators | Quality Indicators(1) | |
Year |
| DECi(2) | FECi(2) |
2016 | N/A | 13.61 | 9.24 |
2017 | EBITDA(3) ≥ 0 | 12.54 | 8.74 |
2018 | [EBITDA (-) QRR (4)] ≥ 0 | 11.23 | 8.24 |
2019 | {Net Debt(5)/[EBITDA(3) (-) QRR(4)]}≤ 1/(0.8*SELIC(6)) | 10.12 | 7.74 |
2020 | {Net Debt(5)/[EBITDA(3) (-) QRR(4)]}≤ 1/(1.11*SELIC(6)) | 9.83 | 7.24 |
(1)According to ANEEL’s Technical Note No. 0335/2015.
(2)DECi – Duration of outages per customer per year (in hours); and FECi – Frequency of outages per customer per year (number of outages).
(3)Earnings before interest, tax depreciation and amortization, as calculated according to ANEEL regulations.
(4)QRR: Regulatory Reintegration Quota or Regulatory Depreciation Expense. This is the value defined in the most recent Periodic Tariff Review (RTP), plus the General Market Price inflation index (IGP-M) between the month preceding the Periodic Tariff Review and the month preceding the twelve-month period of the economic and financial sustainability measurement.
(5)As calculated according to ANEEL regulations.
(6)Selic base rate: limited to 12.87% per year.
We have complied with the quality indicators for 2018 both with respect to DECi totaling 10.29 in 2018) and FECi (totaling 6.20 in 2018).
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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.
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; after July 1, 2019, with demand of at least 2.5 MW at any voltage; and, after July 1, 2020, with demand of at least 2 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, biomass projects, solar plants and others. |
As of December 31, 2018, we had three hundred forty five (345) Free Customers, representing approximately 6.8% of our consolidated net operating revenue and approximately 14.04% of the total quantity of electricity sold by us.
Until March 31, 2019, Copel GeT signed 1 additional agreement with Free Customers. Our contracts with Free Customers are typically for periods of more than two and less than five years.
Approximately 5.2% of the megawatts-hours sold under contracts to such customers by Copel GeT expired in 2018. These customers represented approximately 1.5% of the total volume of electricity we sold in 2018, and approximately 1.7% of total net operating revenue from energy sales for that year.
Regarding our energy trading company, as of December 31, 2018, we had two hundred ninety two (292) Free Customers, representing approximately 2.5% of our consolidated operating revenues and approximately 4.9% of the total volume of electricity we sold in 2018.
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 providesfor competitive bidding for generation concessions for hydroelectric facilities and, since 2017, this requirement applies only to facilities with capacity higher than 50 MW.
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In the transmission business, Brazilian law provides for competitive bidding for transmission concessions for facilities with a 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.
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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 Policy, which integrates corporate planning and sustainability management in order to optimize our financial, social and environmental performance. We have implemented a Climate Change Policy, which establishes guidelines for the mitigation of greenhouse gas emission and changes in our business, evaluating risks and opportunities related to climate change. In 2018, we reviewed our Climate Change Policy and undertook the Company’s new goals with respect to climate change for the following four years.
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.
In 2018, we implemented the necessary environmental and social plans for the development and operation of our local assets related to generation, transmission and distribution.
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. Copel hosts a center for the United Nations Global Compact Cities Programme in the south region of Brazil and, since 2018, it also hosts the first Hub Local 2030, a network composed of the UN, local governments, enterprises and the local community and that aims to create and take actions to achieve the Sustainable Development Goals. Copel has also reviewed the social and environmental responsibility provisions set forth in all the agreements entered into by the Company in order to strengthen the obligations of its business chain with respect to this matter.
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PLANT, PROPERTY AND EQUIPMENT
Our principal properties consist of the generation and telecommunications facilities described in “Business”. Of the net book value of our total property, plant and equipment as of December 31, 2018 (including construction in progress), generation facilities represented 58.1%, wind farms represented 25.7%, telecommunications represented 9.9%, Elejor represented 3.5%, and Araucária Thermoelectric plant represented 2.8%. We believe that our facilities generally are adequate for our present needs and suitable for their intended purposes.
In addition, the infrastructure used by transmission and distribution business is classified as a financial, contract and intangible assets as described in Notes 4.4, 4.5 and 4.9 to our audited financial statements.
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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, after proving its public interest. 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, with friendly settlements for most of them. As of December 31, 2018, we estimated our liability related to the settlement of such disputes to be approximately R$114.6 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 2017, the MME approved a ten-year expansion plan under which Brazil’s installed power generation capacity is projected to increase to 4,212.5 GW by 2026, of which 48.7% is projected to be hydroelectric, 10.9% is projected to be thermoelectric, 1.6% is projected to be nuclear and 29.7% is projected to be from alternative energy sources such as wind, biomass and small hydroelectric plants.
As of 2018, approximately 32% of the installed power generating capacity of Brazil is currently owned by Eletrobras (including its wholly-owned subsidiary Eletronuclear and its 50% participation interest in Itaipu). Through its subsidiaries, Eletrobras is also responsible for 47% 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 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 in the free market, (ii) accounting for and clearing short-term transactions and (iii) managing funds generated by some of the regulatory charges. 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 the 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, Cepel and Itaipu Binacional.Eletrobras manages 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 federal 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:
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· | 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. |
· | 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 adjustment 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. See “Concessions”. |
· | In 2015, the Brazilian government enacted Provisional Measure No. 688, dated as of August 18, 2015, converted into Federal Law No. 13,203, dated as of December 8, 2015, to revise the allocation of the hydrological risks borne by hydroelectric power plants that share hydrological risks under Energy Reallocation Mechanism. See“Item 4 – Information on the Company - The Brazilian Electric Power Industry - Energy Reallocation Mechanism”. In 2014 and 2015, given poor hydrological conditions, the MRE participants generated less electricity than their assured energies, which was confirmed by a significant decrease of the Generating Scaling Factor (“GSF”), a measurement of the proportion between the electricity generated by the MRE participants and their respective assured energy. These generation deficits resulted in losses for the MRE participants given their exposure to hydrological risks. As a consequence, Federal Law No. 13,203 established an optionalmechanism that allows each generation plant to transfer these risks to Final Customers upon payment of a risk premium to the Brazilian federal government, as well as certain temporary extensions of generation concessions to compensate for losses in 2015. We decided to opt-in with respect to all of Copel GeT´s and Elejor´s eligible Energy Agreements under this new hydrological risk allocation mechanism, which represented approximately 16% of Copel GeT´s total assured energy. |
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· | In 2016, the Brazilian government enacted Provisional Measure No. 735, dated as of June 22, 2016, converted into Federal Law No. 13,360, dated as of November 17, 2016, which changed several federal laws mainly to: (i) revise certain rules related to regulatory charges (CDE, CCC and RGE) and appoint CCEE as the new manager of such charges in lieu of Eletrobras; (ii) facilitate the privatization of generation, transmission and distribution companies, (iii) change certain requirements of the generation concession and authorization regimes; (iv) change rules related to the MRE; (v) allow distribution companies to sell energy excess in the free market; (vi) extension of terms for commencement of the supply under energy auctions in the regulated market; and (vii) transfer back from MME to ANEEL the authority to decide about generation and transmission companies’ requests for extension of their facilities construction schedules. |
· | In July 2017, the MME released the Public Consultation No. 033/2017, named “Proposal for improvement of the legal framework of the electricity sector”. This public consultation was intended to receive contributions for the structuring of changes to the power legal framework to ensure long-term sustainability for the Brazilian power industry. This public consultation marks an important step to guide the MME in preparation of specific legislative proposals capable of providing measures of economic rationalization and modernization of the electricity sector. |
· | In August 2017, the Investment Partnership Program Council of the Presidency of the Republic issued Resolution No. 13, dated August 23, 2017, recommending the privatization of Centrais Elétricas Brasileiras S.A. – Eletrobras, and, accordingly, its inclusion in the National Privatization Program, without prejudice to the ongoing divestment processes related to the sale of Eletrobras’ equity interests in six distribution companies under its control and seventy generation and transmission special purpose companies. |
· | In August 2017, Decree No. 9,143/2017 changed the frequency of the auctions for new energy and authorized the distribution companies to negotiate contracts for the sale of energy in the Free Contracting Environment to Free Consumers and other agents (generators, marketers, and self-producers), provided that these contracts are linked to excess in energy contracted in auctions. |
· | In February 2018, the MME published on its website a report of a public hearing, reflecting a proposal of all improvements to be made to the energy regulatory framework, which were especially motivated by the technological, social and environmental events, as well as issues arising from the current business models. |
· | In May 2018, most of the improvements proposed by the MME with respect to the regulatory framework applicable to the energy sector were included in Bill no. 1,917/2015 of the House of Representatives, known as the bill for the energy bill portability (Projeto de Lei da Portabilidade da Conta de Luz). This bill is still subject to analysis in the House of Representatives and, if approved, will depend on further approval by the Senate and the President of Brazil. |
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· | In November 2018, the Brazilian Senate approved the Senate Bill No. 209/2015, which addresses additional measures to reduce judicial disputes involving the short-term energy market. This bill is currently under analysis in the House of Representatives under no. 10,895/2018. |
· | During 2018, the Brazilian federal government concluded the privatization of Eletrobras’ distribution companies Companhia Energética do Piauí - Cepisa, Companhia Energética de Rondônia S.A. - Ceron, Companhia de Eletricidade do Acre - Eletroacre, Boa Vista Energia S.A. - Boa Vista Energia, Companhia Energética de Alagoas - Ceal and Amazonas Distribuidora de Energia S.A. - Amazonas Distribuidora. |
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 others, 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.
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 tocontest 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.
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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.
The New Industry Model Law
In 2004, 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
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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 excluded Eletrobras and some of 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. However, Provisional Measure No. 814, dated December 28, 2017, changed the New Industry Model Law to reinclude Eletrobras and certain of its subsidiaries in the National Privatization Program. The Brazilian federal government intended to complete the Eletrobras privatization process in 2018, but popular and political opposition prevented it from concluding this process before the end of 2018. As the Provisional Measure No. 814 was not approved by the Brazilian Congress and expired in June 2018, the privatization of Eletrobras remains uncertain under the new administration.
For concessionaires of existing generation facilities, the 2013 Concession Renewal Law changed 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.
On July 5, 2017, the MME submitted to a public hearing its proposal for new measures focused on the long-term sustainability of the energy sector, also referred to as the Improvement to the Energy Sector Legal Framework (Aprimoramento do Marco Legal do Setor Elétrico). This proposal was subject to comments in the public hearing which was held from July 5 to August 17, 2017, and received 209 contributions from entities from different areas.
In February 2018, the MME published on its website a report of the public hearing, reflecting the final proposal for improvements to the energy regulatory framework, which were especially motivated by technological, social and environmental matters, as well as difficulties arising from the current business models. Among the discussed topics, the following stand out:
· | Termination of the quota system applicable to hydropower plants (HPP) concessions that have been extended or granted through competitive biddings, in accordance with Federal Law No. 12,783/2013, and allocation of part of the economic benefit of grants to the EnergyDevelopment Account (Conta de Desenvolvimento Energético, or CDE) in order to reduce what is charged to the population; |
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· | Lowering the minimum thresholds for accessing the Free Market; |
· | Approach between the short-term price formation and the operating cost of the system; |
· | Whether energy and ballast (currently combined for commercialization purposes) should be segregated; |
· | Effects of the migration of consumers to the Free Market; |
· | Market for environmental attributes; |
· | Attraction of foreign capital for investments in the Brazilian energy sector; |
· | More efficient tariff discounts; |
· | Allocation of resources from the global reversion reserve to the transmission segment; |
· | Guidelines for the use of research and development resources; |
· | Modernization of the regulated market; and |
· | Reduction of judicial disputes regarding the hydrological risk. |
In May 2018, most of the improvements proposed by the MME with respect to the regulatory framework applicable to the energy sector were included in Bill No. 1,917/2015 of the House of Representatives, known as the bill for the energy bill portability (Projeto de Lei da Portabilidade da Conta de Luz). This bill is still subject to analysis in the House of Representatives and, if approved, will depend on further approval by the Senate and the President of Brazil.
Another legislative initiative waiting for approval is the Senate Bill No. 209/2015, which addresses the judicial disputes in the short-term energy market known as GSF.
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.
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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 thereal/U.S. dollarexchange rate. Changes in the price of Itaipu-generated electricity are, however, subject to the Parcel A cost recovery mechanism discussed as follows under “Distribution Tariffs”.
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 affectBilateral 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 generally made through three types ofBilateral Agreements: (i) Energy Agreements (Contratos de Quantidade de Energia), (ii) Availability Agreements (Contratos de Disponibilidade de Energia) and (iii) allocation of energy quotas, as defined by the ANEEL. 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 an Availability Agreement, a generator commits to making 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. With respect to the third method (introduced by the 2013 Concession Renewal Law), the plants that have had their concession renewed under the 2013 Concession Renewal Law lost the right to sell their energy, and from now on will only receive compensation under the energy quota system as a result of the operation and maintenance of such facilities. As a result, energy generated by these generation concessionaries are passed on to distributors at a lower cost through quotas that match the size of the markets served.
For the generation plants with expired concessions, which were then subject to a new competitive bidding process, the winner of the competitive bidding process was required, from January 1 to December 31, 2016, to allocate 100% of the energy generated by this plant in quotas to the regulated market, as provided by the 2013 Concession Renewal Law, falling to 70% after January 1, 2017, with the remaining 30% available for the generation concessionaire to sell in the market.
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 customers’ tariffs. Where the contracted volume is over 105% of actual demand, the distributor must sell energy in
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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. ANEEL Normative Resolution No. 711, dated April 19, 2016, allowed distribution companies to renegotiate their energy purchase agreements in the regulated market to reduce the contracted amounts. The Federal Law No. 13,360, dated November 17, 2016, also permitted the sale of excess energy by distribution companies in the free market. Resolutions No. 824, dated July 10, 2018, and 833, dated December 4, 2018, have recently provided additional rules on the methodology to be adopted by distribution companies with respect to the Mechanism of Surplus Sales (Mecanismo de Venda de Excedentes, or MVE).
With respect to the granting of new concessions, 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.
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.
As mentioned above, recently, Federal Law No. 13,360, dated November 17, 2016, also permitted the sale of excess energy by distribution companies in the free market, but the effectiveness of the rule is still subject to further regulation by ANEEL.
Focusing on the future of the electricity sector, the Ministry of Mines and Energy launched Public Consultation No. 33/2017 with the purpose of obtaining the view of different participants around improvements in the business model of the sector. Issues such as the expansion of the free market and removal of barriers to the entry of its participants, hourly energy price, adequate allocation of risks, security of supply and socio-environmental sustainability were discussed. Further regulation is expected for the years to come with bills being discussed in the Brazilian Congress in order to implement reforms in the power sector.
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
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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 1st 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 from the third to the seventh year before the initial delivery date of electricity (“A-3 to A-7 Auctions”). Electricity auctions for existing generation projects are held (i) from the first to the fifth year before the initial delivery date (“A to A-5 Auctions”), and (ii) up to four months before the initial 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 if 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 the 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 new generation projects have a term between 15 and 35 years, and the contracts for existing generation projects have a term between 1 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
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quantity of contracted energy in bilateral agreements entered into prior to the enactment of the New Industry Model Law.
With regard to (i) above, the reduction in net revenue caused when a Captive Customer becomes a Free Customer is partially 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-seven (27) auctions for new generation projects, twenty (20) auctions for energy from existing power generation facilities, ten (10) auctions for reserve energy in order to increase energy supply security, three (3) auctions from alternative energy sources and seventeen (17) 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 Reserve Energy Auction, the generation concessionaire and the CCEE execute theContrato 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 theContrato 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 2013 Concession Renewal Law established that generation concessions entered into prior to 2003 that were not renewed would be subject to a new competitive bidding process and that 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. On November 25, 2015, ANEEL carried out a competitive bidding process for the grant of new 30-year concessions of 29 hydroelectric plants in accordance with the 2013 Concession Renewal Law. Until December 31, 2016, 100% of the electricity generated by such 29 hydroelectric plants must be destined to the regulated market and, as of January 1, 2017, the percentage was reduced to 70%. On September 27, 2017, the ANEEL carried another competitive bidding process for the grant of new 30-year concessions of 4 hydroelectric plants in accordance with the 2013 Concession Renewal Law. In this auction, the percentage destined to the regulate market was 70% since the beginning of the concession.
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 regulation establishes certain limitations on the ability of distribution companies to pass-
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through costs to customers, such as no pass-through of costs for electricity purchases that exceed 105% of actual demand.
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.
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) hold, directly or indirectly, any interest in any other company, corporation or strategic agreement, or (iii) 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. According to Law No. 13,360/2016, distributors are allowed to sell energy to Free Customers. However, this legal authorization is still subject to further regulation by ANEEL.
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% 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.
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) for the use of the transmission system,which is the Interconnected Transmission System and its ancillary facilities (“TUST”).
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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 another 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 supply tariff that is calculated based on the voltage used by each customer.
TUST
The TUST (Tarifa de Uso do Sistema de Transmissão)is paid by distribution companies, generators and Free Customers to transmission companies for the use of the Interconnected Transmission System (electrical transmission system with a voltage equal or higher than 230 kV). This tariff is revised annually according to (i) the location of the user of the Interconnected Transmission System and (ii) the annual revenues that a transmission company is permitted to collect for the use of its assets in the Interconnected Transmission System. The ONS, an entity that represents all transmission companies that own assets in the Interconnected Transmission System, coordinates the payment of transmission tariffs to these transmission companies. Users of the Interconnected Transmission System sign contracts with the ONS, which allows them to use the transmission grid in return for paying TUST.
Distribution Tariffs
Distribution tariff rates to final customers (including the TUSD) are subject to review by ANEEL, which has the authority to adjust and review these tariffs in response to changes in energy purchase costs and market conditions. When adjusting distribution tariffs, ANEEL divides the costs of distribution companies into (i) costs that are beyond the control of the distributor, (“Parcel A costs”), and (ii) costs that are under control of distributors (“Parcel B costs”). ANEEL’s tariff adjustment formula treats these two categories differently.
Parcel A costs include, among others, the following:
· | costs of electricity purchased by the concessionaire to attend Captive Customers, in accordance to the regulatory model in force; |
· | charges for the connection to and use of the transmission and distribution grids; and |
· | energy sector regulatory charges. |
Parcel B costs include, among others, the following:
· | a component designed to compensate the distributor for the investments made by the distributor on the concession assets; |
· | depreciation costs; and |
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· | a component designed to compensate the distributor for its operating and maintenance costs. |
Each distribution company’s concession agreement provides for an annual revision (reajuste anual). In general, Parcel A costs are fully passed through to customers. Parcel B costs, however, are only adjusted for inflation in accordance with the IPCA Index, minus the X factor.
Electricity distribution concessionaires are also entitled to periodic tariff revisions (revisão periódica) every four or five years. These revisions are aimed at (i) assuring necessary revenues to cover efficient Parcel B operational costs and adequate compensation for investments deemed essential for services provided within the scope of each such company’s concession and (ii) determining the “X factor”.The fifth amendment to our concession agreement, which establishes the renewal of our concession agreement, determines the Periodic Tariff Review every five years.
The X factor for each distribution company is calculated based on the following components:
· | P, based on the concessionaire’s productivity, which is measured in terms of increases in assets (kms of power grid), the total volume of energy sold, and the number of final customers to which energy is sold; |
· | T, based on the trajectory of the concessionaire’s operating costs, measured as the difference between the cost benchmarks established by ANEEL and the concessionaire’s actual operating costs; and |
· | Q, based on quality target indicators that measure the interruption of energy supply to final customers, and other quality indicators. |
In addition, a distribution concessionaire is entitled to an extraordinary tariff review (revisão extraordinária) on a case-by-case basis, to ensure its financial stability and compensate it for unpredictable costs, including taxes, which significantly change its cost structure. Extraordinary tariff adjustments were granted (i) in June 1999 to compensate for increased costs of electricity purchased from Itaipu as a result of the devaluation of therealagainst the dollar; (ii) in 2000 to compensate for the increase in Social Security Financing Contribution (Contribuição para o Financiamento da Seguridade Social-COFINS) from 2% to 3%; (iii) in December 2001 to compensate for losses caused by the Rationing Program; (iv) in January 2013, due to the enactment of 2013 Concession Renewal Law; (v) in March 2015, to compensate the costs related to the quotas of the Electric Development Account (CDE) and increased costs with the purchase of energy, and (vi) in March 2017, to compensate the amount unduly included in the tariffs for captive consumers in 2016,referring to the Angra III plant.
Since October 2004, on the date of a subsequent tariff adjustment or tariff revision, whichever occurs earlier, distribution companies have been required to execute separate contracts for the connection and use of the distribution grid and for the sale of electricity to their potentially Free Customers.
Tariff Flags (Bandeiras Tarifárias)
Effective as of January 1, 2015, a new system has been introduced by the ANEEL to permit distribution concessionaires to pass on to their final customer certain variable cost increases attributable to changes in hydrological conditions in Brazil, prior to the formal tariffs periodic revisions made by ANEEL.
In accordance with this model, a green, yellow or red flag, as determined by ANEEL, is included in invoices sent to final customers, reflecting nationwide hydrological conditions (except for theState of Roraima). If a green flag is added to final customers’ invoices due to satisfactory hydrological conditions, no additional charges are added. On the other hand, if these invoices contain yellow or red flags, this indicates that distribution concessionaires are facing higher variable costs from the acquisition of electricity and will pass these costs on to final customers.
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Incentives
In 2000, a Federal decree created the Thermoelectric Priority Program, (Programa Prioritário de Termoeletricidade, or“PPT”), for the purposes of diversifying the Brazilian energy matrix and decreasing Brazil’s strong dependence on hydroelectric plants. The incentives granted to the thermoelectric plants included in the PPT were: (i) guarantee of gas supply for 20 years, as per a MME regulation, (ii) assurance that the costs related to the acquisition of the electric energy produced by thermoelectric plants will be passed on to customers through tariffs up to the normative value established by ANEEL, and (iii) guarantee of access to a special BNDES financing program for the electric energy industry.
In 2002, the Brazilian government established the Proinfa Program to encourage the generation of alternative energy sources. Under the Proinfa Program, Eletrobras would purchase the energy generated by alternative sources for a period of 20 years. In its initial phase, the Proinfa Program was limited to a total contracted capacity of 3,300 MW. In its second phase, which should start after the 3,300 MW cap has been reached, the Proinfa Program intends to purchase up to 10% of Brazil’s annual electric energy consumption from alternative sources. The first phase of the Proinfa program commenced in 2004 and it so far has supported the construction of 131 alternative energy plants which is expected to reach the production of 11.2 million MWh. According to a decision of ANEEL, the total investment to the Proinfa Program in 2019 will be R$4.1 billion.
Energy Sector Regulatory Charges
EER
TheEncargo de Energia de Reserva(“EER”) is a regulatory charge designed to raise funds for energy reserves that have been contracted through CCEE and which are deposited in the Reserve Energy Account (Conta de Energia de Reserva – CONER). These energy reserves, which are mandatory, were created in order to attempt to ensure a sufficient supply of energy in the Interconnected Transmission System. The EER shall be collected from final customers of the Interconnected Transmission System. Beginning in 2010, this charge has been collected on a monthly basis.
RGR Fund
In certain circumstances, electric energy companies are compensated for certain assets used in connection with a concession if the concession is revoked or is not renewed. In 1971, the Brazilian Congress created a reserve fund designed to provide these compensatory payments (“RGR Fund”). In February 1999, ANEEL established a fee requiring public-industry electric companies to make monthly contributions to the RGR Fund at an annual rate equal to 2.5% of the company’s fixed assets in service, not to exceed 3% of total operating revenues in any year. Since the enactment of the 2013 Concession Renewal Law, the RGR Fund has been used to fund the compensations arising from the termination of non-renewed concessions. The 2013 Concession Renewal Law also allowed the funds from the RGR Fund to be transferred to the CDE.
According to 2013 Concession Renewal Law, as from January 1, 2013, the concession contracts from concessionaires of (i) distribution; (ii) transmission which competitive bidding process occurred after September 12, 2012; and (iii) transmission and generation which had their concession contractrenewed or had their underlying facilities subject to a new competitive bidding process are no longer obliged to pay the annual RGR fee.
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UBP
Some hydroelectric generation enterprises (except small hydroelectric power plants) are required to make contributions for using a public asset,Uso de Bem Público (“UBP”) according to the rules of the corresponding public bidding process for the granting of concessions. Eletrobras receives the UBP payments in a specific account. See Note 27 to our audited consolidated financial statements.
ESS
The costs related to maintaining system reliability and stability when thermoelectric plants generate energy to meet demand in the National Connection System (SIN) are called System Service Charges, orEncargos de Serviços de Sistema (ESS). These amounts are paid by each entity that purchases energy in the spot market (CCEE), proportional to each such entity’s consumption.
ESS is expressed in R$/MWh and paid only to thermoelectric plants that generate energy in response to requests by the Electricity System National Operator (ONS).
CDE
In 2002, the Brazilian government instituted the Electric Energy Development Account,Conta de Desenvolvimento Energético (“CDE Account”). The CDE Account is funded by (i) annual payments made by concessionaires for the use of public assets, (ii) penalties and fines imposed by ANEEL, (iii) the annual fees paid by agents offering electric energy to final customers, by means of an additional charge added to the tariffs for the use of the transmission and distribution grids and (iv) the credits held by the federal government against Itaipu. The CDE Account was originally created, amongst others, to promote the availability of electric energy services to all of Brazil and the competitiveness of the energy produced by alternative sources. The CDE is regulated by the executive branch, was managed by Eletrobras until April 30, 2017 and is managed by CCEE as of May 1, 2017, pursuant to Federal Law No. 13,360/2016. This charge had been substantially reduced by the 2013 Concession Renewal Law (approximately 75% compared to its December 31, 2011 amount) in an attempt to reduce the cost of electricity paid by final customers, among others. The 2013 Concession Renewal Law also allowed the funds from the RGR Fund to be transferred to the CDE Account, provided that the Federal Treasury would also contribute with the CDE Account and permit the funds deposited in the CDE Account to be used in support of the electricity generation program in non-integrated electric grids (sistemas elétricos isolados) as well as to partially offset the increased costs borne by distribution concessionaires for the purchase of energy in the spot market as a result of the non-renewal of generation concessions due to the 2013 Concession Renewal Law.
On March 7, 2014, the Brazilian government also permitted the transfer to distribution concessionaires of funds deposited in the CDE Account to cover their respective costs arising from involuntary exposure to the spot market in January 2014 as a result of poor hydrological conditions in 2013 and 2014, which mandated the acquisition of thermoelectric energy at higher prices in the spot market, costs which distribution concessionaires were not able to pass on to Final Customers through regular Retail Tariffs prior to formal tariffs periodic revisions made by ANEEL.
Distribution concessionaries will be able to pass on to its final customer a CDE Account charge, to the extent necessary to repay their respective financing obligations contracted by the CCEE through the ACR Account. See “Regulated Market Account – ACR Account.”
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On February 27, 2015, ANEEL approved a significant increase of the CDE fee charged to cover all of these additional costs supported by the CDE Account, which were aggravated by the lack of contribution from the Brazilian Federal Treasury. ABRACE, an association of Free Customers filed lawsuits to contest the increase of the CDE fee and this litigation remains ongoing. Since July 2015, the Free Customers associated with ABRACE benefit from an injunction suspending the increase of the CDE fee. Associations of distributors of energy (including ABRADEE, with whom Copel Distribuição is associated) also obtained injunctions suspending its obligation to withhold such CDE fees while ABRACE´sand other consumers’ injunction remains in force.
Federal Law No. 13,360/2016 established that the Federal Government must prepare a plan for a structural reduction of the CDE charge until December 31, 2017, and it also provided that the revenues, expenses and beneficiaries of the CDE Account must be published monthly by CCEE. More specifically, promulgation of Law No. 13,360, dated November 17, 2016, implemented a series of changes in the structure of the CDE rules, causing the fund to abandon its role as a source of funds for (i) the amortization of financial operations linked to the indemnity for concessions reversal or (ii) the affordable tariff policy. Currently, the scope of the CDE is to compensate for the discounts applied in the transmission tariffs, to provide funds for the payment of amounts related to the management and movement of CDE, CCC and RGR by CCEE; and to compensate the tariff impact of the reduced load density of the rural electrification cooperatives market.
Regulated Market Account – ACR Account.
On April 2014, the Brazilian government created the Regulated Market Account,Conta no Ambiente de Contratação Regulada – Conta-ACR (“ACR Account”), to assist distribution concessionaires to cover their respective costs for the acquisition of thermoelectric energy for the period from February 2014 to December 2014, incurred as a result of poor hydrological conditions. Distributors incurred higher costs as a result of adverse hydrological conditions because they were required to buy thermoelectric energy at higher prices in the spot market, and were unable to pass all these costs on to Final Customers prior to a formal tariff periodic revision made by ANEEL. To fund the ACR Account, the Brazilian federal government authorized the CCEE to enter into credit agreements with certain Brazilian financial institutions. An aggregate of R$21.7 billion, composed of nine tranches, was deposited in the ACR Account. Distribution concessionaires have been repaying this loan since 2015 by charging its final customers with additional CDE Account amounts on a monthly basis. In 2018, distribution concessionaires paid 12 installments of the total amount due and passed the correspondent cost through to their customers as tariffs. At first, the amount deposited in the ACR Account should be repaid by 2020. However, in March 2019, ANEEL authorized CCEE to negotiate with the creditor financial institutions and seek early termination of the corresponding loans. As a result, distribution concessionaires should repay the amount deposited in the ACR Account in full by September 15, 2019.
Itaipu Transmission Fee
The Itaipu Hydroelectric Plant has an exclusive transmission grid and is not part of the Interconnected Transmission System. Companies that are entitled to receive electricity from Itaipu pay a transmission fee in an amount equal to their proportional share of the Itaipu generated electricity.
Use of Water Resources Tax
Holders of concessions and authorizations that allow for the exploitation of water resources must pay a total tax of 7.00% of the value of the energy they generate, which for the purposes of this calculation is based on a rate set by ANEEL. Beginning on January 1, 2019, ANEEL set this rate at R$77.38/MWh. The proceeds of this tax are shared among the states and municipalities where the plant or the plant’s reservoir is located, as well as with certain federal agencies.
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ANEEL Inspection Fee (TFSEE)
The ANEEL Inspection Fee is an annual fee due by the holders of concessions, permissions or authorizations equal to an ANEEL determined percentage of their revenues. The ANEEL Inspection Fee requires these holders to pay up to 0.4% of their annual revenue to ANEEL in 12 monthly installments.
Default on the Payment of Regulatory Charges
The failure to pay required contributions to the RGR Fund, Proinfa Program or CDE Account or to make certain payments, such as those due from the purchase of electric energy in the regulated market or from Itaipu, will prevent the defaulting party from receiving adjustments or reviews of their tariffs (except for an extraordinary review) and will also prevent the defaulting party from receiving funds from the RGR Fund or CDE Account. We comply with payment obligations related to Regulatory Charges.
Energy Reallocation Mechanism
The Energy Reallocation Mechanism (Mecanismo de Realocação de Energia,or MRE) attempts to mitigate the risks borne by hydroelectric generators due to variations in river flows (hydrological risk).
Under Brazilian law, each hydroelectric plant is assigned a determined amount of “assured energy”, according to an energy supply risk criteria defined by MME, based on historical river flow records. The assured energy also represents the maximum energy that can be sold by the generator, which is set forth in each concession agreement, irrespective of the volume of electricity actually generated by the facility.
The MRE tries to guarantee that all participating plants receive the revenue corresponding to their assured energy, irrespective of the volume of electricity generated by them. In other words, the MRE effectively reallocates the electricity, transferring the surplus from those who have produced in excess of their assured energy to those that have produced less than their assured energy. The relocation, which occurs in the Interconnected Transmission System, is determined by the ONS, considering the nationwide electricity demand and hydrological conditions, regardless of the power purchase agreement of each individual generator. The volume of electricity actually generated by the plant, whether more or less than their assigned assured energy quotient, is priced pursuant to a tariff known as the “Energy Optimization Tariff”, designed to cover only the variable operation and maintenance costs of the plant, so that generators are largely unaffected by the actual dispatch of their plants.
Each hydroelectric plant which has its concession contract renewed in accordance to 2013 Concession Renewal Law will no longer participate in the MRE, and the hydrological risk from those plants will be borne by the distribution concessionaires under the National Interconnected Power Grid. For the generation plants with expired concessions, which were subject to a new competitive bidding process under the 2013 Concession Renewal Law, 30% of the generated energy available for the generation concessionaire to sell in the market is also subject to the MRE hydrological risk allocation mechanism. This risk does not impact our distribution business, since we are allowed to increase the tariffs of our distribution customers to compensate any costs arising from this hydrological risk.
Research and Development
The companies holding concessions and permissions for distribution of electricity must invest a minimum of 0.50% of their annual net operational revenues in research and development and 0.50% in energy efficiency programs. Beginning on January 1, 2023, these percentages will become 0.75% and 0.25%, respectively.
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A company holding concessions and authorizations for generation and transmission of electricity must invest a minimum of 1% of its annual net operational revenues in research and development. A company that generates electricity exclusively from small hydroelectric power plants, cogeneration or alternative energy projects is not subject to this requirement.
The amount to be invested in research and development must be distributed as follows:
· | 40% to the company research and development projects, under the supervision of ANEEL; |
· | 40% to the Ministry of Sciences and Technology, to be invested in national research and development projects; and |
· | 20% to the MME, to defray EPE. |
Environmental Regulations
The Brazilian Federal Constitution includes environmental matters among the ones that are subject to concurrent legislative competence, meaning that the Brazilian federal government enacts general rules, which are supplemented by rules passed by states; municipalities, in turn, enact local rules or supplement federal and/or state legislation.
In 1981, the National Environmental Policy was enacted in Brazil (Federal Law No. 6,938/1981). The Federal Environmental Crimes Act (Federal Law No. 9,605/1998), which took effect in 1998, establishes a general framework of liability for environmental crimes. Federal laws and statutes have established the National System for Management of Water Resources and the National Council of Water Resources to address the major environmental issues facing the hydroelectric sector and users of water resources. In 2000, the Brazilian government created an independent agency, the National Water Agency, to regulate and supervise the use of water resources. In 2008, the Federal Decree No. 6,514/2008 was enacted to prescribe the administrative liability due for environmental infractions.
The Brazilian Forestry Code (Federal Law No. 12,651/2012) and related regulations establish rules regarding the maintenance and acquisition of areas affected by hydroelectric plant reservoirs. These regulations may result in increased maintenance, reforestation and expropriation costs to energy industry concessionaires. We have been developing conservation actions in our power plants, as established in the Forestry Code, since their construction.
Under Brazilian environmental Law, one single action that causes risk to the environment can trigger three types of liability: civil, administrative and criminal.
Thus, a violator of an environmental law may be subject to administrative and criminal sanctions and, in case environmental damage occurs, will have an obligation to repair or provide compensation to the affected party. Administrative sanctions may apply to both the company and the individual representatives of the company concomitantly and may include substantial fines and the suspension of activities. Criminal sanctions may include fines and, for individuals, including for directors and employees of companies that commit environmental crimes, possible imprisonment.
Our energy generation, distribution and transmission facilities are subject to prior environmental licensing procedures, which may include the preparation of environmental impact assessments before such facilities are constructed. As a condition for the regularity of these procedures, we must also request authorization from certain regulatory entities, such as Brazilian Institute of National Historic and Artistic Heritage (Instituto do Patrimônio Histórico e Artístico Nacional – IPHAN), an oversight body that is in charge of the protection and preservation of Brazilian cultural heritage (archeological, material andimmaterial). Once the respective environmental licenses are obtained, their maintenance is still subject to compliance with certain requirements.
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Item 4A. Unresolved Staff Comments
None.
Item 5. Operating and Financial Review and Prospects
The information presented in this section should be read together with our consolidated statements of income for the years ended December 31, 2018, 2017 and 2016, that have been prepared in accordance with IFRS as issued by the IASB. For more information see “Presentation of Financial and Other Information” and Note 3 to our audited consolidated financial statements for the year ended December 31, 2018.
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OVERVIEW
Brazilian Economic Conditions
All of our operations are in Brazil, and we are affected by general Brazilian economic conditions. In particular, the general performance of the Brazilian economy affects demand for electricity, and inflation affects our costs and our margins. The Brazilian economic environment faced periods of instability in recent years, impacting the performance of the Brazilian GDP growth rates, with an increase of 2.3% in 2013 and 0.1% in 2014 and a decrease of 3.8% in 2015. The growth rate was equally negative in 2016, with a decrease of 3.3%. The economic environment showed signs of recovery in 2017, with an increase of 1.0% in growth rate. In 2018, the economic environment continued to recover, with an increase of 1.1% in growth rate, but mainly due to the uncertainties caused by the Brazilian presidential election, therealhavedepreciated in comparison to the U.S. dollar.
The following table shows selected economic data for the periods indicated:
| Year ended December 31, | ||
| 2018 | 2017 | 2016 |
Inflation (IGP-DI) | 7.10 | (0.42)% | 7.18% |
Appreciation (depreciation) of therealvs. U.S. dollar | (17.13)% | (1.48)% | 19.81% |
Period-end exchange rate – US$1.00(1) | 3.8748 | 3.3080 | 3.2591 |
Average exchange rate – US$1.00 | 3.6558 | 3.2031 | 3.4500 |
Change in real GDP | 1.1% | 1.0% | (3.3)% |
Average interbank interest rates(2) | 6.40% | 9.80% | 14.05% |
(1) Thereal/U.S. dollar exchange rate at April 17, 2019 was R$3.9225 per US$1.00.
(2) Calculated in accordance with Central Clearing and Custody House, orCentral de Custódia e Liquidação Financeira de Títulos (“CETIP”), methodology (based on nominal rates).
Sources:FGV ‒ Fundação Getúlio Vargas, the Brazilian Central Bank, the Brazilian Geography and Statistics Institute IBGE and CETIP.
Rates and Prices
Our operational results are significantly affected by changes in the prices at which our generation business sells energy, and by the prices at which our distribution business buys and resells energy.
Our generation business sells energy at unregulated prices in the regulated market, in the Free Market and in the Spot Market. Our generation business allocates the amount of energy that it sells in each of these markets seeking to maximize returns, based on factors such as: (i) the requirements of its concession contracts, many of which set a minimum percentage of energy generated in a particular concession that must be sold in the regulated market; (ii) the volume of energy that we plan to sell to Free Customers for a given year; and (iii) the outlook of the short-term, medium-term and long-term for energy prices generally. Although sales in the Free Market and the Spot Market are not directly regulated, they are influenced by energy regulatory policy. The prices at which our generation business sells energy are not regulated.
Our distribution business purchases enough energy to meet 100% of the demand we forecast for our final customers in auctions at unregulated prices in the regulated market. Our distribution business resells that energy to final customers at regulated tariffs that take into consideration the price at which the energy was purchased. If our forecasts fall short of the actual electricity demand of our final customers,we may be forced to make up for the shortfall by entering into short-term agreements to purchase electricity in the spot market. If our forecasts exceed the actual demand of our final customers, our distribution business sells the excess energy in the Spot Market. Except for possible future effects brought by the 2013 Concession Renewal Law, the margins in our distribution business tend to be relatively stable due to the regulated nature of the distribution business, while the margins in our generation business are typically larger but less stable, since they are substantially market regulated.
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Sales to final customers (which include sales by our distribution business to Captive Customers, sales by our generation business and sales by our trading business to Free Customers) represented approximately 59.5% of the volume of electricity we made available in 2018, and accounted for 66.7% of our energy sales revenues. Almost all of such sales were to Captive Customers. For more information, see “Item 4. Information on the Company — The Brazilian Electric Power Industry — Distribution Tariffs”. In general, if our costs for energy increase, the tariff process permits us to recover these costs from our customers through higher rates in future periods. However, if we do not receive tariff increases to cover our costs, if the recovery of these costs is delayed, or if our Board of Directors elects to reduce the tariff increase awarded by ANEEL,our profits and cash flows may be adversely affected.
ANEEL modifies our Retail Tariffs annually, generally in June. Since January 2013, the adjustments have been as follows.
· | In January 2013, due to the enactment of 2013 Concession Renewal Law, we were subject to an extraordinary revision that has been approved by ANEEL. The average impact of this extraordinary review in the tariffs we charge our customers was a decrease of 19.28% which caused a reduction of approximately 14.4% in our distribution revenues since the difference was paid for with funds from the federal government. |
· | In June 2013, ANEEL approved the annual revision of our Retail Tariffs, increasing them by an average of 13.08%, of which 11.40% related to the tariff increase and 1.68% referred to an increase in recovery of deferred regulatory accounts (CVA). After giving effect to the recovery of Parcel A costs, the average effect of this tariff readjustment on our Captive Customers was an increase of 14.61%. However, Copel Distribuição requested a partial deferral of this adjustment, which was authorized by ANEEL and approved on July 9, 2013. The amount of R$255.9 million was therefore deferred, and to be included as a financial component in the 2014 annual revision. This deferral reduced the average effect of the tariff adjustment to 9.55%. |
· | In June 2014, ANEEL approved the annual adjustment of our Retail Tariffs, increasing them by an averageof 35.38%, of which 25.05% related to the tariff increase and 10.34% related to an increase in recovery of deferred regulatory accounts (CVA). After giving effect to the recovery of Parcel A costs, the average effect of this tariff adjustment on our Captive Customers was an increase of 39.71%. However, Copel Distribuição requested a partial deferral of this adjustment, which was authorized by ANEEL and approved on July 22, 2014. The amount of R$898.3 million was therefore deferred, and to be included as a financial component in the 2015 annual readjustment. This deferral reduced the average effect of the tariff revision to 24.86%. |
· | In March 2015, ANEEL approved an extraordinary revision due to a series of events that significantly impacted the distribution concessionaires’ costs, which were not originally foreseen in the 2014 Retail Tariff increase, such as the increase of Itaipu tariffs (46.14%) and higher prices to purchase energy in recent energy auctions. Copel Distribuição’s average tariff revision approved by ANEEL was 36.79% starting from March 2, 2015. Of this total, 22.14% relatedto CDE Account chargesthat have been passed to customers and14.65% relates to (i) Itaipu’s tariff increase and (ii) thehigher prices paid by us to purchase energy in recent energy auctions that have been passed to customers. |
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· | In June 2015, ANEEL authorized theannual revision of Copel Distribuição’s tariff to final customers, increasing them by an average of 15.32%, of which (i) 20.58% related to the inclusion of the financial components, which will be recovered in the 12 months subsequent to the adjustment (including the amount of R$935.3 million corresponding to the deferrals in 2013 and 2014), (ii) 0.34% related to the restatement of Portion B, (iii) (3.25)% related to the adjustment of Portion A, and (iv) (2.35)% reflected the removal of the financial components from the previous process. The adjustment was fully applied to Copel Distribuição’s tariffs as of June 24, 2015. |
· | In June 2016, ANEEL approved the fourth periodic review of our Retail Tariffs, decreasing them by 12.87%, of which: (1.73)% related to the inclusion of financial components; 4.48% due to the update of Portion B; (2.57)% related to the update of Portion A; and (13.05)% reflecting the removal of the financial components of the previous tariff process. |
· | In March 2017, ANEEL approved an extraordinary tariff revision to correct the amount unduly included in the tariffs for captive consumers in 2016. The return corresponded to the energy that was to be generated by the Angra III power plant; however, the plant was not yet in commercial operation. The refund of the amount charged the most was made in a single installment during the month of April 2017, and, as of May 2017, the tariffs were adjusted to disregard the amount that was being charged. The decision, of extraordinary character, affected 90 distributors of electric power of the country. Copel’s retail tariff was reduced by an average of 11.8% during April 2017, and in May 2017, the tariff was close to its previous value, retaining an average discount of 1.27% until June 2017. |
· | In June 2017, ANEEL approved the annual revision of our Retail Tariffs, increasing them by an average of 3.13%, of which 3.86% related to the tariff increase and (0.73)% related to the inclusion of financial components.After the removal of the financial components of the previous tariff process, the average effect of this tariff adjustment on our Customers was an increase of 5.85%. |
· | In June 2018, ANEEL approved the annual revision of our Retail Tariffs, increasing them by an average of 14.32%, of which 7.80% related to the tariff increase and 6.52% related to the inclusion of financial components. After the removal of the financial components of the previous tariff process, the average effect of this tariff adjustment on our Customers was an increase of 15.99%. |
Purchase and Resale of Energy
Our distribution business purchases energy from generation companies and resells this energy to final customers at regulated rates. For more information, see “Item 4. Information on the Company— Business—Generation” and “Item 4. Information on the Company—Business—Purchases”. Our major long-term contracts or purchase obligations are described as follows.
· | We purchase energy from Itaipu at prices that are determined based on the Itaipu project’s costs, including servicing its U.S. dollar-denominated debt. In 2018, our electricity purchases from Itaipu amounted to R$1,272.2 million; |
· | Our distribution business is required to purchase a large portion of its energy needs from the regulated market. For more information, see “Item 4. Information on the Company —The Brazilian Electric Power — Industry — Auctions in the Regulated Market”. |
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Under current legislation, the amount that our distribution business charges Final Customers is composed of two fees: a fee for the actual energy consumed and a fee for the use of our distribution grid. Since the regulated rates at which our distribution business sells energy to final customers are substantially the same as the rates at which it purchases energy (after accounting for deductions and the cost of energy purchased for resale), our distribution business does not generate operating profit from the sale of electricity to final customers. Rather, our distribution business generates operating profit principally by collecting tariffs for the use of our distribution grid.
Impact of the CRC Account
One of our most significant assets consists of the obligations of the State of Paraná under an agreement that was last amended in October 2017. These obligations derive from amounts we were entitled to recover under a prior regulatory regime, and as a result they are referred to as the recoverable rate deficit account or “CRC Account” (Conta de Resultados a Compensar). The balance is adjusted for IGP-DI, plus interest at 6.65% per year, and is payable in monthly installments until April 2025. If the State of Paraná fails to make payments on a timely basis, we may apply dividends we owe to the State of Paraná in its capacity as our shareholder against amounts it owes us under the CRC Account agreement.
In June 2016, as per the request of the Paraná State Government, our Board of Directors approved an amendment to the CRC Agreement, contingent upon the approval of the Brazilian Department of Treasury, comprising: (i) a grace period from April 2016 to December 2016, in which no principal and interest amounts were paid under the CRC Agreement; and (ii) a grace period from January 2017 to December 2017, in which amounts corresponding exclusively to the interest were paid monthly, but no principal amounts were paid. All other provisions of the CRC Agreement were maintained as they were, including the maintenance of the current correction and interest rates, thus not affecting the global net present value of such agreement.
The Company and the State of Paraná formalized the above-mentioned amendment on October 31, 2017, after the consent from the Brazilian Department of Treasury. The State of Paraná complied with the agreed terms of such amendment and made monthly interest payments until December 2018. As of December 31, 2018, the outstanding balance of the CRC Account was R$1,445.6 million.
As of January 1, 2019, there were 76 monthly installments left. For additional information, see Note 8 to our audited consolidated financial statements.
Special Obligations
The contributions received from the federal government and our customers exclusively for investment in our generation assets, transmission and distribution grid are named as special obligations. We record the amount of these contributions on our statement of financial position as a reduction of our intangible and financial assets, under the caption “special obligations”, and, upon the conclusion or termination of the operating concession granted to us, the amount of these contributions is offset against intangible and financial assets. The amount we recorded as special obligations as of December 31, 2018 was R$2,822.7 million as a reduction of intangible assets and R$138.1 million as a reduction of contract assets.
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CRITICAL ACCOUNTING POLICIES
In preparing our financial statements, we make estimates concerning a variety of matters as referred to in Note 3.4 to our audited consolidated financial statements. Some of these matters are highly uncertain, and our estimates involve judgments we make based on the information available to us. We have discussed in “Overview” above certain accounting policies relating to regulatory matters. In the discussion below, we have identified several other matters for which our financial information would be materially affected if either (i) we reasonably used different estimates or (ii) in the future we change our estimates in response to changes that are reasonably likely to occur.
The discussion below addresses only those estimates that we consider most important based on the degree of uncertainty and the likelihood of a material impact if we used a different estimate. There are many other areas in which we use estimates about uncertain matters, but the reasonably likely effect of changed or different estimates is not material to our financial presentation. Please see Note 3.4 to our audited consolidated financial statements included herein for a more detailed discussion of the application of these and other accounting policies.
With the adoption of IFRS 9 and IFRS 15 as of January 01, 2018, some of the policies have been updated. In adopting IFRS 9, the Company applied the exemption contained in the standard, which allows it not to restate comparative information from prior periods arising from changes in the classification and measurement of financial instruments. In adopting IFRS 15, the Company opted to adopt the standard on the date of the initial application as an adjustment to the opening balance, considering only open contracts on the date of application.
Property, Plant and Equipment
We have adopted the deemed cost methodology to determine the fair value of Copel Geração e Transmissão’s property, plant and equipment, specifically for the generation business as of the date of transition of our financial statements to IFRS (January 1, 2009). These assets are depreciated according to the linear method based on annual rates set forth and reviewed periodically by ANEEL, which are used and accepted by the market as representative of the economic useful life of the assets related to concession’s infrastructure, limited to the term of said concession, when applicable. The estimated useful life, the residual amounts, and depreciation are reviewed as of each reporting date, and the effect of any changes in estimates is recorded prospectively.
Accounting for concession arrangements
We account for our concession contracts segregated in: Financial Assets (Accounts receivable - concession), Contract Assets and Intangible Assets, as presented below:
Concession of electric power distribution
The portion that we recognize as a financial asset refers to the indemnification provided for in the concession agreement for public electricity distribution services that guarantees the unconditional right to receive cash at the end of the concession, to be paid by the Granting Authority. This indemnification aims to reimburse the Company for investments made in infrastructure, without recovery, through the tariff. We calculate the cash flows linked to these assets considering the value of the tariff base called the Regulatory Remuneration Base - BRR, defined by the Granting Authority, using the methodology of replacement cost of the assets that are part of the distribution infrastructure linked to the concession.
The portion that we recognize as contract asset represents the contractual right of the concessionaire related to the assets under construction to meet the needs of the distribution concession, accounted for at cost plus financial charges, when applicable. When these assets are put into operation, we transfer to the intangible asset the amount equivalent to what will be remunerated by the user through payment of the fee for the use of the services, and for the receivables linked to the concession, the amount equivalent to the residual portion of the assets not amortized which will be reverted to the granting authority through indemnification at the end of the concession.
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The portion that we recognize as an intangible asset comprises the right to exploit the infrastructure, built or acquired under the concession regime for the public electric power service, and to charge users for the public service rendered. We record at acquisition cost, including borrowing costs, less accumulated amortization and impairment losses, when applicable. The amortization of this intangible asset reflects the pattern in which we expect the future economic benefits of the asset to be consumed, with amortization expected during the concession term.
Concession of electric power transmission
The portion that we recognize as a financial asset refers to the right to indemnification of Concession Agreement No. 060/2001 arising from the Annual Revenue Allowed - RAP not received in the period from January 2013 to June 2017 for the assets of the Basic Network of the Existing System - RBSE. On the balance, we recorded monetary restatement and interest.
The portion that we recognize as a contract asset represents the balance of the public electricity transmission service contracts signed with the Granting Authority to build, operate and maintain the high voltage lines and substations of the generation centers up to the distribution points. During the term of the agreement, we receive, subject to performance, a remuneration denominated Annual Revenue Allowance (RAP) that amortizes the investments made in the construction of the infrastructure and covers the costs of operation and maintenance incurred. After the start of the commercial operation and to the extent that the operation and maintenance service is provided, we recognize this revenue on a monthly basis in the result and invoice together with the part of the revenue recognized in the construction phase related to the remuneration of the constructed assets. The assets arising from the construction of the transmission infrastructure are formed by the recognition of the construction revenue and its financial remuneration. Upon expiration of the concession, if there is a remaining balance not yet received related to the construction of the infrastructure, it will be received directly from the Granting Authority, as provided in the concession agreement, as compensation for the investments made and not recovered through RAP.
We have not recognized intangible assets for energy transmission concession contracts.
Concession of electric power generation
We recognize as a financial asset the concession agreement for quota generation that provides for the payment of a bonus for the grant, considering that this bonus represents an unconditional right to receive cash, guaranteed by the Granting Authority during the term of the concession and without risk of demand. The remuneration of this financial asset is based on the weighted average cost of capital (WACC).
We also recognize as financial assets the electricity generation concession contracts that contain clauses for indemnification of the infrastructure not depreciated, amortized and / or received during the term of the concession. At the end of each reporting period, we evaluate the recoverability of the asset, remeasuring its cash flow based on our best estimate.
In intangible assets, we record the onerous concession contract for the generation of electric energy, which corresponds to the acquisition of the right to exploit the hydroelectric power generation potential whose contract provides for payments to the Federal Government as Use of Public Property - UBP. During the construction of the project, we recognize the amount at the present value of the future cash outflows during the period of validity of the concession agreement. On the date of commencement of the commercial operation of the enterprise, the amount presented is fixed and amortized during the concession period.
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We also recognize as an intangible asset the asset constituted by the Generation Scaling Factor (GSF), derived from the excess amount between the amount recovered from the cost and the MRE (GSF) adjustment factor, subtracted from the total cost of the risk premium to be amortized over the period of energy supply in the regulated environment. The amount was transformed by Aneel into an extension of the grant period, which we amortized on a straight-line basis as from January 1, 2016 until the end of the new concession term.
We did not recognize a contract asset for the power generation concession contracts
Distribution of piped gas
The portion that we recognize as a financial asset is the one that will be indemnified by the Granting Authority corresponding to the investments made in the ten years prior to the end of the concession provided for in the agreement and which, in Management's opinion, guarantees the unconditional right to receive cash at the end of the concession. We use the indemnification premise based on the replacement cost of the concession assets.
The portion that we recognize as a contract asset comprises the works in progress for the distribution of piped gas which will be transferred to the intangible asset upon its entry into operation and to the extent that the right (authorization) to receive the users is received.
The portion that we recognize as an intangible asset corresponds to the users' right to charge for the gas supply. We initially valued this asset at acquisition cost, including interest and other capitalized financial charges. We apply the linear depreciation method based on the estimated useful life of each asset, considering the standard of economic benefit generated by the intangible assets.
In addition to our financial assets, contract assets and intangible assets, under IFRS we also recognize construction revenues and construction costs for construction activities we perform in connection with our distribution and transmission concessions. Our distribution business outsources power distribution infrastructure construction. As a result, under IFRS we recognize construction costs and revenues in roughly the same amounts. In contrast, since our transmission business performs much of our transmission infrastructure construction, we recognize construction revenue in amounts that exceed construction costs. The resulting margin for our transmission business’ construction revenue was 1.65% in 2018, and is calculated based on a methodology that takes into account business risk.
The determination of the amortization term of our intangible assets and the fair value of our financial assets in connection with our concession contracts is subject to assumptions and estimates, and the use of different assumptions could affect the amounts we recognize. The estimated useful lives of the underlying assets, as well as the rate of return of the financial assets also require significant assumptions and estimates. Different assumptions and estimates and changes in future circumstances could have a significant impact on our results of operations.
Additional information on the accounting for intangible, contract and financial assets arising from concession agreements is contained in Notes 4.4, 4.5 and 4.9 to our audited consolidated financial statements.
Revenue Recognition
We bill our residential, industrial and commercial customers monthly. Unbilled revenues from the billing date to month-end are estimated based on the prior month’s billing and recognized as revenue at the end of the month in which the service was provided. We read certain of our individual customers’ meters systematically throughout the month in order to estimate how much energy we have sold to individual customers as a group. At the end of each month, the amount of energy delivered to each customer since their last meter reading date is estimated and the corresponding unbilled revenue is determined based upon a customer’s daily estimated usage by class and applicable customer rates reflecting significant historical trends and experience. Differences between estimated and actual unbilled revenues, which have historically been insignificant, are recognized in the following month.
Net Sectorial Financial Assets and Liabilities
Until 2009, the Brazilian accounting standards allowed distribution concessionaires to book the difference, if any, between the amounts that concessionaires were entitled to collect under their respective concession contracts and the amounts they actually collected, which are referred to as sectorial assets and liabilities. The positive or negative variations in these amounts were included in the tariffs in the following annual tariff adjustment. With the adoption of IFRS in 2010, these assets and liabilities were no longer recorded in the financial statements of distribution concessionaires.
As a result of an amendment to our distribution concession agreement executed on December 10, 2014, we recognized on December 31, 2018, a financial asset of R$678.8 million (R$343.2 million in 2017) and a financial liability in the amount of R$96.5 million (R$283.5 million in 2017). This amendment added a guarantee that, if the concession is extinguished for any reason, the residual amounts of items of Parcel A costs and other financial components that have not been recovered or returned via tariff shall be incorporated in the calculation of the indemnification amount by the granting authority. For more information, see Note 9 to the audited consolidated financial statements.
Impairment of Long-Lived Assets
Long-lived assets, primarily property, plants and equipment and intangible assets, comprise a significant amount of our total assets. We evaluate our long-lived assets and make judgments and estimates concerning the carrying value of these assets, including the amounts to be capitalized, the depreciation/ amortization rates and useful lives of these long-lived assets. The carrying values of these assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. An impairment loss is recorded in the period in which it is determined that the carrying amount is not recoverable. This requires us to make long-term forecasts of future revenues and costs related to the assets subject to review. These forecasts require assumptions about the demand for our products and services, future market conditions and regulatory developments. Significant and unanticipated changes to these assumptions could require a provision for impairment in a future period. Our evaluation as of December 31, 2018, resulted in an impairment of our in service and in progress property, plant and equipment in the amounts of R$3.5 million and R$1,197.7 million, respectively (see Notes 18.1 of our consolidated financial statements).
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Provision for Risks (Labor, Civil, Tax and Environmental Claims)
Our subsidiaries and we are party to certain legal proceedings in Brazil arising in the normal course of business regarding tax, labor, civil and environmental claims.
Provisions are recognized when, and only when: (i) the Company has a present obligation (legal or constructive) resulting from a past event, (ii) it is probable (i.e., more likely than not) that an outflow of resources embodying economic benefits will be required to settle the obligation, and (iii) a reliable estimate can be made of the amount to settle the obligation. By their nature, risks will only be resolved when a future event or events occur or fail to occur. Typically such events will occur a number of years in the future. The evaluation of these risks is performed by our internal and external legal counsel. Accounting for risks requires significant judgment by management concerning the estimated probabilities, including classification as probable or possible losses and ranges of exposure to potential liability. Management's assessment of our exposure to risks could change as new developments occur or more information becomes available. The outcome of the risks could vary significantly and could materially impact our consolidated results of operations, cash flows and financial position. The provision classified as probable losses, as of December 31, 2018 amounted to R$1,664.8 million, of which R$157.1 million was related to tax proceedings, R$736.2 million was related to civil claims, R$612.8 million was related to labor claims, R$85.2 million was related to employee benefits and R$73.5 million was related to regulatory proceedings.
As of December 31, 2018, we estimate that the total amount of claims against us, excluding disputes involving non-monetary claims or claims that cannot be evaluated in the current stage of proceedings, classified as possible losses, was approximately R$3,052.7 million, of which R$311.8 million correspond to labor claims; R$19.1 million to employee benefits; R$866.8 million to regulatory claims; R$1,286.5 million to civil claims; and R$568.5 million to tax claims. For more information, see Note 29 to our audited consolidated financial statements.
Employee Retirement and Health Benefits
We sponsor a (i) defined-benefit pension plan and a (ii) variable contribution pension plan covering substantially all of our employees. We have also established a health care plan for current and retired employees. We determine our obligations for these plans based on calculations performed by independent actuaries using assumptions that we provide about interest rates, investment returns, rates of inflation, mortality rates and future employment levels (see the assumptions in Note 24.5.1 and the sensitivity analysis in Note 24.5.8 of our consolidated financial statements). These assumptions directly affect our post-employment benefits liability.
In 2018, we recorded expenses in the amount of R$243.7 million for our pension and health care plans. We estimate that we will incur expenses in the amount of R$99.6 million in 2019 for our health care plans (according to actuarial calculations).
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Deferred Taxes
We recognize deferred tax assets and liabilities based on the differences between the financial statement carrying amounts and the tax basis of assets and liabilities using prevailing rates. We regularly review our deferred tax assets for recoverability based on historical taxable income, projected future taxable income, and the expected timing of the reversals of existing temporary differences. If we are unable to generate sufficient future taxable income, or if there is a material change in the actual effective tax rates or time period within which the underlying temporary differences become taxable or deductible, we could be required to derecognize all or a significant portion of our deferred tax assets resulting in a substantial increase in our effective tax rate and a material adverse impact on our operating results. The taxes balances subject to the federal taxing department inspection are those constituted over the last five years. As of December 31, 2018, we have recognized deferred tax assets totaling R$2,047.4 million and deferred tax liabilities in the amount of R$1,197.7 million. We have not considered any reduction for risk of recovery of such assets (see Note 13.2.1 to the consolidated financial statements).
Expected credit losses
We recorded the expected credit losses in amounts deemed sufficient to cover potential losses on the realization of customer receivables and others whose recovery is considered unlikely. We account for the balance of expected credit losses based on the credit risk analysis, taking into account specific payment history criteria, recovery actions for credit recovery and the relevance of the amount due in the receivables portfolio. As of December 31, 2018, we recorded expected credit losses in the amount of R$331.4 million (see Note 7.3 to our consolidated financial statements for further details including provisions and reversals).
Power purchase and sale operations in active market
We negotiate energy purchase and sale operations in the active market and part of our contracts are classified as derivative financial instruments measured at fair value through profit or loss. We recognize in the income for the period unrealized net gains or losses arising from the mark-to-market of these contracts, based on the difference between contracted and market prices.
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ANALYSIS OF ELECTRICITY SALES AND COST OF ELECTRICITY PURCHASED
The following table sets forth the volume and average rate components of electricity sales and purchases for the years ended December 31, 2018, 2017 and 2016:
| Year ended December 31, | ||
| 2018 | 2017 | 2016 |
Electricity Sales |
|
|
|
Sales to Final Customers |
|
|
|
Average price (R$/MWh):(1) |
|
|
|
Industrial customers(2) | 267.18 | 254.45 | 246.25 |
Residential customers | 361.12 | 335.71 | 338.80 |
Commercial customers | 332.74 | 318.65 | 339.26 |
Rural customers | 371.90 | 333.33 | 378.67 |
Other customers(3) | 282.96 | 262.23 | 268.98 |
All customers(2) | 317.33 | 299.06 | 301.95 |
Volume (GWh): |
|
|
|
Industrial customers(2) | 8,641 | 7,689 | 9,585 |
Residential customers | 7,238 | 7,126 | 6,932 |
Commercial customers | 4,979 | 4,847 | 5,108 |
Rural customers | 2,288 | 2,257 | 2,180 |
Other customers(3) | 2,481 | 2,455 | 2,404 |
All customers(2) | 25,627 | 24,374 | 26,209 |
Total revenues from sales to final customers (millions of R$) | 8,132 | 7,691 | 7,914 |
Sales to distributors(4) |
|
|
|
Average price (R$/MWh)(1) | 278.75 | 183.98 | 146.93 |
Volume (GWh)(5) | 12,979 | 17,263 | 18,213 |
Total revenues (millions of R$) | 3,618 | 3,176 | 2,676 |
Electricity Purchases |
|
|
|
Purchases from Itaipu |
|
|
|
Average cost (R$/MWh)(6) | 222.18 | 188.41 | 182.91 |
Volume (GWh) | 5,726 | 5,934 | 5,958 |
Percentage of total Itaipu production purchased | 7.1 | 7.2 | 6.5 |
Total cost (millions of R$)(7) | 1,272.2 | 1,118.0 | 1,089.8 |
Purchases from Angra |
|
|
|
Average cost (R$/MWh) | 248.07 | 226.49 | 221.25 |
Volume (GWh) | 1,009 | 1,023 | 1,026 |
Total cost (millions of R$)(7) | 250.3 | 231.7 | 227.0 |
Purchases from CCGF |
|
|
|
Average cost (R$/MWh) | 90.92 | 61.55 | 66.19 |
Volume (GWh) | 6,520 | 7,271 | 7,553 |
Total cost (millions of R$)(7) | 592.8 | 447.5 | 499.9 |
Purchases from others(4) |
|
|
|
Average cost (R$/MWh) | 237.41 | 342.37 | 202.27 |
Volume (GWh) | 17,884 | 12,758 | 14,180 |
Total cost (millions of R$)(7) | 4,246 | 4,368 | 2,868 |
(1)Average prices or costs have been computed by dividing (i) the corresponding revenues or expenses by (ii) MWh of electricitysold or purchased.
(2)Includes Free Customers outside Paraná.
(3)Includes public services such as street lighting, as well as the supply of electricity to government agencies, and our own consumption.
(4)Energy traded between Copel’s subsidiaries not included.
(5)Energy Reallocation Mechanism not included.
(6)Our purchases of electricity generated by Itaipu are stated inreais and paid for on the basis of a capacity charge expressed in U.S. dollars per kW plus a “wheeling” (or transportation) charge expressed inreaisper kWh.
(7)See “Item 4. Information on the Company-Business—Generation” and “Item 4. Information on the Company—Business Purchases” for an explanation of our expenses relating to electricity purchases.
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RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016
The following table summarizes our results of operations for the years ended December 31, 2018, 2017 and 2016.
Our consolidated financial statements present our operating costs of sales and services provided by function. However, in accordance with IFRS, Note 32 of our audited consolidated financial statements presents this information according to the nature of the operating cost or expense. For ease of understanding, the analysis below reflects the information presented by nature.
| Year ended December 31, | ||
| 2018 | 2017 | 2016 |
| (R$ million) | ||
Operating Revenues: |
|
|
|
Electricity sales to Final Customers: | 5,548.6 | 4,681.5 | 5,231.5 |
Residential | 1,596.7 | 1,381.7 | 1,371.2 |
Industrial | 1,854.4 | 1,488.5 | 1,796.0 |
Commercial, services and other activities | 1,032.6 | 904.5 | 1,065.2 |
Rural | 611.4 | 511.4 | 584.5 |
Other classes | 453,5 | 395.5 | 414.6 |
Electricity sales to distributors | 2,765.9 | 3,176.4 | 2,676.1 |
Use of main distribution and transmission grid | 3,469.1 | 3,617.9 | 3,976.6 |
Residential | 1,017.0 | 1,010.5 | 977.4 |
Industrial | 454.3 | 468.0 | 564.3 |
Commercial, services and other activities | 624.0 | 640.0 | 667.7 |
Rural | 239.5 | 241.0 | 241.0 |
Other classes | 248.5 | 248.3 | 231.9 |
Interest income | 277.9 | 403.8 | 854.1 |
Other distribution and transmission revenue | 607.6 | 606.3 | 440.2 |
Construction revenues | 1,097.3 | 868.0 | 1,279.7 |
Revenues from telecommunications | 366.2 | 309.0 | 261.6 |
Distribution of piped gas | 557.2 | 454.8 | 471.9 |
Sectorial financial assets and liabilities result | 893.7 | 718.8 | (1,079.7) |
Other operating revenues | 189.4 | 141.1 | 151.4 |
Fair value of assets from the indemnity for the concession | 47.5 | 57.1 | 132.7 |
| 14,934.8 | 14,024.6 | 13,101.8 |
Cost of sales and services provided: |
|
|
|
Electricity purchased for resale | (6,361.2) | (6,165.5) | (4,685.6) |
Charge of main distribution and transmission grid | (1,176.8) | (712.0) | (866.2) |
Personnel and management | (1,357.8) | (1,343.3) | (1,304.4) |
Pension and healthcare plans | (243.8) | (237.6) | (259.8) |
Material and supplies | (81.8) | (83.1) | (81.5) |
Materials and supplies for power electricity | (19.7) | (97.4) | (33.4) |
Natural gas and supplies for gas business | (412.6) | (309.5) | (325.4) |
Third-party services | (572.2) | (521.5) | (550.5) |
Depreciation and amortization | (749.2) | (731.6) | (708.3) |
Accruals and provisions | (306.7) | (365.5) | (768.7) |
Construction cost | (1,052.2) | (1,003.9) | (1,280.7) |
Other costs and expenses | (342.7) | (414.0) | (414.8) |
| (12,676.6) | (11,984.9) | (11,279.3) |
Equity in earnings of associates and joint ventures | 135.9 | 101.7 | 166.4 |
Financial results | (438.1) | (748.4) | (594.7) |
Profit before income tax and social contribution | 1,956.0 | 1,392.9 | 1,394.2 |
Income tax and social contribution on profit | (512.0) | (274.7) | (519.7) |
Net income for the year | 1,444.0 | 1,118.3 | 874.5 |
Net income attributable to controlling shareholders | 1,407.1 | 1,033.6 | 895.8 |
Net income attributable to non-controlling interest | 36.9 | 84.7 | (21.3) |
Other comprehensive income | 38.5 | 31.3 | (57.2) |
Comprehensive income | 1,405.6 | 1,086.9 | 817.3 |
Comprehensive income attributable to controlling shareholders | 1,368.5 | 1,002.4 | 838.5 |
Comprehensive income attributable to non-controlling interest | 37 | 84.5 | (21.2) |
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Results of Operations for 2018 Compared with 2017
Operating Revenues
Our consolidated operating revenues increased by 6.5% or R$910.2 million in 2018 compared to 2017. This result reflected an increase of R$867.1 million in electricity sales to Final Customers; an increase of R$229.3 million in construction revenues; an increase of R$174.9 million in sectorial financial assets and liabilities; an increase of R$102.4 million in the distribution of piped gas; an increase of R$57.2 million in telecommunications revenues; and an increase of R$48.3 million in other operating revenues. These increases were partially offset by a reduction of R$410.5 million in electricity sales to distributors; reduction of R$148.8 million in the use of our main transmission grid; and a reduction of R$9.6 million in fair value of the Indemnifiable Concession Assets.
Electricity Sales to Final Customers. Our revenues from electricity sales to Final Customers increased by 18.5%, or R$867.1 million, to R$5,548.6 million in 2018 compared to R$4,681.5 million in 2017, mainly due to a increase of 5.1% of total power consumption of our Final Customers, from 24,374 GWh in 2017 to 25,627 GWh in 2018, and the average readjustment of 15.99% in June 2018 in tariffs paid by consumers in the captive market, as follows:
· | The volume of electricity sold to residential customers increased by 1.6% in 2018 compared to 2017. While there was an increase in the number of customers by 2.0%, the average consumption remained stable in 2018 compared to 2017. |
· | The volume of eletricity sold to industrial customers, including both Captive Customers and Free Customers, increased by 12.4% in 2018 compared to 2017, mainly due to the growth of Copel's commercial customers in the Free Market, partially offset by the reduction of industrial customers in the captive market. The number of industrial customers decreased by 4.1% and average consumption grew by 17.2% in 2018 compared to 2017. |
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· | The volume of eletricity sold to commercial customers, including both Captive Customers and Free Customers, increased by 2.7% in 2018 compared to 2017. Despite the increase in number of customers by 2.7%, the average consumption remained practically stable in 2018 compared to 2017. |
· | The volume of eletricity sold to rural customers increased by 1.4% in 2018 compared to 2017. This increase is mainly due to the performance of agribusiness in the State of Paraná and an increase of 2.2% in the average consumption. |
Electricity Sales to Distributors. Our revenues from electricity sales to distributors revenues decreased by 12.9%, or R$410.5 million, to R$2,765.9 million in 2018 compared to R$3,176.4 million in 2017. This reduction was mainly due to the decrease in our revenues from eletricity sold in the spot market (CCEE), which decreased by 38.1%, or R$387.0 million, to R$628.1 million in 2018 compared to R$1,015.1 million in 2017. This reduction in CCEE's revenues is a result of (i) the non-activation of the Araucária Thermoelectric Plant; and (ii) lower prices in the spot market.
Use of main distribution and transmission grid. Our revenues from the use of main distribution and transmission grid decreased by 4.1%, or R$148.8 million, to R$3,469.1 million in 2018 compared to R$3,617.9 million in 2017. This decrease was mainly due to the remeasurement of assets related to the Existing System Basic Network (RBSE), which registered a revenue of R$82.6 million in 2018 compared to R$361.2 million in 2017, as disclosed in Note 10.5 of our Consolidated Financial Statements. This decrease in our revenues from the use of main distribution and transmission grid was partially offset by the 1.9% growth in Copel Distribuição's grid market.
Construction revenues. Our revenues construction increased by 26.4%, or R$229.3 million, to R$1,097.3 million in 2018, compared to R$868.0 million in 2017. This increase was mainly due to the intensification of construction efforts in 2018 with the objective of improving our distribution and transmission infrastructure.
Fair value of assets from the indemnity for the concession. The fair value of the assets from the indemnity for the concession decreased by 16.8%, or R$9.6 million, to R$47.5 million in 2018, compared to R$57.1 million in 2017. The decrease was mainly due to lower variation in the distribution concession agreement’s assets.
Revenues from Telecommunications. Revenues from our telecommunications segment increased by 18.5%, or R$57.2 million, to R$366.2 million in 2018 compared to R$309.0 million in 2017, as a result of an increase in the number of customers in the retail market, notably in the internet broadband segment
Distribution of Piped Gas. Revenues from the distribution of piped gas increased by 22.5%, or R$102.4 million, to R$557.2 million in 2018, compared to R$454.8 million in 2017, due to the tariff adjustment and improvement of 2.9% in the gas market.
Sectorial Financial Assets and Liabilities. Sectoral financial assets and liabilities increased by 24.3%, or R$174.9 million, to R$893.7 million in 2018, compared to R$718.8 million in 2017. This variation was mainly due to the recognition of receivables resulting from the positive difference between the average price of eletricity purchased from Itaipu, Angra, CCGF and the Availability Contracts and the average price of the hedging rate. In relation to Itaipu's eletricity, the higher cost is due to the exchange variation, while in relation to other contracts the higher cost originates from the hydrological scenario (variations in GSF and PLD). For more information on this variation, see Note 9.2 to our ConsolidatedFinancial Statements.
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Other Operating Revenues. Other operating revenues increased by 34.2%, or R$48.3 million, to R$189.4 million in 2018, compared to R$141.1 million in 2017, mainly due to revenues from services renderedofthe engineering contract of owner of the HPP Baixo Iguaçu, and higher revenues from leases and rents.
Cost of sales and services provided
Our consolidated costs of sales and services provided increased by 5.8% or R$691.7 million, to R$12,676.6 million in 2018 compared to R$11,984.9 million in 2017. The main factors leading to such increase in our cost of sales and services provided are as follows:
· | Electricity Purchased for Resale. Our purchased energy costs for resale increased by 3.2%, or R$195.8 million, to R$6,361.2 million in 2018, compared to R$6,165.4 million in 2017. This increase was mainly due to: (i) an increase by 21.1% in the cost of eletricity purchased through bilateral contracts, explained in particular by the higher volume of eletricity purchased by Copel Comercialização (4,101 GWh in 2018 compared to 2,644 GWh in 2017), and (ii) an increase by 13.8% in the costs of purchasing eletricity from Itaipu, due to the exchange variation. |
· | Charge of Main Distribution and Transmission Grid. Expenses we incurred for our use of the main distribution and transmission grid increased 65.3%, or R$464.8 million, to R$1,176.8 million in 2018, compared to R$712.0 million in 2017, mainly as a result of (i) the adjustment in TUST in June 2018 and June 2017 (when the indemnity related to RBSE assets began to incorporate Permitted Annual Revenue - APR, and in 2018 the impact was on the whole year), and (ii) cost of System Services Charges (ESS), reflecting the greater amount of resources received from the reserve electric energy (Coner) in 2017, due to the effects of the indemnities to the transmission of energy. |
· | Personnel and Management. Personnel and administrative expenses increased by 1.1%, or R$14.5 million, to R$1,357.8 million in 2018, compared to R$1,343.3 million in 2017, as a result of (i) salary readjustment 3.97% of as of October 2018 and 1.63% as of October 2017, (ii) provision for indemnification for retirement incentive program (PDI), and (iii) an increase of R$22.7 million in the amount allocated to Profit Sharing - PLR, partially offset by a reduction in the number of employees. |
· | Pension and Healthcare Plans. Pension and Healthcare expenses increased 2.6%, or R$6.2 million, to R$243.8 million in 2018, compared to R$237.6 million in 2017, due to the readjustment of the monthly care plans. |
· | Material and Supplies. Material expenses decreased 1.6%, or R$1.3 million, to R$81.8 million in 2018 compared to R$83.1 million in 2017. |
· | Material and Supplies for Power Electricity. These expenses decreased 79.8% or R$77.7 million, totaling R$19.7 million in 2018, compared to R$97.4 million in 2017, mainly as a result of the activation of Araucária TPP in 2017, and the corresponding increase in purchases of natural gas, while in 2018 the plant was not activated. |
· | Natural Gas and Supplies for Gas Business. Expenses related to natural gas purchases increased 33.3%, or R$103.1 million, to R$412.6 million in 2018, compared to R$309.5million in 2017, mainly due to growth in the market of Compagas and exchange variation. |
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· | Third-Party Services. Third-party service expenses increased by 9.7%, or R$50.7 million, to R$572.2 million in 2018, compared to R$521.5 million in 2017, mainly due to the higher maintenance value of the electric system, communication, data processing and transmission and advisory services and auditing services. |
· | Depreciation and Amortization. Depreciation and amortization increased by 2.4%, or R$17.6 million, to R$749.2 million in 2018, compared to R$731.6 in 2017, mainly due to an increase in our non-current assets. |
· | Accruals and Provisions. Provisions and reversals expenses decreased by 16.1%, or R$58.8 million, to R$306.7 million in 2018, compared to R$365.5 million in 2017, due in particular to the reversal of the provision for R$92.7 million related to an indemnification action against third parties. |
· | Construction Cost. Construction costs increased by 4.8%, or R$48.3 million, to R$1,052.2 million in 2018, compared to R$1,003.9 million in 2017, mainly reflecting investments in transmission, distribution and Compagas assets. |
· | Other Costs and Expenses. Other costs and expenses decreased 17.2%, or R$71.3 million, to R$342.7 million in 2018, compared to R$414.0 million in 2017. This reduction is mainly due to reimbursement from suppliers of wind farm assets of the Brisa Potiguar Complex in the amount of R$72.1 million. |
Equity earnings of associates and joint ventures
Equity earnings of associates and joint ventures was R$135.9 million in 2018, an increase of 33.5%, compared to R$101.8 million in 2017, mainly due to a growth in the profits of our associate entities and joint ventures.
Namely, our equity accounting income for 2018 was: (i) loss of R$4.0 million from Voltalia, compared to loss of R$0.6 million in 2017; (ii) R$3.0 million from Costa Oeste, compared to loss of R$2.6 million in 2017; (iii) R$7.0 million from Marumbi compared to loss of R$9.5 million in 2017; (iv) R$1.2 million from Transmissora Sul Brasileira, compared to loss of R$5.0 million in 2017; (v) R$5.0 million from Caiuá, compared to loss of R$4.0 million in 2017; (vi) R$9.2 million from the Integração Maranhense compared to loss of R$8.9 million in 2017; (vii) R$50.4 million from Matrinchã compared to R$57.4 million in 2017; (viii) R$35.3 million from Guaraciaba, compared to R$25.4 million in 2017; (ix) loss of R$16.5 million from Paranaíba, compared to R$17.0 million in 2017; (x) loss of R$2.5 million from the Mata de Santa Genebra, compared to R$19.5 million in 2017; (xi) R$24.6 million from Cantareira compared to R$3.9 million in 2017; (xii) R$10.0 million from Dona Francisca compared to R$8.9 million in 2017; and (xiii) R$13.2 million from Foz do Chopim versus R$6.6 million from 2017.
Financial Results
We recognized a reduction of financial losses of 41.5%, or R$310.3 million, to R$438.1 million of net financial losses in 2018, compared to a net financial loss of R$748.4 million in 2017. This result is due to: (i) an increase by 16.4% in financial revenues, mainly due to the increase in interest and monetary variation on CRC onlendings and the recognition of tax credits, and (ii) a reduction of 13.5% in financial expenses, due to lower monetary, exchange rate and debt charges, mainly influenced by the reduction of the Selic rate.
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Income Tax and Social Contribution Expenses
In 2018, our income tax and social contribution expenses increased to R$512.0 million, reflecting an effective tax rate of 26.2% in our pretax income, compared to R$274.7 million and an effective 19.7% in our pretax profit in 2017. The increase in our effective tax rate in 2018 compared to 2017 was primarily due to our enrollment in a special tax benefit program of the Brazilian Federal Tax Authority (Programa Especial de Regularização Tributária – PERT da Secretaria da Receita Federal). For more information on this special tax benefit program, see Note 13.3.1 to our Consolidated Financial Statements.
Results of Operations for 2017 Compared with 2016
The information contained herein reflects the restatement of Financial Results and Net Income of the Income Statement of the year 2016. For more information see Note 4.1 of our Consolidated Financial Statements for December 31, 2017.
Operating Revenues
Our consolidated operating revenues increased by 7.0% or R$922.8 million, in 2017 compared to 2016. This result reflected an increase of R$1,798.5 million in the sectorial financial assets and liabilities; an increase of R$500.3 million in electricity sales to distributors; an increase of R$47.4 million in telecommunications revenues. These increases were partially offset by a decrease of R$550.0 million in electricity sales to final customers; a decrease of R$411.6 million in construction revenues; a decrease of R$358.6 million in revenues from the use of our main transmission grid; a decrease of R$75.7 million in fair value of the Indemnifiable Concession Assets; a decrease of R$17.1 million in distribution of piped gas; and a decrease of R$10.3 million in other operating revenues.
Electricity Sales to Final Customers. Our revenues from electricity sales to Final Customers decreased by 10.5%, or R$550.0 million, to R$4,681.5 million in 2017 compared with R$5,231.5 million in 2016, primarily due to a decrease of 6.8% of total power consumption of our Final Customers, from 26,151 GWh in 2016 to 24,374 GWh in 2017, as follows:
· | The volume of electricity sold to residential customers increased by 2.8% in 2017 compared to 2016. While there was an increase in number of customers by 2.4%, the average consumption remained stable in 2017 compared to 2016. |
· | The volume of electricity sold to industrial customers, including both Captive Customers and Free Customers, decreased by 19.7% in 2017 compared to 2016. Primarily due to the increasing migration of industrial customers to the free market and the country’s economic situation. The number of industrial customers decreased by 6.9% and the average consumption decreased by 39.2% in 2017 compared to 2016. |
· | The volume of electricity sold to commercial customers, including both Captive Customers and Free Customers, decreased by 4.2% in 2017 compared with 2016. Despite the increase in number of customers of 2.0%, the average of consumption decrease by 9.9% in 2017 compared to 2016. |
· | The volume of electricity sold to rural customers increased by 3.5% in 2017 compared to 2016. This increase is mainly due to the positive performance of agribusiness in the State of Paraná and to an increase of 5.1% in the average consumption. |
The decrease of the total power consumption of our Final Customers was partially offset by anincrease of 5.9% from June 2017 in the average tariff paid by Final Customers.
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Electricity Sales to Distributors. Our revenues from electricity sales to distributors increased by 18.7%, or R$500.3 million, to R$3,176.4 million in 2017 compared with R$2,676.1 million in 2016. This increase was mainly caused by (i) an increase in our revenues from energy sold to distributors under Bilateral Agreements, which increased by 42.5%, or R$581.3 million, to R$1,947.9 million in 2017 from R$1,366.6 million in 2016; and (ii) an increase in our revenues from energy sold to distributors in the spot market (CCEE), which increased by 43.1%, or R$324.6 million, to R$1,077.9 million in 2017 from R$753.4 million in 2016. This increase in CCEE revenues is a result of the activation of the Araucária Thermoelectric plant and higher prices in the spot market.
Use of main distribution and transmission grid. Our revenues from the use of main distribution and transmission grid decreased by 9.0%, or R$358.6 million, to R$3,617.9 million in 2017 compared to R$3,976.6 million in 2016. This decrease was mainly due to the recognition of the indemnification of assets related to the Existing System Basic Network (RBSE) which registered a revenue of R$361.2 million in 2017, compared to R$809.6 million in 2016, as disclosed in Note 10.4 of our Consolidated Financial Statements.” This decrease in our revenues from the use of main distribution and transmission grid was partially offset by the result of the 4th tariff review cycle in June 2016, which increased the Parcel B in 22%. For more information about the calculation of the tariff review, see “Item 4. Information on the Company - The Brazilian Electric Power IndustryRates and Prices”.
Construction revenues. Our revenues from construction decreased by 32.2%, or R$411.6 million, to R$868.0 million in 2017 compared to R$1,279.7 million in 2016. This decrease was mainly due to reduced investments in infrastructure, reflecting the decrease in construction costs.
Fair value of assets from the indemnity for the concession. The fair value of our assets from the indemnity for the concession decreased 57.0%, or R$75.7 million, to R$57.1 million in 2017 compared to R$132.7 million in 2016. This decrease was mainly due to lower variation in the distribution concession agreement’s assets and the reduction of IPCA index, from 6.29% in 2016 to 2.95% in 2017.
Revenues from Telecommunications. Revenues from our telecommunications segment increased by 18.1%, or R$47.4 million, to R$309.0 million in 2017 compared to R$261.6 million in 2016, as a result of an increased number of customers in the retail market, notably in the internet broadband segment.
Distribution of Piped Gas. Revenues from the distribution of piped gas decreased by 3.6%, or R$17.1 million, to R$454.8 million in 2017 compared to R$471.9 million in 2016, reflecting the decrease in natural gas consumption by industrial clients by 13.1%. This decrease was partially offset by the activation of the Araucária TPP.
Sectorial Financial Assets and Liabilities. Sectorial financial assets and liabilities registered a gain of R$718.8 million in 2017 compared to a loss of R$1,079.7 million in 2016. This positive variation of R$1,798.5 million was mainly due to the recognition of receivables resulting from the positive difference between the average price of the electricity purchased from Angra, CCGF and under the Availability Agreements and the coverage tariff average price, which in turn resulted from a lower average GSF and a higher average PLD. For more information on this positive variation, see Note 9.2 of our Consolidated Financial Statements.
Other Operating Revenues. Other operating revenues decreased by 6.8%, or R$10.3 million, to R$141.1 million in 2017 compared to R$151.4 million in 2016, mainly due to a decrease in our revenues from penalties imposed on customers.
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Cost of sales and services provided
Our consolidated costs of sales and services provided increased by 6.3% or R$705.6 million, to R$11,984.9 million in 2017 compared with R$11,279.3 million in 2016. The main factors leading to such increase in our cost of sales and services provided are as follows:
· | Electricity Purchased for Resale.Our expenses for purchasing energy for resale increased by 31.6%, or R$1,479.8 million, to R$6,165.4 million in 2017 compared to R$4,685.6 million in 2016. This increase was mainly due to: (i) an increase by 229.7%, or R$1,230.4 million, in the cost of energy purchased in the spot market in 2017 compared to 2016, and (ii) an increase by R$746.8 million in the cost of energy purchased pursuant to Bilateral Agreements, both mainly as a result of a lower average GSF (81.6% in 2017 versus 88.2% in 2016) and a higher average PLD in the period (R$318.15/MWh in 2017 versus R$92.35/MWh in 2016). |
· | Charge of Main Distribution and Transmission Grid.Expenses we incurred for our use of the main distribution and transmission grid decreased by 17.8%, or R$154.2 million, to R$712.0 million in 2017 compared to R$866.2 million in 2016, mainly as a result of the lower costs with System Service Charges - ESS, in connection with the funds from the reserve electric energy (Coner) and of the charge of the reserve energy - EER, offset against the increase in costs of the basic network costs and transportation of energy, due to the effects of the indemnifications to the energy transmission companies. |
· | Personnel and Management.Personnel and management expenses increased by 3.0%, or R$38.9 million, to R$1,343.3 million in 2017 compared to R$1,304.4 million in 2016, as a result of (a) wage increases of 1.63% as of October 2017 and 9.15% as of October 2016, and (b) the provision of R$53.4 million for the retirement incentive program (PDI). |
· | Pension and Healthcare Plans. Pension and Healthcare expenses decreased by 8.5%, or R$22.2 million, to R$237.6 million in 2017, compared with R$259.8 million in 2016, arising from the effects of the actuarial valuation, calculated by the actuary hired. |
· | Material and Supplies.Materials and supplies expenses increased by 2.0%, or R$1.7 million, to R$83.1 million in 2017 compared with R$81.5 million in 2016. |
· | Material and Supplies for Power Electricity. These expenses drastically increased 191.9%, or R$64.0 million, to R$97.4 million in 2017, compared to R$33.4 million in 2016, mainly as a result of the activation of TPP Araucaria in 2017, and the corresponding increase in natural gas purchases. |
· | Natural Gas and Supplies for Gas Business.Expenses related to natural gas purchases decreased by 4.9%, or R$15.9 million, to R$309.5 million in 2017 compared to R$325.4 million in 2016, mainly as a result of a reduction in the demand of natural gas, which was partially offset by the activation of TPP Araucária. |
· | Third-Party Services. Third-party services expenses decreased by 5.3%, or R$29.0 million, to R$521.5 million in 2017 compared with R$550.5 million in 2016, mainly due to the decrease in expenses with the maintenance of our electric system and with auditing and advisory services, offset against the increase in the communication, processing and data transmission services. |
· | Depreciation and Amortization. Depreciation and amortization increased by 3.3%, orR$23.3 million, to R$731.6 million in 2017, compared to R$708.3 in 2016, mainly due to an increase in our non-current assets. |
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· | Accruals and Provisions.Accruals and provisions expenses decreased by 52.4% or R$403.2 million, to R$365.5 million in 2017 compared to R$768.7 million in 2016, mainly due to (i) the reversal of estimated impairment of assets of R$122.8 million in 2017, against an accrual of estimated impairment of assets of R$581.6 million in 2016; and (ii) a decrease in the provision for estimated losses with doubtful accounts in the amount of R$89.3 million. These decreases were partially offset by an increase in the provision for litigation of R$407.8 million in 2017 compared to 2016. |
· | Construction Cost. Construction costs decreased by 21.6%, or R$276.9 million, to R$1,003.9 million in 2017 from R$1,280.7 million in 2016, mainly due to reduced investments in infrastructure, reflecting the completion of certain projects by Copel Distribuição in 2016 and 2017. |
· | Other Costs and Expenses. Other costs and expenses decreased by 0.2%, or R$0.9 million, to R$414.0 million in 2017, compared to R$414.9 million in 2016. This decrease was mainly due to a non-operational gain of R$28.7 million arising from the sale of our stake in Sanepar. |
Equity earnings of associates and joint ventures
Equity earnings of associates and joint ventures was R$101.8 million in 2017, a decrease of 38.9%, compared to R$166.4 million in 2016, mainly due to a decrease in the profits of our associate entities and joint ventures in 2017, in special due to the sale of our stake in Sanepar.
Namely, our equity method income for 2017 was: (i) loss of R$0.6 million from Dominó Holdings, compared with income of R$37.5 million in 2016; (ii) loss of R$9.5 million from Marumbi, compared with income of R$16.2 million in 2016; (iii) loss of R$8.9 million from Integração Maranhense, compared with income of R$15.9 million in 2016; (iv) R$57.4 million from Matrinchã, compared with R$41.9 million in 2016; (v) R$25.4 million, from Guaraciaba, compared with R$11.2 million in 2016; (vi) R$19.5 million from Mata de Santa Genebra, compared with a loss of R$2.6 in 2016; and (vii) R$17.0 million from Paranaíba, compared with R$12.8 million in 2016.
Financial Results
We recognized an increase of financial losses by 25.9%, or R$153.8 million, to R$748.4 million of net financial losses in 2017, compared to a net financial loss of R$594.7 million in 2016. This increase in financial losses is primarily due to the decrease of our financial revenues by 22.6%, mainly as a result of deflation of financial indexes that update financial revenue and lower fees on late payments of energy bills. This increase was partially offset by a decrease in our financial expenses by 3.4%.
Income Tax and Social Contribution Expenses
In 2017, our income tax and social contribution expenses decreased to R$274.7 million, reflecting an effective tax rate of 19.7% on our pretax income, compared to R$519.7 million and an effective tax rate of 39.7% on our pretax income in 2016. The decrease in our effective tax rate in 2017 compared to 2016 was primarily due to our enrollment in a special tax benefit program of the Brazilian Federal Tax Authority (Programa Especial de Regularização Tributária – PERT da Secretaria da Receita Federal). For more information on such special tax benefit program, see Note 13.3.1 of our Consolidated Financial Statements.
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LIQUIDITY AND CAPITAL RESOURCES
Our principal liquidity and capital requirements are to finance the expansion and improvement of our distribution and transmission infrastructure and to finance the expansion of our generation facilities.
We believe our working capital is sufficient for our present requirements and the next 12 months. Our other principal uses of cash are to dividends payments and debt servicing. Capital expenditures were R$2,590.8 million in 2018 and R$2,524.7 million in 2017. The following table sets forth a breakdown of our capital expenditures for the periods indicated. Our capital expenditures are focused on projects located in Brazil.
As of December 31, 2018, our Net Working Capital ended negative by R$17.3 million. As in previous years, our capital requirement will be financed by cash from our operations and by external financing, which will serve to offset commitments arising from the maturity of previous external financing.
| Year ended December 31, | ||
| 2018 | 2017 | 2016 |
| (R$ million) | ||
Generation and transmission¹ | 1,423.1 | 1,389.1 | 2,129.5 |
Distribution | 696.0 | 630.4 | 777.1 |
Telecom | 309.4 | 241.1 | 193.8 |
Investment of associates and joint ventures | 87.5 | 248.2
| 503.1 |
Araucária Thermoelectric Plant | 2.8 | 0.7 | 20.4 |
Compagas | 15.6 | 13.7
| 25.8 |
Elejor | 2.7 | 1.5 | 1.5 |
Others | 53 | - | - |
Total | 2,590.8 | 2,524.7 | 3,651.2 |
¹ Considers investment in projects held 100% by Copel GeT.
Our total budgeted capital expenditures for our wholly-owned subsidiaries for 2019 is R$1,993.5 million, of which:
· | R$794.8 million is for generation and transmission, R$59.3 million is for the construction of the Colíder Hydroelectric Plant, and R$18.1 million is for the construction of the Baixo Iguaçu Hydroelectric Plant; |
· | R$835.0 million is for our distribution business; |
· | R$290.2 million is for our telecommunication business; |
· | R$59.2 million for the construction of the Cutia Wind Farm Complex; and |
· | R$14.3 million is for other investments. |
Our following subsidiaries also budgeted their own capital expenditures for 2019, as described as follows:
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· | Compagas: R$20.3 million; |
· | Araucária: R$0.8 million; and |
· | Elejor: R$11.3 million. |
Historically, we have financed our liquidity and capital requirements primarily with cash provided by our operations and through external financing. Our principal source of funds in 2018 was our operating activities. Net cash provided by financing activities was R$1,286.5 million in 2018, compared with R$650.0 million in 2017. Net cash provided by operating activities was R$1,771.0 million in 2018, compared with R$989.2 million in 2017. In 2019, we expect to finance our liquidity and capital requirements primarily with cash provided by our operations and through debt financing from BNDES and the Brazilian capital markets.
As in prior years, we plan to make significant investments in future periods to expand and upgrade our generation, transmission and distribution businesses. In addition, we may seek to invest in other existing electric utilities, in communications services or in other areas, each of which may require additional domestic and international financing. Our ability to generate cash sufficient to meet our planned expenditures is dependent upon a variety of factors, including our ability to maintain adequate tariff levels, to obtain the required regulatory and environmental authorizations, to access domestic and international capital markets, and a variety of operating and other contingencies. We anticipate that our cash provided by operations may be insufficient to meet these planned capital expenditures, and that we may require additional financing from sources such as BNDES and the Brazilian and international capital markets.
ANEEL’s regulations require prior approval from ANEEL for any transfer of funds from our subsidiaries to us in the form of loans or advances. ANEEL approval is not required for cash dividends, as long as cash dividends do not exceed a dividend threshold (“Dividend Threshold”) equal to the greater of adjusted net income or income reserves available for distribution. The Dividend Threshold is established by Brazilian Corporate Law.
The cash dividends we have received from our subsidiaries have been historically sufficient to meet our cash flow requirements without exceeding the Dividend Threshold. As a result, we have not sought approval from ANEEL to receive either loans or advances from our subsidiaries or cash dividends from our subsidiaries in excess of the Dividend Threshold. We do not expect these restrictions on loans and advances and on cash dividends exceeding the Dividend Threshold to impact our ability to meet our cash obligations, since we expect cash dividends below the Dividend Threshold to be sufficient in the future.
Like other state-owned companies, we are subject to certain CMN restrictions on our ability to obtain financing from domestic and international financial institutions. CMN restrictions could limit our ability to obtain bank financing but do not affect our ability to access the Brazilian and international capital markets, and do not restrict our access to banking financing for the purpose of repaying or refinancing debt.
Our total outstanding loans and financing (including debentures) as of December 31, 2018 totaled R$11,565.4 million. Approximately R$104.7 million of the total debt outstanding as of December 31, 2018 was denominated in U.S. dollars. For more information on the terms of these loans and financings, including reference to their specific maturity dates and interest rate structure, see Notes 22 and 23 to our audited consolidated financial statements. We are not subject to seasonality with respect to our borrowing requirements. Our major loans and financing arrangements are:
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Banco do Brasil:
· | We have R$1,006.5 million of outstanding debt with Banco do Brasil (not including the debentures listed below), consisting of financings we contracted to increase our working capital. |
Debentures:
· | In May 2014, Copel Holding issued R$1,000.0 million in simple, non-convertible debentures, with an interest rate of 111.5% of the CDI index per year and with a five year maturity and payment of interest on a semester basis. As of December 31, 2018, we had an aggregate outstanding balance of R$336.1 million under these debentures; |
· | In May 2015, Copel GeT issued R$1,000.0 million in simple, in five-year non-convertible debentures, with an interest rate of 113% of the CDI index per year and payment of interest on an annual basis. As of December 31, 2018, we had an aggregate balance of R$695.3 million of outstanding debt under these debentures; |
· | In October 2015, Copel Telecom issued R$160.0 million in simple, in nine-year non-convertible debentures. These debentures have an interest rate equal to IPCA index + 7.9633% per year, a five-year maturity and payment of interest on a semester basis. As of December 31, 2018, we had an aggregate balance of R$186.8 million of outstanding debt under these debentures; |
· | In March 2016, Nova Asa Branca I, Nova Asa Branca II, Nova Asa Branca III, Nova Eurus IV and Ventos de Santo Uriel Wind Farms issued R$300.8 million in non-converstible debentures, with sixteen-year maturity and payment of interest on monthly basis. The interest rate of TJLP index + 2.02% per year is applicable to R$147.6 million and IPCA index + 9.87% per year is applicable to R$153.2 million. As of December 31, 2018, we had an aggregate balance of R$268.3 million of outstanding debt under these debentures. In addition, as of December 31, 2018, the subsidiaries Nova Asa Branca I Energias Renováveis S.A., Nova Asa Branca II Energias Renováveis S.A., Nova Asa Branca III Energias Renováveis S.A., Nova Eurus IV Energias Renováveis S.A. and Ventos de Santo Uriel did not comply with the Debt Service Coverage Ratio - ICSD of 1.3, when calculating the rate without considering the value of the compensation to suppliers of goods. On December 28, 2018, the Company requested preventively and received a letter from BNDES, referring to AE/DEENE2 No. 101/2018, not declaring accelerated maturity of the debentures in 2018. Except for the foregoing, as of December 31, 2018, all the conditions agreed had been fulfilled. For more information, see Note 23.3 to our audited consolidated financial statements; |
· | In April 2016, Compagas privately issued R$33.6 million in simple non-convertible debentures, single series, with floating charge, with an interest rate equal to TJLP index + 2.17% per year, with a five-year maturity and payment of interest on a quartely basis. As of December 31, 2018, we had an aggregate balance of R$17.6 million of outstanding debt under these debentures; |
· | In July 2016, Copel GeT issued R$1,000.0 million in three-year simple, non-convertible debentures, with an interest rate of 121% of the CDI index per year and payment of interest on an annual basis. As of December 31, 2018, we had an aggregate balance of R$515.0 million of outstanding debt under these debentures; |
· | In October 2016, Copel Distribuição issued R$500.0 million in simple, non-convertible debentures, with an interest rate of 124% of the CDI index per year, with a three years maturity and payment of interest on an annual basis. As of December 31, 2018, we had an aggregate outstanding balance of R$250.9 million under these debentures; |
· | In June 2017, Copel Holding issued R$520.0 million in simple, non-convertible debentures, with an interest rate of 117% of the CDI index per year, with a two years maturity and payment of interest . As of December 31, 2018, we had an aggregate outstanding balance of R$585.5 million under these debentures; |
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· | In July 2017, Copel Telecom issued R$220.0 million in five-year simple, non-convertible debentures. These debentures have an interest rate equal to IPCA index + 5.4329% per year, a five-year maturity and payment of interest on an semestral basis. As of December 31, 2018, we had an aggregate outstanding balance of R$232.1 million under these debentures; |
· | In October 2017, Copel Distribuição issued R$500.0 million in simple, non-convertible debentures, with an interest rate of 126% of the CDI index per year, with a five years maturity and payment of interest on a semestral basis. As of December 31, 2018, we had an aggregate outstanding balance of R$502.6 million under these debentures; |
· | In October 2017, Copel GeT issued R$1.0 billion in simple non-convertible debentures, with an interest rate of 126% of the CDI index per year, with a five years maturity and payment of interest on a semestral basis. As of December 31, 2018, we had an aggregate outstanding balance of R$1,003.7 million under these debentures; |
· | In January 2018, Copel Holding issued R$600.0 million in simple, non-convertible debentures, with an interest rate of 119% of the CDI index per year, with a three-years maturity and payment of interest on a semester basis. As of December 31, 2018, we had an aggregate outstanding balance of R$616.4 million under these debentures; |
· | In July 2018, Copel GeT issued R$1.0 billion in simple, non-convertible debentures, with an interest rate of 126% of the CDI index per year, with a five-years maturity and payment of interest on a semester basis . As of December 31, 2018, we had an aggregate outstanding balance of R$1,017.8 million under these debentures; |
· | In September 2018, Copel GeT issued R$290.0 million in simple, non-convertible debentures. These debentures have an interest rate equal to IPCA index + 7.6475% per year, with a seven-years maturity and payment of interest on a semester basis. As of December 31, 2018, we had an aggregate outstanding balance of R$286.2 million under these debentures; and |
· | In September 2018, Copel Distribuição issued R$1.0 billion in simple, non-convertible debentures with an interest rate of CDI index + 2.70% per year, with a five-years maturity and payment of interest on a semester basis . As of December 31, 2018, we had an aggregate outstanding balance of R$1,003.5 million under these debentures. |
BNDES
· | In December 2013, we received approval for the BNDES financing of HPP Colíder in an aggregate amount of R$1,041.2 million. As of December 31, 2013, we had received R$840.1 million of this amount, with the remaining disbursements to be made in accordance with the construction schedule of HPP Colíder. Additionally, BNDES approved the finance of the Cerquilho III transmission substation in the amount of R$17.6 million, which was disbursed in a single installment. As of December 31, 2018, the aggregate outstanding balance of these two contracts totaled R$854.5 million; |
· | BNDES has provided a loan to Copel of R$339.0 million to finance the construction of the Mauá Hydroelectric Plant. Mauá is owned by Consórcio Energético Cruzeiro do Sul, in which Copel has a 51.0% interest and Eletrosul has a 49.0% interest. BNDES is providing 50.0% of the loan amount, and Banco do Brasil S.A. is providing the remaining 50.0%. All the receivables arising from this plant were pledged in favor of BNDES and Banco doBrasil until full repayment of the loan. As of December 31, 2018, we had an aggregate of R$214.7 million in outstanding debt with BNDES and Banco do Brasil under this facility; |
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· | In December 2011, we entered into a financing contract with BNDES in the total value of R$44.7 million for the construction of Transmission Line Foz do Iguacu - Cascavel Oeste, with maturity in 14 years. As of December 31, 2018, we had an aggregate of R$24.3 million in outstanding debt under this financing contract; |
· | In March 2012, we entered into a financing contract with BNDES in the total value of R$282.1 million for the construction of GE Farol, Ge Boa Vista, GE São Bento do Norte and GE Olho D’Água Wind Farms with maturity in 16 years. As of December 31, 2018, we had an aggregate of R$235.1 million in outstanding debt under this financing contract; |
· | In September 2012, we entered into a financing contract with BNDES in the total value of R$73.1 million for the construction of SHP Cavernoso II, with maturity in 16 years. As of December 31, 2018, we had an aggregate balance of R$50.9 million of outstanding debt under this financing contract; |
· | In December 2014, we entered into a financing contract with BNDES to finance the improvement of the distribution system of the greater Curitiba area, with maturity in 9.4 years. We have obtained a R$139.1 million funding on December 2014 and as of December 31, 2018, we had an aggregate outstanding balance of R$69.6 million under this financing contract; |
· | In June 2015, we entered into a financing contract with BNDES in the total value of R$124.0 million for the construction Santa Helena and Santa Maria Wind Farm, with maturity in 6 years. As of December 31, 2018, we had an aggregate balance of R$100.3 million of outstanding debt under this financing contract; |
· | In December 2015, we entered into a financing contract with BNDES in the total value of R$55.8 million for the construction of Transmission Line Assis - Paraguaçu Paulista II and Londrina - Figueira e Salto Osório - Foz do Chopim C2, with maturity in 15 years. As of December 31, 2018, we had an aggregate balance of R$38.5 million of outstanding debt under this financing contract; |
· | In October 2018, we entered into a financing contract with BNDES in the total value of R$194.0 million for theimplementing Baixo Iguaçu Hydroelectric Power Plantas well as its associated transmission system, with maturity in 17 years. As of December 31, 2018, we had an aggregate balance of R$158.6 million of outstanding debt under this financing contract; and |
· | In October 2018, we entered into a financing contract with BNDES in the total value of R$619.4 million for the construction andimplementingCutia Empreendimentos Eólicos Wind Farms, with maturity in 17 years. As of December 31, 2018, we had an aggregate balance of R$505.4 million of outstanding debt under this financing contract. |
ELETROBRAS
· | We have R$21.6 million in outstanding debt with Eletrobras (i) for the Salto Caxias plant and (ii) under government programs to finance distribution projects; |
FINEP
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· | In July 2012, a loan agreement in the amount of R$52.2 million was signed by Copel Telecomunicações S.A. with FINEP to partially finance the BEL – Extra Broadband project. As of December 31, 2018, we had an aggregate outstanding balance of R$10.6 million under this loan agreement. |
Promissory notes
· | In May 2017, Copel GeT issued R$500.0 million of promissory notes with an interest rate of 117% of the CDI index per year, with maturity in two years. As of December 31, 2018, we had an aggregate outstanding balance of R$571.8 million under these promissory notes. |
We are party to several legal proceedings that could have a material adverse impact on our liquidity if the rulings are unfavorable to us. In addition, we are contesting a determination by ANEEL that would require us to pay additional amounts for energy we purchased for resale during the electricity-rationing period in 2001 and the first quarter of 2002. We are also involved in several lawsuits, including challenges to the legality of certain federal taxes, which have been assessed against us, claims by industrial customers that certain increases in electricity tariffs from March through November 1986 were illegal and several labor-related claims. These contingencies are described in “Item 8. Financial Information—Legal Proceedings”. If any of these claims are decided against us either individually or in the aggregate, they could have a material adverse effect on our liquidity and our financial condition.
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In the table below, we set forth certain of our contractual obligations as of December 31, 2018, and the period in which such contractual obligations come due.
| Payments due by period | ||||
| Total | Less than1 year | 1-3 years | 3-5 years | More than |
| (R$ million) | ||||
Contractual obligations: |
|
|
|
|
|
Loans and financing(1) | 5,280.7 | 1,382.4 | 1,454.8 | 596.8 | 1,846.7 |
Debentures(2) | 9,478.8 | 2,610.8 | 3,492.8 | 2,824.3 | 550.9 |
Suppliers(3) | 1,469.2 | 1,415.1 | 29.0 | - | 25.1 |
Purchase obligations(4) | 133,662.9 | 3,891.8 | 8,351.4 | 9,424.6 | 111,995.1 |
Concession payments(5) | 1,731.3 | 71.4 | 150.1 | 162.3 | 1,347.5 |
Eletrobras ‒ Itaipu(6) | 6,975.1 | 1,253.8 | 2,875.4 | 2,845.9 | - |
Installment due to the Federal Revenue of Brazil(7) | 802.0 | 119.4 | 123.5 | 118,2 | 440.9 |
Post-employment benefits(8) | 9,653.0 | 549.8 | 1,161.3 | 1,113.5 | 6,828.4 |
Sectoral Financial liabilities(9) | 106.8 | - | 106.8 | - | - |
Total | 169,159.8 | 11,294.5 | 17,745.1 | 17,085.6 | 123,034.6 |
(1) Includes interest as agreed under agreements in the amount of R$1,337.4. For more details, see Note 22 to our audited consolidated financial statements.
(2)Includes interest as agreed under relevant agreements in the amount of R$1,945.4. For more details, see Note 23 to our audited consolidated financial statements.
(3)Mainly consists of Electricity purchased from auctions on the CCEAR with balances falling due in less than 30 days and gas supplied by Petrobras to the Araucária Thermoelectric Plant.
(4)Consists of binding power purchase commitments. Includes monetary restatements as agreed under relevant agreements.
(5)Payments to the federal government arising from Elejor, Mauá, Colíder, Rio Jordão and Baixo Iguaçu facilities concession agreement. Includes interest and applicable monetary restatements.
(6)Includes expected exchange variation.
(7)Income Tax and Social Contribution due by Copel Geração e Transmissão in 2014 and joining the Special Tax Regularization Program (Programa Especial de Regularização Tributária – Pert) in August 2017 by Copel Distribuição. Includes interest and applicable monetary restatement.
(8)For more details, see Note 24 to our audited consolidated financial statements.
(9)For more details, see Note 9 to our audited consolidated financial statements.
We are also subject to risks with respect to tax, labor and civil claims and have provisioned R$1,664.8 million for accrued liabilities under legal proceedings related to these claims as of December 31, 2018. For more information, see “Item 8. Financial Information—Legal Proceedings” and Notes 16 and 29 to our audited consolidated financial statements.
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OFF-BALANCE SHEET ARRANGEMENTS
We have not engaged in any off-balance sheet arrangements that have, or are reasonably likely to have a current or future effect on the registrant’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
With the adoption of IFRS 16, from January 1st, 2019 the Company will recognize a right to use asset and a lease liability at the present value of approximately R$ 114,000, resulting in a variation of no more than 0.5% of the total consolidated asset as of December 31, 2018, with no impact on Equity.
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Item 6. Directors, Senior Management and Employees
We are managed by:
· | a Board of Directors, which may be composed of up to nine (9) members and is currently composed of seven (7) members; and |
· | a Board of Executive Officers, which is currently composed of six (6) members. |
BOARD OF DIRECTORS
The Board of Directors ordinarily meets monthly. A majority of the members of the Board of Directors is required for the meeting to be held, and decisions are taken by a majority vote of those present at the meeting. For additional information, see “Item 10. Additional Information - Memorandum and Articles of Association”. The members of the Board of Directors are elected to serve for two-year terms and may be reelected. Among the currentsevenmembers of the Board of Directors:
· | five were elected by the controlling shareholders (two of which were appointed by BNDESPAR pursuant to the shareholders’ agreement that was in force until December 21, 2018); |
· | one was elected by minority shareholders; and |
· | one was elected by our employees. |
According to Brazilian Corporate Law, minority shareholders are entitled to appoint and remove a member of the Board of Directors, in a separate election, without the participation of the controlling shareholder, if such minority shareholders hold (i) at least 15% of the company’s voting shares or (ii) at least 10% of the company’s outstanding non-voting shares.
Also according to Brazilian Coroporate law, the member of our Board of Directors who is elected by the non-controlling shareholders has the right to veto (provided it is duly justified) the appointment of the independent auditor made by the majority of the members of our Board of Directors.
The terms of the current members of the Board of Directors expire in April 2019 but, under Brazilian law, such members should remain in office until new members are appointed by the shareholders in an Annual Meeting and take office. A Shareholders’ Annual Meeting is scheduled for April 29, 2019. The current members of our Board of Directors are:
Name | Position | Since |
Mauricio Schulman | Chairman | 2017 |
Leila Abraham Loria | Director | 2017 |
Olga Stankevicius Colpo | Director | 2017 |
Sérgio Abu-Jamra Misael | Director | 2017 |
Adriana Angela Antoniolli | Director | 2017 |
Marco Antônio Barbosa Cândido | Director | 2018 |
Daniel Pimentel Slaviero | Director | 2019 |
*Currently there are two vacant positions |
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The following are brief biographies of the current members of our Board of Directors:
Mauricio Schulman. Mr. Schulman was born on January 21, 1932. He received a post-graduate degree in Business Administration (1972) and he took perfectioning training courses in Electricity and Economy in France (1960-1961). Mr. Schulman holds a degree in Civil Engineering, from Universidade Federal do Paraná (1950-1954). He was the Chief Executive Officer at Federação Brasileira de Bancos - Febraban/Fenaban (National Bank Federation) (1994-1997); Chairman of the Board of Directors at Light S.A. (1979-1980); Chairman of the Brazilian Committee at the Comisión de Integración Energética Regional - Bracier (1979-1980); Member of the Board of Directors at BNDE (1974-1980); Member of the National Monetary Council (Conselho Monetário Nacional) (1974-1979); Chief Executive Officer at the Banco Nacional de Habitação - BNH (1974-1979); State Secretary of the Treasury in the State of Paraná (1970-1974); Chief Corporate Management Officer and Chief Executive Officer at Eletrobras (1967-1970 and 1979-1980); Advisor at the Brazilian Federal Government Ministry of Planning and General Coordination (1964-1966); Chief Administrative Officer at Companhia Paranaense de Desenvolvimento Econômico do Paraná - Codepar (1962); and Civil Engineer and Chief Technical Officer at Companhia Paranaense de Energia - Copel (1956-1984).
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Leila Abraham Loria. Ms. Loria was born on January 26, 1954. Ms. Loria took an advanced Governance, Risk and Compliance training course at Risk University - KPMG (2018) and a Corporate Governance and Innovation course at Nova School of Business and Economics, in Lisbon, Portugal (2016). She holds a Post-MBA in Corporate Governance and Capital Markets for executives from B.I. International (2015) and an International Executive MBA from APG-Amana (1994). Ms. Loria also has a Taught Master’s Degree in Business Administration from COPPEAD-UFRJ Business School (1978) and a Bachelor’s Degree in Business Administration from Fundação Getúlio Vargas (1976). Ms. Loria is currently a member of the Board of the Brazilian Institute of Corporate Governance - IBGC, and of the Board of Directors of Madeira Energia - MESA. She is also a member of the Advisory Board of Casas Pernambucanas, INPLAC Indústria de Plástico and Costão do Santinho Resort. Previously, she was a Member of the Board of Directors of COPPEAD (2005-2018), Telefonica Vivo (2010-2015), Fundação Telefônica (2010-2015), Direct TV (1997-2010); Tevecap (1997-2006) and Canbras, a joint venture between Abril and Bell Canada (1998-2002); Chief Business Officer at Walmart (1994-1997).
Olga Stankevicius Colpo. Ms. Colpo was born on May 26, 1952. Ms. Colpo received a post-graduate degree from the Executive Program of Singularity University (2018), an international executive MBA degree from FIA/USP (2000); she took a specialization course in International Business at Harvard University (1996), a specialization course in Managing Managers at Michigan University (1986); a Continued Education Program in Human Resources Management from Fundação Getúlio Vargas (1984); and a specialization course in Organizational Psychology at UMC (1975). Ms. Colpo is currently a Member of the Board of Directors of Solvi S.A., Member of the Board of Directors, Audit Committee and People Committee at Banco BMG S.A.; Member of the Consulting Board of the International Executive MBA at FIA; Counselor and Member of the Executive Board at Childhood Brasil; Visiting Professor at the International Executive MBA program at FIA/USP; and Visiting Professor of the Board of Directors Training Course at IBGC. Previously, she was the Chief Executive Officer at Participações Morro Vermelho S.A. (2009-2016); Partner at PwC - PricewaterhouseCoopers (1999-2009).
Sérgio Abu-Jamra Misael. Mr. Misael was born on November 6, 1949. Mr. Misael received a post-graduate degree in Business Administration - Management for Engineers from PUC-PR (1989). Mr. Misael holds a degree in Civil Engineering from UFPR (1974). He is currently the Chief Executive Officer and co-owner at Ytuporanga Engenharia, Oceanografia e Consultoria Ltda. Previously, he was the Head of the Department of Construction Support, Planning, Measurements and Contract Negotiations at Itaipu Binacional (1985-1992); Construction Superintendent at Itaipu Binacional (1992-1998); Member of the Brazilian Committee on Dams - CBDB (1993-1995); Coordinator of the CDBD Technical Commissions (1995-1998 and 2013-2016); Board Member at Fundação Itaipu de Assistência Social - FIBRA (1993-1997); President at Companhia de Habitação de Curitiba - COHAB-CT (1998-2001); and Member of the Núcleo Paranaense de Energia - NPEnergia/UTFPR – Public Policies and Energetic Planning (2012-2017).
Adriana Angela Antoniolli. Ms. Antoniolli was born on November 19, 1966. Ms. Antoniolli received a post-graduate degree in Applied Law from Escola da Magistratura do Paraná (2011) and a post-graduate degree in Marketing and Advertising from Instituto Superior de Pós-graduação - ISPG(2000). Ms. Antoniolli holds a degree in Law from Universidade Tuiuti do Paraná (2008) and a degree in Accounting from Faculdade de Educação, Ciências e Letras de Cascavel (1988). She is currently a Regulatory Analyst at Copel. Previously, she acted as Services Department Manager at Copel (2013-2015); East Revenue Department Manager at Copel (2009-2013); and Business Procedures Department Manager at Copel (2008). Ms. Antoniolli was appointed as a member of our Board of Directors as a representative of our employees.
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Marco Antônio Barbosa Cândido. Mr. Cândido was born on March 6, 1969. Mr. Cândido holds a Ph.D. degree in Production Engineering from Universidade Federal de Santa Catarina - UFSC (1997), a Master degree in Production Engineering from Universidade Federal de Santa Catarina - UFSC (1994) and a degree in Aeronautical Mechanics Engineering from Instituto Tecnológico de Aeronáutica - ITA (1991). Mr. Cândido is currently an officer at A3 Capital Assessoria e Consultoria Financeira, Chief Executive Officer and Founding Partner at MBC Consultoria, member of the Board of Directors of Hospital Santa Rita and Santa Rita Saúde health care provider in the city of Maringá – PR, and member of the Board of Directors at the hotel group Rafain, in the city of Foz do Iguaçu - PR. Previously, he was a professor and researcher at Pontifícia Universidade Católica do Paraná - PUCPR (1995-2013); Chief Executive Officer at Associação Paranaense de Cultura - APC, a parent company of Pontifícia Universidade Católica do Paraná - PUCPR (2005-2012); Chief Executive Officer at Grupo Marista (2012-2013); Chief Executive Officer at Grupo Paysage (2013-2015); member of the Board of Directors at Sistema de Saúde Mãe de Deus, health care provider in the state of Rio Grande do Sul (2014-2015); and member of the Board of Directors at Grupo Positivo (2014-2016).
Daniel Pimentel Slaviero.Mr. Slaviero was born on November 22, 1980. Mr. Slaviero has completed the Owner/President Management - OPM program (2015) and the YPO Harvard President Seminar (2010), both from Harvard Business School. Mr. Slaviero has also completed the Executive Business Program (STC) from Kellog School of Management/Fundação Dom Cabral (2009); and holds a degree in Business Administration from Universidade Positivo - UP (2001). He is currently Copel’s Chief Executive Officer and Chairman of the Board of Directors of Copel Geração e Transmissão S.A. – Copel GeT, Copel Distribuição S.A. – Copel DIS, Copel Comercialização S.A., Copel Telecomunicações S.A. – Copel Telecom and Copel Renováveis S.A. – Copel REN. Previously he acted as the Chief Executive Officer at Sistema Brasileiro de Televisão - SBT (2017-2018); Chief Business Officer at Sistema Brasileiro de Televisão - SBT (2017-2018); Institutional Director at Grupo Silvio Santos - GSS (2010-2017); General Director at Sistema Brasileiro de Televisão - SBT Brasília (2010-2017); Chairman at Brazilian Association of Radio and Television Broadcasters - ABERT (2006-2016); Executive Officer at Grupo Paulo Pimentel - GPP (2001-2010); andProgramming and Production Manager at Grupo Paulo Pimentel - GPP (2000-2001).
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BOARD OF EXECUTIVE OFFICERS
Our Board of Executive Officers meets every two weeks and is responsible for the daily management of the Company. Each Executive Officer also has individual responsibilities established by the Board’s internal rules.
According to our bylaws, our Board of Executive Officers consists of six (6) members. The Executive Officers are elected by the Board of Directors for two-year terms but may be removed by the Board of Directors at any time. The terms of the current members of the Board of Executive Officers expire in December 2019. The current members are as follows:
Name | Position | Since |
Daniel Pimentel Slaviero | Chief Executive Officer | 2019 |
Ana Letícia Feller | Chief Business Management Officer | 2018 |
Adriano Rudek de Moura | Chief Financial and Investor Relations Officer | 2017 |
Cassio Santana da Silva | Chief Business Development Officer | 2019 |
Eduardo Vieira de Souza Barbosa | Chief Legal and Institutional Relations Officer | 2019 |
Vicente Loiácono Neto | Chief Governance, Risk and Compliance Officer | 2018 |
The following are brief biographies of the current members of our Board of Executive Officers:
Daniel Pimentel Slaviero. Mr.Slaviero has been our Chief Executive Officer since January 8, 2019. For biographical information regarding Mr.Slaviero, see “Board of Directors”.
Ana Letícia Feller.Ms. Feller was born on October 15, 1977. She received an MBA degree in Leadership with emphasis in Management, from Estação Business School (2015); a Post-graduate degree in Management with emphasis in Strategic People Management, from FAE Centro Universitário (2009); and a Post-graduate degree in Labor Law, from Unibrasil (2005). She holds a Bachelor’s degree in Law from Pontifícia Universidade Católica do Paraná (2000). Ms. Feller has been a Lawyer at Companhia Paranaense de Energia - Copel since 2000, where she also served as Assistant to the Chief Business Management Officer (2017-2018); Chair of the Permanent Compensation Committee (2017-2018); Chair of the Management Committee (2017-2018); Human Resources Chief Official (2007-2010 e 2013-2017); and Member of the Ethical Guidance Council (2006-2008 e 2010-2012). Additionally, she was an alternate member of the Deliberative Council of Fundação Copel de Previdência e Assistência Social (2014-2018). She is currently a Member of the Board of Directors of Copel Distribuição S.A. – Copel DIS, Copel Comercialização S.A., Copel Telecomunicações S.A. – Copel Telecom and Copel Renováveis S.A. – Copel REN.
Adriano Rudek de Moura. Mr. Moura was born on September 25, 1962. Mr. Moura took a professional development course at Duke’s Fuqua School of Business (2010) and a professional development course at Harvard Business School (2007). Mr. Moura received a post-graduation degree in Finance and Controllership from Fundação Instituto de Pesquisas Contábeis, Atuariais e Financeiras - FIPECAFI/USP (1997). Mr. Moura holds a degree in Accounting from Centro Universitário Ítalo Brasileiro – Unítalo (1985). Mr. Moura is currently the Chief Financial Officer of Copel Geração e Transmissão S.A. - Copel GeT; Chief Financial Officer of Copel Distribuição S.A. - Copel DIS; Chief Financial Officer of Copel Comercialização S.A. - Copel COM; and Chief Financial Officer of Copel Renováveis S.A. - Copel REN. Previously, he was the Vice-president and Chief Management, Financial and Investor Relations Officer at Elecrolux for Latin America (2003-2017); Chief Management, Financial and Investor Relations Officer at Electrolux do Brasil (1999-2003); Controller at Electrolux do Brasil (1997-1999); Vice-president at Associação Nacional de Fabricantes de Produtos Eletroeletrônicos (National Association of Home Appliance Manufacturers) - Eletros (2013-2015); Member of the Board ofDirectors at CTI (2011-2017); Member of the Board of Directors at Eletros (2013-2015); Member of the Supervisory Board at Gafisa (2009-2014); Member of the Supervisory Board at Tenda (2009-2014); Member of the Supervisory Board at Alphaville (2012-2013); graduate school Professor at Fundação Armando Alvares Penteado - FAAP (1999); Professor at Faculdade de Administração de Empresas e Economia do Paraná – FAE (1995); and Auditor and consultant at Arthur Andersen (1982-1997).
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Cassio Santana da Silva. Mr. da Silva was born on August 14, 1978. He holds a Bachelor’s degree in Business Administration from Universidade Federal do Paraná - UFPR (2002); and an Executive MBA from Fundação Getúlio Vargas - Rio de Janeiro (2003). He is currently the Chief Business Development Officer at Copel. Previously, he held leading positions in many multinational companies, such as Business Unit Manager at Telefônica Brasil S.A. (2014-2019); Senior Brand and Trade Manager at Kimberly Clark (2011-2013); Marketing and Trade Marketing Manager at Danone Northeastern Business Unit (2009-2011); National Trade Marketing Manager at Danone (2008-2009); Trade Marketing Manager at Philip Morris (2007-2008); Regional Sales Manager at Ambev in the Dominican Republic (2006-2007); Trade Marketing Manager (2005-2006) and Sales Manager (2002-2005) at AmBev.
Eduardo Vieira de Souza Barbosa.Mr. Barbosa was born on October 3, 1982. Mr. Barbosa has a Specialization degree in Constitutional Law from Academia Brasileira de Direito Constitucional - ABDConst. Mr. Barbosa holds a Bachelor’s degree in Law from Universidade Tuiuti do Paraná - UTP. He is currently Copel’s Chief Legal and Institutional Relations Officer, as well as the Chief Legal and Institutional Relations Officer of Copel Geração e Transmissão S.A. – Copel GeT, Copel Distribuição S.A. – Copel DIS, Copel Comercialização S.A. and Copel Renováveis S.A. – Copel REN. Previously he acted as Chief Legal Officer of the Conselho de Jovens Empresários - CJE (Young Entrepreneurs Committee) at the State of Paraná Trade Association (2011-2016); Member of the Political Council of the State of Paraná Trade Association (2013-2016); Strategic Consultant of Companhia Paranaense de Saneamento do Paraná - Sanepar, Assistant to the Chief Legal Officer for CS Bioenergia S.A. (2015); Chief Prosecutor of the Commercial Registry of the State of Paraná (2011-2015); and Legal adviser and referee to legal and individual entities directly and indirectly linked to Public Administration.
Vicente Loiácono Neto.Mr. Loiácono was born on June 4, 1983. He received a Post-Graduate degree in Civil Procedure Law from Universidade do Sul de Santa Catarina (2010). He holds a Bachelor’s degree in Law from Faculdades Integradas Curitiba (2007) and he is currently Chief Governance, Risk and Compliance Officer at Companhia Paranaense de Energia - Copel. Mr. Loiácono has been a Lawyer at Company since 2011, where he also served as Advisor to the CEO (2017-2018); Regulatory Area Manager at Copel Distribuição S.A. (2016-2017); Advisor to the Chief Corporate Management Officer of Companhia Paranaense de Energia - Copel (2013-2016); Member of the Supervisory Board of Fundação Copel de Previdência e Assistência Social (2015); Member of the Ethical Guidance Council of Companhia Paranaense de Energia - Copel (2014); and Advisor to the Chief Legal Officer of Companhia Paranaense de Energia - Copel (2013). Previously, Mr. Loiácono had served as Lawyer at Punho Construtora e Serviços Ltda. (2008-2010); Advisor to the Appeal Panel of Tribunal de Justiça do Paraná (2007-2008); and Legal Assistant at Instituto Curitiba de Informática (2005-2006).
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We have a permanent Supervisory Board (Conselho Fiscal), which generally meets monthly. The Supervisory Board consists of five (5) members and five (5) alternates elected for two-year terms by the shareholders at the annual meeting. The Supervisory Board, which is independent of our management and of our external auditors,has the responsibilities provided in Federal Law No. 6,404/1976 and Federal Law No. 13,303/2016, which include, among others:
· | reviewing our financial statements and reporting on them to our shareholders; |
· | issuing reports on proposed changes in capitalization, corporate budgets and proposed dividend distributions and any corporate reorganization to be submitted to the shareholders; and |
· | in general, supervising the activities of management and reporting on them to our shareholders. |
The following table lists the current and alternate members of the Supervisory Board, who were appointed at the 63rd annual shareholders’ meeting held on June 15, 2018. The term of all members of the Supervisory Board indicated below will expire in April 2019, but, under Brazilian law, such members should remain in office until a new member is appointed by the Company’s Shareholders Annual Meeting. A Shareholders’ Annual Meeting is expected to occur on April 29, 2019.
Name | Since |
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Roberto Lamb | 2017 |
Letícia Pedercini Issa Maia(1) | 2017 |
David Antonio Baggio Batista | 2018 |
George Hermann Rodolfo Tormin | 2018 |
Clemenceau Merheb Calixto | 2018 |
ALTERNATES | |
Kurt Janos Toth | 2017 |
Gilberto Pereira Issa(1) | 2018 |
Otamir Cesar Martins | 2018 |
João Luiz Giona Junior | 2018 |
Julio Takeshi Suzuki Júnior | 2018 |
(1)Letícia Pedercini Issa Maia, member of our Supervisory Board, is the daughter of Gilberto Pereira Issa, an alternate member of our Supervisory Board.
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Pursuant to Rule 10A-3 under the Securities Exchange Act and our bylaws, our Audit Committee is composed of five members of our Board of Directors, each of whom serves a term of two years, and may be re-elected up to three consecutives times. Pursuant to the Audit Committee charter, the members of this committee are appointed by, and may be replaced by, a resolution taken by our Board of Directors. The members of the Audit Committee are Mr. Mauricio Schulman (chairman), Ms. Leila Abraham Loria, Ms. Olga Stankevicius Colpo and Mr. Marco Antônio Barbosa Cândido and, due to the resignation of one member, one position in the Audit Committee is currently vacant.The Audit Committee is responsible for auditing, supervising and fiscalizalizing the processes related to the preparation of our financial statements, ensuring that we are in compliance with all legal requirements related to our reporting obligations, monitoring the work of the independent auditors and our staff who are responsible for internal auditing of the Company and reviewing the effectiveness of our internal control and risk management procedures and staff.
Under Brazilian Corporate Law, the function of hiring independent auditors is reserved for the board of directors of a company. As a result, our Board of Directors acts as our Audit Committee, as specified in Section 3(a)(58) of the Securities Exchange Act, for the purposes of approving, on a case-by-case basis, any engagement of our independent auditors for audit and non-audit services provided to us or our subsidiaries. Except in these respects, our Audit Committee is comparable to and performs the functions of audit committees of U.S. companies.
COMPENSATION OF DIRECTORS, OFFICERS,SUPERVISORY BOARD MEMBERS AND AUDIT COMMITTEE MEMBERS
Under Brazilian Corporate law, the total compensation of the Board of Directors, Executive Board and Supervisory Board is established annually by our general shareholders meeting. Under parapraph 3 of section162 of the Brazilian Corporate Law, the compensation of the members of our Supervisory Board must be equal to, or greater than, 10% of the average compensation paid to the members of our Executive Board (excluding benefits, representation funds and profit-sharing plans, if applicable). The members of our Supervisory Board received in 2018 15% of the monthly compensation of the Chief Executive Officer. Finally, the members of our Audit Committee (who are also members of our Board of Directors) received the monthly compensation paid to the members of the Supervisory Board plus R$5,000.
For the year ended December 31, 2018, the aggregate amount of compensation paid by us to the members of our Board of Directors, Board of Executive Officers and Supervisory Board was R$11.7 million, of which 79.0% was for our Board of Executive Officers, 14% was for our Board of Directors, and 7% was for our Supervisory Board, as approved by our 63rd annual shareholders’ meeting held on June 15, 2018.
The following table shows additional details about the compensation paid to the members of our Board of Directors, Executive Board and Supervisory Board for the periods indicated.
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| Compensation (R$’000) in the years ended December 31, | ||||||||
| Board of Directors | Executive Officers | Supervisory Board | ||||||
Area | 2018 | 2017 | 2016 | 2018 | 2017 | 2016 | 2018 | 2017 | 2016 |
Number of members(1) | 8.58 | 8.75 | 7,50 | 7.00 | 6.00 | 6.00 | 5.00 | 5.00 | 5.00 |
Total Salary | 854.4 | 987.2 | 1,159.6 | 6,562.1 | 6,652.7 | 6,417.9 | 628.2 | 557.2 | 505.1 |
Largest Salary | 268.8 | 153.3 | 235.9 | 1,404.2 | 1,431.4 | 1,413.1 | 169.8 | 162.9 | 103.2 |
Smallest Salary | 156.0 | 134.2 | 138.7 | 867.2 | 868.4 | 632.3 | 90.2 | 162.9 | 103.2 |
Average Salary | 206.3 | 148.3 | 181.8 | 1,375.1 | 1,346.4 | 1,150.2 | 159.2 | 162.9 | 103.2 |
Compensation for attending committees(2) | 508.5 | 62.8 | 180.6 | - | - | - | - | - | - |
Others(3) | 322.3 | 247.2 | 23.5 | 2,719.6 | 2,771.9 | 483.0 | 154.9 | 153.0 | 11.1 |
Total | 1,685.2 | 1,297.2 | 1,363.7 | 9,281.7 | 9,424.6 | 6,900.9 | 783.1 | 710.2 | 516.2 |
(1) This figure corresponds to the average number of members per year.
(2) Refers to Statutory Audit Committee.
(3)Refers to Private Pension Contribution, Assistance Plan for all members and Representation Grant for Executive Officers.
We have no service contracts with our directors providing for benefits upon termination of employment. We do not have a stock option plan for our directors, officers or employees.
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EMPLOYEES
On December 31, 2018, we had 7,611 employees, compared to 8,245 employees on December 31, 2017 and 8,531 employees on December 31, 2016. Including employees at Compagas, Elejor and UEG Araucária Ltda. (companies in which we have a majority stake) we had 7,794 employees as of December 31, 2018.
The following table sets forth the number of our employees and a breakdown of employees by area of activity as of the dates indicated in each area of our operations.
| As of December 31, | ||
Area | 2018 | 2017 | 2016 |
Generation and transmission | 1,660 | 1,734 | 1,680 |
Distribution | 5,364 | 5,746 | 6,022 |
Telecommunications | 478 | 649 | 660 |
Corporation staff and research and development | 75 | 78 | 69 |
Other employees | 34 | 38 | 100 |
Total employees of Copel wholly-owned subsidiaries | 7,611 | 8,245 | 8,531 |
Compagas | 159 | 163 | 162 |
Elejor | 7 | 7 | 7 |
Araucária | 17 | 17 | 16 |
Total | 7,794 | 8,432 | 8,716 |
All of our employees are covered by collective bargaining agreements that we renegotiate annually with the unions that represent the various employee groups. In 2018, we negotiated and signed labor agreements with the unions representing our employees. These new bargaining agreements became effective in October and will be in place for a one-year term. We agreed to salary increases of 3.97% in 2018 compared to 2017 salaries.
We provide a number of benefits to our employees. The most significant is our sponsorship ofFundação Copel de Previdência e Assistência Social (“Fundação Copel”), which supplements the Brazilian government retirement and health benefits available to our employees. As of December 31, 2018, approximately 99% of our employees had elected to participate in a defined contribution plan.
In accordance with federal law and our compensation policy, our employees participate in a profit-sharing plan. The Board of Directors and the shareholders must approve the amount of such compensation, which is determined in accordance with an agreement between an employee committee and us. An employee’s receipt of compensation is conditioned on the company meeting certain benchmarks described in the above-mentioned agreement, as confirmed in our published year-end financial statements. The amount of profit-sharing distributions reserved and approved for the 2018 fiscal year (including Compagas) was R$ 91.5 million. The amount of profit-sharing distributions accrued and approved for the 2017 fiscal year (including Compagas) was R$68.8 million. The terms of the profit-sharing agreement are currently being revised and negotiated for future years.
On August 1, 2016, we launched a new retirement incentive program (“PDI”), in which an employee who had worked at least 20 years at Copel and was at least 50 years of age could join. Employees who simultaneously met the following requirements were entitled to join the PDI: (i) being 55 years old and having obtained the retirement benefit; or (ii) being 55 years old and having the sum of the minimum contribution time plus age in accordance with the National Institute of Social Security (“INSS”) standards.
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On December 22, 2017, Circular Letter No. 103/2017 announced the termination of the PDI as of March 31st, 2018. Employees who met the requirements of the PDI were entitled to adhere to it until March 31st, 2018, and would be dismissed until December 15th, 2018. Until December 31, 2018, five hundred and sixty three (563) employees had been dismissed under the program, totaling R$102.6 million in benefits/indemnity compensation for the termination of employment contracts.
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SHARE OWNERSHIP
As of March 31, 2019, board members and executive officers held, collectively, directly or indirectly, less than 1.0% of any class of our shares.
The following table indicates the board members, executive officers and members of the Supervisory Board who held shares as of March 31, 2019, and their respective share ownership as of such date. No other board member, executive officer, members or alternate members of theSupervisory Board held shares issued by the Company on March 31, 2019.
Number of shares | |||
Common | Class A | Class B | |
Board of Directors | |||
Mauricio Schulman | 1 | - | - |
Leila Abraham Loria | 1 | - | - |
Olga Stankevicius Colpo | 1 | - | - |
Sérgio Abu-Jamra Misael | 412 | - | - |
Adriana Angela Antoniolli | 1 | - | - |
Marco Antônio Barbosa Cândido | 1 | - | - |
Executive Officers | |||
- | - | - | - |
Supervisory Board - Members | |||
Letícia Pedercini Issa Maia | 2 | - | 2 |
Supervisory Board - Alternates | |||
- | - | - | -- |
We have no share-based incentive plan for employees.
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Item 7. Major Shareholders and Related Party Transactions.
MAJOR SHAREHOLDERS
Since 1954, the State of Paraná has owned the majority of our Common Shares and has exercised control over us. On December 31, 2018, the State of Paraná directly owned 58.6% of the Common Shares.The State of Paraná does not have any different voting rights, but as long as it holds a majority of our Common Shares, it will have the right to elect a majority of our directors.
On December 31, 2018, BNDESPAR owned directly 26.4% of our Common Shares. The shareholders’ agreement entered into by and between the State of Paraná and BNDESPAR on December 22, 1998, and amended on March 29, 2001, was terminated on December 21, 2018.
The following table sets forth certain information regarding the ownership of our Common Shares on December 31, 2018:
Shareholder | Common shares | |
| (thousands) | (% of total) |
State of Paraná | 85,029 | 58.6 |
BNDESPAR | 38,299 | 26.4 |
Eletrobras | 1,531 | 1.1 |
Public Float – ADRs | 649 | 0.4 |
Public Float – B3 (Brasil, Bolsa, Balcão) | 19,187 | 13.2 |
Other | 336 | 0.2 |
All directors and officers as a group(1) | - | - |
Total | 145,031 | 100.0 |
(1) On December 31, 2018, our directors and officers held an aggregate of 419 Common Shares.
The following table sets forth certain information regarding the ownership of our Class B Shares on December 31, 2018:
Shareholder | Class B Shares | |
| (thousand) | (% of total) |
State of Paraná | – | – |
BNDESPAR | 27,282 | 21.3 |
Eletrobras | – | – |
Traded as ADSs | 30,973 | 24.1 |
Traded in the B3 (Brasil, Bolsa, Balcão) | 69,783 | 54.4 |
Other | 258 | 0.2 |
All directors and officers as a group | – | – |
Total | 128,296 | 100.0 |
As of March 31, 2019, 2.00% of the Common Shares and 18.82% of the Class B Shares were held by 202 holders that reside in the United States and have registered with the Companhia Brasileira de Liquidação e Custódia (“CBLC”). At the same date, the ADSs represented 0.28% of the Common Shares and 24.85% of the Class B Shares, and together, approximately 11.80% of our total share capital. ByMarch 31, 2019, there were no conversions of Class A Shares into Class B shares. For the last three fiscal years, we had no changes in the amount of our issued corporate capital, in the number of our shares or in the voting rights of our shares.
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Related Party Transactions
We engage in transactions, including the sale of electric energy, with our principal shareholders and with our affiliates. The tariffs we charge on electric energy sold to our related parties are approved by ANEEL, and the amounts are not material. We also provide guarantees in the context of financing transactions and power purchase agreements entered into by our subsidiaries in the ordinary course of business.For more information, see Notes 36 and 36.1 to our audited consolidated financial statements.
Transactions with Shareholders
The following summarizes the most significant transactions with our principal shareholders:
Government of the State of Paraná
The State of Paraná owns 58.6% of our Common Shares. We had accounts receivable from the government of the State of Paraná under the CRC Account agreement in the amount of R$1,445.0 million as of December 31, 2018. The outstanding balance bears interest of 6.65% per year and is adjusted in accordance with the IGP-DI inflation index. We recorded interest income and monetary variation receivable from the government of the State of Paraná under the CRC Account of R$188.8 million in 2018. For more information, see “Item 5. Operating and Financial Review and Prospects—Overview—Impact of the CRC Account” and Note 36 to our audited consolidated financial statements.
We also had an amount receivable of R$10.4 million related to the Luz Fraterna Program, a program that allows the State of Paraná to pay off the energy bills of customers enrolled in the Social Electricity Tariff, provided that consumption does not exceed 120 kWh. For more information, see Note 36 to our audited consolidated financial statements.
We also had an amount receivable of R$15.8 million related to the telecommunication services and equipment and infrastructure leases, and such services generated in 2018 an operating income of R$41.4 million. For more information, see Note 36 to our audited consolidated financial statements.
We also had ICMS payables in the amount of R$185.6 million as of December 31, 2018. ICMS expenses during 2018 amounted to R$4.2 billion.
BNDES and BNDESPAR
BNDESPAR, a wholly-owned subsidiary of BNDES, owns 26.4% of our Common Shares. BNDES has granted us loans to finance the construction of generation and transmission facilities and both BNDES and BNDESPAR have purchased debentures issued by Nova Asa Branca I, Nova Asa Branca II, Nova Asa Branca III, Nova Eurus IV and Ventos de Santo Uriel Wind Farms, which are our subsidiaries.
As of December 31, 2018, we had an aggregate of R$2,494.9 million in outstanding debt with BNDES and BNDESPAR under these financing transactions. For additional information, please see Notes 23 and 36 to our audited consolidated financial statements, as well as “Item 5. Operating and Financial Review and Prospects – Liquidity and Capital Resources.”
Fundação Copel
Fundação Copelis a closed pension fund sponsored by Copel, Compagas and other entities that runs and operates benefit plans, welfare and social assistance. In 2018, Copel made payments to Fundação Copel consisting of: (i) rental in the amount of R$15.4 million and (ii) R$243.7 million for expenditure on pension and welfare plans. For more information, see Note 36 to our audited consolidated financial statements.
Transactions with Affiliates
Dona Francisca Energética S.A.
We own 23.0% of the total issued and outstanding share capital ofDona Francisca EnergéticaS.A. - DFESA.
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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$17.0 million annually, under which Copel Geração e Transmissão purchases 23.03% of DFESA’s assured energy (proportional to Copel’s equity interest).
As of December 31, 2018, we had accounts payable to DFESA in the amount of R$1.4 million under the above-mentioned agreements. For more information, see Note 36 to our audited consolidated financial statements.
Foz do Chopim Energética Ltda.
We own 35.8% of Foz do Chopim Energética Ltda., which operates an hydroelectric generation project. In 2018, we acquired from Foz do Chopim plant projects for which we recorded a liability of R$ 19.5 million. For more information, see Note 36 to our audited consolidated financial statements.
Voltália São Miguel do Gostoso I Participações S.A.
We own 49.0% of the total issued and outstanding share capital of Voltália São Miguel do Gostoso I S.A. On May 14, 2015, a loan agreement was entered by and between us (lender) and Voltalia São Miguel do Gostoso Participações S.A. (borrower), with retroactive effect as of February 6, 2015, in the total amount of up to R$29.4 million plus IOF tax, with a two year term and a remuneration of 111.5% of the CDI index aiming at providing working capital to finance the activities and business of Voltália São Miguel do Gostoso I S.A. The initial two-year term was extended until February 6, 2018, when the loan agreement was paid in full. Voltália used R$38.2 million of the credit line’s total amount.
We also had balances receivable from jointly controlled projects, mainly in the case of dividends. For additional information, please see Note 36 to our audited consolidated financial statements.
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Item 8. Financial Information
See pages F-1 through F-135.
A. Consolidated Financial Information
See “Item 3. Key Information—Selected Financial Data”, “Item 5. Operating and Financial Review and Prospects – Overview” and “Item 18. Financial Statements.”
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Legal Proceedings
We are currently subject to numerous proceedings relating to civil, administrative, labor and tax claims. Our audited consolidated financial statements only include provisionswhen the Company has a present obligation (legal or constructive) resulting from a past event; it is probable (i.e, more likely than not) that an outflow of resources embodying economic benefits will be required to settle the obligation; and a reliable estimate can be made of the amount necessary to settle the obligation.As of December 31, 2018, our provisions for such risks were R$1,664.8 million. However, it is possible that some amounts actually paid are different from the estimates made in recognizing these provisions because of determinations of final judgments and/or liquidations of the award.
As of December 31, 2018, we estimate that the total amount of claims against us, excluding disputes involving non-monetary claims or claims whose potential losses cannot be reasonably estimated due to the current early stages of proceedings, for which no provisions have been made, was approximately R$3,052.7 million, of which R$311.8 million correspond to labor claims; R$19.1 million to employee benefits; R$866.8 million to regulatory claims; R$1,286.5 million to civil claims; and R$568.5 million to tax claims. For more information, see Note 29 to our audited consolidated financial statements.
Tax and Social Contribution Claims
During the second half of 2010, two lawsuits were decided before the Federal Regional Court (Tribunal Regional Federal) in favor of the federal government, reversing the prior judgment that recognized our immunity regarding the payment of COFINS tax. As a result, the Federal Internal Revenue Service (Receita Federal) issued an infraction notice demanding the payment of COFINS tax from the period between August 1995 and December 1996. As of December 31, 2018, we had provisioned R$102.6 million to cover expected losses related to these lawsuits.
Additionaly, we are party to administrative and judicial proceedings pursuant to which we are challenging claims of the Brazilian Social Security authorities to pay additional security contributions for the period between 2000 and 2006. In these proceedings, we estimate the amount of our expected loss to be R$30.0 million.
Labor-related Claims
We are the defendant in several lawsuits filed by either current or past employees of ours, related to overtime claims, dangerous work conditions, relocation, and other matters. As of December 31, 2018, we have provisions totaling R$612.8 million reflecting the expected losses related to these lawsuits.
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Regulatory
We are disputing certain regulatory and legal proceedings in connection with ANEEL’s allegations that we violated regulatory standards. As of December 31, 2018, we have provisions totaling R$73.5 million reflecting the expected losses related to these proceedings.
Additional Claims
We are party to several lawsuits related to accidents involving equipment used in our electricity transmission and distribution grids, vehicle accidentsand lawsuits for the recovery of commissions by Tradener (for more information see Note 29.1.2(e) to ouraudited consolidated financial statements). As of December 31, 2018, we have provisions totaling R$492.9 million reflecting the expected losses related to these lawsuits.
We are also party to several lawsuits brought by landowners whose land has been affected by our transmission and distributions lines. As of December 31, 2018, we have provisions totaling R$234.5 million reflecting the expected losses related to these lawsuits.
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Dividend Payments
In accordance with our bylaws and Brazilian Corporate Law, we regularly pay annual dividends for each fiscal year within sixty days of the declaration of the dividends at the annual shareholders’ meeting. To the extent amounts are available for distribution, we are required to distribute as a mandatory dividend an aggregate amount equal to at least 25.0% of our adjusted net profit. Dividends are allocated pursuant to the formula described in “Dividend Priority of Class A Shares and Class B Shares” below. Under Brazilian Corporate Law, we are not permitted to suspend the mandatory dividend payable with respect to the Common Shares, Class A Shares and Class B Shares for any year. Brazilian Corporate Law permits, however, a company to suspend the payment of all dividends if the Board of Directors, with the approval of the Supervisory Board, reports at the shareholders’ meeting that the distribution would be detrimental to the Company given its financial circumstances. In such a case, companies with publicly traded securities must submit a report to the CVM providing the reasons for the suspension of dividend payments. Notwithstanding the above, Brazilian Corporate Law and our bylaws provide that Class A Shares and Class B Shares shall acquire voting rights if we suspend the mandatory dividend payments for more than three consecutive fiscal years, and such voting rights will continue until all dividend payments, including back payments, have been made. We are not subject to any contractual limitations on our ability to pay dividends.
Calculation of Adjusted Net Profit
Annual dividends are payable from our adjusted net profit for such period. Brazilian Corporate Law defines “net profit” for any fiscal year as the result of a fiscal year after the deduction of income and social contribution taxes for that fiscal year and after the deduction of any amounts allocated to employees’ and management’s participation in our results in such fiscal year. The “net profit” for a relevant fiscal year is subject to adjustment by the addition or subtraction of amounts allocated to legal and other reserves, the result of which is known as our adjusted net profit.
In accordance with Brazilian Corporate Law, we must maintain a legal reserve, to which we must allocate a minimum of 5% of our net profits for each fiscal year until such reserve reaches an amount equal to 20.0% of our capital stock (calculated in accordance with Brazilian Corporate Law). However, we are not required to make any allocations to our legal reserve in a fiscal year in which the legal reserve, when added to our other established capital reserves, exceeds 30.0% of our total capital. The amounts to be allocated to such reserve must be approved by our shareholders in a shareholders’ meeting and may be used only for the increase of our capital stock or compensation of losses.
On December 31, 2018, our legal reserve was R$914.8 million, or approximately 11.6% of our capital stock at that date.
In addition to deducting amounts for the legal reserve, under Brazilian Corporate Law net profit may also be adjusted by deducting amounts allocated to:
· | the contingency reserve: under Brazilian Corporate Law, our shareholders’ meeting, upon a justified proposal of our Board of Directors or Board of Executive Officers, may decide to allocate a percentage of our net profits to a contingency reserve for anticipated losses that are deemed probable in future years, which amount may be estimated; |
· | the tax incentives reserve: under Brazilian Corporate Law, our shareholders’ meeting, upon a justified proposal of our Board of Directors or Board of Executive Officers, may decide to allocate a percentage of our net profits resulting from government donations or subsidies for investment purposes. |
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On the other hand, net profits may also be increased by:
· | the reversal of any amounts previously allocated to a contingency reserve in the fiscal year in which the loss that had been anticipated does not occur as projected or in which the anticipated loss occurs but is lower than the contingency allocated to it; and |
· | any amounts included in the unrealized profits reserve that have been realized in the relevant fiscal year and have not been used to offset losses, as approved by our shareholders’ meeting, upon the proposal of our Board of Directors or Board of Executive Officers. |
Moreover, our net profits are also adjusted by adding the realization of amounts registered under “Equity Value Adjustments”. The account “Equity Value Adjustments” was created as a result of the first-time adoption of IFRS by Copel in 2010, which caused a fair value revaluation of certain fixed assets and the adoption of the fair value as its “deemed cost” at that date. The increase of the deemed cost of fixed assets led to an increase in depreciation costs. Thus, our management has decided to add to the adjusted net profits the realization of the “Equity Value Adjustments” in order to compensate for effects of the increased depreciation costs.This procedure is authorized by ICPC 10 (Interpretação do Comitê de Pronunciamento Contábil) .In 2018, our adjusted net profits used to calculate our dividends was increased by R$67.1 million as a result of said realization.
The amounts available for distribution are determined on the basis of the Statutory Financial Statements prepared using the method required by Brazilian Corporate Law, which differ from our audited consolidated financial statements included herein.
Dividend Priority of Class A Shares and Class B Shares
According to our bylaws, Class A Shares and Class B Shares are entitled to receive annual, non-cumulative minimum dividends, which dividend per share shall be at least 10% higher than the dividends per share paid to the holders of the Common Shares. Class A Shares have a dividend priority over the Class B Shares, and Class B Shares have a dividend priority over the Common Shares. To the extent that dividends are paid, they are to be paid in the following order:
· | first, the holders of Class A Shares have the right to receive a minimum dividend equal to 10% of the total share capital represented by the Class A Shares outstanding at the end of the fiscal year in respect of which the dividends have been declared; |
· | second, to the extent there are additional amounts to be distributed after all amounts allocated to the Class A Shares have been paid, the holders of Class B Shares have the right to receive a minimum dividend per share equal to (i) the mandatory dividend divided by (ii) the total number of Class B Shares outstanding at the end of the fiscal year in respect of which the dividends have been declared; and |
· | third, to the extent that there are additional amounts to be distributed after all amounts allocated to the Class A Shares and the Class B Shares have been paid, the holders of Common Shares have the right to receive an amount per share equal to (i) the mandatory dividend divided by (ii) the total number of Common Shares outstanding at the end of the fiscal year in respect of which dividends have been declared, provided that the Class A Shares and Class B Shares receive dividends per share at least 10% higher than the dividends per share paid to the Common Shares. |
To the extent that there are additional amounts to be distributed after all amounts described inthe preceding items have been paid and in the form therein described, any such additional amount will be divided equally among all our shareholders.
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Payment of Dividends
We are required to hold an annual shareholders’ meeting by April 30th of each year at which, among other things, an annual dividend may be declared by decision of the shareholders on the recommendation of the management, as approved by the Board of Directors. The payment of annual dividends is based on the financial statements prepared for the fiscal year ending December 31. Under Brazilian Corporate Law, we must pay dividends to shareholders of record within 60 days of the date of the shareholders meeting that declared the dividends. A shareholders’ resolution may set forth another date of payment, which must occur prior to the end of the fiscal year in which such dividend was declared. We are not required to adjust the amount of paid-in capital for inflation for the period from the end of the last fiscal year to the date of declaration or to adjust the amount of the dividend for inflation for the period from the end of the relevant fiscal year to the payment date. Consequently, the amount of dividends paid to holders of Class B Shares may be substantially reduced due to inflation.
Pursuant to our bylaws, our management may declare interim dividends to be paid from profits in our semi-annual financial statements, in accordance with the Company's dividend policy and subject to further endorsement by the Shareholders’ Meeting. Any payment of interim dividends counts towards the mandatory dividend for the year in which the interim dividends were paid.
Pursuant to Brazilian Corporate Law, we may pay interest on equity in lieu of dividends as an alternative form of making distributions to shareholders. We may treat a payment of interest on equity as a deductible expense for tax purposes, provided that it does not exceed the lesser of:
· | the total amount resulting from (i) Long-Term Interest Rate (Taxa de Juros a Longo Prazo, or “TJLP”) multiplied by (ii) the total shareholders’ equity (determined in accordance with Brazilian Corporate Law), less certain deductions prescribed by Brazilian Corporate Law; and |
· | the greater of (i) 50.0% of current net income (after the deduction of social contribution on profits (CSLL ‒Contribuição Social sobre o Lucro Líquido) and before taking such distributions and any deductions for corporate income tax) for the year in respect of which the payment is made or (ii) 50.0% of retained earnings and profit reserves for the year prior to the year in respect of which the payment is made. |
In order to be eligible to receive amounts remitted in foreign currency outside of Brazil, shareholders who are not residents of Brazil must register with the Central Bank in order to receive dividends, sales proceeds or other amounts with respect to their shares. The Class B Shares underlying the ADSs are held in Brazil by the Custodian, as agent for the Depositary, which is the registered owner of our shares.
Payments of cash dividends and distributions, if any, will be made in Brazilian currency to the Custodian on behalf of the Depositary, which will then convert such proceeds into U.S. dollars and will cause such U.S. dollars to be delivered to the Depositary for distribution to holders of ADSs. In the event that the Custodian is unable to immediately convert the Brazilian currency received as dividends into U.S. dollars, the amount of U.S. dollars payable to holders of ADSs may be adversely affected by devaluations of the Brazilian currency that occur before such dividends are converted and remitted. In the event the holder of an ADS fails to collect its dividends from the Custodian within three (3) years, counted as of the date when such dividend was made available, Brazilian corporate law states that such dividends may be returned to us. In this case, the ADS holder shall lose its right to receive the dividends.
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The table below sets forth the cash distributions we paid/will pay as dividends and as interest on equity for the periods indicated.
Year | Payment date | Distribution (R$ thousands) | Payment per share (R$) | ||
|
|
| Common | Preferred A | Preferred B |
2014 | June 2015 | 622,523 | 2.17236 | 2.52507 | 2.39000 |
2015 | June 2016 | 326,795 | 1.13716 | 2.52507 | 1.25473 |
2016 | June 2017 | 282,947 | 0.98539 | 2.89050 | 1.08410 |
2016 | December 2017 | 223,266 | 0.77927 | - | 0.85932 |
2017 | August 2018 | 266,000 | 0.92624 | 2.89050 | 1.01887 |
2017 | August 2018 | 23,401 | 0.08177 | - | 0.08996 |
2018 | To be defined | 280,000 | 0.97515 | 2.89050 | 1.07270 |
The table below sets forth the cash distributions we paid/will pay as dividends and as interest on equity, translated into US$ based on the exchange rate at year-end, for the periods indicated.
Year | Payment date | Distribution (US$ thousands) | Payment per thousand shares (US$) | ||
|
|
| Common | Preferred A | Preferred B |
2014 | June 2015 | 234,366 | 0.81785 | 0.95063 | 0.89978 |
2015 | June 2016 | 83,691 | 0.29122 | 0.64666 | 0.32133 |
2016 | June 2017 | 86,818 | 0.30235 | 0.88690 | 0.33264 |
2016 | December 2017 | 68,505 | 0.23911 | - | 0.26367 |
2017 | August 2018 | 81,618 | 0.29237 | 0.91241 | 0.32161 |
2017 | August 2018 | 7,387 | 0.02581 | - | 0.02840 |
2018 | To be defined | 72,262 | 0.25166 | 0.74597 | 0.27684 |
Item 9. The Offer and Listing
The principal trading market for our shares (including our Class B Shares) is the B3 (Brasil, Bolsa, and Balcão) market. Our Common Shares trade on B3 under the symbol “CPLE3” and our Class B Shares trade under the symbol “CPLE6”. On March 31, 2019, approximately 5,428 shareholders owned our Class B Shares.
In the United States, our Class B Shares in the form of ADSs, each representing one Class B Share (as a result of the reverse stock split), issued by the Depositary pursuant to the Deposit Agreement by and between Copel, the Depositary and the registered holders and beneficial owners from time to time of the ADSs. The ADSs trade on the NYSE under the symbols “ELP” and “ELPVY”.
On June 19, 2002, our shares were listed on Latibex, an Euro-based market for Latin American securities. The shares trade under the symbol “XCOP”.
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Item 10. Additional Information
Memorandum and Articles of Association
Organization
We are a publicly traded company duly registered with the CVM under No. 1431-1. According to Article One of our bylaws, we are authorized to pursue, directly or through consortia or in partnership with private companies, the following objectives and purposes:
· | researching and studying, technically and economically, all energy sources, providing solutions for a sustainable development; |
· | researching, studying, planning, constructing and developing the production, transformation, transportation, storage, distribution and trade of energy in any of its forms, chiefly electric power, as well as fuels and energy raw materials; |
· | studying, planning, designing, constructing and operating dams and their reservoirs, as well as other undertakings for multiple uses of water resources; |
· | providing services in energy trading, energy infrastructure, information and technical assistance concerning the rational use of energy to business undertakings with the aim of implementing and developing economic activities deemed relevant for the development of the State of Paraná, upon approval by the Board of Directors; and |
· | developing activities in the areas of energy generation, electronic data transmission, electronic communications and control, cellular telephone systems, and other endeavors that may be deemed relevant to the Company and the State of Paraná, being authorized, for such aims, upon approval by the Board of Directors, and for the aims set forth in the second and third sub-items above, to join, preferably holding major stakes or controlling interest, consortia or concerns with private companies, pension funds or other private entities, to participate in bidding processes of new concessions and/or already established special purpose companies to exploit already existing concessions, having taken into consideration, besides the projects' general features, their respective social and environmental impacts. |
Except as described in this section, our bylaws do not contain provisions addressing the duties, authority, or liabilities of directors and management, which are instead established by Brazilian Corporate Law.
Qualification of Board of Directors
The appointed directors must comply with the legal requirements set forth in Federal Law No. 13,303/2016, particularly the ones mentioned in its article 17, and Federal Law No. 6,404/1976. Moreover, pursuant to Federal Law No. 13,303/2016 and to our bylaws, our Board of Directors will mandatorily comprise, at least, (i) three independent members, (ii) five members that meet the requirements for members of the Statutory Audit Committee, and (iii) one member appointed by the employees. Among the members described in item (ii) above, at least one shall compulsorily have recognized professional experience in matters of corporate accounting in order to sit on the Statutory Audit Committee.
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Limitations on Directors’ Powers
Under Brazilian Corporate Law, if a director or an executive officer has a conflict of interest with the company in connection with any proposed transaction, the director or executive officer may not vote in any decision of the board of directors or of the board of executive officers related to that transaction, and must disclose the nature and extent of the conflict of interest for transcription in the minutes of the meeting. A director or an executive officer may not transact any business with a company, including accepting any loans, except on reasonable and fair terms for the Company and conditions that are identical to the terms and conditions prevailing in the market or offered by third parties. According to our bylaws, shareholders set the aggregate compensation payable to directors and executive officers. For more information, see “Item 6. Directors, Senior Management and Employees”. Our bylaws do not establish any mandatory retirement age limits.
Board of Directors and Board of Executive Officers
According to our bylaws, we are managed by a Board of Directors, composed of nine members and a Board of Executive Officers, composed of six members. Two positions of our Board of Directors are currently vacant.
Our Board of Directors ordinarily meets monthly and is responsible, among other things, for: (i) establishing our corporate strategy; (ii) defining the general orientation of our business; (iii) defining the responsibilities of members of our Board of Executive Officers; and (iv) electing the members of our Board of Executive Officers.
Our Board of Executive Officers meets every two weeks and is responsible for the daily management of the Company. Each Executive Officer also has individual responsibilities established by our bylaws.
The members of our Board of Directors, of our Board of Executive Officers, our Supervisory Board and of our statutory committees shall be liable for any loss or damages resulting from the performance of their duties, in compliance with the applicable law. Notwithstanding, we shall ensure, provided no conflict with our own interests arises, legal assistance for members or former members of statutory bodies in judicial and administrative proceedings brought by third parties, during or after their term of office, for the performance of the duties of their office, in accordance to the terms and provisions of our bylaws.
For further information, see Items 6 – “Directors, Senior Management and Employees - Board of Directors” and “Directors, Senior Management and Employees - Board of Executive Officers”.
Shareholders’ Meetings
The convening of our shareholders’ meeting is made through publication of a notice to shareholders in two newspapers, which are determined at the previous shareholders’ meeting. Generally, we make such notice inDiário Oficial do Estado – PRand the Folha de Londrina. As provided by Brazilian Corporate Law, publications have to be made in the official newspaper located in the state of our corporate headquarters, and in a newspaper with wide circulation in the same city as our corporate headquarters. The notice must be published no fewer than three times, beginning at least 30 calendar days prior to the scheduled meeting date.
In order for a shareholders’ meeting to be held on first call, shareholders representing at least one- quarter of the voting capital have to be present, except as otherwise provided for under Brazilianlaw. If no such quorum is verified, a second meeting may be called by notice given at least 8 calendar days prior to such meeting and in accordance with the same rules of publication previously described. The quorum requirements will not apply to a second meeting, subject to the minimum quorum and voting requirements for certain matters, as discussed as follows. A shareholder without a right to vote may attend a general shareholders’ meeting and take part in the discussion of matters submitted for consideration.
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A shareholder may be represented at a general shareholders' meeting by a proxy appointed in accordance with applicable Brazilian law not more than one year before the meeting, who must be a shareholder, a company officer, a lawyer or a financial institution.
Right of Withdrawal
Our common shares and preferred shares are not redeemable, with the exception that a dissenting shareholder has, under certain circunstances provided for in Brazilian Corporate Law, the right to withdraw its equity interest from a company and to receive a payment for the portion of shareholder’s equity attributable to his or her equity interest.
Preferred Shares Rights
Pursuant to Brazilian Corporate Law, each preferred share of a class that is admitted to trading on a Brazilian stock exchange must have the certain rights under the Company’s bylaws.
Our bylaws comply with the directives provided by Brazilian Corporate Law as follows: (i) our Class A Shares shall have priority in the distribution of minimum dividends of 10% per year,pro rata, calculated as a percentage of the paid-in capital stock represented by such shares on December 31 of the previous fiscal year; (ii) our Class B Shares shall have priority in the distribution of minimum dividends,pro rata, in the amount equivalent to 25.0% of our net profits, as adjusted in accordance with Section 202 of Law No. 6,404/76, calculated as a proportion of the paid-in capital stock represented by such shares on December 31st of the previous fiscal year; (iii) the dividends paid on Class B Shares pursuant to item (ii) above shall be paid only from any remaining profits after the payment of priority dividends to Class A Shares; and (iv) the dividends to be paid per preferred share, regardless of the class, shall be at least 10% higher than the dividends to be paid per Common Share; and (v) the preferred shares will acquire voting rights if, during three consecutive fiscal years, we fail to pay a fixed or minimum dividend to which the preferred shares are entitled. For more information on our dividend policy, see “Item 8, Financial Information—Dividend Policy and Payments”.
Voting Rights
As a general rule, only our Common Shares are entitled to vote and each Common Share corresponds to one vote. Holders of preferred shares acquire voting rights if, during three consecutive fiscal years, we fail to pay a fixed or minimum dividend to which the preferred shares are entitled. If a holder of preferred shares acquires voting rights in this manner, such rights will be identical to the voting rights of a holder of Common Shares and will continue until the dividend is paid.
Preemptive Rights
Our shareholders have a general preemptive right to subscribe for shares in any capital increase, in proportion to his or her ownership, as provided for in the Brazilian Corporate Law. A minimum period of 30 days following the publication of notice of a capital increase is assured for the exercise of the right, and the right is transferable. We may issue shares up to the limit of the authorized capital, excluding right of first refusal to the shareholders, as provided for in the Brazilian Corporate Law and in our bylaws.
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Liquidation
In the event of liquidation of the Company, after all creditors have been paid, all shareholders will participate equally and ratably in any remaining residual assets.
Liability of the Shareholders for Further Capital Calls
Neither Brazilian Corporate Law nor our bylaws provide for capital calls. The shareholders’ liability is limited to the payment of the issue price of the shares subscribed or acquired.
Conversion Rights
Our bylaws provide that the only permitted conversion of shares is Class A Shares are convertible into Class B Shares. Our shares are not otherwise convertible.
Form and Transfer
Our shares are maintained in book-entry form with a transfer agent (“Transfer Agent”). To make a transfer of shares, the Transfer Agent makes an entry in the register, debits the share account of the transferor and credits the share account of the transferee.
Transfers of shares by foreign investors are made in the manner described above and are executed by the investor’s local agent on the investor’s behalf. However, if the original investment was registered with the Central Bank pursuant to a foreign investment mechanism regulated by Resolution No. 4,373 of September 29, 2014 of the CMN (“Resolution No. 4,373”) as described under “Exchange Controls” as follows, the foreign investor must declare the transfer in its electronic registration.
A shareholder may choose, in its individual discretion, to hold its shares through CBLC. Shares are added to the CBLC system through Brazilian institutions that have clearing accounts with the CBLC. Our shareholder registry indicates which shares are listed on the CBLC system. Each participating shareholder is in turn registered in a register of beneficial shareholders maintained by the CBLC and is treated in the same manner as the other registered shareholders.
Changes in rights of shareholders
A General Meeting of Shareholders must be held whenever the Company intends to change the rights of holders of our common shares or preferred shares. Under Brazilian Corporate Law the proposed changes must be approved by a majority of the class of shareholders that would be affected. Certain changes related to the rights of preferred shares, such as changes in preferences, advantages or conditions of redemption or amortization, may result in the exercise of rights to withdraw by the holders of the shares affected.
Regulation of and Restrictions on Foreign Investors
Foreign investors face no legal restrictions barring them from holding Common Shares, Class A Shares, Class B Shares or ADSs.
The ability to convert into foreign currency dividend payments and proceeds from the sale of Class B Shares or preemptive rights, and to remit such amounts outside Brazil is subject to restrictions under foreign investment legislation which generally requires, among other things, the registration of the relevant investment with the Central Bank. Any foreign investor who registers with the CVM in accordance with CMN Resolution No. 4,373 may buy and sell securities on Brazilian stock exchangeswithout obtaining a separate certificate of registration for each transaction.
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Annex II to CMN Resolution No. 4,373 (“Annex II Regulations”) allows Brazilian companies to issue depositary receipts in foreign exchange markets. Our ADS program is duly registered with the Central Bank and the CVM.
Our bylaws do not impose any limitation on the rights of Brazilian residents or non-residents to hold our shares and exercise the rights in connection therewith.
Disclosure of Shareholder Ownership
Under Brazilian regulations any person or group of persons representing the same interest that carries out a relevant trading involving shares or securities issued by a publicly traded company must disclose its share ownership to the investor relations officer of such company, which, in turn, must disclose such information to the CVM and to any relevant stock exchange. A relevant trading is defined as a transaction by which the direct or indirect equity stake of the persons referred above reaches an equity interest corresponding to 5% or its multiples (10%, 15%, and so on), of a type or class of shares representing the company’s capital stock. Any subsequent increase or decrease of 5% or its multiples in ownership of any class of shares must be similarly disclosed. The same reporting obligation applies to the acquisition of any rights over the shares and other securities mentioned in applicable regulation and to the execution of any derivative financial instruments referenced in shares. If such increase results in change of corporate control or administrative structure, or if the increase imposes a public offering, in addition to informing the investor relations officer, a statement containing certain required information must be published in newspapers that are widely circulated in Brazil.
Arbitration
As provided for in our bylaws, we, our shareholders, directors, officers and members of the Supervisory Board shall resolve through arbitration any dispute or conflict that may arise between them, regarding, among others, the application, validity, effectiveness, interpretation, violation and corresponding effects of the provisions of our bylaws, of the current applicable law, of the rules applicable to the capital markets in general, as well as those of the regulation of the level 1 of corporate governance of B3 (Brasil, Bolsa, Balcão) (“Level 1”), of the Level 1 participation contract, and of the Sanctions and the Arbitration Regulations of the B3 Market Arbitration Chamber.
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Material Contracts
For information concerning our material contracts, see “Item 4. Information on the Company” and “Item 5. Operating and Financial Review and Prospects”.
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Exchange Controls
The ownership of Class A Shares, Class B Shares or Common Shares of the Company by individuals or legal entities domiciled outside Brazil is subject to certain conditions established under Brazilian law, as described below.
The right to convert dividend payments and proceeds from the sale of shares into foreign currency and to remit such amounts outside Brazil is subject to restrictions under Brazilian foreign investment legislation, which generally requires, among other things, that the relevant investments have been registered with the Central Bank. Such restrictions on the remittance of foreign capital abroad may hinder or prevent Itaú Unibanco S.A., as custodian for the Class B Shares represented by ADSs (“Custodian”), or holders who have exchanged ADSs for Class B Shares from converting dividends, distributions or the proceeds from any sale of such Class B Shares, as the case may be, into U.S. dollars and remitting such U.S. dollars abroad. Holders of ADSs could be adversely affected by delays in, or refusal to grant any, required government approval for conversions of Brazilian currency payments and remittances abroad of the Class B Shares underlying the ADSs.
Under Resolution No. 4,373/2014, foreign investors may invest in almost all financial assets and engage in almost all transactions available in the Brazilian financial and capital markets, provided that certain requirements are fulfilled. The definition of foreign investor includes individuals, legal entities, mutual funds and other collective investment entities, domiciled or headquartered abroad.
To be eligible to invest in the Brazilian financial and capital markets, foreign investors must:
1. | point at least one representative in Brazil with powers to perform actions relating to foreign investments; |
2. | register as a foreign investor with the CVM; |
3. | register the foreign investment with the Central Bank; and |
4. | constitute at least one custodian institution authorized by CVM. |
Securities and other financial assets held by foreign investors must be registered or maintained in deposit accounts or under the custody of an entity duly licensed by the Central Bank or the CVM. In addition, securities trading is restricted to transactions carried out in the stock exchanges or organized over-the-counter markets licensed by the CVM.
The Annex II Regulations provide for the issuance of depositary receipts in foreign markets in respect of shares of Brazilian issuers. Prior to the issuance of the ADSs, the ADS program was approved by the Central Bank and the CVM under the Annex V to CMN Resolution No. 2,689, which allowed Brazilian companies to issue depositary receipts in foreign exchange markets and was in force by the time the ADSs were issued. Depositary receipts are currently governed by Resolution No. 4,373. The proceeds from the sale of ADSs by ADS holders outside Brazil are free of Brazilian foreign investment controls and holders of the ADSs who are not resident of a tax haven will be entitled to favorable tax treatment. For more information, see “Item 10. Additional Information - Taxation - Brazilian Tax Considerations - Taxation of Gains Outside Brazil”.
An electronic registration has been issued in the name of the Depositary with respect to the ADSs and is maintained by the Custodian on behalf of the Depositary. Pursuant to this electronic registration, the Custodian and the Depositary are able to convert dividends and other distributions with respect to the Class B Shares represented by ADSs into foreign currency and remit the proceeds outside Brazil. In the event that a holder of ADSs exchanges such ADSs for Class B Shares, such holder must seek to obtain its own electronic registration with the Central Bank.
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Pursuant to Central Bank Resolution No. 4,373/2014, the withdrawal of Class B Shares upon cancellation of ADSs may require simultaneous exchange transactions in the event the investor decides not to dispose of those Class B Shares. The simultaneous exchange transactions may be required in order to obtain a certificate of registration of Class B Shares with the Central Bank. This transaction will be subject to tax in Brazil. For more information, see “Item 10. Additional Information - Taxation—Brazilian Tax Considerations—Other Brazilian Taxes”.
Thereafter, any holder of Class B Shares may not be able to convert into foreign currency and remit outside Brazil the proceeds from the disposition of, or distributions with respect to, such Class B Shares, unless such holder obtains his own electronic registration. A holder that obtains an electronic registration may be subject to less favorable Brazilian tax treatment than a holder of ADSs. For more information, see “Item 10. Additional Information - Taxation—Brazilian Tax Considerations”.
The federal government may impose temporary restrictions on remittances of foreign capital abroad in the event of a serious imbalance or an anticipated serious imbalance of Brazil’s balance of payments. For approximately six months in 1989 and early 1990, the federal government froze all dividend and capital repatriations held by the Central Bank that were owed to foreign equity investors, in order to conserve Brazil’s foreign currency reserves. These amounts were subsequently released in accordance with federal government directives. There can be no assurance that the federal government will not impose similar restrictions on foreign repatriations in the future.
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Taxation
The following summary contains a description of the principal Brazilian and U.S. federal income tax consequences of the acquisition, ownership and disposition of Class B Shares or ADSs, but it does not purport to be a comprehensive description of all of the tax considerations that may be relevant to a decision to purchase Class B Shares or ADSs. The summary is based upon the tax laws of Brazil and regulations thereunder and on the tax laws of the United States and regulations thereunder as in effect on the date hereof, which are subject to change. Prospective purchasers of Class B Shares or ADSs should consult their own tax advisors as to the tax consequences of the acquisition, ownership and disposition of Class B Shares or ADSs.
Although there is at present no income tax treaty between Brazil and the United States, the tax authorities of the two countries have had discussions that may culminate in such a treaty. No assurance can be given, however, as to whether or when a treaty will enter into force or how it will affect the U.S. holders of Class B Shares or ADSs. Prospective holders of Class B Shares or ADSs should consult their own tax advisors as to the tax consequences of the acquisition, ownership and disposition of Class B Shares or ADSs in their particular circumstances.
Brazilian Tax Considerations
The following discussion summarizes the principal Brazilian tax consequences of the acquisition, ownership and disposition of Class B Shares or ADSs by an individual, entity, trust or organization resident or domiciled outside Brazil for purposes of Brazilian taxation (“Non-Brazilian Holder”). It is based on Brazilian law currently in effect, which is subject to differing interpretations and changes that may apply retroactively. This discussion does not address all the Brazilian tax considerations that may be applicable to any particular Non-Brazilian Holder, and each Non-Brazilian Holder should consult its own tax advisor about the Brazilian tax consequences of investing in Class B Shares or ADSs.
Taxation of Dividends
Dividends paid by the Company in cash or in kind from profits of periods beginning on or after January 1, 1996 (i) to the Depositary in respect of Class B Shares underlying ADSs or (ii) to a Non-Brazilian Holder in respect of Class B Shares generally will not be subject to Brazilian withholding income tax. Dividends paid from profits generated before January 1, 1996 may be subject to Brazilian withholding income tax at varying rates depending upon the year in which the profits have been obtained.
Distributions of Interest on Equity
In accordance with Law No. 9,249, dated December 26, 1995, as amended, Brazilian corporations may make payments to shareholders characterized as distributions of interest on the equity of the company as an alternative form of making dividend distributions. The rate of interest may not be higher than TJLP, as determined by the Central Bank from time to time. The total amount distributed as interest on equity may not exceed, for tax purposes, the greater of (i) 50.0% of net income (after the deduction of the social contribution on net profits and before taking into account the provision for corporate income tax and the amounts attributable to shareholders as net interest on equity) related to the period in respect of which the payment is made and (ii) 50.0% of the sum of retained profits and profit reserves as of the date of the beginning of the period in respect of which the payment is made.
Distributions of interest on equity paid to Brazilian and Non-Brazilian Holders of Class B Shares, including payments to the Depositary in respect of Class B Shares underlying ADSs, are deductible by the Company for Brazilian corporate income tax and social contribution on net profits purposes as far as the limits above described are observed. Such payments to shareholders are subject toBrazilian withholding income tax at the rate of 15.0%, except for payments to shareholders situated in tax haven jurisdictions (that is, a country or location that does not impose income tax or where the maximum income tax rate is lower than 20% or where the local legislation imposes restrictions on disclosing the shareholding composition or the ownership of the investment or the beneficial owner of the income derived from transactions carried out and attributable to a Non-Brazilian Holder - “Tax Haven Holder”), which payments are subject to withholding income tax at a 25.0% rate. These payments may be included, at their net value, as part of any mandatory dividend. To the extent that payment of interest on net equity is so included, the corporation is required to distribute to shareholders an additional amount to ensure that the net amount received by them, after payment of the applicable withholding income tax, plus the amount of declared dividends, is at least equal to the mandatory dividend.
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Taxation of Gains Outside Brazil
According to Law No. 10,833 of December 29, 2003 (“Law No. 10,833/03”), capital gains realized on the disposition of assets located in Brazil by a Non-Brazilian Holder, whether to another non-Brazilian resident or to Brazilian residents, are subject to taxation in Brazil. In this sense, if the Class B Shares are disposed of by a Non-Brazilian Holder, as they are defined as assets located in Brazil, such holder will be subject to income tax on the gains assessed, following the rules described below, whether the disposition is conducted in Brazil or abroad and with a Brazilian resident or not.
A disposition of Class B Shares can occur abroad if an investor decides to cancel its investment in ADSs and register the underlying Class B Shares as a direct foreign investment under Law No. 4,131. Any capital gain arising from sales or other dispositions of Class B Shares outside Brazil would be subject to Brazilian income tax at the rates thatrange from 15% to22.5% depending on the gain derived by the Brazilian individual, as follows: (i) 15% on gains not exceeding R$5,000,000.00; (ii)17.5% on gains that exceed R$5,000,000.00 and do not exceed R$10,000,000.00; (iii) 20% on gains that exceed R$10,000,000.00 and do not exceed R$30,000,000.00; and (iv)22.5% on gains exceedingR$30,000,000.00 or, if the investor is a Tax Haven Holder, 25.0%, which should be withheld by the purchaser of the Class B Shares outside Brazil or its attorney-in-fact in Brazil.
Regarding ADSs, although the matter is not free from doubt, the gains realized by a Non-Brazilian Holder on the disposition of ADSs to another Non-Brazilian Holder should not be taxed in Brazil, based on the theory that ADSs do not constitute assets located in Brazil for purposes of Law No. 10,833/03. However, we cannot assure you that Brazilian courts would adopt this theory. Thus, the gain on a disposition of ADSs by a Non-Brazilian Holder to a resident in Brazil (or possibly even to a Non-Brazilian Holder in the event that courts determine that ADSs would constitute assets located in Brazil) may be subject to income tax in Brazil.
Taxation of Gains in Brazil
For purposes of Brazilian taxation, the income tax rules on gains related to disposition of Class B Shares vary depending on the domicile of the Non-Brazilian Holder, the form by which such Non-Brazilian Holder has registered its investment before the Brazilian Central Bank and/or how the disposition is carried out, as described below.
Generally, gains are defined as the positive difference between the amount realized on the sale or exchange of a security and its acquisition cost. Gains assessed on the disposition of the Class B Shares carried out on the Brazilian stock exchange (which includes the transactions carried out on the organized over-the-counter market) are:
1. | exempt from income tax when assessed by a Non-Brazilian Holder registered under Resolution No. 4,373 of the CMN (“4,373 Holder”) that is not a Tax Haven Holder; or |
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2. | subject to income tax at a rate of 15.0% in any other case, including the gains assessed by a Non-Brazilian Holder that (i) is not a 4,373 Holder, or (ii) is a 4,373 Holder and is not a Tax Haven Holder, and a Tax Haven Holder. |
There can be no assurance that the current preferential treatment for 4,373 Holders will continue in the future.
Any other gains assessed on a disposition of the Class B Shares that is not carried out on the Brazilian stock exchange is subject to income tax at the progressive rates ranging from 15% to22.5%, except for gains assessed by Tax Haven Holders who are subject to an income tax rate of 25.0%.
If these gains are related to transactions conducted on the Brazilian non-organized, over-the-counter market, through an intermediary, the withholding income tax of 0.005% on the sale value shall also be applicable and can be offset with the eventual income tax due on the capital gain.
The deposit of Class B Shares in exchange for the ADSs may be subject to Brazilian income tax In this case, the difference between the acquisition cost and the market price of the Class B Shares would be subject to income tax at the progressive ratesranging from 15% to22.5% or 25.0% in the case of investors that are Tax Haven Holders. There may be arguments to claim that this taxation is not applicable in the case of a Non-Brazilian Holder that is registered under Resolution 4,373 (other than Tax Haven Holders), which should not be subject to income tax in such a transaction.
The withdrawal of Class B Shares upon cancellation of ADSs should not be subject to Brazilian income tax, as long as the regulatory rules are appropriately observed with respect to the registration of the investment before the Central Bank.
In the case of redemption of the Class B Shares or ADSs or capital reduction by a Brazilian corporation, with subsequent withdrawal of the ADSs, such as our company, the positive difference between the amount effectively received by the Non-Brazilian Holder and the acquisition cost of the securities redeemed is treated as capital gain derived from the sale or exchange of shares not carried out on a Brazilian stock exchange market and is therefore subject to income tax at the progressive rates ranging from 15.0% to 22.5% or 25.0%, as the case may be.
Any exercise of preemptive rights relating to the Class B Shares or ADSs will not be subject to Brazilian taxation. Gains on the sale or assignment of preemptive rights will be subject to the same tax treatment applicable to disposition of Class B Shares.
Other Brazilian Taxes
There are no Brazilian inheritance, gift or succession taxes applicable to the ownership, transfer or disposition of Class B Shares or ADSs by a Non-Brazilian Holder except for gift and inheritance taxes levied by some states in Brazil on gifts made or inheritances bestowed by individuals or entities not resident or domiciled in Brazil or in the relevant State to individuals or entities that are resident or domiciled within such State in Brazil. There are no Brazilian stamp, issue, registration, or similar taxes or duties payable by holders of Class B Shares or ADSs.
Pursuant to Decree No. 6,306 of December 14, 2007 (“Decree No. 6,306/07”), a tax on foreign exchange transactions (“IOF/Exchange”) may be imposed on the conversion of Brazilian currency into foreign currency (e.g., for purposes of paying dividends and interest) orvice-versa. Currently, for most exchange transactions, the rate of IOF/Exchange is 0.38%, except for: (i) foreign exchange transactions for the inflow of funds related to investments in variable income effectuated by a Non-Brazilian Holder in the Brazilian financial and capital market, in which case the rate is 0%, and (ii) payment of dividends, andinterest on shareholders’ equity related to the investment mentioned under item (i) above, in which case the rate is zero. Nonetheless, the Brazilian government may increase the rate to a maximum of 25.0%. Any such increase will be applicable only prospectively.
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Pursuant to Decree No 6,306/07, the Tax on Bonds and Securities Transactions (“IOF/Bonds”) may be imposed on any transactions involving bonds and securities, including those carried out on Brazilian stock, futures and commodities exchanges. The rate of IOF/Bonds Tax applicable to transactions involving common shares is currently zero if the redemption, transfer or renegotiation occurs after 30 days of their acquisition. As from December 24, 2013, the IOF/Bonds levies at a rate of zero percent on the transfer (cessão) of shares traded in a Brazilian stock exchange environment with the specific purpose of enabling the issuance of depositary receipts to be traded outside Brazil. The Brazilian government is permitted to increase such rate at any time up to 1.5% per day, but only in respect of future transactions.
U.S. Federal Income Tax Considerations
The statements regarding U.S. tax law set forth below are based on U.S. law as in force on the date of this annual report, and changes to such law subsequent to the date of this annual report may affect the tax consequences described herein (possibly with retroactive effect). This summary describes the principal U.S. federal income tax consequences of the ownership and disposition of Class B Shares or ADSs, but it does not purport to be a comprehensive description of all of the U.S. tax consequences that may be relevant to a decision to hold or dispose of Class B Shares or ADSs. This summary applies only to purchasers of Class B Shares or ADSs who will hold the Class B Shares or ADSs as capital assets and does not apply to special classes of holders such as dealers in securities or currencies, holders whose functional currency is not the U.S. dollar, holders of 10% or more of our shares by vote or value (taking into account shares held directly or through depositary arrangements), tax-exempt organizations, financial institutions, holders liable for the alternative minimum tax, securities traders who elect to account for their investment in Class B Shares or ADSs on a mark-to-market basis, partnerships or other pass-through entities, insurance companies, U.S. expatriates, and persons holding Class B Shares or ADSs in a hedging transaction or as part of a straddle, conversion or other integrated transaction for U.S. federal income tax purposes. Moreover, this summary does not address the Medicare tax on net investment income or the tax consequences to U.S. holders of acquiring, owning or disposing of Class B Shares or ADSs under any U.S. federal estate or gift, state, local or foreign taxes.
Each holder is encouraged to consult such holder’s tax advisor concerning the overall tax consequences to it, including the consequences under laws other than U.S. federal income tax laws, of an investment in Class B Shares or ADSs.
In this discussion, references to a “U.S. holder” are to a beneficial holder of a Class B Share or an ADS that is (i) an individual citizen or resident of the United States of America, (ii) a corporation, or any other entity taxable as a corporation, organized under the laws of the United States of America, any state thereof, or the District of Columbia, or (iii) otherwise subject to U.S. federal income taxation on a net basis with respect to the Class B Share or ADS.
For purposes of the U.S. Internal Revenue Code of 1986, as amended, which we call the “Code”, holders of ADSs will generally be treated as owners of the Class B Shares represented by such ADSs.
Taxation of Distributions
A U.S. holder will recognize dividend income for U.S. federal income tax purposes in an amount equal to the amount of any cash and the value of any property distributed by us as a dividend to the extent that such distribution is paid out of our current or accumulated earnings and profits, as determined forU.S. federal income tax purposes, when such distribution is received by the custodian (or by the U.S. holder in the case of a holder of Class B Shares). The amount of any distribution will include the amount of Brazilian tax withheld on the amount distributed, and the amount of a distribution paid inreais will be measured by reference to the exchange rate for convertingreais into U.S. dollars in effect on the date the distribution is received by the custodian (or by a U.S. holder in the case of a holder of Class B Shares). If the custodian (or U.S. holder in the case of a holder of Class B Shares) does not convert suchreais into U.S. dollars on the date it receives them, it is possible that the U.S. holder will recognize foreign currency loss or gain, which would be ordinary loss or gain, when thereais are converted into U.S. dollars. Dividends paid by us will not be eligible for the dividends received deduction allowed to corporations under the Code.
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Subject to certain exceptions for short-term and hedged positions, the U.S. dollar amount of dividends received by an individual, with respect to the ADSs, will be subject to taxation at preferential rates if the dividends are “qualified dividends”. Dividends paid on the ADSs will be treated as qualified dividends if (i) the ADSs are readily tradable on an established securities market in the United States and (ii) we were not, in the year prior to the year in which the dividend was paid, and are not, in the year in which the dividend is paid, a passive foreign investment company (“PFIC”). The ADSs are listed on the New York Stock Exchange, and will qualify as readily tradable on an established securities market in the United States so long as they are so listed. Based on our audited financial statements and relevant market and shareholder data, we believe that we were not treated as a PFIC for U.S. federal income tax purposes with respect to our 2018 taxable year. In addition, based on our audited financial statements and our current expectations regarding the value and nature of our assets, the sources and nature of our income, and relevant market and shareholder data, we do not anticipate becoming a PFIC for the 2019 taxable year. Based on existing guidance, it is not clear whether dividends received with respect to the Class B Shares will be treated as qualified dividends, because the Class B Shares themselves are not listed on a U.S. exchange. In addition, the U.S. Treasury has announced its intention to promulgate rules pursuant to which holders of ADSs or Class B Shares and intermediaries through whom such securities are held will be permitted to rely on certifications from issuers to treat dividends as qualified for tax reporting purposes. Because such procedures have not yet been issued, it is not clear whether we will be able to comply with them. Holders of ADSs and Class B Shares should consult their own tax advisers regarding the availability of the reduced dividend tax rate in the light of the considerations discussed above and their own particular circumstances.
Distributions out of earnings and profits with respect to the Class B Shares or ADSs generally will be treated as dividend income from sources outside of the United States and generally will be treated separately along with other items of “passive” income for purposes of determining the credit for foreign income taxes allowed under the Code. Subject to certain limitations, Brazilian income tax withheld in connection with any distribution, with respect to the Class B Shares or ADSs may be claimed as a credit against the U.S. federal income tax liability of a U.S. holder if such U.S. holder elects for that year to credit all foreign income taxes. Alternatively such Brazilian withholding tax may be taken as a deduction against taxable income. Foreign tax credits will not be allowed for withholding taxes imposed in respect of certain short-term or hedged positions and may not be allowed in respect of arrangements in which a U.S. holder’s expected economic profit, after non-U.S. taxes, is insubstantial. U.S. holders should consult their own tax advisors concerning the implications of these rules in light of their particular circumstances.
Distributions of additional shares to holders with respect to their Class B Shares or ADSs that are made as part of a pro rata distribution to all our shareholders generally will not be subject to U.S. federal income tax.
Holders of Class B Shares or ADSs that are foreign corporations or nonresident alien individuals, which we call “Non-U.S. Holders”, generally will not be subject to U.S. federal income tax or withholding tax on distributions with respect to Class B Shares or ADSs that are treated as dividendincome for U.S. federal income tax purposes unless such dividends are effectively connected with the conduct by the holder of a trade or business in the United States.
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Taxation of Capital Gains
Upon the sale or other disposition of a Class B Share or ADS, a U.S. holder generally will recognize gain or loss for U.S. federal income tax purposes. The amount of the gain or loss will be equal to the difference between the amount realized in consideration for the disposition of the Class B Share or ADS (including the gross amount of the proceeds before the deduction of any Brazilian tax) and the U.S. holder’s tax basis in the Class B Share or ADS. Such gain or loss generally will be subject to U.S. federal income tax as capital gain or loss and will be long-term capital gain or loss if the Class B Share or ADS has been held for more than one year on the date of the disposition. The net amount of long-term capital gain recognized by an individual holder generally is subject to taxation at preferential rates. Capital losses may be deducted from taxable income, subject to certain limitations. Gain realized by a U.S. holder on a sale or disposition of Class B Shares or ADSs generally will be treated as U.S. source income. Consequently, if Brazilian tax is imposed on such gain, the U.S. holder will not be able to use the corresponding foreign tax credit, unless the holder has other foreign source income of the appropriate type in respect of which the credit may be used. Alternatively, such Brazilian tax may be taken as a deduction against taxable income if the U.S. holder does not take a credit for any foreign income tax during the taxable year.
A Non-U.S. Holder will not be subject to U.S. federal income tax or withholding tax on gain realized on the sale or other disposition of a Class B Share or ADS unless (i) such gain is effectively connected with the conduct by the holder of a trade or business in the United States, or (ii) such holder is an individual who is present in the United States of America for 183 days or more in the taxable year of the sale and certain other conditions are met.
Backup Withholding and Information Reporting
Dividends paid on, and proceeds from the sale or other disposition of, the ADSs or Class B Shares to a U.S. holder generally may be subject to the information reporting requirements of the Code and may be subject to backup withholding unless the U.S. holder (i) is a corporation or other exempt recipient or (ii) provides an accurate taxpayer identification number and certifies that no loss of exemption from backup withholding has occurred. The amount of any backup withholding collected from a payment to a U.S. holder will be allowed as a credit against the U.S. holder’s U.S. federal income tax liability and may entitle the U.S. holder to a refund, provided that certain required information is furnished to the Internal Revenue Service.
A Non-U.S. Holder generally will be exempt from these information reporting requirements and backup withholding tax, but may be required to comply with certain certification and identification procedures in order to establish its eligibility for such exemption in connection with payments received within the United States or through certain U.S. related intermediaries.
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Dividends and Paying Agents
Not applicable.
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statement by experts
Not applicable.
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SUBSIDIARY INFORMATION
Not applicable.
158
Documents on Display
We file reports, including annual reports on Form 20-F and other information with the SEC pursuant to the rules and regulations of the SEC that apply to foreign private issuers. We are required to make filings with the SEC by electronic means. Any filings we make electronically will be available to the public over the Internet at the SEC’swebsite.
Item 11. Quantitative and Qualitative Disclosures about Market Risk
See Note 35.2 to our audited consolidated financial statements for disclosure about market risk.
Item 12. Description of Securities Other than Equity Securities
Not applicable.
Item 12A. Debt Securities
Not applicable.
Item 12B. Warrants and Rights
Not applicable.
Item 12C. Other Securities
Not applicable.
Item 12D. American Depositary Shares
In the United States, the Class B Shares trade in the form of ADSs, each representing one Class B Share (as a result of the reverse stock split), issued by The Bank of New York Mellon (or the Depositary) pursuant to the Deposit Agreement. The ADSs trade under the symbols ELP and ELPVY. ADS holders are required to pay various fees to the Depositary, and the Depositary may refuse to provide any service for which a fee is assessed until the applicable fee has been paid. The Depositary is located at 240 Greenwich Street, New York, NY 10286.
ADS holders are required to pay the Depositary: (i) an annual fee of up to US$0.02 per ADS (or portion thereof) for administering the ADS program, and (ii) amounts in respect of expenses incurred by the Depositary or its agents on behalf of ADS holders, including expenses arising from compliance with applicable law, taxes or other governmental charges, facsimile transmission, or conversion of foreign currency into U.S. dollars. In both cases, the Depositary may decide in its sole discretion to seek payment by either billing holders or by deducting the fee from one or more cash dividends or other cash distributions.
ADS holders are also required to pay additional fees for certain services provided by the Depositary, as set forth in the table below.
Depositary service | Fee payable by ADS holders |
Issuance of ADSs, including issuances resulting from a distribution of shares or rights or other property | US$5.00 or less per 100 ADSs (or portion thereof) |
Cancellation of ADSs for the purpose of withdrawal, including if the deposit agreement terminates | US$5.00 or less per 100 ADSs (or portion thereof) |
Distribution of cash dividends | US$0.02 or less per ADS |
Distribution of securities distributed to holders of deposited securities which are distributed by the depositary to ADS registered holders | A fee equivalent to the fee that would be payable if securities distributed to the holder had been shares and the shares had been deposited for issuance of ADSs |
Depositary services | US$0.02 (or less) per ADSs per calendar year |
Transfer and registration of shares on the Depositary’s share register to or from the name of the depositary or its agent when the holder deposits or withdraws shares | Registration or transfer fees |
Cable, telex and facsimile transmissions (when expressly provided in the deposit agreement) | Expenses of the Depositary |
Converting foreign currency to U.S. dollars | Expenses of the Depositary |
Taxes and other governmental charges the Depositary or the custodian are required to pay on any ADS or share underlying an ADS (e.g., stock transfer taxes, stamp duty or withholding taxes) | As necessary |
Any charges incurred by the Depositary or its agents for servicing the deposited securities | As necessary |
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Payments by the Depositary
The Depositary pays us an agreed amount, which includes reimbursements for certain expenses we incur in connection with the ADS program. These reimbursable expenses currently include legal and accounting fees, listing fees, investor relations expenses and fees payable to service providers for the distribution of material to ADR holders. For the year ended December 31, 2018, this amount was US$ 681.4 thousand.
Item 13. Defaults, Dividend Arrearages and Delinquencies
Not applicable.
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
None.
Item 15. Controls and Procedures
Financial Responsibility, Disclosure Controls and Procedures, and Report on Internal Control Over Financial Reporting
(a) Disclosure Controls and Procedures
We have evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of December 31, 2018. Based upon our evaluation, we concluded that as a result of the material weakness in our internal control over financial reporting described below, as of December 31, 2018, our disclosure controls and procedures were not effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the applicable rules and forms, and that it is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
(b) Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting and for the assessment of the effectiveness of internal control over financial reporting. Our internal control over financial reporting is a process designed by our Chief Executive Officer and our Chief Financial Officer, under the supervision of our Board of Directors and effected by our management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with IFRS, as issued by the IASB.
Internal control over financial reporting is defined in rules 13a-15(f) and 15d-15(f) under the Exchange Act as a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles, and includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the audited consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions.
Our management has assessed the effectiveness of our internal control over financial reporting as of December 31, 2018, based on the criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on such assessment and criteria, and due to the material weakness described below, our management has concluded that our internal control over financial reporting was not effective as of December 31, 2018.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim consolidated financial statements will not be prevented or detected on a timely basis.
The following material weakness in internal control over financial reporting was identified and assessed by our management:
Ineffective controls over the revenues in the Company´s wholly-owned subsidiaries Copel GeT and Copel Telecom: There were failures in the design and operating effectiveness relating to (1) the review of unbilled revenues by professionals with adequate levels of authority and competence; (2) the absence of controls reviewing the accuracy of customer information, including prices reflected in invoices; and (3) the absence of controls reviewing the completeness of Copel Telecom's revenue.
Our independent registered public accounting firm has audited the effectiveness of our internal control over financial reporting, as stated in their report, which is included herein.
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(c) Effectiveness of Internal Control over Financial Reporting Audit
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of Companhia Paranaense de Energia - Copel
Curitiba - PR - Brazil
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Companhia Paranaense de Energia - Copel and subsidiaries (the "Company”) as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, because of the effect of the material weakness identified below on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board - PCAOB (United States), the consolidated financial statements as of and for the year ended December 31, 2018 of the Company and our report, dated April 26, 2019, expressed an unqualified opinion on those financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission - SEC and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definitions and Limitations of Internal Control over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Material Weakness
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weakness has been identified and included in management's assessment: neffective controls over the revenues in the Company’s wholly-owned subsidiaries Copel GeT (Generation and Transmission) and Copel Telecom.
This material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the consolidated financial statements as of and for the year ended December 31, 2018, of the Company, and this report does not affect our report on such financial statements.
/s/DELOITTE TOUCHE TOHMATSU
Auditores Independentes
Curitiba, Brazil
April 26, 2019
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(d) Changes in Internal Controls over Financial Reporting
The management of the Company did not identify any change in its internal control over financial reporting during the fiscal year ended December 31, 2018, that has materially affected or is reasonably likely to materially affect its internal control over financial reporting, except for the remediation plans related to the material weaknesses described below.
Remediation Plans for Material Weakness identified on December 31, 2018
Our management is engaged in the remediation of the above mentioned material weakness. The remediation plans described below are either implemented or in the process of being implemented and are intended to directly address the material weakness previously identified.
As a first step, to follow up on the actions to remediate the material weakness, our management resolved to strengthen the management committee created in 2018 (mentioned in item “Remediation Plans for Material Weaknesses reported on December 31, 2017” below), by allocating additional resources for the execution of its action plans. Our CEO will continue to coordinate it and officers and specialists from each of our business sectors will continue to participate in this committee. Likewise, this committee will continue to submit period reports to our Audit Committee, our Supervisory Board and our Board of Directors.
Ineffective controls over the revenues in the Company´s wholly-owned subsidiaries Copel GeT and Copel Telecom:This material weakness is a result of the combination of deficiencies in internal controls over revenue in our wholly-owned subsidiaries Copel GeT and Copel Telecom. There were failures in the design and operating effectiveness relating to (1) the review of unbilled revenues by professionals with adequate levels of authority and competence; (2) the absence of controls reviewing the accuracy of customer information, including prices reflected in invoices; and (3) the absence of controls reviewing the completeness of Copel Telecom's revenue.
As immediate action, the Company will provide additional training and reinforce communication to personnel involved in this process, presenting again the notions of internal controls, as well as the operating aspects of activities related to the accounting of revenue balances.
In addition to training, our management will review and adjust the operation of controls over the calculation of unbilled revenue provision, and will improve customer and price registration processes, in order to determine new procedures for verification of registration data and approval flows, in accordance with our internal policies and guidelines.
We will also create new controls to certify the integration of information systems used by Copel Telecom, so that we can review that the company’s revenue with respect to all of its customers is complete.
Remediation of material weaknesses reported on December 31, 2017
In order to remediate the material weaknesses identified in 2017, our management created a committee composed of officers and assisted by specialists from each of the executive offices in order to analyze and determine immediate remediation actions. The activities carried out by this committee were periodically reported to our Audit Committee, our Supervisory Board and our Board of Directors throughout 2018.
The Company has also engaged a specialized consulting firm to assist in the process of determining appropriate measures to mitigate the below mentioned weaknesses and to improve Copel's internal controls environment, including the use of a software to adequately manage this risk and internal control process.
As a result of the work carried out by our management, the Company was able to successfully remediate all of the material weaknesses discussed in our previous year's report.
In this context, the main measures adopted to resolve each material weakness identified during 2017 are the following:
(i) Remediation actions related to controls to monitor and authorize certain transactions in non-wholly-owned subsidiaries (Compagas, Elejor and UEGA):
As of December 31, 2017 we reported a material weakness related to controls to monitor and authorize certain transactions in non-wholly-owned subsidiaries (Compagas, Elejor and UEGA). The Company had no control designed to mitigate the risks of: (a) decisions made by the management of these subsidiaries that do not comply with the Company's policies, (b) accounting practices adopted by these subsidiaries that do not comply with practices of the group and (c) errors in these subsidiaries’ financial statements investment in Fundo de Investimento Multimercado resulting from the use of inaccurate assumptions to determine accounting estimates and/or inaccurate accounting classification of new agreements and/or unusual transactions.
During 2018, the Company strengthened its organizational structure by creating the Financial Controller Coordination Department, under our Finance and Investors Relation Office, whose main objective is to coordinate and carry out monitoring activities, from economic and financial perspectives, with respect to corporate interests held by Copel (Holding) and its wholly-owned subsidiaries in companies that we control (individually or as part of a controlling block) or other affiliates. This department has implemented and executed several controls to monitor the investees.
Among the main internal controls that were improved and implemented by the Company, we highlight the following:
· Strengthening the monitoring process related to the financial statements of non-wholly-owned subsidiaries with respect to compliance with all accounting policies adopted by Copel;
· Updating Copel's Financial Investment Policy and monitoring the compliance with this policy by the companies we invest in;
· Strengthening the monitoring process of the investees with a detailed analysis of unusual transactions, events subsequent to the financial statements and material related party transactions;
· Improving the relationship with the companies we invest in by adopting new communication tools, including correspondence informing the list of all accounting and financial information that should be delivered periodically for monthly closing, quarterly and annual reports (monthly balance sheets, Quarterly and annual balance sheets, Independent Auditors' reports, etc.);
· Implementation of control and formalization of the analysis of material and / or unusual variations in the monthly balance sheets, seeking explanations;
· Implementation of control to evaluate financial investments, by obtaining supporting documentation (extracts, updated bylaws of funds, etc.) to review the figures contained in the financial statements are accounted for at the exact value, that these figures are measured by the appropriate method and that their classification is correct.
Also, in order to reinforce the procedures adopted by the investees and align the rules and policies adopted by Copel, several meetings were held with the management of our investees (Compagas, Elejor and UEGA). In those meetings, we have emphasized the importance of adopting Copel’s rules and policies, considering the characteristics of each business, and paid special attention to the following subjects:
· Code of Conduct;
· Integrated Corporate Risk Management Policy;
· Corporate Governance Policy;
· Related Party Transactions and Conflict of Interest Policy;
· Sustainability Policy;
· Policy for Disclosure of Material Information and Confidentiality;
· Investors Relation Policy;
· Confidential Communication Channel Policy;
· Communication Policy;
· Information Security Policy;
· Sponsorship Policy;
· Financial Investment Policy.
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In addition to the aforementioned procedures, management provided specific training covering matters of corporate governance and internal controls to the directors and officers appointed by Copel to its wholly-owned and non-wholly-owned subsidiaries.
In view of the above, our management acknowledged that the actions taken to remediate this material weakness improved the mitigation of risks and the environment of controls related to this process, and concluded that this material weakness was remediated as of December 31, 2018.
(ii) Remediation actions related to the control over financial reporting related to the accounting of investments in investment funds and taxes on regulatory assets:
As of December 31, 2017 we reported a material weakness related to the control over financial reporting related to the accounting of investments in investment funds and taxes on regulatory assets. There were failures in the operation of controls related to the process of publishing UEGA’s financial statements with respect to bonds and securities, since they did not comply with the accounting practices adopted by the group. There were also weaknesses in the controls of the holding company, which did not allow us to identify the noncompliance with our establishment accounting practices. Additionally, controls of Copel Distribuição related to the process of reviewing of the calculation of tax on the variation of Sectorial financial assets and liabilities were not properly maintained, resulting in the recognition of adjustments to the financial statements in 2017.
The Company has improved its procedures related to the review of the recording and of the method of measuring and classifying its investment funds. The Company has also improved its procedures related to the calculation of taxes on the variation of sector financial assets and liabilities so that the calculation and accounting comply with applicable rules.
Among the main internal controls that were improved and implemented by the Company, we highlight the following:
· Strengthening the monitoring process related to the financial statements of non-wholly-owned subsidiaries with respect to compliance with all accounting policies adopted by Copel;
· Strengthening the monitoring process of the investees with a detailed analysis of unusual transactions, events subsequent to the financial statements and material related party transactions;
· Improving the relationship with the companies we invest in by adopting new communication tools, including correspondence informing the list of all accounting and financial information that should be delivered periodically for monthly closing, quarterly and annual reports (monthly balance sheets, Quarterly and annual balance sheets, Independent Auditors' reports, etc.);
· Implementation of control to assess material and / or unusual variations in the monthly balance sheets, seeking explanations;
· Implementation of control to evaluate financial investments, by obtaining supporting documentation (extracts, updated bylaws of funds, etc.) to review that the figures contained in the financial statements are accounted for at the appropriate value, that these figures are measured by the appropriate method and that their classification is correct.
· Improvement of controls over the review of our tax calculation worksheet, ensuring that revision is carried out by qualified personnel;
· Improvement of controls so that accounting entries are reviewed and approved by the competent team.
In view of the above, our management acknowledged that the actions taken to remediate this material weakness improved the mitigation of risks and the environment of controls related to this process, and concluded that this material weakness was remediated as of December 31, 2018.
(iii) Remediation actions related to general information technology controls implemented for the controlled companies - Compagas, Elejor and UEGA:
As of December 31, 2017 we reported a material weakness related to general information technology controls implemented for the controlled companies - Compagas, Elejor and UEGA. The Company did not maintain controls to establish and monitor compliance with policies for access, segregation of duties and procedures for managing changes in its controlled companies (Compagas, Elejor, and UEGA).
The Company held several meetings with the management of its controlled companies, especially with the management of Compagas, Elejor and UEGA, in order to emphasize the importance of an environment of general Information Technology controls that are appropriate to the size of these companies. In addition, Copel has provided technical resources to support the standardization of IT procedures, internal rules and policies adopted by our controlled companies based on the best practices already adopted by Copel.
During 2018, the following Information Technology controls were improved and implemented by Compagas, Elejor and UEGA:
Compagas
· Creation and revision of information security policies, internal rules and procedures, including determination of: (i) minimum password requirements, (ii) a new process applicable to changes in management, (iii) an access management process, and (iv) network and data center operations;
· Implementation of controls to review that minimum password parameters are applied to the Oracle EBS, Oracle Database, Legado and ELAG systems;
· Creation of a risk matrix related to segregation of functions in the Oracle EBS, Legado and ELAG systems, with formal procedures for identification of conflicting accesses and periodic review of the matrix.
· Implementation of procedures and controls for periodic review and revocation of accesses in the Oracle EBS, Legado, ELAG and Data Center system, in accordance with guidelines set forth in Copel's internal policies;
· Introduction of procedures and controls for periodic evaluation of critical accesses and conflicts related to segregation of functions in the Oracle EBS system, in accordance with guidelines set forth in Copel's internal policies.
Elejor
· Creation and revision of information security policies, internal rules and procedures, including determination of: (i) a new process applicable to changes in management, (ii) an access management process, and (iii) network and data center operations;
· Implementation of controls over the concession and suspension of accesses to the network, in accordance with guidelines set forth in Copel's internal policies;
UEGA
· Creation and revision of information security policies, internal rules and procedures, including determination of: (i) minimum password requirements, (ii) a new process applicable to changes in management, (iii) an access management process, (iv) network and data center operations, and (v) backup routines;
· Implementation of procedures and controls to maintain periodic backups for the Database, Operating System and Senior System, in accordance with guidelines set forth in Copel's internal policies;
· Determination of parameters and implementation of minimum security requirements for the Senior System, Network, Database and Operating System, in accordance with guidelines set forth in Copel's internal policies;
· Implementation of controls over the concession and suspension of accesses to the Senior System, in accordance with guidelines set forth in Copel's internal policies;
· Implementation of procedures and controls for periodic review and revocation of accesses in the Senior System, in accordance with guidelines set forth in Copel's internal policies;
· Introduction of procedures and controls for periodic evaluation of critical accesses and conflicts related to segregation of functions in the Senior System, in accordance with guidelines set forth in Copel's internal policies.
In view of the above, our management acknowledged that the actions taken to remediate this material weakness improved the mitigation of risks and the environment of controls related to this process, and concluded that this material weakness was remediated as of December 31, 2018.
(iv) Remediation actions related to the controls on the review of estimates used in analyzing the impairment of fixed generation assets:
As of December 31, 2017 we reported a material weakness related to the controls on the review of estimates used in analyzing the impairment of fixed generation assets. There were failures in the operation of the controls to address that all the assumptions adopted in the impairment calculation of fixed generation assets were reviewed by professionals of appropriate seniority.
As a first step, the Company sought to provide additional training to the personnel involved in this process, presenting notions of internal controls, as well as operational aspects of calculation of impairment. Our management has also prepared and made available technical documentation to clarify the scope of events (regular or occasional) that may be considered indicative of impairment, as well as the materiality, timing and deadlines for the official report of this information to the area conducting the operational evaluations for purposes of impairment.
In parallel, the following processes and controls have been improved and implemented to remediate this material weakness:
· Expansion of the process for discussing and determining impairment indicators, by scheduling quarterly meetings with all departments of the Company that may be aware of events that are capable of influencing the recoverable value of Copel's assets;
· Implementation of controls for a detailed review of all assumptions regarding generation assets, particularly those under construction, by the executive board of Copel GeT;
· Implementation of procedures and controls so that all impairment tests are duly reviewed by another qualified employee of the Company, through a checklist created strictly for this purpose;
· Improvement of the controls and processes to carry out prior internal evaluation of all potential impacts of impairment indicators;
· Meetings for presentation and detailed discussion of the results of prior impairment measures, including the evolution of assumptions and impacts throughout the year.
In view of the above, our management acknowledged that the actions taken to remediate this material weakness improved the mitigation of risks and the environment of controls related to this process, and concluded that this material weakness was remediated as of December 31, 2018.
(v) Remediation actions related to controls designed to identify lawsuits that may impact theprovision for risks:
As of December 31, 2017 we reported a material weakness related to controls designed to identify lawsuits that may impact the provision for risks. The Company did not maintain controls designed so that all information about changes in lawsuits and/or new claims from external sources identified by management were effectively included in its system.
In response to this material weakness, the Company adopted measures to standardize the execution of each stage for identifying processes that may impact the risk provision. These measures resulted in a better design of our internal controls and procedures, which include:
· Adoption of an external data monitoring system, controlled by a specialized company using artificial intelligence, to recognize and monitor new legal proceedings directly from the Brazilian courts data base;
· Strengthening and implementation of controls for the quarterly review of all lawsuits recorded in the Lawsuit Control System (Controles de Processos Jurídicos, or CPJ) that have not been updated for a period of more than one year;
· Review and improvement of all risks and controls used to analyze legal contingencies of our parent company, in order to accurately identify the amount and expectation of losses in connection with ongoing lawsuits;
· Creation of controls for monitoring and analyzing changes to values involved in ongoing lawsuits as compared to the preceding quarter;
· Improvement of procedures for estimating losses related to labor lawsuits, by engaging specialized firms.
In view of the above, our management acknowledged that the actions taken to remediate this material weakness improved the mitigation of risks and the environment of controls related to this process, and concluded that this material weakness was remediated as of December 31, 2018.
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Item 16A. Audit Committee Financial Expert
In July 13, 2017, our Board of Directors reviewed the qualifications and backgrounds of the members of the Audit Committee and determined that Mr. Rogério Pernawas an “audit committee financial expert” within the meaning of Item 16A of Form 20-F and satisfied the requirements of Rule 10A-3 under the Securities Exchange Act. However, due to the resignation of Mr. Rogério Perna in September, 2018, and the fact that our Board of Directors has not determined any of the other committee members to be a “financial expert,” the Company does not have an “audit committee financial expert” currently serving on its Audit Committee. Our internal rules require all members of our Audit Committee to be also members of our Board of Directors, and the appointment of a new financial expert to our Audit Committee may only occur after the appointment of new members to our Board of Directors by our shareholders, which is expected to occur in April, 2019. For more information regarding our Audit Committee, see “Item 6. Directors, Senior Management and Employees — Audit Committee”.
Item 16B. Code of Ethics
Our code of ethics, named as “Code of Conduct”, was first adopted in 2003, applicable to our chief executive officer, our executive financial officer and the main executives of our accounting department.
In 2015, our code was revised after an open consultation process that involved our internal staff and inputs from stakeholders. In this process, after the proposals were consolidated, the code was approved by our Management and by our Board of Officers. In 2017, an amendment to this code was approved by our Management and our Board of Directors to reflect new Brazilian regulation on conflict of interests and periodical training. In 2018, the Code of Ethics was revised and a new version was approved by the Board of Directors on March 13, 2018.
This code applies to all of our employees, board members, officers (including our Chief Executive Officer, our Chief Financial Officer and our officer in charge of our accounting department) and outsourced, as well as those of our wholly-owned subsidiaries. Our code is available on our website (ir.copel.com) and copies can also be delivered by mail upon a written request sent to the address provided on the cover page of this 20-F.
As from the adoption of our code of ethics, we have not granted any implicit or explicit waivers to any sections of our code of ethics to the above-mentioned employees, board members, officers and outsourced.
Item 16C. Principal Accountant Fees and Services
Audit and Non-Audit Fees
Deloitte Touche Tohmatsu Auditores Independentes acted as our independent registered public accounting firm for the fiscal years ended December 31, 2018, 2017 and 2016.
The table next sets forth the total amount billed to Deloitte Touche Tohmatsu Auditores Independentes for services performed in 2018, 2017 and 2016, and breaks down these amounts by category of service.
| Year ended December 31, | ||
Billed | 2018 | 2017 | 2016 |
| (R$ million) | ||
Audit fees | 3.9 | 3.9 | 2.4 |
Audit-related fees | - | - | - |
Tax fees | 0.2 | 0.2 | - |
All other fees | 1.0 | - | 0.8 |
Total | 5.1 | 4.1 | 3.2 |
Audit Fees
Audit fees are fees billed for the audit of our annual financial statements and for the reviews of our quarterly financial information in connection with statutory and regulatory filings or engagements.
Tax Fees
Tax fees are fees billed for the review of fiscal and tax procedures, including the examination of the procedures in force for the calculation, retention, registration, control, collection, recovery and accounting of taxes, including ancillary obligations.
All Other Fees
The services comprising the fees disclosed under “All Other Fees” refer to (i) the rendering of independent technical assistance and issuance of opinions in connection with the dispute with the ColíderConsortium, with respect to the “Agreement for the Supply of Goods and Services” for the Implementation of the Colíder HPP, and (ii) the analysis and issuance of an opinion in connection with the legal procedure aimed at reestablishing the economic and financial balance of said Agreement.
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Audit Committee Pre-Approval Policies and Procedures
Neither our Board of Directors nor our Audit Committee has established pre-approval policies and procedures for the engagement of our registered public accounting firm for services. Our Board of Directors expressly approves on a case-by-case basis any engagement of our registered public accounting firm for audit and non-audit services provided to us or our subsidiaries. Our Audit Committee provides recommendations to our Board of Directors regarding such engagements. For more information regarding our Board of Directors and Audit Committee, see “Item 6. Directors, Senior Management and Employees”.
Item 16D. Exemption from the Listing Standards for Audit Committees
Under the listed company audit committee rules of the NYSE and the SEC, we must comply with Securities Exchange Act Rule 10A-3, which requires that we establish an audit committee composed of members of the board of directors that meets specified requirements. All four members of our Audit Committee rely on the exemption in Rule 10A-3(b)(iv)(E): (i) Mr. Mauricio Schulman and Mr. Marco Antônio Cândido, who are designees of the State of Paraná, and (ii) Ms. Leila Abraham Loria and Ms. Olga Stankevicius Colpo, who are designees of the BNDESPar. In our assessment, each of these members acts independently in performing the responsibilities of an audit committee member under the Sarbanes-Oxley Act and satisfies the other requirements of Securities Exchange Act Rule 10A-3. For more information regarding our Audit Committee, see “Item 6. Directors, Senior Management and Employees — Audit Committee”.
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
None.
Item 16F. Changes in Registrant’s Certifying Accountant
Not applicable.
Item 16G. Corporate Governance
Section | New York Stock Exchange Corporate Governance Rules for U.S. Domestic Issuers | Copel’s Approach |
Director Independence | ||
303A.01 | A company listed on the New York Stock Exchange (a “listed company”) must have a majority of independent directors on its Board of Directors. “Controlled companies” are not required to comply with this requirement. | Copel fits the definition of a “controlled company” since the majority of its voting shares are held by the State of Paraná. As such, Copel would not be required to comply with the majority of independent directors requirement. However, Brazilian Law 13,303/2016 requires that at least 25% of our board members be independent members and according to Copel’s bylaws, we are required to have a minimum of 30% of independent directors on Board of Directors.
|
303A.03 | The non-management directors of a listed company must meet at regularly scheduled executive sessions without management. | The non-management directors of Copel do not hold regularly scheduled executive sessions without management. Our Chief Executive Officer is also a member of our board of directors. Pursuant to the internal regulations of our board of directors, in the event a conflict of interest or particular interest of any board member is identified in relation to a matter to be decided to be decided by the board, such board member must recuse himself from the meeting, which will continue without his presence.
|
Nominating/Corporate Governance Committee | ||
303A.04 | A listed company must have a Nominating/ Corporate Governance Committee composed entirely of independent directors, with a written charter that covers certain minimum specified duties. “Controlled companies” are not required to comply with this requirement. | As a controlled company, Copel would not be required to comply with the nominating/ corporate governance committee requirements. However, Copel has a permanent statutory committee, advisory to the shareholders, and responsible for monitoring the nomination and evaluation processes applicable to our management, members of our board of directors, Supervisory Board and board committees. This committee is composed of members nominated by the shareholders.
|
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Compensation Committee | ||
303A.05 | A listed company must have a compensation committee composed entirely of independent directors, with a written charter that covers certain minimum specified duties. “Controlled companies” are not required to comply with this requirement. | Copel does not have a compensation committee. As a controlled company, Copel would not be required to comply with the compensation committee requirements if it were a U.S. domestic issuer. |
Audit Committee | ||
303A.06 303A.07 | A listed company must have an audit committee with a minimum of three (3) independent directors who satisfy the independence requirements of Rule 10A-3 under the Securities Exchange Act, with a written charter that covers certain minimum specified duties. | COPEL has a statutory Audit Committee composed of five board members (of whom three must satisfy the requirements set forth in Rule 10A-3 under the Securities Exchange Act and one must have professional experience in corporate accounting), each of whom serves a term of two years, and may be re-elected up to three consecutive times. One of the positions in our Audit Committee is currently vacant. Pursuant to the Audit Committee internal rules, the Audit Committee members are appointed by, and may be replaced by, the Board of Directors. All of the members of the Audit Committee are members of our Board of Directors. The Audit Committee is an advisory committee responsible for assisting our Board of Directors and giving its opinion on matters related to our financial and accounting management, risks, internal controls and audit, including, but not limited to, the quality, transparency and integrity of our financial statements, effectiveness of our internal controls with respect to the preparation of financial reports, as well as the activities, independence and quality of the work of our external and internal auditors. |
Equity Compensation Plans | ||
303A.08 | Shareholders must be given the opportunity to vote on all equity compensation plans and material revisions thereto, with limited exemptions set forth in the NYSE rules. | Under Brazilian Corporate Law, shareholder pre-approval is required for the adoption of any equity compensation plans and material revisions thereto.
|
Corporate Governance Guidelines | ||
303A.09 | A listed company must adopt and disclose corporate governance guidelines that cover certain minimum specified subjects. | Although the corporate governance practices adopted by Copel do not comply with all the terms specified in the rules of the NYSE, they fulfill the requirements established for companies listed on level 1 of corporate governance of B3 (Brasil, Bolsa, Balcão). The Company also adopts the Code of Better Corporate Governance Practices of the Brazilian Institute for Corporate Governance (”IBGC”) and was granted with a certification under the State-Owned Enterprise Governance Program of B3 (Brasil, Bolsa, Balcão). |
Code of Ethics for Directors, Officers and Employees | ||
303A.10 | A listed company must adopt and disclose a code of business conduct and ethics for its directors, officers and employees, and must promptly disclose any waivers of the code for directors or executive officers. | Copel has adopted a code of ethics that applies to all members of the board of directors, the Supervisory Board, the executive board and employees.
|
Certification Requirements | ||
303A.12 | A CEO of a listed company must promptly notify the NYSE in writing after any executive officer of the listed company becomes aware of any material non-compliance with any applicable provisions of Section 303A and certify he or she is not aware of any violation by the listed company of NYSE corporate governance listing standards, qualifying the certification to the extent necessary. Each listed company must submit an executed Written Affirmation annually to the NYSE. In addition, each listed company must submit an interim Written Affirmation as and when required by the interim Written Affirmation form specified by the NYSE. | Copel’s CEO will promptly notify the NYSE in writing after any executive officer of Copel becomes aware of any material non-compliance with any applicable provisions of the NYSE corporate governance rules and will also certify if he is not aware of any violation by the listed company of NYSE corporate governance listing standards. Copel submits every year an Annual Written Affirmation to the NYSE and will submit an interim Written Affirmation when required. |
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Item 17. Financial Statements
Not applicable.
Item 18. Financial Statements
Reference is made to pages F-1 through F-135.
Item 19. Exhibits
101.INS | XBRL Instance Document. |
101.SCH | XBRL Taxonomy Extension Schema Document. |
101. CAL | XBRL Taxonomy Extension Calculation Linkbase Document. |
101. DEF | XBRL Taxonomy Extension Definition Linkbase Document. |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document. |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document. |
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We omitted from the exhibits filed with or incorporated by reference into this annual report certain promissory notes and other instruments and agreements with respect to our long-term debt, none of which authorizes securities in a total amount that exceeds 10% of our total assets. We hereby agree to furnish to the Securities and Exchange Commission copies of any such omitted promissory notes or other instruments or agreements as the Commission requests.
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technical GLOSSARY NOT DEFINED IN THE BODY OF THE DOCUMENT
2013 Concession Renewal Law: Brazilian Law No. 12,783 enacted on January 11, 2013, under which 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 a new tariff regime to be established by ANEEL.
A-3 Auctions: The denomination of electricity auctions for new generation projects being held in the regulated Brazilian market in the third year before the initial delivery date.
A-5 Auctions: The denomination of electricity auctions for new generation projects being held in the regulated Brazilian market in the fifth year before the initial delivery date.
ADRs: American Depositary Receipts.
ADSs: American Depositary Shares, each representing one Class B Share.
ANATEL: The Brazilian National Telecommunication Agency, or theAgência Nacional de Telecomunicações.
ANEEL: The Brazilian Electricity Regulatory Agency, or theAgência Nacional de Energia Elétrica.
Annual Permitted Revenues: The annual revenue established by ANEEL to be charged by a transmission concessionaire for the use of its transmission lines by third parties, which include Free Customers, generators and distributors, orReceita Anual Permitida - RAP.
Assured Energy: Determined amount assigned to each hydroelectric plant according to the energy supply risk criteria defined by MME. The assured energy also represents the maximum energy that can be sold by the generator, which is set forth in each concession agreement, irrespective of the volume of electricity actually generated by the facility.
Availability Agreement: Agreement under which a generator commits to making a certain amount of electrical 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.
Average Tariff or Rate: Total sales revenue divided by total megawatt hours (MWh) sold for each relevant period, including in the case of the Company, unbilled electricity, or electricity which has been delivered to a customer, but for which the utility has yet to deliver a bill. Total sales revenue, for the purpose of computing average tariff or rate, includes both gross billings before deducting value-added tax and unbilled electricity sales upon which such taxes have not yet accrued.
Bilateral Agreement:Legal instrument that formalizes the purchase and sale of electric energy between Agents of the Chamber of Commercialization of Electric Energy - CCEE, with the purpose of establishing prices, terms and amounts of supply at determined time intervals.
B3 (Brasil, Bolsa, Balcão):B3 S.A. - Brasil, Bolsa, Balcão, the securities, commodities and futures exchange, headquartered in São Paulo, Brazil, incoporated as a resulto f the merger of BM&FBOVESPA S.A. – Bolsa de Valores, Mercadorias e Futuros and CETIP S.A. – Mercados Organizados.
Captive Customers: customers whose energy is supplied by the distributor in which theconsumer unit is connected, such as that the amount paid already includes the energy cost and service cost for use of transmission and distribution - wire service. The consumer is not free to negotiate the conditions and the flexibility of energy supplied to meet the needs of its business, instead having to follow the determinations set forth by the distributor. The consumer is subject to the unpredictability of the annual variation of the value of the distributors’ tariffs.
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CBLC: TheCompanhia Brasileira de Liquidação e Custódia.
CER: Reserve Energy Contract (Contrato de Energia Reserva).
Central Bank: The Brazilian Central Bank, orBanco Central do Brasil.
Class A Shares: The Company’s class A preferred shares.
Class B Shares: The Company’s class B preferred shares.
CMN: The National Monetary Council of Brazil, orConselho Monetário Nacional.
Code:The U.S. Internal Revenue Code of 1986, as amended.
Common Shares: The Company’s common shares.
Copel Distribuição S.A.: The Company’s entity engaged in the distribution business.
Copel Geração e Transmissão S.A. or Copel GeT: The Company’s entity engaged in the generation and transmission business.
CRC Account: Therecoverable rate deficit account, orConta de Resultados a Compensar.
Custodian: Itaú Unibanco S.A., as custodian for the Class B Shares represented by ADSs.
Decree No. 6,306/07: Brazilian tax Decree No. 6,306 dated December 14, 2007, which regulates tax on credit, exchange and insurance, or relating to securities -IOF.
Deloitte:Deloitte Touche Tohmatsu Auditores Independentes.
Deposit Agreement: A Deposit Agreement between Copel, the Depositary and the registered holders and beneficial owners from time to time of the ADSs.
Depositary: The Bank of New York Mellon, as depositary.
Distribution: The transfer of electricity from the transmission lines at grid supply points and its delivery to customers through distribution lines at voltages between 13.8 kV and 44 kV.
Distributor: An entity supplying electrical energy to a group of customers by means of a distribution network.
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Elejor: Centrais Elétricas do Rio Jordão S.A.
Eletrosul: Eletrosul Centrais Elétricas S.A.
Energy Agreement: Agreement under which 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, 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.
Final Customer: A party that uses electricity for its own needs.
FINEP: The Brazilian Studies and Projects Funding AgencyorFinanciadora de Estudos e Projetos.
Firm Capacity: The level of electricity that we can deliver from a specified power plant with a 95.0% degree of certainty, determined in accordance with certain prescribed statistical models.
Free Customers: Electricity customers that are able to choose their own power suppliers since they meet the following requirements: (i) demand of at least 3 MW at any voltage for new customers (those connected to the distribution grid after July 1995); (ii) demand of at least 3 MW and supplied at voltage levels equal to or greater than 69 kV for existing customers (those connected to the distribution grid before July 1995); and (iii) demand of at least 500 kW and that opt to be supplied energy by means of alternative sources, such as wind power projects, small hydroelectric power plants or biomass projects (also known as Special Customers).
Free Market: Market segment that permits a certain degree of competition. The free market specifically contemplates purchase of electricity by non-regulated entities such as Free Customers and energy traders.
Furnas: Furnas Centrais Elétricas S.A
Generating Unit: An electric generator together with the turbine or other device that drives it.
Gigawatt (GW): One billion watts.
Gigawatt hour (GWh): One gigawatt of power supplied or demanded for one hour, or one billion watt hours.
GPON: Gigabit-Capable Passive Optical Networks - A passive optical network (PON) is a system that brings optical fiber cabling and signals all or most of the way to the end user. Depending on where the PON terminates, the system can be described as fiber-to-the-curb (FTTC), fiber-to-the-building (FTTB), or fiber-to-the-home (FTTH). Passive Optical Network: A point-to-multipoint, passive fiber network architecture in which a single fiber utilizes optical splitters to serve multiple premises. GigabitPON: Based on the previous PON types, GPON supports higher data rates and increased security, and has been deployed around the world by major telecom operators.
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Group A Customers: A group of customers that uses electricity at 2.3 kV or higher. Tariffs applied to this group are based on the actual voltage level at which energy is supplied and the time of day and year the energy is supplied.
Group B Customers: A group of customers that uses electricity at less than 2.3 kV. Tariffs applied to this group are comprised solely of an energy charge and are based on the classification of the customer.
High Voltage: A class of nominal system voltages equal to or greater than69,000 volts and less than 230,000 volts.
HPP – Hydroelectric Power Plant: A generating unit that uses water power to drive the electric generator.
IASB: International Accounting Standards Board.
IFRS: International Financial Reporting Standards.
IGP-DI: TheÍndice Geral de Preços—Disponibilidade Interna inflation index.
IGP-M Index:The Brazilian General Market Price inflation index, or theÍndice Geral de Preços do Mercado.
Installed Capacity: The level of electricity that can be delivered from a particular generating unit on a full-load continuous basis under specified conditions as designated by the manufacturer.
Interconnected Transmission System: Systems or networks for the transmission of energy, connected together by means of one or more lines and transformers.
IPCA:Índice Nacional de Preços ao Consumidor Amplo - IPCA inflation index.
IPP: Independent Power Producer, a legal entity or consortium holding a concession or authorization for power generation for sale for its own account to public utility concessionaires or Free Customers.
Itaipu:Itaipu Binacional, a hydroelectric facility equally owned by Brazil and Paraguay, with an installed capacity of 14,000 MW.
Kilovolt (kV): One thousand volts.
Kilowatt (kW): One thousand watts.
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Kilowatt hour (kWh): One kilowatt of power supplied or demanded for one hour, or one thousand watt hours.
Latibex: A Euro-based market for Latin American securities, which is part of the Madrid Stock Exchange.
Low-income Residential Customers: A group of customers that consumes less than 220 kWh per month and has filed an application to receive benefits under any of the federal government’s social programs. Low-income residential customers are considered a subgroup of residential customers and are not subject to payment of emergency capacity and emergency acquisition charges or any extraordinary tariff approved by ANEEL.
Main Transmission Concession: transmission concession contractNo. 060/2001 comprised of different transmission assets that were in operation in the year of 2001 (date of execution of the concession agreement).
MCSD: The Mechanism for Compensation of Surpluses and Deficits (Mecanismo de Compensação de Sobras e Déficits), which corresponds to theprocess of reallocation of energy surpluses and deficits undertaken in accordance with the Regulated Contracting Environment – ACR among the distribution agents that participate in CCEE.
MCSD-EN: The Mechanism for Compensation of Surpluses and Deficits of New Energy (Mecanismo de Compensação de Sobras e Déficits de Energia Nova), which allows distribution agents to offsetamounts of electric energy and power acquired in auctions of new generation projects, and allows the reduction of amounts contracted with generating agents bound to new generation ventures.
Megawatt (MW): One million watts.
Megawatt hour (MWh): One megawatt of power supplied or demanded for one hour, or one million watt hours.
MME: The Brazilian Ministry of Mines and Energy, or the Ministério de Minas e Energia.
MRE: The Energy Reallocation Mechanism is a mechanism which attempts to mitigate the risks borne by hydroelectric generators due to variations in river flows (hydrological risk).
MVE: The Mechanism of Surplus Sales (Mecanismo de Venda de Excedentes), which allows distribution companies to sell energy surpluses and, in the case of sales related to amounts within the regulatory limits or involuntary overcontracting, allows distribution companies to revert the acquired benefit to consumers through tariff adjustments.
Non-Brazilian Holder: An individual, entity, trust or organization resident or domiciled outside Brazil for purposes of Brazilian taxation that acquires, owns and disposes of Class B Shares or ADSs.
ONS: The National Electric System Operator, or theOperador Nacional do Sistema Elétrico.
RAP:Annual Permitted Revenues (or Receita Anual Permitida).
Rationing Program: A program instituted by the Brazilian government to reduce electricity consumption, in effect from June 1, 2001 to February 28, 2002, given it was a period of low rainfall in Brazil.
Real, Reais or R$: Brazilianreais(plural)and the Brazilianreal (singular).
Regulated Market: Market segment in which distribution companies purchase all the electricity needed to supply customers through public auctions. The auction process is administered by ANEEL, either directly or through CCEE, under certain guidelines provided by the MME. The regulated market is generally considered to be more stable in terms of supply of electricity.
Regulatory Remuneration Base:The aggregate amount of investments made by the distribution companies in connection with the services compensated by tariffs charged to consumers(Base de Remuneração Regulatória).
Reserve Energy Auction:mechanism for the contracting of reserve energy created to increase the security in the supplied of energy by the National Interconnected System (SIN). The reserve auction acts as an insurance contracted by distributors to be used when there is a mismatch between forecasted demand and supply. This modality of contracting is formalized through the conclusion of the CER between the selling agents in the auctions and the CCEE.
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Retail Tariff: Revenue charged by distribution companies to its 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. Retails tariffs are subject to annual revision by ANEEL.
RGR Fund: A reserve fund designed to provide compensatory payments to energy companies for certain assets used in connection with a concession if the concession is revoked or is not renewed.
Sanepar: Companhia de Saneamento do Paraná– Sanepar.
Securities Act:The United States Securities Act of 1933, as amended.
Securities Exchange Act:The United States Securities Exchange Act of 1934, as amended.
Sercomtel Telecomunicações: Sercomtel Telecomunicações S.A.
SHP ‒ Small Hydroelectric Plant: Hydroelectric plants with generating capacity between 1,000 kW and 30,000 kW with a reservoir covering an area equal to or less than 3.0 km2.
Special Customers: A group of customers that uses 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.
Spot Market:Deregulated market segment in which electricity is bought or sold for immediate delivery. In general, prices of spot market energy purchases tend to be substantially higher than the price of energy under long-term energy purchase agreements.
Substation: An assemblage of equipment, which switches and/or changes or regulates the voltage of electricity in a transmission and distribution system.
Tax Haven Holder: A shareholder situated in tax haven jurisdictions (that is, a country or location that does not impose income tax or where the maximum income tax rate is lower than 20% or where the local legislation imposes restrictions on disclosing the shareholding composition or the ownership of the investment or the beneficial owner of the income derived from transactions carried out and attributable to a Non-Brazilian Holder).
Thermoelectric Power Plant or TPP: A generating unit which uses combustible fuel, such as coal, oil, diesel natural gas or other hydrocarbon as the source of energy to drive the electric generator.
TJLP: The Long-Term Interest Rate, or theTaxa de Juros a Longo Prazo,the Brazilian federal government’s long-term interest rate.
Transmission: The bulk transfer of electricity from generating facilities to the distribution grid at load center station by means of the transmission grid (in lines with capacity between 69 kV and 525 kV).
Transmission Tariff: Revenue charged by a transmission concessionaire based on the transmission network it owns and operates. Transmission tariffs are subject to periodic revisions by ANEEL.
TUST: The tariff established by ANEEL for the use of the transmission system, which is the Interconnected Transmission System and its ancillary facilities.
U.S. Dollars, dollars, or US$: United States dollars.
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U.S.Holder: A beneficial holder of a Class B Share or an ADS that is (i) an individual citizen or resident of the United States of America, (ii) a corporation, or any other entity taxable as a corporation, organized under the laws of the United States of America, any state thereof, or the District of Columbia, or (iii) otherwise subject to U.S. federal income taxation on a net basis with respect to the Class B Share or ADS.
Utility: An entity that is the holder of a concession or authorization to engage in the generation, transmission or distribution of electric energy in Brazil.
Volt: The basic unit of electric force analogous to water pressure in pounds per square inch.
Watt: The basic unit of electrical power.
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Signatures
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
Companhia Paranaense De Energia – Copel
By:/s/ Daniel Pimentel Slaviero
Name: Daniel Pimentel Slaviero
Title: Chief Executive Officer
By:/s/ Adriano Rudek de Moura
Name: Adriano Rudek de Moura
Title: Chief Financial and Investor Relations Officer
Date:April 26, 2019
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of
Companhia Paranaense de Energia - Copel
Curitiba - PR - Brazil
Opinion on the Financial Statements
We have audited the accompanying consolidated statements of financial position of Companhia Paranaense de Energia - Copel and subsidiaries (the “Company”) as of December 31, 2018 and 2017, the related consolidated statements of income, comprehensive income, changes in equity, and cash flows, for each of the three years in the period ended December 31, 2018, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity with International Financial Reporting Standards - IFRS as issued by the International Accounting Standards Board - IASB.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2018, based on the criteria established inInternal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report datedApril 26, 2019, expressed an adverse opinion on the Company’s internal control over financial reporting because of material weaknesses.
Change in Accounting Principle
As discussed in Note 4.17 to the consolidated financial statements, the Company has changed its method of accounting for revenue from contracts with customers and financial instruments during 2018 due to the adoption of IFRS 15 - Revenue from Contracts with Customers and IFRS 9 - Financial Instruments, respectively.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits alsoincluded evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ DELOITTE TOUCHE TOHMATSU
Deloitte Touche Tohmatsu
Auditores Independentes
Curitiba, Brazil
April 26, 2019
We have served as the Company’s auditor since 2016.
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Companhia Paranaense de Energia – Copel and Subsidiaries
Consolidated Financial Statements as of December 31, 2018 and 2017
and for the years ended December 31, 2018, 2017 and 2016 and Report of
Independent Registered Public Accounting Firm
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Consolidated Statements of Financial Position
As of December 31, 2018 and 2017
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
ASSETS | Note | 12.31.2018 | 12.31.2017 |
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CURRENT ASSETS |
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|
|
Cash and cash equivalents | 5 | 1,948,409 | 1,040,075 |
Bonds and securities | 6 | 124,862 | 1,341 |
Collaterals and escrow accounts |
| 203 | 59,372 |
Trade accounts receivable | 7 | 2,944,091 | 2,733,240 |
Dividends receivable |
| 76,672 | 80,815 |
CRC Transferred to the Paraná State Government | 8 | 190,876 | 167,109 |
Sectorial financial assets | 9 | 421,184 | 171,609 |
Accounts receivable - concessions | 10 | 53,177 | 149,744 |
Contract assets | 11 | 85,019 | - |
Other current receivables | 12 | 363,250 | 409,351 |
Inventories |
| 116,285 | 110,559 |
Income tax and social contribution receivable | 13.1 | 152,157 | 501,685 |
Other current recoverable taxes | 13.3 | 160,842 | 198,232 |
Prepaid expenses | 14 | 40,819 | 39,867 |
Receivable from related parties | 15 | - | 38,835 |
|
| 6,677,846 | 5,701,834 |
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NONCURRENT ASSETS |
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|
Long Term Assets |
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|
Bonds and securities | 6 | 219,434 | 218,322 |
Other temporary investments | 16 | 19,511 | 18,727 |
Collaterals and escrow accounts | 22.1 | 89,555 | 75,665 |
Trade accounts receivable | 7 | 162,915 | 261,082 |
CRC Transferred to the Paraná State Government | 8 | 1,254,166 | 1,349,253 |
Judicial deposits | 16 | 528,290 | 582,529 |
Sectorial financial assets | 9 | 257,635 | 171,609 |
Accounts receivable - concessions | 10 | 2,497,514 | 4,429,237 |
Contract assets | 11 | 3,348,211 | - |
Other noncurrent receivables | 12 | 228,894 | 149,416 |
Income tax and social contribution receivable | 13.1 | 166,384 | 176,480 |
Deferred income tax and social contribution | 13.2 | 1,007,061 | 915,492 |
Other noncurrent recoverable taxes | 13.3 | 231,400 | 116,974 |
Prepaid expenses | 14 | 3,290 | 12,684 |
Receivable from related parties | 15 | - | 130,156 |
|
| 10,014,260 | 8,607,626 |
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|
|
|
Investments | 17 | 2,368,234 | 2,570,643 |
Property, plant and equipment | 18 | 10,840,663 | 9,829,450 |
Intangible assets | 19 | 6,029,097 | 6,452,824 |
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|
|
|
|
| 29,252,254 | 27,460,543 |
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TOTAL ASSETS |
| 35,930,100 | 33,162,377 |
Notes are an integral part of these financial statements. | |||
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F-1
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Consolidated Statements of Financial Position, continued
As of December 31, 2018 and 2017
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
LIABILITIES | Note | 12.31.2018 | 12.31.2017 |
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CURRENT LIABILITIES |
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|
|
Payroll, social charges and accruals | 20 | 284,179 | 313,967 |
Accounts payable to suppliers | 21 | 1,419,243 | 1,683,577 |
Income tax and social contribution payable | 13.1 | 197,949 | 86,310 |
Other taxes due | 13.3 | 451,433 | 345,487 |
Loans and financing | 22 | 1,113,047 | 784,666 |
Debentures | 23 | 2,184,881 | 1,632,062 |
Dividend payable |
| 375,675 | 288,981 |
Post-employment benefits | 24 | 58,478 | 53,225 |
Sectorial charges due | 25 | 79,872 | 150,025 |
Research and development and Energy efficiency | 26 | 270,429 | 282,766 |
Accounts payable related to concession | 27 | 67,858 | 62,624 |
Sectorial financial liabilities | 9 | - | 192,819 |
Other accounts payable | 28 | 192,070 | 121,405 |
Provisions for legal claims | 29 | - | 112,000 |
|
| 6,695,114 | 6,109,914 |
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NONCURRENT LIABILITIES |
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Accounts payable to suppliers | 21 | 49,956 | 43,469 |
Deferred income tax and social contribution | 13.2 | 157,420 | 156,630 |
Other taxes due | 13.3 | 796,732 | 809,576 |
Loans and financing | 22 | 2,934,260 | 2,974,839 |
Debentures | 23 | 5,333,250 | 4,438,916 |
Post-employment benefits | 24 | 910,285 | 812,878 |
Research and development and Energy efficiency | 26 | 322,306 | 249,709 |
Accounts payable related to concession | 27 | 516,305 | 492,330 |
Sectorial financial liabilities | 9 | 96,531 | 90,700 |
Other accounts payable | 28 | 116,954 | 72,849 |
Provisions for legal claims | 29 | 1,664,773 | 1,400,064 |
|
| 12,898,772 | 11,541,960 |
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EQUITY |
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Attributable to controlling shareholders |
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Capital | 30.1 | 7,910,000 | 7,910,000 |
Equity valuation adjustments | 30.2 | 785,610 | 895,601 |
Legal reserve |
| 914,751 | 844,398 |
Profit retention reserve |
| 6,422,564 | 5,557,843 |
|
| 16,032,925 | 15,207,842 |
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Attributable to non-controlling interests | 17.2.2 | 303,289 | 302,661 |
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|
| 16,336,214 | 15,510,503 |
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TOTAL LIABILITIES & EQUITY |
| 35,930,100 | 33,162,377 |
Notes are an integral part of these financial statements. |
F-2
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Consolidated Statements of Income
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
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| Note | 12.31.2018 | 12.31.2017 | 12.31.2016 |
NET OPERATING REVENUE | 31 | 14,934,780 | 14,024,573 | 13,101,753 |
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| |
OPERATING COSTS | 32 | (11,501,688) | (10,665,890) | (10,234,115) |
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| |
GROSS PROFIT |
| 3,433,092 | 3,358,683 | 2,867,638 |
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| |
Operational expenses / income |
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| |
Selling expenses | 32 | (148,709) | (169,050) | (250,448) |
General and administrative expenses | 32 | (723,534) | (685,675) | (741,145) |
Other operational income (expenses) | 32 | (302,690) | (464,316) | (53,638) |
Equity in earnings of investees | 17 | 135,888 | 101,739 | 166,411 |
|
| (1,039,045) | (1,217,302) | (878,820) |
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| |
PROFIT BEFORE FINANCIAL RESULTS AND TAXES |
| 2,394,047 | 2,141,381 | 1,988,818 |
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| |
Financial results | 33 |
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| |
Financial income |
| 813,915 | 699,310 | 903,936 |
Financial expenses |
| (1,251,965) | (1,447,750) | (1,498,592) |
|
| (438,050) | (748,440) | (594,656) |
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| |
OPERATING PROFIT |
| 1,955,997 | 1,392,941 | 1,394,162 |
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| |
INCOME TAX AND SOCIAL CONTRIBUTION | 13.4 |
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| |
Current |
| (580,065) | (379,943) | (589,322) |
Deferred |
| 68,072 | 105,257 | 69,632 |
|
| (511,993) | (274,686) | (519,690) |
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| |
NET INCOME |
| 1,444,004 | 1,118,255 | 874,472 |
Attributed to controlling shareholders |
| 1,407,063 | 1,033,626 | 895,772 |
Attributed to non-controlling interest | 17.2.2 | 36,941 | 84,629 | (21,300) |
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| |
BASIC AND DILUTED NET EARNING PER SHARE ATTRIBUTED TO PARENT |
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| |
COMPANY SHAREHOLDERS - EXPRESSED IN BRAZILIAN REAIS | 30.5 |
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| |
Common shares |
| 4.91091 | 3.60754 | 3.12641 |
Class "A" Preferred shares |
| 5.40201 | 3.96830 | 3.43906 |
Class "B" Preferred shares |
| 5.40201 | 3.96830 | 3.43906 |
Notes are an integral part of these financial statements. |
F-3
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Consolidated Statements of Comprehensive Income
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
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| Note | 12.31.2018 | 12.31.2017 | 12.31.2016 |
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| ||
NET INCOME |
| 1,444,004 | 1,118,255 | 874,472 |
Other comprehensive income |
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| |
Items that will never be reclassified to profit or loss | 30.2 |
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| |
Gain (losses) on actuarial liabilities |
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| |
Post employment benefits |
| (58,354) | (46,506) | (88,906) |
Post employment benefits - equity |
| - | - | (852) |
Taxes on other comprehensive income |
| 19,994 | 16,827 | 30,174 |
Items that may be reclassified to profit or loss | 30.2 |
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| |
Adjustments related to financial assets |
| - | 26,138 | 3,612 |
Taxes on other comprehensive income |
| - | (8,888) | (1,229) |
Realization - gain on financial assets, net of tax |
| - | (18,909) | - |
Total comprehensive income, net of taxes |
| (38,360) | (31,338) | (57,201) |
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| ||
TOTAL COMPREHENSIVE INCOME |
| 1,405,644 | 1,086,917 | 817,271 |
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| ||
Attributed to controlling shareholders |
| 1,368,549 | 1,002,411 | 838,506 |
Attributed to non-controlling interest |
| 37,095 | 84,506 | (21,235) |
Notes are an integral part of these financial statements. |
F-4
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Consolidated Statements of Changes in Equity
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
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| Attributable to controlling shareholders |
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| |||||
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| Equity valuation adjustments | Profit reserves |
| Attributable |
| |||
| Note |
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| Other |
| Profit |
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| to non - |
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|
| Deemed | comprehensive | Legal | retention | Accumulated | Shareholders’ | controlling |
| |
|
| Capital | cost | income | reserve | reserve | profit | equity | interests | Equity |
Balance as of January 1, 2016 |
| 6,910,000 | 1,046,663 | 130,709 | 744,784 | 5,330,383 | - | 14,162,539 | 317,953 | 14,480,492 |
Net Income (loss) |
| - | - | - | - | - | 895,772 | 895,772 | (21,300) | 874,472 |
Other comprehensive income |
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Gain on financial assets, net of taxes | 31.2 | - | - | 2,383 | - | - | - | 2,383 | - | 2,383 |
Actuarial gain (losses), net of taxes | 31.2 | - | - | (59,649) | - | - | - | (59,649) | 65 | (59,584) |
Total comprehensive income |
| - | - | (57,266) | - | - | 895,772 | 838,506 | (21,235) | 817,271 |
Realization - deemed cost, net of taxes | 31.2 | - | (101,707) | - | - | - | 101,707 | - | - | - |
Realization - actuarial gain | 31.2 | - | - | (19,933) | - | 19,933 | - | - | - | - |
Deliberation of additional dividends proposed | 18.2.2 | - | - | - | - | - | - | - | (23,072) | (23,072) |
Distribution of dividends with retained earnings | 18.2.2 | - | - | - | - | - | - | - | (9,342) | (9,342) |
Capital increase |
| 1,000,000 | - | - | - | (1,000,000) | - | - | - | - |
Allocation proposed to GSM: |
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Legal reserve |
| - | - | - | 47,932 | - | (47,932) | - | - | - |
Interest on own capital | 31.4 | - | - | - | - | - | (282,947) | (282,947) | - | (282,947) |
Dividends | 18.2.2 | - | - | - | - | - | - | - | (4,260) | (4,260) |
Profit retention reserve |
| - | - | - | - | 666,600 | (666,600) | - | - | - |
Balance as of December 31, 2016 |
| 7,910,000 | 944,956 | 53,510 | 792,716 | 5,016,916 | - | 14,718,098 | 260,044 | 14,978,142 |
Net Income |
| - | - | - | - | - | 1,033,626 | 1,033,626 | 84,629 | 1,118,255 |
Other comprehensive income |
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|
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|
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|
Gain on financial assets, net of taxes | 30.2 | - | - | 17,250 | - | - | - | 17,250 | - | 17,250 |
Actuarial losses, net of taxes | 30.2 | - | - | (29,556) | - | - | - | (29,556) | (123) | (29,679) |
Realization - gain on financial assets, net of taxes | 30.2 | - | - | (18,909) | - | - | - | (18,909) | - | (18,909) |
Total comprehensive income |
| - | - | (31,215) | - | - | 1,033,626 | 1,002,411 | 84,506 | 1,086,917 |
Realization - deemed cost, net of taxes | 30.2 | - | (71,650) | - | - | - | 71,650 | - | - | - |
Deliberation of additional dividends proposed | 17.2.2 | - | - | - | - | - | - | - | (11,053) | (11,053) |
Approval of additional dividends in accordance with the 62nd Annual General Meeting |
| - | - | - | - | (223,266) | - | (223,266) | - | (223,266) |
Allocation proposed to GSM: |
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Legal reserve |
| - | - | - | 51,682 | - | (51,682) | - | - | - |
Interest on own capital | 30.4 | - | - | - | - | - | (266,000) | (266,000) | - | (266,000) |
Dividends | 17.2.2 | - | - | - | - | - | (23,401) | (23,401) | (30,836) | (54,237) |
Profit retention reserve |
| - | - | - | - | 764,193 | (764,193) | - | - | - |
Balance as of December 31, 2017 |
| 7,910,000 | 873,306 | 22,295 | 844,398 | 5,557,843 | - | 15,207,842 | 302,661 | 15,510,503 |
Adjustments arising from the adoption of IFRS15 and IFRS9 | 4.18.3 | - | - | (4,391) | - | - | (160,533) | (164,924) | - | (164,924) |
Transfers to profit retention reserve | 4.18.3 | - | - | - | - | (160,533) | 160,533 | - | - | - |
Balance as of January 1, 2018 |
| 7,910,000 | 873,306 | 17,904 | 844,398 | 5,397,310 | - | 15,042,918 | 302,661 | 15,345,579 |
Net Income |
| - | - | - | - | - | 1,407,063 | 1,407,063 | 36,941 | 1,444,004 |
Other comprehensive income |
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|
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|
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|
Actuarial gains (losses), net of taxes | 30.2 | - | - | (38,514) | - | - | - | (38,514) | 154 | (38,360) |
Total comprehensive income |
| - | - | (38,514) | - | - | 1,407,063 | 1,368,549 | 37,095 | 1,405,644 |
Realization - deemed cost, net of taxes | 30.2 | - | (67,086) | - | - | - | 67,086 | - | - | - |
Allocation proposed to GSM: |
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Legal reserve |
| - | - | - | 70,353 | - | (70,353) | - | - | - |
Interest on own capital | 30.4 | - | - | - | - | - | (280,000) | (280,000) | - | (280,000) |
Dividends | 17.2.2 | - | - | - | - | - | (98,542) | (98,542) | (36,467) | (135,009) |
Profit retention reserve |
| - | - | - | - | 1,025,254 | (1,025,254) | - | - | - |
Balance as of December 31, 2018 |
| 7,910,000 | 806,220 | (20,610) | 914,751 | 6,422,564 | - | 16,032,925 | 303,289 | 16,336,214 |
Notes are an integral part of these financial statements. |
F-5
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Consolidated Statements of Cash Flows
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
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| Note | 12.31.2018 | 12.31.2017 | 12.31.2016 |
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CASH FLOWS FROM OPERATIONAL ACTIVITIES |
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Net income |
| 1,444,004 | 1,118,255 | 874,472 |
|
|
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|
|
Adjustments to reconcile net income for the period with cash generated from operating activities |
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|
|
Unrealized monetary and cambial variation and debt charges - net |
| 767,751 | 900,610 | 1,171,228 |
Interest - bonus from the grant of concession agreements under the quota system | 10.3 | (85,986) | (82,160) | (96,783) |
Gain on transmission concession agreement | 11.3 | (268,904) | (129,769) | (98,780) |
Reversal of estimated losses on transmission concession agreement | 10.4 | - | - | (29,025) |
Gain on remeasurement of the cash flow from the RBSE assets | 10.5 | (82,640) | (361,156) | (809,639) |
Result of the adoption of the Special Tax Regularization Program |
| - | (154,197) | - |
Income tax and social contribution | 13.4 | 580,065 | 379,943 | 589,322 |
Deferred income tax and social contribution | 13.4 | (68,072) | (105,257) | (69,632) |
Equity in earnings of investees | 17.1 | (135,888) | (101,739) | (166,411) |
Result of renegotiation of hydrological risk - GSF |
| - | - | (26,872) |
Appropriation of actuarial calculation of post-employment benefits | 24.4 | 97,900 | 97,511 | 130,707 |
Appropriation of pension and healthcare contributions | 24.4 | 151,215 | 153,069 | 142,735 |
Creation for research and development and energy efficiency programs | 26.2 | 125,369 | 118,753 | 101,946 |
Recognition of fair value of assets related to concession compensation | 31 | (47,499) | (57,080) | (132,741) |
Sectorial financial assets and liabilities result | 31 | (985,344) | (767,040) | 1,079,662 |
Depreciation and amortization | 32 | 749,179 | 731,599 | 708,296 |
Net operating estimated losses, provisions and reversals | 32.4 | 306,697 | 365,539 | 768,696 |
Result from the change of the investment valuation method |
| - | - | (52,107) |
Losses in the business combination | 32.6 | 3,769 | - | - |
Result of disposal of investment | 32.6 | (8,174) | (28,650) | - |
Fair value in the purchase and sale of power in the active market | 35.2.12 | (3,786) | - | - |
Impairment of accounts receivable related to concession | 10 | 1,536 | 17 | 54 |
Loss on disposal of contract assets | 11 | 9,762 | - | - |
Loss on disposal of property, plant and equipment | 18.2 | 68,450 | 64,508 | 27,316 |
Loss on disposal of intangible assets | 19 | 28,742 | 42,740 | 47,434 |
|
| 2,648,146 | 2,185,496 | 4,159,878 |
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|
Decrease (increase) in assets |
|
|
|
|
Trade accounts receivable |
| 191,113 | (322,814) | 578,116 |
Dividends and interest on own capital received |
| 50,858 | 44,334 | 154,877 |
CRC transferred to the Government of the State of Paraná | 8.1 | 260,117 | 97,085 | 49,425 |
Judicial deposits |
| 87,853 | 96,028 | 62,324 |
Sectorial financial assets | 9.2 | 482,974 | - | 258,779 |
Other receivables |
| 17,292 | (44,193) | 15,244 |
Inventories |
| (5,726) | 20,078 | 381 |
Income tax and social contribution |
| 360,855 | 146,602 | (69,989) |
Other current taxes recoverable |
| (74,003) | 87,884 | (25,608) |
Prepaid expenses |
| 8,520 | 12,128 | 10,096 |
Related parties |
| - | (667) | - |
|
| 1,379,853 | 136,465 | 1,033,645 |
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|
|
Increase (decrease) in liabilities |
|
|
|
|
Payroll, social charges and accruals |
| (29,845) | 26,170 | 29,396 |
Related parties |
| (59) | - | - |
Suppliers |
| (572,306) | 275,370 | (666,864) |
Other taxes |
| 75,234 | 24,795 | (62,239) |
Post-employment benefits | 24.4 | (204,809) | (200,848) | (187,143) |
Sectorial charges due |
| (70,507) | 8,313 | (135,746) |
Research and development and energy efficiency | 26.2 | (91,015) | (104,512) | (58,831) |
Payable related to the concession | 27.2 | (64,365) | (65,871) | (648,593) |
Sectorial financial liabilities |
| - | 419,220 | - |
Other accounts payable |
| 103,464 | (101,062) | (23,605) |
Provisions for legal claims | 29.1.1 | (144,171) | (124,395) | (193,197) |
|
| (998,379) | 157,180 | (1,946,822) |
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|
|
CASH GENERATED FROM OPERATING ACTIVITIES |
| 3,029,620 | 2,479,141 | 3,246,701 |
|
|
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|
|
Income tax and social contribution paid |
| (468,552) | (335,087) | (859,784) |
Loans and financing - interest due and paid | 22.4 | (289,095) | (532,033) | (362,128) |
Debentures - interest due and paid | 23.2 | (501,002) | (622,815) | (547,971) |
|
|
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|
|
NET CASH GENERATED FROM OPERATING ACTIVITIES |
| 1,770,971 | 989,206 | 1,476,818 |
(continued) |
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F-6
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Consolidated Statements of Cash Flows, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
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| Note | 12.31.2018 | 12.31.2017 | 12.31.2016 |
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CASH FLOWS FROM INVESTMENT ACTIVITIES |
|
|
|
|
Financial investments |
| (75,804) | 48,512 | 13,664 |
Loans and financing granted to related parties |
| - | (5,145) | (9,422) |
Receipt of loans and financing granted to related parties |
| 117,645 | 24,985 | 5,112 |
Additions to contract assets |
| (792,835) | - | - |
Customers contributions - contract assets |
| 106,764 | - | - |
Acquisitions of subsidiaries - effect on cash |
| 7,998 | - | - |
Disposal of investments |
| - | 484,608 | - |
Additions in investments | 17.1 e 39.1 | (51,557) | (248,243) | (505,098) |
Capital reduction of investees | 17.1 | 35,280 | - | 74,983 |
Additions to property, plant and equipment |
| (1,489,067) | (1,205,508) | (1,284,436) |
Customers contributions - property, plant and equipment |
| 12 | - | 40 |
Additions to intangible assets |
| (7,589) | (806,240) | (928,727) |
Customers contributions - intangible assets |
| - | 125,858 | 122,809 |
|
|
|
|
|
NET CASH (USED IN) GENERATED FROM INVESTING ACTIVITIES |
| (2,149,153) | (1,581,173) | (2,511,075) |
|
|
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|
CASH FLOWS FROM FINANCING ACTIVITIES |
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|
|
|
Loans and financing obtained from third parties | 22.4 | 1,314,766 | 800,044 | 93,806 |
Issue of Debentures | 23.2 | 2,890,283 | 2,242,521 | 1,822,965 |
Payments of principal - loans and financing | 22.4 | (1,126,144) | (971,187) | (226,973) |
Payments of principal - debentures | 23.2 | (1,491,667) | (915,005) | (785,239) |
Dividends and interest on own capital paid |
| (300,722) | (506,404) | (368,956) |
|
|
|
|
|
NET CASH GENERATED FROM FINANCING ACTIVITIES |
| 1,286,516 | 649,969 | 535,603 |
|
|
|
|
|
TOTAL EFFECTS ON CASH AND CASH EQUIVALENTS |
| 908,334 | 58,002 | (498,654) |
|
|
|
|
|
Cash and cash equivalents at the beginning of the period | 5 | 1,040,075 | 982,073 | 1,480,727 |
Cash and cash equivalents at the end of the period | 5 | 1,948,409 | 1,040,075 | 982,073 |
|
|
|
|
|
CHANGE IN CASH AND CASH EQUIVALENTS |
| 908,334 | 58,002 | (498,654) |
Notes are an integral part of these financial statements. |
F-7
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
1 Operations
Companhia Paranaense de Energia (Copel, Company or Parent Company), with its head office located at Rua Coronel Dulcídio, 800, Curitiba - State of Paraná, is a publicly-held mixed capital company controlled by the State of Paraná and its shares are traded at Corporate Governance Level 1 of the Special Listing Segments of B3 S.A. - Brasil, Bolsa Balcão Stock Exchange and also on the New York Stock Exchange (NYSE) and on the Madrid Stock Exchange in the Latin American segment (Latibex).
The core activities of Copel and its subsidiaries, which are regulated by the Brazilian Electricity Regulatory Agency (ANEEL), linked to the Brazilian Ministry of Mines and Energy (MME), is to carry out research, study, planning, and asset building activities related to the generation, transformation, distribution and trading of energy in any of its forms, primarily electricity. Furthermore, Copel participates in consortiums and in private sector and mixed-capital companies for the purpose of engaging in activities, primarily in the fields of energy, telecommunications and natural gas.
1.1 Copel’s equity interests
Copel has direct and indirect interests in subsidiaries (1.1.1), joint ventures (1.1.2), associates (1.1.3) and joint operations (1.1.4).
The changes, acquisitions and sales in relation to the equity stakes as of 12.31.2017 were: business combination presented in Note 1.2, transfer of Foz do Chopim (NE nº 1.1.3) and constitution of the Specific Purpose Company - SPE Bela Vista Geração de Energia S.A.
F-8
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
1.1.1 Subsidiaries
| Headquarters | Main activity | Interest | |
Subsidiaries | % | Investor | ||
Copel Geração e Transmissão S.A. (Copel GeT) | Curitiba/PR | Production and transmission of electricity | 100.0 | Copel |
Copel Distribuição S.A. (Copel DIS) | Curitiba/PR | Distribution and marketing of electricity | 100.0 | Copel |
Copel Telecomunicações S.A. (Copel TEL) | Curitiba/PR | Telecommunication and communication | 100.0 | Copel |
Copel Renováveis S.A. (Copel REN) (a) | Curitiba/PR | Control and management of interests | 100.0 | Copel |
Copel Comercialização S.A. (Copel Energia) | Curitiba/PR | Commercialization of electricity | 100.0 | Copel |
Companhia Paranaense de Gás - Compagás | Curitiba/PR | Distribution of pipeline gas | 51.0 | Copel |
Elejor - Centrais Elétricas do Rio Jordão S.A. | Curitiba/PR | Production of electricity | 70.0 | Copel |
UEG Araucária Ltda. (UEG) | Curitiba/PR | Production of electricity from natural gas | 20.0 | Copel |
60.0 | Copel GeT | |||
São Bento Energia, Investimentos e Participações S.A. (São Bento) | Curitiba/PR | Control and management of interests | 100.0 | Copel GeT |
Nova Asa Branca I Energias Renováveis S.A. | S. Miguel do Gostoso/RN | Production of electricity from wind sources | 100.0 | Copel GeT |
Nova Asa Branca II Energias Renováveis S.A. | Parazinho/RN | Production of electricity from wind sources | 100.0 | Copel GeT |
Nova Asa Branca III Energias Renováveis S.A. | Parazinho/RN | Production of electricity from wind sources | 100.0 | Copel GeT |
Nova Eurus IV Energias Renováveis S.A. | Touros/RN | Production of electricity from wind sources | 100.0 | Copel GeT |
Santa Maria Energias Renováveis S.A. | Maracanaú/CE | Production of electricity from wind sources | 100.0 | Copel GeT |
Santa Helena Energias Renováveis S.A. | Maracanaú/CE | Production of electricity from wind sources | 100.0 | Copel GeT |
Ventos de Santo Uriel S.A. | João Câmara/RN | Production of electricity from wind sources | 100.0 | Copel GeT |
Cutia Empreendimentos Eólicos S.A. (Cutia) | Curitiba/PR | Control and management of interests | 100.0 | Copel GeT |
Costa Oeste Transmissora de Energia S.A. (1.2) | Curitiba/PR | Transmission of electricity | 100.0 | Copel GeT |
Marumbi Transmissora de Energia S.A. (1.2) | Curitiba/PR | Transmission of electricity | 100.0 | Copel GeT |
Bela Vista Geração de Energia S.A. (b) | Curitiba/PR | Production of electricity | 99.9 | Copel GeT |
GE Olho D’Água S.A. | São Bento do Norte/RN | Production of electricity from wind sources | 100.0 | São Bento |
GE Boa Vista S.A. | São Bento do Norte/RN | Production of electricity from wind sources | 100.0 | São Bento |
GE Farol S.A. | São Bento do Norte/RN | Production of electricity from wind sources | 100.0 | São Bento |
GE São Bento do Norte S.A. | São Bento do Norte/RN | Production of electricity from wind sources | 100.0 | São Bento |
Central Geradora Eólica São Bento do Norte I S.A. (c) | São Bento do Norte/RN | Production of electricity from wind sources | 100.0 | Cutia |
Central Geradora Eólica São Bento do Norte II S.A. (c) | São Bento do Norte/RN | Production of electricity from wind sources | 100.0 | Cutia |
Central Geradora Eólica São Bento do Norte III S.A. (b) | São Bento do Norte/RN | Production of electricity from wind sources | 100.0 | Cutia |
Central Geradora Eólica São Miguel I S.A. (c) | São Bento do Norte/RN | Production of electricity from wind sources | 100.0 | Cutia |
Central Geradora Eólica São Miguel II S.A. (c) | São Bento do Norte/RN | Production of electricity from wind sources | 100.0 | Cutia |
Central Geradora Eólica São Miguel III S.A. (c) | São Bento do Norte/RN | Production of electricity from wind sources | 100.0 | Cutia |
Usina de Energia Eólica Guajiru S.A. (c) | São Bento do Norte/RN | Production of electricity from wind sources | 100.0 | Cutia |
Usina de Energia Eólica Jangada S.A. (c) | São Bento do Norte/RN | Production of electricity from wind sources | 100.0 | Cutia |
Usina de Energia Eólica Potiguar S.A. (c) | São Bento do Norte/RN | Production of electricity from wind sources | 100.0 | Cutia |
Usina de Energia Eólica Cutia S.A. (c) | São Bento do Norte/RN | Production of electricity from wind sources | 100.0 | Cutia |
Usina de Energia Eólica Maria Helena S.A. (c) | São Bento do Norte/RN | Production of electricity from wind sources | 100.0 | Cutia |
Usina de Energia Eólica Esperança do Nordeste S.A.(c) | São Bento do Norte/RN | Production of electricity from wind sources | 100.0 | Cutia |
Usina de Energia Eólica Paraíso dos Ventos do Nordeste S.A. (b) | São Bento do Norte/RN | Production of electricity from wind sources | 100.0 | Cutia |
(a) Company management is assessing whether a business purpose change or a closure and transfer of assets to the shareholder is required. | ||||
(b) Pre-operating stage. | ||||
(c) Operation started from December 2018. |
1.1.2 Joint ventures
Joint ventures | Headquarters | Main activity | Interest | |
% | Investor | |||
Voltalia São Miguel do Gostoso I Participações S.A. | São Paulo/SP | Interests in companies | 49.0 | Copel |
Paraná Gás Exploração e Produção S.A. (a) | Curitiba/PR | Exploration of natural gas | 30.0 | Copel |
Caiuá Transmissora de Energia S.A. | Rio de Janeiro/RJ | Transmission of electricity | 49.0 | Copel GeT |
Integração Maranhense Transmissora de Energia S.A. | Rio de Janeiro/RJ | Transmission of electricity | 49.0 | Copel GeT |
Matrinchã Transmissora de Energia (TP NORTE) S.A. | Rio de Janeiro/RJ | Transmission of electricity | 49.0 | Copel GeT |
Guaraciaba Transmissora de Energia (TP SUL) S.A. | Rio de Janeiro/RJ | Transmission of electricity | 49.0 | Copel GeT |
Paranaíba Transmissora de Energia S.A. | Rio de Janeiro/RJ | Transmission of electricity | 24.5 | Copel GeT |
Mata de Santa Genebra Transmissão S.A. (b) | Rio de Janeiro/RJ | Transmission of electricity | 50.1 | Copel GeT |
Cantareira Transmissora de Energia S.A. | Rio de Janeiro/RJ | Transmission of electricity | 49.0 | Copel GeT |
|
|
|
|
|
(a) Project with its activities halted because of a Public Civil Action pending a decision at TRF-4. There is a decision of the consortium members requesting the National Agency of Petroleum, Natural Gas and Biofuels – ANP, through the establishment of an institutional arbitration procedure, to release contractual obligations without burden to the bidders, with the consequent return of the subscription bonuses, reimbursement of the warranty costs incurred, and the release of the guarantees provided. | ||||
(b) Pre-operating stage. |
F-9
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
1.1.3 Associates
Associated companies | Headquarters | Main activity | Interest | |
% | Investor | |||
Dona Francisca Energética S.A. | Agudo/RS | Production of electricity | 23.0303 | Copel |
Foz do Chopim Energética Ltda. (a) | Curitiba/PR | Production of electricity | 35.77 | Copel GeT |
Carbocampel S.A. | Figueira/PR | Coal exploration | 49.0 | Copel |
Copel Amec S/C Ltda. - in liquidation | Curitiba/PR | Services | 48.0 | Copel |
Sercomtel S.A. Telecomunicações (c) | Londrina/PR | Telecommunications | 45.0 | Copel |
Dominó Holdings Ltda. | Curitiba/PR | Interests in companies | 49.0 | Copel Energia |
GBX Tietê II Empreendimentos Participações S.A. (b) | São Paulo/SP | Incorporation of real estate projects | 19.31 | UEG |
|
|
|
|
|
(a) In February 2018, the associated Foz do Chopim Energética Ltda. was transferred from Copel to Copel GeT, through an increase in the capital stock. As it is a transfer without change of control, the Company recorded the book values. The balances was transferred in the transaction are shown in Note 17.1 | ||||
(b) Pre-operating stage. | ||||
(c) Investment reduced to zero due to the impairment tests. |
1.1.4 Joint operations (consortiums)
Joint operations | Interest (%) | Other consortium members |
Hydroelectric Power Plant Gov. Jayme Canet Júnior (Mauá - Note 18.5) | 51.0 | Eletrosul Centrais Elétricas S.A. (49%) |
Hydroelectric Power Plant Baixo Iguaçu (Note 18.5) | 30.0 | Geração Céu Azul S.A (Subsidiary of Neoenergia S.A.) (70%) |
1.2 Business combination through the exchange of assets
1.2.1 Subsidiaries acquired and joint venture disposed of
On August 30, 2018, Copel GeT signed a Share Exchange Agreement with Eletrosul with respect to the joint ventures Costa Oeste Transmissora de Energia S.A. (51% -Copel GeT and 49% - Eletrosul), Marumbi Transmissora de Energia S.A. (80% - Copel GeT and 20%- Eletrosul) and Transmissora Sul Brasileira de Energia S.A. (20% - Copel GeT and 80% - Eletrosul). The impact of the exchange agreement is that Copel GeT obtained a 100% interest in the former joint ventures Costa Oeste and Marumbi, and Eletrosul obtained a 100% interest in Transmissora Sul Brasileira.
The assumption of the 100% interest in Costa Oeste and Marumbi by Copel GeT will allow economies of scale in the integrated management of these ventures with theotherCompany’s assets.
The business combinations occurred on August 31, 2018, date of transfer of the shares.
|
|
| Percentage interest | Consideration | |
|
| in shares of Copel-GeT | transferred | ||
Subsidiaries acquired | Main activity | Date of acquisition | previous | acquired | R$ |
Costa Oeste | Transmission of electricity | 08.31.2018 | 51% | 49% | 38,883 |
Marumbi | Transmission of electricity | 08.31.2018 | 80% | 20% | 23,811 |
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F-10
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
1.2.2 Consideration transferred and concession right generated in acquisitions
The business combinations occurred through exchange of assets and the amount of the consideration corresponded to the fair value of the 20% interest held by Copel GeT in Transmissora Sul Brasileira (asset transferred). This amount was allocated in proportion to the fair value of the equity interests acquired from Eletrosul, corresponding to 49% of Costa Oeste and 20% of Marumbi.
| Net assets transferred | Net assets acquired | |
Consideration transferred | Transmissora Sul Brasileira | Costa Oeste | Marumbi |
Fair value on 08.31.2018 | 313,471 | 73,219 | 109,861 |
Percentage of interest transferred | 20% | -49% | -20% |
Amount of portion exchanged | 62,694 | (35,878) | (21,971) |
Consideration amount | 62,694 | 38,883 | 23,811 |
Concession rights | - | 3,005 | 1,840 |
The concession rights generated in the business combinations consist mainly of expected synergies and economies of scale and will be amortized over the remaining concession periods of Costa Oeste and Marumbi, which will expire on January 11, 2042 and May 9, 2042, respectively.
|
|
|
Concession right generated in the acquisition | Costa Oeste | Marumbi |
Fair value of consideration transferred | 38,883 | 23,811 |
Fair value of Copel GeT interest before the combination | 37,341 | 87,890 |
76,224 | 111,701 | |
Net value of identifiable assets acquired and liabilities assumed | (73,219) | (109,861) |
Concession rights | 3,005 | 1,840 |
1.2.3 Assets acquired and liabilities recognized on the acquisition date
Copel GeT measured preliminarily at fair value on the acquisition date its prior equity interests in the acquires, the identifiable assets acquired, and the liabilities assumed.
The losses resulting from the fair value measurement of the prior equity interests of Copel GeT in Costa Oeste and Marumbi, amounting to R$ 3,769, are included in Other operating income (expenses), net, in the statement of income.
The fair values of the prior equity interests and the interests acquired on the business combination dates of Costa Oeste and Marumbi are shown below:
F-11
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
Costa Oeste |
| Fair value | ||
|
| Equity interest |
| |
| At the | before business | Equity interest | |
08.31.2018 | Carrying amount | acquisition date | combination - 51% | acquired - 49% |
Assets identified | 102,355 | 109,327 | 55,757 | 53,570 |
Cash and cash equivalents | 4,140 | 4,140 | 2,111 | 2,029 |
Trade accounts receivable | 945 | 945 | 482 | 463 |
Prepaid expenses | 22 | 22 | 11 | 11 |
Taxes recoverable | 59 | 59 | 30 | 29 |
Collaterals | 1,711 | 1,711 | 873 | 838 |
Financial assets - concession | 95,448 | 95,448 | 48,678 | 46,770 |
Financial assets - business combination | - | 6,972 | 3,556 | 3,416 |
Property, plant and equipment | 13 | 13 | 7 | 6 |
Intangible assets | 17 | 17 | 9 | 8 |
Liabilities assumed | 30,420 | 36,108 | 18,416 | 17,692 |
Suppliers | 93 | 93 | 47 | 46 |
Financing | 26,011 | 26,011 | 13,266 | 12,745 |
Deferred income tax and social contribution | 3,029 | 3,029 | 1,545 | 1,484 |
Deferred income tax and social contribution - business combination | - | 661 | 37 | 324 |
Provisions for legal claims | 831 | 831 | 424 | 407 |
Contingent liabilities - business combination | - | 5,027 | 2,564 | 2,463 |
Others liabilities | 456 | 456 | 233 | 223 |
Net assets acquired | 71,935 | 73,219 | 37,341 | 35,878 |
Marumbi |
| Fair value | ||
|
| Equity interest |
| |
| At the | before business | Equity interest | |
08.31.2018 | Carrying amount | acquisition date | combination - 80% | acquired - 20% |
Assets identified | 167,533 | 164,999 | 132,000 | 32,999 |
Cash and cash equivalents | 3,857 | 3,857 | 3,086 | 771 |
Trade accounts receivable | 1,928 | 1,928 | 1,542 | 386 |
Prepaid expenses | 56 | 56 | 45 | 11 |
Taxes recoverable | 6 | 6 | 5 | 1 |
Collaterals | 2,623 | 2,623 | 2,098 | 525 |
Financial assets - concession | 159,022 | 156,488 | 125,191 | 31,297 |
Property, plant and equipment | 22 | 22 | 18 | 4 |
Intangible assets | 19 | 19 | 15 | 4 |
Liabilities assumed | 52,142 | 55,138 | 44,110 | 11,028 |
Suppliers | 3,016 | 3,016 | 2,413 | 603 |
Financing | 40,764 | 40,764 | 32,611 | 8,153 |
Deferred income tax and social contribution | 4,919 | 4,919 | 3,935 | 984 |
Deferred income tax and social contribution - business combination | - | (2,849) | (2,279) | (570) |
Provisions for legal claims | 2,103 | 2,103 | 1,682 | 421 |
Contingent liabilities - business combination | - | 5,845 | 4,676 | 1,169 |
Others liabilities | 1,340 | 1,340 | 1,072 | 268 |
Net assets acquired | 115,391 | 109,861 | 87,890 | 21,971 |
1.2.4Impact of acquisition on consolidated profit or loss
The profit for the year includes R$ 1,875 attributable to the additional income generated by Costa Oeste and R$ 5,108 attributable to Marumbi. The consolidated revenues for the period include R$ 3,093 related to Costa Oeste and R$ 6,085 related to Marumbi.
Had these business combinations occurred on January 1, 2018, the consolidated net operating revenue would have increased in R$ 23,834, totalizing R$ 14,958,614 and the consolidated net income for the period would have increased in R$ 4,666, totalizing R$1,448,670. Management considers that these pro forma amounts represent an approximate measurement of the combined consolidated performance on an annualized basis and serve as reference for comparison in future years.
F-12
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
2 Concessions and Authorizations
2.1 Concessions contracts or authorizations obtained by Copel
Copel |
| Interest % | Maturity |
Concession agreement / authorization of the equity |
|
|
|
Copel DIS | Contract 046/1999, extended by 5th addendum to the contract | 100 | 07.07.2045 |
Copel TEL (2.1.2) | Authorization Term 54/2003 - Anatel/SVP/PVST | 100 | Indeterminate |
| Authorization Term 305/2012 - Anatel/SVP/PVST | 100 | Indeterminate |
Elejor | Contract 125/2001 - HPP Fundão and Santa Clara | 70 | 05.28.2037 |
| Authorization - SHP Fundão I and SHP Santa Clara I - 753/2002 and 757/2002 | 70 | 12.18.2032 |
Dona Francisca Energética | Contract 188/1998 - HPP Dona Francisca | 23 | 08.27.2033 |
UEG Araucária | Authorization 351/1999 - TPP Araucária (60% Copel GET) | 20 | 12.22.2029 |
Compagás (2.1.1) | Concession gas distribution contract | 51 | 01.20.2019 |
Paraná Gás (1.1.2 - a) | PART-T-300_R12 4861-.0000.99/2014-00 - ANP | 30 | 05.15.2045 |
Usina de Energia Eólica São João S.A. (a) | MME Ordinance 173 /2012 - WPP São João | 49 | 03.25.2047 |
Usina de Energia Eólica Carnaúba S.A. (a) | MME Ordinance 204 /2012 - WPP Carnaúbas | 49 | 04.08.2047 |
Usina de Energia Eólica Reduto S.A. (a) | MME Ordinance 230 /2012 - WPP Reduto | 49 | 04.15.2047 |
Usina de Energia Eólica Santo Cristo S.A. (a) | MME Ordinance 233/2012 - WPP Santo Cristo | 49 | 04.17.2047 |
(a) Subsidiaries of Voltalia São Miguel do Gostoso I Participações S.A. | |||
Hydroelectric Power Plant - HPP | |||
Small Hydroelectric Plant - SHP | |||
Thermal Power Plant - TPP | |||
Wind Power Plant - WPP |
2.1.1 Compagás
Compagás is a party to a concession agreement entered into with the Concession Grantor, the State of Paraná, setting July 6, 2024 as the expiration date of the concession.
On December 7, 2017, the State of Paraná published Supplementary Law 205, introducing a new interpretation of the expiration of the concession, understanding that expiration will be on January 20, 2019. Considering that up to this date the extension/bidding of the concession has not yet occurred, the law provides that the concession operator may, after the expiration of the term, remain responsible for its performance until the assumption of the new concession operator, subject to the conditions established.
The Management of Compagás, its Parent company and other shareholders are challenging the effects of the aforesaid law since they understand that it conflicts with the provisions of the concession agreement currently in force. Compagás filed a lawsuit challenging the early termination of the concession and, on October 30, 2018, a preliminary injunction was granted. The Company is awaiting the trial of the merit of the case.
However, as of the issuance of these annual financial statements, such lawsuit continues outstanding. These financial statements reflect the acceleration of the expiration of the Compagas concession as of December 31, 2018, as follows:
F-13
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
|
|
|
|
12.31.2018 | End of | Adjustments | End of |
STATEMENTS OF FINANCIAL POSITION |
|
|
|
Noncurrent assets |
|
|
|
Accounts receivable related to the concession and Contract Assets | 148,720 | 199,257 | 347,977 |
Intangible assets | 152,538 | (148,919) | 3,619 |
STATEMENTS OF INCOME |
|
|
|
Net operating revenue |
|
|
|
Fair value of assets from the indemnity for the concession | 9,184 | 3,009 | 12,193 |
Operating Costs |
|
|
|
Amortization | (29,012) | 6,253 | (22,759) |
|
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|
| End of |
| End of |
12.31.2017 | Adjustments | concession in 2019 | |
STATEMENTS OF FINANCIAL POSITION |
| ||
Noncurrent assets |
| ||
Accounts receivable related to the concession | 148,868 | 154,800 | 303,668 |
Intangible assets | 198,688 | (154,800) | 43,888 |
STATEMENTS OF INCOME |
| ||
Net operating revenue |
| ||
Fair value of assets from the indemnity for the concession | (197) | 41,078 | 40,881 |
Management will continue to make its best efforts to protect the Company's interests, aiming to appropriately settle the impacts of the new interpretation given by the Concession Grantor and find alternatives necessary to maintain the concession in a sustainable manner.
2.1.2 Copel Telecomunicações
On April 17, 2019, Copel's Board of Directors resolved, unanimously, that we should continue to analyze alternatives for a potential transfer of control of Copel Telecomunicações S.A.
F-14
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
2.2 Concession contracts or authorizations obtained by Copel GeT and its investees
Copel GeT |
| Interest % | Maturity |
ONEROUS CONCESSION BY THE USE OF PUBLIC PROPERTY - UBP |
| ||
Generation Concession 001/2007 - HPP Gov. Jayme Canet Júnior (Mauá) | 51 | 07.02.2042 | |
Generation concession 001/2011 - HPP Colíder (a) | 100 | 01.16.2046 | |
Ordinance 133/2011 - SHP Cavernoso II | 100 | 02.27.2046 | |
Generation Concession 002/2012 - HPP Baixo Iguaçu (a) | 30 | 09.13.2049 | |
Generation Concession 007/2013 |
| ||
HPP Apucaraninha | 100 | 10.12.2025 | |
HPP Chaminé | 100 | 08.16.2026 | |
HPP Derivação do Rio Jordão | 100 | 11.15.2029 | |
HPP Cavernoso | 100 | 01.07.2031 | |
| |||
PUBLIC SERVICE CONCESSIONS |
| ||
| |||
Generation concession 045/1999 |
| ||
TPP Figueira (Note 35.2.6) | 100 | 03.26.2019 | |
HPP Gov. Bento Munhoz da Rocha Neto (Foz do Areia) (Note 35.2.6) | 100 | 09.17.2023 | |
HPP São Jorge | 100 | 12.03.2024 | |
HPP Guaricana | 100 | 08.16.2026 | |
HPP Gov. Ney Aminthas de Barros Braga (Segredo) | 100 | 11.15.2029 | |
HPP Gov. José Richa (Salto Caxias) | 100 | 05.04.2030 | |
| |||
Authorization 278/1999 - WPP Palmas | 100 | 09.28.2029 | |
Dispatch 182/2002 - Hydroeletric Generating Plant - HGP Melissa, HGP Pitangui and |
| ||
HGP Salto do Vau (only register with ANEEL) | 100 | - | |
Generation concession 002/2016 - HPP Gov. Pedro Viriato Parigot de Souza (GPS) | 100 | 01.05.2046 | |
HPP Marumbi - Power generating plant registration: CGH. PH. PR. 001501-6.02 | 100 | - | |
Authorization Aneel 5,373/2015 - HGP Chopim I (only register with ANEEL) | 100 | - | |
Concession agreement / authorization of the equity |
| ||
UEG Araucária | Authorization 351/1999 - TPP Araucária (20% - Copel) | 60 | 12.22.2029 |
Nova Asa Branca I | MME Ordinance 267/2011 - WPP Asa Branca I | 100 | 04.24.2046 |
Nova Asa Branca II | MME Ordinance 333/2011 - WPP Asa Branca II | 100 | 05.30.2046 |
Nova Asa Branca III | MME Ordinance 334/2011 - WPP Asa Branca III | 100 | 05.30.2046 |
Nova Eurus IV | MME Ordinance 273/2011 -WPP Eurus IV | 100 | 04.26.2046 |
Santa Maria | MME Ordinance 274/2012 - WPP SM | 100 | 05.07.2047 |
Santa Helena | MME Ordinance 207/2012 - WPP Santa Helena | 100 | 04.08.2047 |
Ventos de Santo Uriel | MME Ordinance 201/2012 - WPP Santo Uriel | 100 | 04.08.2047 |
GE Boa Vista | MME Ordinance 276 /2011 - WPP Dreen Boa Vista | 100 | 04.27.2046 |
GE Farol | MME Ordinance 263 /2011 - WPP Farol | 100 | 04.19.2046 |
GE Olho D’Água | MME Ordinance 343 /2011 - WPP Dreen Olho D'Água | 100 | 05.31.2046 |
GE São Bento do Norte | MME Ordinance 310 /2011 - WPP Dreen São Bento do Norte | 100 | 05.18.2046 |
Esperança do Nordeste | MME Ordinance 183/2015 - WPP Esperança do Nordeste (b) | 100 | 05.10.2050 |
Paraíso dos Ventos do Nordeste | MME Ordinance 182/2015 - WPP Paraíso dos Ventos do Nordeste (a) | 100 | 05.10.2050 |
Usina de Energia Eólica Jangada | Resolution 3,257/2011 - WPP GE Jangada (b) | 100 | 01.04.2042 |
Maria Helena | Resolution 3,259/2011 - WPP GE Maria Helena (b) | 100 | 01.04.2042 |
Usina de Energia Eólica Potiguar | MME Ordinance 179/2015 - WPP Potiguar (b) | 100 | 05.10.2050 |
Usina de Energia Eólica Guajiru | Resolution 3,256/2011 - WPP Dreen Guajiru (b) | 100 | 01.04.2042 |
Usina de Energia Eólica Cutia | Resolution 3,258/2011 - WPP Dreen Cutia (b) | 100 | 01.04.2042 |
São Bento do Norte I | Ordinance 349/2015 - WPP São Bento do Norte I (b) | 100 | 08.03.2050 |
São Bento do Norte II | Ordinance 348/2015 - WPP São Bento do Norte II (b) | 100 | 08.03.2050 |
São Bento do Norte III | Ordinance 347/2015 - WPP São Bento do Norte III (a) | 100 | 08.03.2050 |
São Miguel I | Ordinance 352/2015 - WPP São Miguel I (b) | 100 | 08.03.2050 |
São MigueI lI | Ordinance 351/2015 - WPP São Miguel II (b) | 100 | 08.03.2050 |
São Miguel III | Ordinance 350/2015 - WPP São Miguel III (b) | 100 | 08.03.2050 |
Foz do Chopim | Authorization 114/2000 - SHP Arturo Andreoli | 35.77 | 04.23.2030 |
SHP Bela Vista | Resolution Nº 913/2007 (c) | 99.9 | 01.01.2041 |
|
|
|
|
(a) Project under construction. | |||
(b) Beginning of the operation in December, 2018. | |||
(c) Building under construction, in process of transfer of the grant after success in Auction No. 003/2018-ANEEL, on 08.31.2018. |
F-15
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
Copel GeT |
| Interest % | Maturity |
Transmission lines and substations concession agreements |
| ||
Contract 060/2001 (extended by 3rd addendum to the contract) - Transmission facilities – several joint ventures | 100 | 12.31.2042 | |
Contract 075/2001 - Transmission line Bateias - Jaguariaíva | 100 | 08.16.2031 | |
Contract 006/2008 - Transmission line Bateias - Pilarzinho | 100 | 03.16.2038 | |
Contract 027/2009 - Transmission line Foz do Iguaçu - Cascavel Oeste | 100 | 11.18.2039 | |
Contract 010/2010 - Transmission line Araraquara II - Taubaté | 100 | 10.05.2040 | |
Contract 015/2010 - Substation Cerquilho III | 100 | 10.05.2040 | |
Contract 022/2012 - Transmission line - Foz do Chopim - Salto Osório C2; Transmission line 230 kV Londrina - Figueira | 100 | 08.26.2042 | |
Contract 002/2013 - Transmission line - Assis - Paraguaçu Paulista II; Substation 230/88 kV Paraguaçu Paulista II | 100 | 02.24.2043 | |
Contract 005/2014 - Transmission line - Bateias - Curitiba Norte; Substation 230/138 kV Curitiba Norte | 100 | 01.28.2044 | |
Contract 021/2014 - Transmission line Foz do Chopim - Realeza; Substation Realeza 230/138 kV - Pátio novo 230 kV | 100 | 09.04.2044 | |
Contract 022/2014 - Transmission line Assis - Londrina | 100 | 09.04.2044 | |
Contract 006/2016 - Transmission line 525kV Curitiba Leste - Blumenau C1 (a) | 100 | 04.06.2046 | |
Contract 006/2016 - Transmission line 230 kV Uberaba - Curitiba Centro C1 e C2 (Underground) (a) |
| ||
Contract 006/2016- Substation 230/138 kV Curitiba Centro (SF6) - 230/138 kV - 2 x ATF 150 MVA (a) |
| ||
Contract 006/2016- Substation 230/138 kV Medianeira (Pátio novo 230 kV) - 2 x 150 MVA (a) |
| ||
Contract 006/2016- Transmission line 230 kV Baixo Iguaçu - Realeza (a) |
| ||
Contract 006/2016- Substation 230/138 kV Andirá Leste - 2 x ATR 150 MVA (a) |
| ||
| |||
Concession agreement / authorization of the equity |
| ||
Costa Oeste Transmissora | Contract 001/2012 - Transmission line Cascavel Oeste - Umuarama; Substation Umuarama 230/20138 kV | 100 | 01.11.2042 |
Caiuá Transmissora | Contract 007/2012 - Transmission line Umuarama - Guaíra; Transmission line 230 kV Cascavel Oeste - Cascavel Norte; | 49 | 05.09.2042 |
Substation Santa Quitéria 230/69-13,8 kV; Substation Cascavel Norte 230/20138-13,8 kV |
| ||
Marumbi Transmissora | Contract 008/2012 - Transmission line Curitiba - Curitiba Leste; Substation Curitiba Leste 525/230 kV | 100 | 05.09.2042 |
Integração Maranhense | Contract 011/2012 - Transmission line Açailândia - Miranda II | 49 | 05.09.2042 |
Matrinchã Transmissora | Contract 012/2012 - Transmission line Paranaíta - Ribeirãozinho; Transmission line 500 kV Paranaíta - Cláudia; | 49 | 05.09.2042 |
Substation Cláudia 500 kV; Transmission line 500 kV Cláudia - Paranatinga; Substation Paranatinga 500 kV; |
| ||
Transmission line 500 kV Paranatinga - Ribeirãozinho |
| ||
Guaraciaba Transmissora | Contract 013/2012 - Transmission line Ribeirãozinho - Marimbondo II; | 49 | 05.09.2042 |
Transmission line 500 kV Ribeirãozinho - Rio Verde Norte; Transmission line 500 Rio Verde Norte - Marimbondo II; |
| ||
Sectioning of Transmission lines 500 kV Marimbondo - Araraquara, at Substation Marimbondo II; |
| ||
Substation Marimbondo II 500 kV |
| ||
Paranaíba Transmissora | Contract 007/2013 - Transmission line - T 500 kV Barreiras II - Rio das Éguas; | 24.5 | 05.01.2043 |
Transmission line 500 kV Rio das Éguas - Luziânia; Transmission line 500 kV Luziânia - Pirapora 2 |
| ||
Mata de Santa Genebra | Contract 001/2014 - Transmission line - Itatiba - Bateias (a); Transmission line 500 kV Itatiba - Bateias (a); | 50.1 | 05.13.2044 |
Transmission line 500 kV Araraquara 2 - Itatiba (a); Transmission line 500 kV Araraquara 2 - Fernão Dias (a); |
| ||
Substation Santa Bárbara D'Oeste 440 kV (a); Substation Itatiba 500 kV (a); |
| ||
Substation 500/440 kV Fernão Dias (a) |
| ||
Cantareira Transmissora | Contract 019/2014 - Transmission line - Estreito - Fernão Dias | 49 | 09.04.2044 |
(a) Buildings under construction. |
3 Basis of Preparation
3.1 Statement of compliance
The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board, IASB.
The Company's Management believes that all the relevant information used in its management is evidenced in the consolidated financial statements.
The consolidated financial statements were approved by Management and authorized for issue on April 26, 2019.
3.2 Functional and presentation currency
The financial statements are presented in Brazilian Reais, which is the functional and presentation currency of the Company. Balances herein have been rounded to the nearest thousand, unless otherwise indicated.
F-16
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
3.3 Basis of measurement
The financial statements were prepared based on the historical cost, except for certain financial instruments and investiments measured at fair value, as described in the respective accounting policies and notes.
3.4 Use of estimates and judgments
In the preparation of these financial statements, Management used judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses of the Company. Actual results may differ from those estimates.
Estimates and assumptions are reviewed on a continuous basis.Changes inestimates are recognized in the period in which they occur.
3.4.1 Judgements
Information about judgment referring to the adoption of accounting policies which significantlyimpactsthe amounts recognized in the consolidated financial statements, except those involving estimates, is included in the following notes:
· Note 4.1 - Basis of consolidation; and
· Note 4.2 - Financial instruments.
3.4.2 Uncertainties over assumptions and estimates
Information on uncertainties related to assumptions and estimates that pose achanceof resulting in a material change within the next financial year is included in the following notes:
· Notes 4.3 and 9 - Sectorial financial assets and liabilities;
· Notes 4.4 and 10 - Accounts receivable related to the concession
· Notes 4.5 and 11 - Contract assets;
· Notes 4.8 and 18 - Property, plant and equipment;
· Notes 4.9 and 19 - Intangible assets;
· Notes 4.10 and 18.7 - Impairment of assets;
· Notes 4.11 and 29 - Provisions for litigation and contingent liabilities;
· Note 4.12 - Revenue recognition;
· Note 4.14 - Power purchase and sale transactions in the Spot Market (Electric Energy Trading Chamber–CCEE);
· Note 4.15 - Power purchase and sale transactions in the active market;
· Note 7.3 - Expected credit losses
· Note 13.2 - Deferred income tax and social contribution; and
· Note 24 - Post-employment benefits.
F-17
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
3.5 Management's Judgment on Going Concern
Management has concluded that there are no material uncertainties that cast doubt on the Company’s ability to continue as a going concern. No events or conditions were identified that, individually or in the aggregate, may raise significant doubts on its ability to continue as a going concern.
The main bases of judgment used for such conclusion are: (i) main activities resulting from long-term concessions; (ii) robust equity; (iii) strong operating cash generation, including financial capacity to settle commitments entered into with financial institutions; (iv) historical profitability; and (v) fulfillment of the objectives and targets set forth in the Company's Strategic Planning, which is approved by Management, monitored and reviewed periodically, seeking the continuity of its activities.
4 Significant Accounting Policies
4.1 Basis of consolidation
4.1.1 Calculation of equity in earnings of investees
Payment of dividends decreases the carrying value of investments.
When required, for calculation of equity in earnings of investees, the investees' financial statements are adjusted to align their policies with the Company's accounting policies.
4.1.2 Subsidiaries
The subsidiaries are entities to which the Company is exposed to or has a right over the variable returns arising from its involvement with them and has the ability to affect those returns exerting its power over the entities.
The financial statements of the subsidiaries are included in the consolidated financial statements as from the date they start to be controlled by the Company until the date such control ceases.
The balances of the subsidiaries’assets and liabilities, and profit or loss, are consolidated and transactions between consolidated companies are eliminated.
4.1.3 Noncontrolling interests
Noncontrolling interests are presented in equity, separately from the equity attributable to the Company's shareholders. Profits, losses and other comprehensive income are also allocated separately from the ones allocated to the Company's shareholders, even if this procedure results in negative noncontrolling interest balance.
F-18
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
4.1.4 Joint ventures and associates
Joint ventures are entities over which the Company, subject to an agreement, has the ability to affect returns exerting its power in conjunction with other parties, irrespective of the percentage of interest in the voting capital.
Associates are entities over which the Company exerts significant influence regarding financial and operational decisions, without control.
When the share in losses of a joint venture or associate equals or exceeds the accounting balance of the investor’s equity interest in the investee, the investor should discontinue the recognition of its share in future losses. Additional losses will be considered, and a liability will be recognized, only if the investor incurs legal or constructive obligations, or performs payments on behalf of the investee. Should the investee subsequently post profits, the investor should resume the recognition of its interest in these profits only subsequent to the point at which the portion to which it is entitled to in these subsequent profits equals its share in unrecognized losses.
4.1.5 Joint operations (consortiums)
Joint operation is a joint business according to which parties that jointly control the business have rights on assets and obligations regarding liabilities related to the business.
Joint operations are recorded in proportion to the share of interest held in their assets, liabilities and profit or loss.
4.1.6 Business combination
The acquisition analysis is done on a case-by-case basis to determine whether the transaction represents a business combination or an asset purchase. Transactions between companies under common control do not constitute a business combination.
Assets and liabilities acquired in a business combination are accounted for using the acquisition method and are recognized at their fair values at the acquisition date.
The excess of the acquisition cost over the fair value of the net assets acquired (identifiable assets acquired, net of assumed liabilities) is recognized as goodwill in intangible assets. When the amount generated is negative, the bargain purchase gain is recognized directly in profit or loss.
The amount paid that refers specifically to the concession right acquired in a business combination where the acquired entity is a concession operator, whose right to the concession has a known and defined term, is not characterized as goodwill.
In acquisitions of interests in affiliates and in joint ventures, although they do not constitute a business combination, the net assets acquired are also recognized at fair value. Goodwill is presented in the investment.
F-19
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
4.2 Financial instruments
Financial instruments are recognized immediately on the trade date, that is, when the obligation or right arises. They are initially recorded at fair value, unless it is a trade receivables without a significant financing component, plus, for an item not measured at fair value through profit or loss, any directly attributable transaction costs. An accounts receivable from customers without a significant component of financing is initially measured at the price of the transaction.
Fair values are determined based on market prices for financial instruments with active market, and by the present value method of expected cash flows, for those that have no quotation available in the market.
The Company do not operate with derivative financial instruments, except for the purchase and sale of energy contracts disclosed in Statement No. 35.2.12. The company does not operate financial instruments measured at fair value through other comprehensive income.
Financial assets are not reclassified subsequent to initial recognition, unless the Company changes the business model for the management of financial assets, in which case all affected financial assets are reclassified on the first day of the reporting period subsequent to the change in business model.
The Company's financial instruments are classified and measured as described below.
4.2.1 Financial assets recorded at fair value through profit or loss
Financial assets recorded at fair value through profit or loss include financial assets designated upon initial recognition as at fair value through profit or loss or financial assets required to be measured at fair value. Financial assets are classified as held for trading if they are acquired for the purpose of being sold or repurchased in the near term. Financial assets with cash flows that are not solely payments of principal and interest are classified and measured at fair value through profit or loss, irrespective of the business model. After initial recognition, transaction costs and attributable interest expenses, when incurred, are recognized through profit or loss.
4.2.2 Financial assets measured at amortized cost
Financial assets are classified and measured when: (i) the financial asset is maintained within a business model whose objective is to maintain financial assets in order to receive contractual cash flows; and (ii) the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.
4.2.3 Financial liabilities measured at amortized cost
Financial liabilities are measured at amortized cost using the effective interest method. This method is also used to allocate interest expense of these liabilities for the period. The effective interest rate is the rate that discounts estimated future cash flows (including fees paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) over the expected life of the financial liability or, when appropriate, over a shorter period, for the initial recognition of the net carrying amount.
4.2.4 Financial liabilities measured at fair value through Profit or Loss
Financial liabilities designated fair value through profit or loss are stated at fair value with the respective gains or losses in fair value recognized in the statement of income. Net gains or losses recognized in profit or loss include the interest paid on the financial liability.
F-20
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
4.2.5 Derecognition of financial assets and liabilities
The Company derecognizes a financial asset when the contractual rights to the cash flows from the financial asset expire, or it transfers the rights to receive the contractual cash flows in a transaction in which substantially all of the risks and rewards of ownership of the financial asset are transferred or in which the Company neither transfers nor retains substantially all of the risks and rewards of ownership and it does not retain control of the financial asset.
The Company derecognizes financial liabilities only when its obligations are discharged, cancelled or settled. The difference between the carrying amount of the derecognized financial liability and the corresponding disbursement made or to be made is recorded to profit or loss.
4.3 Net sectorial financial assets and liabilities
Accordingtothe amendment to the concession agreement of distribution companies, the Company records changes in sectorial financial assets and liabilities. Until the next tariff adjustment/review process, when the Concession Grantor approves the transfer as components of the power tariff and thus, it passes the adjustment on to consumers in the next tariff cycle, which occurs on June 24 of each year.
In the event of termination of the concession for any reason, the residual values of Part A items and other financial components not recovered or returned through tariff are incorporated in the calculation of compensation or deducted from unamortized assets indemnity values, thus protecting rights or obligations of the distribution company to theConcession Grantor.
4.4 Accounts receivable related to the concession
Refer to financial assets of the concessions with unconditional right to receive cash by the Company, guaranteed by the Concession Grantorby contractual clause and specific legislation.
4.4.1 Power distribution service concession
The concession agreement for electricity distribution provides that the users of the public service remunerate part of the investments made by the concessionaire and the Concession Grantorat the end of the concession indemnifies the other party. This model provides for the recognition of financial assets, contract assets in the construction period and intangible assets.
The portion recognized as financial asset refers to the indemnity set forth in the public power distribution service concession agreements, which the Company understands as an unconditional right to cash payments from the Concession Grantor upon expiration of the concession. This indemnification aims to reimburse the Company for investments made in infrastructure, without recovery, through the tariff.
F-21
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
The cash flows related to these assets are determined taking into account the Regulatory Compensation Basis (Base de Remuneração Regulatória or BRR, in Portuguese), defined by the Concession Grantor. The methodology of the BRR is based on the replacement cost of the assets that make up the power distribution infrastructure related to the concession.
4.4.2 Piped gas distribution service concession
Gas concession agreement follows the bifurcated model, whereby part of the investments made by the concession operator is paid by users of the public service and the other part is indemnified by the Concession Grantor, the State of Paraná, at the end of the concession. This model provides for recognition of a financial asset,acontract asset in the construction period andanintangible asset.
The amount recognized as a financial asset is the amount that will be indemnified by the Concession Grantor corresponding to the investments made in the last ten years prior to the end of the concession as foreseen in the agreement and that, according to Management, assures the unconditional right to receive cash at the end of the concession. The indemnity assumption is based on the replacement cost of the concession assets.
4.4.3 Bonus for the grant of quota system generation concession agreement
The quota system generation concession agreement provides for the payment of a bonus for the grant to the Concession Grantor, pursuant to paragraph 7 of article 8 of Law 12,783/2013.
This bonus is recognized as a financial asset because it represents an unconditional right to receive cash, guaranteed by the Concession Grantor during the term of the concession and without risk of demand.
The remuneration of this financial asset is based on theWeighted Average Cost of Capital - WACC defined by the National Energy Policy Council (CNPE) in Resolution 2/2015, which is being presented in the statement of income as operating revenue in accordance with the Company's business model.
4.4.4 Transmission concession – Reassessment of assets of the Basic Network of the Existing System
Refers to the right to reimbursement of the Concession Agreement No. 060/2001 arising from the Annual Revenue Allowed not received in the period from January 2013 to June 2017. The balance includes monetary adjustment and interest rates (Note 10.5).
4.4.5 Concession of power generation
The Company has operated and operates concession agreements for power generation that contain indemnification clauses for the infrastructure not depreciated, amortized and/or received during the concession term. After maturity, the residual balance of the assets is transferred to Accounts receivable related to the concession. At the end of each reporting period, Management evaluates the recoverability of the asset, remeasuring its cash flow based on its best estimate.
F-22
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
4.5 Contract assets
Represented by the construction in progress or in service of the infrastructure delegated by the Concession Grantor, conditional upon the receipt of revenue not only by the passage of time, but after fulfilling the performance obligation to maintain and operate the infrastructure.
4.5.1 Power distribution service concession
Represents the concessionaire's contractual right related to the works under construction to meet the needs of the concession, accounted for at cost plus financial charges, when applicable.
When the assets are put into operation, the assets are transferred to the intangible asset, in the amount equivalent to what will be remunerated by the user through payment of the fee for the use of the services, or to the accounts receivable associated to the concession, in the amount equivalent to the residual portion of the assets not amortized, which will be reverted to the Concession Grantor through indemnification at the end of the concession.
4.5.2 Power gas distribution service concession
Construction in progress for the distribution of piped gas which will be transferred to intangible assets upon their entry in operation and to the extent that the right (authorization) is received to charge the users of the public service. The amount that will not be amortized within the term of the concession is presented in financial assets, indemnified at the end of the concession by the Concession Grantor according to contractual definition.
4.5.3 Power transmission concession
Represents the balance of public electricity transmission contracts signed with the Concession Grantor to build, operate and maintain the high voltage lines and substations of the generation centers up to the distribution points.
During the term of the concession agreement, the Company receives, subject to its performance, a remuneration denominated Annual Revenue Allowance (RAP) that remunerates the investments made in the construction of the infrastructure and covers the costs of operation and maintenance incurred. After the start of the commercial operation, this revenue is recognized in the statement of income to the extent that the operation and maintenance service are provided, and the portion of the revenue recognized in the construction phase, referring to the remuneration of the constructed assets, is billed, and will be presented in trade accounts receivable until their actual receipt.
The assets arising from the construction of the transmission infrastructure are formed by the recognition of construction revenue (NE 4.13) and by their financial remuneration (NE 4.12.2).
F-23
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
Upon expiration of the concession, any uncollected amounts related to the construction of infrastructure shall be received directly from the Concession Grantor, as an unconditional right to cash reimbursement pursuant to the concession agreement, as compensation for investments made and not recovered through tariffs (RAP).
4.6 Accounts payable related to the concession
These refer to the amounts set forth in the concession agreement in connection with the right to explore hydraulic energy potential (onerous concession), whose agreement is signed as Use of Public Property (Uso do Bem Público or UBP, in Portuguese) agreements. The asset is recognized on the date of signature of the concession agreement corresponding to the present value of future cash payments for the concession. The liability is then remeasured using the effective interest rate and reduced by contractual payments.
4.7 Inventories (including property, plant and equipment and contract assets)
Materials and supplies in inventory, classified under current assets and those assigned for investments, classified under property, plant and equipment, and contract assets, have been recorded at their average acquisition cost. Recorded amounts do not exceed their net realizable value.
4.8 Property, Plant and Equipment
The property, plant and equipment related to the public service concession agreement are depreciated according to the straight-line method based on annual rates set forth and reviewed periodically by ANEEL, which are used and accepted by the market as representative of the economic useful lives of the assets related to concession's infrastructure. Property, plant and equipment related to contracts for the use of public property under the independent electricity producer scheme are depreciated based on annual rates established by ANEEL limited to the concession period. All other property, plant and equipment are depreciated using the straight-line method based on estimates of their useful lives, which is reviewed annually and adjusted if necessary.
Costs directly attributable to construction works as well as interest and financial charges on borrowings from third parties during construction are recorded under property, plant and equipment in progress, if it is probable that they will result in future economic benefits for the Company.
4.9 Intangible Assets
These comprise software acquired from third parties and software developed in-house and are measured at acquisition cost and amortized over five years, besides Intangible assets from Concession Agreements below.
4.9.1 Onerous concession of electric power generation
Corresponds to acquisition of exploration rights on hydropower potential whose onerous concession contract is signed as Use of Public Property - UBP.
F-24
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
During construction work, this asset is recognized at the present value of future cash disbursements during the Concession Agreement term. When commercial operation starts, the amount starts to be amortized over the concession period.
4.9.2 Hydrological risk renegotiation (Generation Scaling Factor - GSF)
Asset consisting of the renegotiation of the hydrological risk under the terms of Law No. 13,203/2015, arising from the excess amount between the amounts recovered from the cost with the adjustment of the Energy Reallocation Mechanism - MRE (GSF), subtracted from the total cost of the risk premium to be amortized over the energy supply period in the regulated environment. The amount was transformed by ANEEL into an extension of the concession period, which is amortized on a straight-line basis as from January 1, 2016 until the end of the new concession period, according to note 14.1.
4.9.3 Power distribution service concession
This comprises the right to control infrastructure, built or acquired by the operator or provided to be used by the operator as part of the electric energy public service concession, and the right to charge fees to the users of the public service.
Intangible assets are recorded at their fair acquisition and construction value, less accumulated amortization and impairment losses, when applicable. The amortization of intangible assets reflects the pattern in which it is expected that future economic benefits will flow to the Company during the concession period.
During the infrastructure construction phase costs are classified as contract assets (NE 4.5).
4.9.4 Piped gas distribution service concession
Intangible assets for piped gas distribution services, which correspond to the right to charge users for the gas supply.
This intangible asset was initially recognized at acquisition or construction cost, plus interest and other capitalized finance charges. This asset is amortized using the straight-line basis over its estimated useful life, considering the economic benefits generated by intangible assets.
During the infrastructure construction phase costs are classified as contract assets (NE 4.5).
4.9.5 Intangible assets acquired separately
Intangible assets with a finite useful life, acquired separately, are recorded at cost, less accumulated amortization and accumulated impairment losses. Amortization is recognized using the straight-line method based on the estimated useful lives of the corresponding assets. The estimated useful lives and the amortization method are reviewed at the end of each reporting period, with the effect of any changes in estimate being accounted for on a prospective basis.
F-25
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
4.9.6 Derecognition of intangible assets
An intangible asset is derecognized when no future economic benefits are expected from use or disposal. Gains or losses arising from disposal of an intangible asset are recognized in profit or loss, measured as the difference between net disposal proceeds and the carrying amount of the asset.
4.10 Impairment of assets
Assets are assessed to detect evidence of impairment.
4.10.1 Financial assets
Provisions for losses on financial assets are based on assumptions about default risk and expected loss rates. The Company uses judgment to establish these assumptions and to select the data for the calculation of the impairment, based on the Company's history, on the existing market conditions and on the future estimates at the end of each year.
The Company applies the simplified approach of IFRS 9 to the measurement of expected credit losses by considering a provision for expected loss over a useful life for all trade accounts receivable. To measure expected credit losses, trade accounts receivable are grouped based on shared credit risk characteristics and overdue days.
4.10.2 Non-financial assets
Assets under formation arising from onerous concession and concession rights and/or authorization to generate electricity are classified as intangible assets. Impairment is tested along with the other assets of that cash-generating unit.
Whenever there is a loss resulting from situations where an asset’s carrying value exceeds its recoverable value, defined as the higher of the asset’s value in use or its net selling price, this loss is recognized in profit or loss for the year.
For impairment testing purposes, assets are grouped at the lowest levels for which there are separately identifiable cash flows (Cash Generating Units - CGU).
The amount of the impairment of non-financial assets is reviewed at the reporting date. In case of reversal of impairment losses which had been recorded in prior years, this reversal is recognized in current year's profit or loss.
F-26
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
The Impairment of contract assets in their construction phase are tested immediately, mainly considering the use of the effective interest rate fixed at the beginning of the project and carried to the end of the concession cash flow. After the beginning of the commercial operation, the portion of revenue recognized is tested for impairment in the accounts receivable from customers. For the receivable part conditioned to fulfill the performance obligation to maintain and operate the infrastructure, the Company has no history and no expectation of losses, since amount are subject to guarantee structures, via shared apportionment of eventual default losses among the other members of the national interconnected system managed by the “Operador Nacional do Sistema” (ONS) and by jurisdiction of the sector.
4.11 Provisions
Provisions are recognized when: i) the Company has a present obligation (legal or constructive) resulting from a past event, ii) it is probable (i.e., more likely than not) that an outflow of resources embodying economic benefits will be required to settle the obligation, and iii) a reliable estimate can be made of the amount to settle the obligation.
The estimates of outcomes and financial impacts are determined by the Company, which requires use of judgment by Management, supplemented by the experience of similar past transactions and, in some cases, by independent expert reports.
Environmental liabilities are recognized as the Company assumes formal obligations before regulatory agencies or becomes aware of potential risks related to environmental issues, which may lead to cash disbursements that are deemed probable and that may be estimated. During the project implementation phase, the accrued amounts areincluded inproperty, plant and equipment (generation), construction cost (transmission) or contract assets (distribution). At the start of operations, all costs included in the Operating License, whose programs will be executed during the concession and the respective disbursement has not yet occurred, are measured and adjusted to present value according to the estimated cash flow of disbursements and recorded as environmental provisions matched against the assets related to the project, being adjusted periodically.
Once the project enters commercial operation, all costs or expenses incurred with environmental programs related to the project’s operation and maintenance licenses are analyzed according to their nature andincluded inprofit or loss for the period.
4.12 Revenue recognition
4.12.1 Revenue from contracts with customers
Revenue is measured based on the consideration that the Company expects to receive in a contract with the customer, net of any variable consideration. The Company recognizes revenues when it transfers control of the product or service to the customer. The Company's operating revenue comes mainly from the electricity supply and from the electric network availability.
F-27
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
The revenue from electricity supply is recognized monthly based on the data for billing that are determined by the average MW of contracted electricity and declared with the CCEE. When the information is not available, the Company, estimates the revenue considering the contracts’rules, the price estimate and the volume provided.
For wind power generation companies subject to minimum generation amounts, the Company understands that it is subject to variable consideration, and for this reason,includesa provision for non-performance based on the annual generation estimates, reducing revenue.
Revenue from electric power supply and network availability is recognized monthly based on measured and effectively billed energy. In addition, the Company records unbilled revenue, calculated from the period between the last billing and the end of each month, by estimate based on the last measurement taken. In the concession contract for the public electricity distribution service, non-performance compensations are provided for quality indicators that, when incurred, reduce electricity availability revenue.
4.12.2 Interest income
Interest income is recognized when it is probable that future economic benefits will flow to the Company and its amount can be reliably measured. Interest income is recognized on a straight-line basis and based on time and the effective interest rate on outstanding principal amounts. The effective interest rate is the one that discounts the estimated future cash receipts calculated during the estimated life of the financial asset in relation to initial net carrying amount of that asset.
Regarding the financial and contract assets of the power transmission concession, financial compensation revenue is recognized using the discount rate established at the beginning of each project, which is presented in the statement of income as operating income in accordance with the Company's business model.
4.13 Construction revenues and costs
Revenue related to construction services for infrastructure in the power transmission and distribution services, and gas distribution, are recognized using the percentage of completion (PoC) method at each reporting period and measured on the basis of the proportion of costs incurred in relation to the total estimated costs of the distribution and transmission concession contracts.Related costs are recognized in the statement of income as construction cost.
Given that Copel DIS and Compagás outsource the construction of distribution infrastructure to unrelated parties through works carried out in the short term, the construction margin to the power and gas distribution activities result in no significant amounts, resulting in the non-recognition of such margin.
The construction margin adopted for the transmission activity for the years 2018 and 2017 was 1.65%, and results from a calculation methodology which takes into account the respective business risk.
F-28
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
4.14 Power purchase and sale transactions in the Spot Market (Electric Energy Trading Chamber - CCEE)
Power purchase and sale transactions in CCEE are recorded on the accrual basis of accounting, based on data released by CCEE, which are calculated by the product of the Differences settlement prices - PLD multiplied by the energy surplus declared with CCEE, or, when such information is not available in a timely manner, by an estimate prepared by Management.
4.15 Power purchase and sale transactions in the active market
The Company negotiates energy purchase and sale agreements in the active market and part of its contracts are classified as derivative financial instruments measured at fair value through profit or loss.
Unrealized net gains or losses arising from the mark-to-market of these contracts ( the difference between contractual and market prices) are recognized in the statement of income.
4.16 Leases
Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. Other leases are classified as operating.
4.17 Standards applicable to the Company effective January 1, 2018
The following accounting pronouncements were reviewed and had no material effect on the transactions carried out by the Company in periods prior to or after the effective date, of January 1.2018:
(i) IFRIC 22 - Foreign Currency Transactions and Advance Consideration;
(ii) IFRS 2 - Share-based payment;
(iii) IAS 40 - Investment Property;
(iv) IAS 28 - Investments in Associates and Joint Ventures; and
(v) Annual Review of IASB 2014-2016.
Furthermore, the Company adopted the following standards, with effects from January 1, 2018:
4.17.1 IFRS 9 – Financial instruments
The Company adopted IFRS 9 applying the exemption set forth in item 7.2.15 of the standard, which allows it not to restate prior period’s comparative information due to the changes in classification and measurement of financial instruments.
The new standard establishes three categories for classification and measurement of financial assets: (i) measured at fair value through profit or loss; (ii) measured at amortized cost, based on the business model within which they are held and the characteristics of their contractual cash flows; and (iii) measured at fair value through other comprehensive income. The initial adoption had the following impacts on the classification of the Company's financial assets:
F-29
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
|
|
|
Financial instrument | Classification as IAS 39 | New classification (IFRS 9) |
Bonds and securities | Available for sale | Fair value through profit or loss |
Collaterals and escrow accounts | Loans and receivables | Amortized cost |
Trade accounts receivable | Loans and receivables | Amortized cost |
CRC transferred to the State Government of Paraná | Loans and receivables | Amortized cost |
Sectorial financial assets | Loans and receivables | Amortized cost |
Accounts receivable related to the concession - |
|
|
transmission (amortizable) | Loans and receivables | (a) |
Accounts receivable related to the concession - |
|
|
transmission (indemnable) | Loans and receivables | (a) |
Accounts receivable related to the concession - |
|
|
bonus from the grant | Loans and receivables | Amortized cost |
Accounts receivable related to the concession - distribution | Available for sale | Fair value through profit or loss |
Accounts receivable related to the concession compensation | Available for sale | Fair value through profit or loss |
State of Paraná - Government Programs | Loans and receivables | Amortized cost |
Other temporary investments | Available for sale | Fair value through profit or loss |
(a) Rights that are now considered as contract assets, in accordance with IFRS 9. (Note 11) |
The standard also requires the Company’s Management to carry out an assessment of its financial assets for a time span of twelve months or throughout the life of the asset and record the effects when there is indication of expected credit losses (ECLs) on financial assets. IFRS 9 defined the expected credit loss model, which requires an entity to account for ECLs and changes in those expected credit losses at each reporting date to reflect changes in credit risk since initial recognition.
Previously, impairment of accounts receivable was presented as incurred losses. Uncollectable individual accounts receivable were written off through the direct reduction of the accounting value.
Since the adoption of the new standard, the Company has applied the simplified approach whereby expected losses are recognized throughout the life of financial assets of trade accounts receivable. The effect on the balance sheet as of January 1, 2018 arising from this new accounting policy is presented in Note 4.17.3.
With regard to financial liabilities, IFRS 9 defines that any change in fair value of a financial liability designated as at fair value through profit or loss attributable to changes in the credit risk of that liability should be stated in other comprehensive income and not in the statement of income, unless such recognition results in a mismatching in the statement of income. There was no impact on the classification of Company’s financial liabilities.
4.17.2 IFRS 15 - Revenue from contracts with customers
The Company opted to adopt the IFRS 15 standard on the date of the initial application as an adjustment to the opening balance, considering only contracts entered into prior to the date of application, as set forth in IFRS 15.
F-30
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
The standard establishes that an entity shall recognize revenue to represent the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Therefore, an entity recognizes revenue when (or as) the entity satisfies a performance obligation, i.e., when the "control" over the goods and services in a certain operation is transferred to the customer.
The standard also determines that when the Company completes the performance by transferring goods or services to the customer before payment of the consideration or before payment is due, the entity must present this right as a contract asset.
The contract asset is defined by the standard as the right to the consideration in exchange for goods or services transferred to the customer when this right is conditioned to something beyond the passage of time, for instance, its future performance.
The effects on the balance sheet resulting from the adoption of this standard are presented in Note 4.17.3.
In addition, as a result of the new standard, in the energy distribution segment, the Company changed the method for accounting compensation of non-performance evidenced by the availability indicators, which were previously recorded as operating expenses and are currently recorded reducing revenue from electric network availability.
4.17.3 Effect on the financial statements
The differences in accounting balances of financial assets and liabilities resulting from the initial adoption of IFRS 15 and IFRS 9 were recognized in retained earnings, totaling R$ 160,533, as shown below:
|
|
|
|
|
| 12.31.2017 | Effects of applying | Effects of applying | 01.01.2018 |
STATEMENTS OF FINANCIAL POSITION |
|
| ||
Assets | 33,162,377 | (150,428) | (14,496) | 32,997,453 |
Current assets | 5,701,834 | (2,960) | (18,608) | 5,680,266 |
Trade accounts receivable (a) (b) | 2,733,240 | (2,960) | (18,507) | 2,711,773 |
Other current receivables (a) | 409,351 | - | (101) | 409,250 |
Accounts receivable related to the concession (c) | 149,744 | (66,366) | - | 83,378 |
Contract assets (c) | - | 66,366 | - | 66,366 |
Noncurrent assets | 27,460,543 | (147,468) | 4,112 | 27,317,187 |
Trade accounts receivable (a) | 261,082 | - | (3,356) | 257,726 |
Accounts receivable related to the concession (c) | 4,429,237 | (2,066,325) | - | 2,362,912 |
Contract assets (c) | - | 2,774,142 | - | 2,774,142 |
Deferred income tax and social contribution | 915,492 | 1,280 | 7,468 | 924,240 |
Investments (d) | 2,570,643 | (148,748) | - | 2,421,895 |
Intangible assets in progress (c) | 9,829,450 | (707,817) | - | 9,121,633 |
Liabilities | 33,162,377 | (150,428) | (14,496) | 32,997,453 |
Equity | 15,510,503 | (150,428) | (14,496) | 15,345,579 |
Attributable to controlling shareholder's | 15,207,842 | (150,428) | (14,496) | 15,042,918 |
Equity valuation adjustments (e) | 895,601 | - | (4,391) | 891,210 |
Accumulated profit | - | (150,428) | (10,105) | (160,533) |
F-31
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
a) | Increase of R$ 21,863 in expected credit losses from trade accounts receivable and R$ 101 in expected credit losses from other receivables, recognized in retained earnings net of taxes. |
b) | In the telecommunications segment, revenue from activation is recognized at a point in time if the customer opts for non-loyalty of the connectivity plan. If the customer opts for loyalty, a discount is applied to the amount of the service rendered during the plan and the revenue will be deferred for a twelve-month period. The Company assessed that the deferred revenue adjustment to be recognized on January 1, 2018 was R$ 2,960, based on the agreements in effect on December 31, 2017. |
c) | Reclassification of R$ 2,132,691 of accounts receivable related to the concession for contract assets, referring to electricity transmission concession contracts, by IFRS 15, which brought the concept of the right to receive the built infrastructure conditioned to the fulfillment of performance obligations to operate and maintain the infrastructure and not only over time.Reclassification of R$ 707,817 intangible assets in progress to contract assets because works in progress for the distribution of electricity and piped gas were within the scope of IFRIC 12 until December 31, 2017. With the entry into force on January 1, 2018 of IFRS 15 and the revision of IFRIC 12, the Company began to classify as contract assets the works for distribution of electricity and piped gas during the construction period. |
d) | As of December 31, 2017, the joint ventures operating in the transmission segment had their electricity transmission concession agreements classified as financial assets within the scope of IAS 39 and IFRIC 12. With the entry into force on January 1, 2018 of IFRS 15, bringing the concept of the right to receive the infrastructure investments conditioned to the fulfillment of performance obligations to operate and maintain the infrastructure and not only by the passage of time, the electricity transmission concession agreements started being classified as contract assets. As a result, the balance of the financial assets of the joint ventures started being classified on January 1, 2018 as contract assets in accordance with the Company's practices, with a reduction in its measurement in the amount of R$148,748 with effect in the Company in the caption Investments, by equity. At the transition, the Company and its joint ventures opted to adopt the standard on the date of initial application as an adjustment to the opening balance, in equity account, considering only agreements outstanding prior to the date of application, as set forth in IFRS 15. |
e) | Realization of the fair value of other temporary investments, previously classified as available for sale and recognized in other comprehensive income within the scope of IAS 39. As from January 1, 2018 the fair value of temporary investments started being classified as fair value through profit or loss in accordance with IFRS 9. |
F-32
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
4.18 New standards that are not yet in effect
In addition, the standards below, effective as of January 1, 2019 and not early adopted by the Company:
(i) IAS 28 - Investments in associates and joint ventures;
(ii) IAS 19 - Employee benefits;
(iii) IFRS 9 - Financial instruments; and
(iv) Revision of IASB (2015-2017 cycle).
The Company assessed the application of these changes and do not expect significant impacts on their financial statements due to the adoption of the new requirements.
In addition, the standards below, also effective as of January 1, 2019 and not adopted in advance by the Company were evaluated, as described below.
4.18.1 IFRS 16 - Leases
The pronouncement replaces IAS 17 - Leases, as well as related interpretations (IFRIC 4, SIC 15 and SIC 27). It eliminates the operating lease accounting for the lessee, presenting a single lease model consisting of initially recognizing all leases in intangible assets (Right-of-Use Assets) and liabilities (Other Accounts Payable) at present value; and recognizing the amortization of the right to use the asset and lease interest separately in the statement of income.
For short-term leases (lease term of 12 months or less) and low-value assets leases (such as computers, printers and mobile devices), the Company will choose to recognize lease expenses on a straight-line basis as provided for in IFRS 16.
Management intends to apply the modified retrospective transition method, which does not require the presentation of comparative information, and the liability and the right-of-use asset are recognized at the present value of the remainingpayments.
As of January 1st, 2019 the Company will recognize a right to use asset and a lease liability at the present value of approximately R$ 114,000, resulting in a variation of no more than 0.5% of the total consolidated asset as of December 31, 2018, with no impact on equity.
4.18.2 IFRIC 23 - Uncertainty over Income Tax Treatments
The interpretation explains how to apply the recognition and measurement requirements of IAS 12 - Income Taxes where there is un/certainty over a tax treatment. In accordance with certain requirements, such as where the tax authority is most likely not to accept certain treatment, the entity shall recognize and measure its current or deferred tax, asset or liability, applying the requirements of IAS 12 based on taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and ruling statutory tax rates, considering this non-acceptance.
F-33
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
The Company is evaluating the income tax treatments and has the perspective of concluding that the application of the standard will not have significant impacts on its results.
5 Cash and Cash Equivalents
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|
|
| 12.31.2018 | 12.31.2017 |
Cash and bank accounts | 167,728 | 157,470 |
Financial investments with immediate liquidity | 1,780,681 | 882,605 |
| 1,948,409 | 1,040,075 |
These comprise cash on hand, deposits with banks and short-term highly liquid investments, which can be redeemed in cash within 90 days from the investment date. Temporary short-term investments are recorded at cost at the reporting date, plus earnings accrued. Cash and cash equivalents are subject to an insignificant risk of change in value.
Financial investments refer to Bank Deposit Certificates - CDBs and Repurchase Agreements, which are the sale of a security with the commitment of the seller (Bank) to repurchase it, and of the purchaser to resell it in the future. Investments are remunerated between 75% and 101% of Interbank Deposit Certificate (Certificado de Depósito Interbancário - CDI) interest
6 Bonds and Securities
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|
|
Category | Index | 12.31.2018 | 12.31.2017 |
Quotas in Funds (a) | CDI | 286,855 | 114,732 |
Bank Deposit Certificates - CDB | 95.0% to 101% of CDI | 50,629 | 57,192 |
Committed Operation | 96.5% to 98% of CDI | 6,116 | 47,052 |
Financial Treasury Bonds - LFT | Selic | 696 | 687 |
|
| 344,296 | 219,663 |
| Current | 124,862 | 1,341 |
| Noncurrent | 219,435 | 218,322 |
Interbank Deposit Certificate - CDI | |||
Interest rate equivalent to the reference rate of the Special System for Settlement and Custody - Selic | |||
(a) These are fixed income funds in the Parent Company and reserve accounts intended to comply with contracts with BNDES, in other companies. | |||
Copel has securities that yield variable interest rates. The term of these securities ranges from 1 to 60 months from the end of the reporting period.
F-34
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
7 Trade Accounts Receivable
| Balances | Overdue | Overdue for | Total | Total |
| falling due | up to 90 days | more than 90 days | 12.31.2018 | 12.31.2017 |
Customers |
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|
Residential | 343,122 | 224,828 | 16,671 | 584,621 | 512,817 |
Industrial | 282,547 | 40,763 | 85,786 | 409,096 | 368,054 |
Commercial | 284,733 | 64,786 | 29,930 | 379,449 | 340,520 |
Rural | 64,804 | 20,498 | 4,332 | 89,634 | 80,531 |
Public Entities | 43,038 | 9,028 | 4,854 | 56,920 | 55,826 |
Public lighting | 39,095 | 19 | - | 39,114 | 37,684 |
Public service | 41,211 | 1,046 | 445 | 42,702 | 39,780 |
Unbilled | 538,245 | - | - | 538,245 | 471,421 |
Energy installments plan (7.1) | 137,866 | 15,129 | 44,956 | 197,951 | 190,261 |
Low income subsidy - Eletrobras | 11,958 | - | - | 11,958 | 14,435 |
Other receivables | 41,725 | 23,768 | 72,623 | 138,116 | 157,611 |
1,828,344 | 399,865 | 259,597 | 2,487,806 | 2,268,940 | |
Concessionaires and Permission holder |
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Energy supplies |
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Energy purchase agreements in the |
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regulated market - CCEAR | 4,590 | 788 | 5,504 | 10,882 | 61,838 |
Bilateral contracts | 94,162 | - | 7,432 | 101,594 | 68,111 |
CCEE (7.2) | 132,801 | - | 190,856 | 323,657 | 442,541 |
Unbilled | 137,076 | - | - | 137,076 | 183,765 |
Quota system and Reimbursement to generators | - | 740 | 2,254 | 2,994 | 1,331 |
368,629 | 1,528 | 206,046 | 576,203 | 757,586 | |
Charges from using transmission grid | 191,879 | 8,305 | 7,876 | 208,060 | 162,020 |
. |
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Telecommunications | 43,499 | 13,190 | 6,296 | 62,985 | 65,769 |
. |
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Gas distribution | 87,754 | 5,074 | 10,512 | 103,340 | 49,837 |
. |
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Expected credit losses (7.3) | (2,886) | (10,732) | (317,770) | (331,388) | (309,830) |
| 2,517,219 | 417,230 | 172,557 | 3,107,006 | 2,994,322 |
Current |
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| 2,944,091 | 2,733,240 |
Noncurrent |
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|
| 162,915 | 261,082 |
7.1 Energy installments plan
The trade accounts receivable renegotiated are discounted to present value, taking into consideration the future value, the maturity dates, the dates of settlement and the discount rate ranging from 0.0028% to 2.1450% p.m.
F-35
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
7.2 Electricity Trading Chamber - CCEE
From the total balance, the most significant amounts are: (i) R$ 54,873 of Copel DIS, fully received to the date of this publication; (ii) R$ 57,930 of Wind Farms, of which R$ 8,606 were already received or offset and the remaining balance is expected to be received or offset with CCEE upcoming settlements; and (iii) R$ 201,252 of Copel GeT, of which R$ 42,023 was received and the balance is also expected to be received or offset with the upcoming CCEE settlements.
From this amount of GeT, R$ 190,856 is the remainder of the R$ 231,617 balance derived from the reprocessing by CCEE of the energy measured at the PLD amount for the period from January to October 2015. This was the result of the favorable outcome on the filing of application for preliminary injunction in the ordinary lawsuit for exclusion of responsibility in energy delivery to comply with the trading contracts of HPP Colíder (Note 18.4). During this period Copel GeT complied with its commitment with energy surpluses not contracted in its other plants.
From the amount of R$ 201,252 calculated by CCEE, based on the PLD amount, arising from the effects of the injunction to exclude the responsibility of Colíder HPP, there is an expected credit losses of R$ 119,665. The remaining balance of R$ 81,585 refers to the right that we are certain to receive for the energy supply, regardless of any litigation, measured at the price of the trading agreements.
Also, regarding the exclusion of responsibility of Colíder HPP, there is an additional amount of R$ 43,844 related to the same energy supply, measured at the PLD amount, which was not recognized due to the uncertainty on the related lawsuit merit judgment.
7.3 Expected credit losses
As from January 1, 2018, expected credit losses are recorded based on the analysis of the risks of realization of the credits in an amount considered sufficient to cover expected losses on the realization of the trade accounts receivable, considering specific criteria of the payment history, the collection actions performed for the recovery of the credit and the materiality of the amounts due in the receivables portfolio.
The Company considers the provision for expected credit losses of trade accounts receivable sufficient to cover possible losses on the realization of these assets, according to the breakdown below:
| Balance as of |
| Reversal | Balance as of | Additions/ | Reversal | Balance as of | Effects of applying | Additions / | Reversal | Balance as of |
| January 1, 2016 | Additions | of write offs | December 31, 2016 | (reversals) | of write offs | December 31, 2017 | new IFRS | (reversals) | of write offs | December 31, 2018 |
Customers |
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Residential | 104,167 | 69,041 | (106,706) | 66,502 | 36,177 | (80,147) | 22,532 | (5,708) | 62,274 | (57,376) | 21,722 |
Industrial | 42,176 | 45,552 | (21,165) | 66,563 | 26,265 | (14,049) | 78,779 | 4,394 | 10,367 | (6,343) | 87,197 |
Commercial | 48,385 | 49,664 | (30,974) | 67,075 | 18,101 | (25,901) | 59,275 | 16,973 | 10,318 | (16,849) | 69,717 |
Rural | 1,827 | 4,106 | (2,803) | 3,130 | 2,997 | (3,396) | 2,731 | 1,646 | 3,734 | (4,301) | 3,810 |
Public Entities | 10,651 | 2,424 | (94) | 12,981 | (3,833) | (4,313) | 4,835 | 3,262 | (1,313) | (1,910) | 4,874 |
Public lighting | 81 | 23 | - | 104 | 205 | (269) | 40 | 389 | (304) | (5) | 120 |
Public service | 607 | 504 | - | 1,111 | (653) | (439) | 19 | 460 | 8 | (288) | 199 |
Unbilled | - | - | - | - | - | - | - | 1,573 | (71) | - | 1,502 |
Adjustment to present value | - | - | - | - | - | - | - | (4,048) | 1,165 | - | (2,883) |
207,894 | 171,314 | (161,742) | 217,466 | 79,259 | (128,514) | 168,211 | 18,941 | 86,178 | (87,072) | 186,258 | |
Concessionaries and permission holder |
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CCEE (7.2) | 119,665 | - | - | 119,665 | - | - | 119,665 | - | - | - | 119,665 |
Concessionaries and permission holder | 10,141 | 3,266 | (330) | 13,077 | 1,287 | (175) | 14,189 | 4,155 | (8,860) | (10) | 9,474 |
129,806 | 3,266 | (330) | 132,742 | 1,287 | (175) | 133,854 | 4,155 | (8,860) | (10) | 129,139 | |
Telecommunications | 191 | 2,598 | (2,255) | 534 | 8,309 | (7,332) | 1,511 | (1,233) | 12,749 | (9,148) | 3,879 |
Gas distribution | 1,795 | 3,209 | (80) | 4,924 | 1,433 | (103) | 6,254 | - | 6,017 | (159) | 12,112 |
| 339,686 | 180,387 | (164,407) | 355,666 | 90,288 | (136,124) | 309,830 | 21,863 | 96,084 | (96,389) | 331,388 |
F-36
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
Trade accounts receivable are written off when there is no reasonable expectation of recovery. Indications for this include, among other things, the inability of the debtor to participate in a plan to renegotiate its debtwith the Company or to make contractual payments of overdue debts.
Expected credit losses are presented in selling expenses, in the group of Credit losses, provisions and reversals.
8 CRC Transferred to the Paraná State Government.
By means of a fourth amendment dated January 21, 2005, the Company renegotiated with the State of Paraná the outstanding CRC (Account for Compensation of Income and Losses) balance as of December 31, 2004, in the amount of R$ 1,197,404. This receivable isto be paid by the State of Paraná in 244 installments under the Price amortization system, adjusted according to the IGP-DI inflation index plus interest of 6.65% p.a., which are received monthly, with the first installment due on January 30, 2005 and the others due in subsequent and consecutive months.
The Paraná State Government requested the Novation of the Adjustment Term of CRC, which was approved by the Company’s Board of Directors on June 16, 2016, subject to the consent of the Ministry of Finance of the following: (i) no principal and interest payments in the period from April to December 2016, and (ii) no payment of principal and monthly payments of interest from January to December 2017. The other clauses were maintained, including the maintenance of the current restatement and interest indexes, thus not affecting the global net present value of the referred agreement.
The Company’s Management and the State of Paraná formalized on October 31, 2017 the fifth amendment.
The State of Paraná complied with the agreed terms and made the payments of the monthly interest until December 2017. With the end of the grace period, the State of Paraná has strictly complied with the payments under the agreed terms, there remaining 76 monthly installments to be paid.
8.1 Changes in CRC
Balance as of |
| Monetary |
| Balance as of |
| Monetary |
| Balance as of |
January 1, 2017 | Interest | variations | Amortizations | December 31, 2017 | Interest | variations | Amortizations | December 31, 2018 |
1,522,735 | 97,085 | (6,373) | (97,085) | 1,516,362 | 93,009 | 95,788 | (260,117) | 1,445,042 |
Current |
|
|
| 167,109 |
|
|
| 190,876 |
Noncurrent |
|
|
| 1,349,253 |
|
|
| 1,254,166 |
F-37
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
8.2 Maturity of non-current installments
2020 | 203,570 |
2021 | 217,108 |
2022 | 231,547 |
2023 | 246,946 |
2024 | 263,369 |
After 2024 | 91,626 |
| 1,254,166 |
9 Net Sectorial Financial Assets and Liabilities
The Net Sectorial Financial Assets and Liabilities are compounded of the values of: a) Compensation Account of Changes in Values and Portion A - CVA, composed of the variation between the expected and realized costs of electric power, power transmission and sector charges, and b) financial items, which correspond to overcontracting of energy, neutrality of charges and other tariff rights and obligations. After the homologation of the Annual Tariff Adjustment and Periodic Tariff Review, the new tariff applied for the tariff year allows the collection or return of the assets / liabilities constituted.
Thus, the balance as of December 31, 2018 is composed of: i) the previous cycle (2018 tariff adjustment), under amortization, which represents the balance approved by ANEEL already reflected in the tariff, and ii) by the cycle under constitution (2019 tariff adjustment and 2021 periodic tariff revision), whose values will be ratified by ANEEL in the next tariff events.
F-38
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
9.1 Composition of net sectorial financial assets and liabilities balances per tariff cycle
|
|
|
| |
|
| 12.31.2018 |
| 12.31.2017 |
| Current | Noncurrent | Current | Noncurrent |
Sectorial financial assets - Electricity rate adjustment recoverable 2018 |
|
|
|
|
Portion A |
|
|
|
|
Electricity purchased for resale - CVA Energ | 274,495 | - | 333,412 | 333,412 |
Electricity purchased for resale - Itaipu | 278,072 | - | 250,851 | 250,851 |
Transport of energy using the transmission system - basic grid | 28,100 | - | 18,056 | 18,056 |
Transport of energy purchased from Itaipu | 8,312 | - | 5,063 | 5,063 |
System Service Charges - ESS | (240,248) | - | (211,735) | (211,735) |
Energy Development Account - CDE | 16,434 | - | (28,800) | (28,800) |
Proinfa | 3,007 | - | (33) | (33) |
Other financial components |
|
|
|
|
Neutrality | 42,605 | - | 33,319 | 33,319 |
Overcontracting | (46,972) | - | (112,137) | (112,137) |
Hydrological risk | (175,117) | - | (93,964) | (93,964) |
Tariff refunds | (36,840) | - | (21,302) | (21,302) |
CVA Angra III Adjustment | 6,272 | - | (1,121) | (1,121) |
Other | 5,429 | - | - | - |
| 163,549 | - | 171,609 | 171,609 |
Sectorial financial assets - Electricity rate adjustment recoverable 2019 |
|
|
|
|
Portion A |
|
|
|
|
Electricity purchased for resale - CVA Energ | 176,198 | 176,198 | - | - |
Electricity purchased for resale - Itaipu | 304,085 | 304,086 | - | - |
Transport of energy using the transmission system - basic grid | (29,307) | (29,307) | - | - |
Transport of energy purchased from Itaipu | 7,469 | 7,469 | - | - |
System Service Charges - ESS | (120,862) | (120,862) | - | - |
Energy Development Account - CDE | 71,325 | 71,325 | - | - |
Proinfa | (9) | (9) | - | - |
Other financial components |
|
|
|
|
Neutrality | 40,212 | 40,211 | - | - |
Overcontracting | (95,722) | (95,722) | - | - |
Hydrological risk | (71,958) | (71,958) | - | - |
Tariff refunds | (23,796) | (23,796) | - | - |
| 257,635 | 257,635 | - | - |
| 421,184 | 257,635 | 171,609 | 171,609 |
|
|
|
| |
|
| 12.31.2018 |
| 12.31.2017 |
| Current | Noncurrent | Current | Noncurrent |
Sectorial financial liabilities - Electricity rate adjustment recoverable 2017 |
|
|
|
|
Portion A |
|
|
|
|
Electricity purchased for resale - CVA Energ | - | - | (168,939) | - |
ESS | - | - | (167,938) | - |
CDE | - | - | (84,293) | - |
Proinfa | - | - | (5,122) | - |
Electricity purchased for resale - Itaipu | - | - | 36,002 | - |
Transport of energy using the transmission system - basic grid | - | - | 11,127 | - |
Transport of energy purchased from Itaipu | - | - | 2,797 | - |
Other financial components |
|
|
|
|
Tariff refunds | - | - | (12,470) | - |
Overcontracting | - | - | 87,949 | - |
Neutrality | - | - | 54,609 | - |
CVA Angra III Adjustment | - | - | 50,435 | - |
Other | - | - | 3,024 | - |
- | - | (192,819) | - | |
Sectorial financial liabilities - Tariff Review 2021 |
|
|
|
|
Financial components |
|
|
|
|
Tariff refunds | - | (96,531) | - | (90,700) |
- | (96,531) | - | (90,700) | |
| - | (96,531) | (192,819) | (90,700) |
F-39
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
9.2 Changes in net sectorial financial assets and liabilities
Balance as of | Operating revenues | Financial results | Rate | Balance as of | ||
| December 31, 2017 | Constitution | Amortization | Updating | flags | December 31, 2018 |
Portion A |
|
|
|
|
|
|
Electricity purchased for resale - Itaipu (9.2.1) | 537,704 | 661,144 | (348,586) | 35,981 | - | 886,243 |
Electricity purchased for resale - CVA Energy (9.2.2) | 497,885 | 710,482 | (129,555) | 31,053 | (482,974) | 626,891 |
Transport of energy using the transmission system - basic grid | 47,239 | (36,959) | (43,101) | 2,307 | - | (30,514) |
Transport of energy purchased from Itaipu | 12,923 | 21,526 | (12,194) | 995 | - | 23,250 |
ESS (9.2.3) | (591,408) | (302,226) | 443,817 | (32,155) | - | (481,972) |
CDE (9.2.4) | (141,893) | 231,308 | 69,851 | (182) | - | 159,084 |
Proinfa | (5,188) | 6,111 | 2,024 | 42 | - | 2,989 |
Other financial components |
|
|
|
|
|
|
Neutrality (9.2.5) | 121,247 | 100,280 | (100,661) | 2,162 | - | 123,028 |
CVA Angra III Adjustment | 48,193 | 8,482 | (57,214) | 6,811 | - | 6,272 |
Hydrological risk (9.2.6) | (187,928) | (310,975) | 189,289 | (9,419) | - | (319,033) |
Tariff refunds (9.2.7) | (145,774) | (80,493) | 52,290 | (6,986) | - | (180,963) |
Overcontracting (9.2.8) | (136,325) | (54,421) | (37,176) | (10,494) | - | (238,416) |
Others | 3,024 | 11,193 | (8,892) | 104 | - | 5,429 |
| 59,699 | 965,452 | 19,892 | 20,219 | (482,974) | 582,288 |
Current assets | 171,609 |
|
|
|
| 421,184 |
Noncurrent assets | 171,609 | 257,635 | ||||
Current liabilities | (192,819) | - | ||||
Noncurrent liabilities | (90,700) |
|
|
|
| (96,531) |
Balance as of | Operating revenues | Financial results | Rate | Balance as of | ||
| January 1, 2017 | Constitution | Amortization | Updating | flags | December 31, 2017 |
Portion A |
|
|
|
|
|
|
Electricity purchased for resale - Itaipu (9.2.1) | 424,085 | 495,889 | (420,054) | 37,784 | - | 537,704 |
Electricity purchased for resale - CVA Energy (9.2.2) | (536,125) | 937,324 | 517,751 | (1,845) | (419,220) | 497,885 |
Transport of energy using the transmission system - basic grid | 8,411 | 50,426 | (12,275) | 677 | - | 47,239 |
Transport of energy purchased from Itaipu | 7,703 | 11,067 | (7,155) | 1,308 | - | 12,923 |
ESS (9.2.3) | (273,418) | (529,932) | 262,568 | (50,626) | - | (591,408) |
CDE (9.2.4) | 70,611 | (158,514) | (60,149) | 6,159 | - | (141,893) |
Proinfa | 17,293 | (14,677) | (10,423) | 2,619 | - | (5,188) |
Other financial components |
|
|
|
|
|
|
Neutrality (9.2.5) | 190,976 | 28,694 | (99,593) | 1,170 | - | 121,247 |
CVA Angra III Adjustment | - | 97,426 | (54,516) | 5,283 | - | 48,193 |
Hydrological risk (9.2.6) | - | (183,728) | - | (4,200) | - | (187,928) |
Tariff refunds (9.2.7) | (71,244) | (78,254) | 13,479 | (9,755) | - | (145,774) |
Overcontracting (9.2.8) | 156,170 | (203,797) | (90,272) | 1,574 | - | (136,325) |
Extraordinary Tariff Review | (257,353) | - | 257,353 | - | - | - |
Financial exposure | (16,250) | - | 16,250 | - | - | - |
Others | 149 | 5,570 | (3,418) | 723 | - | 3,024 |
| (278,992) | 457,494 | 309,546 | (9,129) | (419,220) | 59,699 |
Current assets | - |
|
|
|
| 171,609 |
Noncurrent assets | - | 171,609 | ||||
Current liabilities | (155,261) | (192,819) | ||||
Noncurrent liabilities | (123,731) |
|
|
|
| (90,700) |
9.2.1 Electricity purchased for resale–Itaipu
The power output from the Itaipu hydroelectric power plant is sold as quotas to utility companies in the South, Southeast and Midwest Brazilian regions in proportion to their markets, whose value is set in dollars per kilowatt of contracted monthly power (USD/kW). The invoices are paid in Brazilian currency and are used for currency conversion, the average USD sales rate calculated by the Central Bank of Brazil, on the business day immediately prior to the payment of the invoice.
F-40
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
The amount constituted in 2018 refers to the change in the power purchase cost and foreign exchange difference, in relation to that predicted in the last tariff adjustment, where the Itaipu HPP transfer tariff for 2018 was USD 27.87/kW (Resolution 2,363/2017). The dollar used in monthly payments was higher than the tariff coverage, thus generating a sectorial financial asset, which will be reversed in the next tariff adjustment in June 2019.
9.2.2 Electricity purchased for resale - CVA Energy
The balance constituted reflects the difference between the average price of payment related to the cost of energy purchased and the average price of tariff coverage, mainly due to the effects of contracting by availability (ECD) - associated with the dispatch of thermal plants and generation of wind farms and the transfer of the hydrological risk associated with the plants committed to Contracts of Quotas of Assured Power - CCGF, as well as the enterprises that signed the renegotiation term.
The CVA Energy account was offset by funds received from the Rate Tier Pooling Account (CCRBT) or Tariff Flags Account, which in the year resulted in the deduction of R$ 482,974 from the cost of energy.
9.2.3 System Service Charges - ESS
The objective of the ESS is to cover the cost of maintaining the reliability and stability of the electrical system. Its calculation is performed monthly by CCEE and paid by the distributor and by generation agents. The ESS liability balance set up in 2018 is the result of the lower amount paid in relation to the amount included in the tariff, mainly due to the variation of the costs related to the dispatch of thermal plants.
9.2.4 Energy Development Account - CDE
The balance of the CDE in 2018 is the result of the higher amount of monthly payment quotas, except in this case the CDE discounts resulting from preliminary injunctions, ratified by ANEEL (Note 31.2.1), in relation to the regulatory quota in the electricity tariff.
9.2.5 Neutrality
Portion A's neutrality corresponds to the estimate of the recoverable portion of the sector charges, energy, transportation, financial components and unrecoverable revenues, not billed by the current, and should be understood as the guarantee of transfer to consumers of all the components over which the distributor has no managing power.
F-41
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
9.2.6 Hydrological risk
In the tariff adjustment of 2018, there was calculation of the coverage of the hydrological risks associated with plants committed to Contract of Quotas of Assured Power - CCGF, of the Itaipu plant and of the hydroelectric power plants whose energy was contracted within the Regulated Contracting Environment - ACR and that signed the Risk Renegotiation Term in conformity with Law No. 13,203/2015. The estimated hydrological risk defined in the tariff adjustment will be reversed in the subsequent tariff adjustment, adjusted by the Selic rate.
9.2.7 Tariff refunds
ANEEL, by means of Order No. 245 of January 28, 2016, in line with the Tariff Regulation Procedures - Proret, sub-module 2.1 - General Procedures, determined that the amounts resulting from excess demand and surplus of reagents previously recorded as special obligations should be recorded as sector financial liabilities.
9.2.8 Overcontracting
ANEEL, though the Normative Resolution 255/2007, established the criteria for transfer, to the final consumer's tariffs. For the calculation of the transfer of energy overcontracting or exposure to the short-term market, it is necessary to calculate the results in the short-term market of the distributor with data made available by CCEE. The Company closed the 2018 year within the regulatory limits of 100% to 105% contracting, thus ensuring the integral transfer of overcontracting.
10 Accounts Receivable Concessions
| 12.31.2018 | 12.31.2017 |
Power distribution service concession (10.1) | 783,023 | 684,206 |
Piped gas distribution service concession (10.2) | 322,259 | 303,668 |
Bonus from the grant of concession agreements under the quota system (10.3) | 625,772 | 606,479 |
Power transmission concession (10.4) | - | 1,497,399 |
Remeasurement of RBSE assets (10.5) | 753,826 | 1,418,370 |
Generation concession agreements (10.6) | 65,811 | 68,859 |
| 2,550,691 | 4,578,981 |
Current | 53,177 | 149,744 |
Noncurrent | 2,497,514 | 4,429,237 |
F-42
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
10.1 Power distribution service concession
|
|
Balance as of January 1, 2017 | 614,806 |
Donations and grants received | 76 |
Transfers from intangible assets (Note 19.1) | 56,853 |
Transfers to other receivables (assets held for disposal) | (3,711) |
Fair value recognition | 16,199 |
Loss on disposal | (17) |
Balance as of December 31, 2017 | 684,206 |
Transfers from contract assets (Note 11.1) | 66,380 |
Transfers to other receivables (assets held for disposal) | (1,334) |
Fair value recognition | 35,306 |
Loss on disposal | (1,535) |
Balance as of December 31, 2018 | 783,023 |
The distribution concession agreement amount is measured at fair value and its collection is assured by the Concession Grantor through an indemnity upon the return of these assets at the end of the concession period.
10.2 Piped gas distribution service concession
Balance as of January 1, 2017 | 83,378 |
Reclassifications from intangible assets (Note 2.1.1) | 154,800 |
Transfers from intangible assets (Note 19.3) | 24,609 |
Fair value recognition | 40,881 |
Balance as of December 31, 2017 | 303,668 |
Transfers from contract assets (Note 11.2) | 6,399 |
Fair value recognition | 12,193 |
Loss on disposal | (1) |
Balance as of December 31, 2018 | 322,259 |
10.3 Bonus from the grant of concession agreements under the quota system
|
|
Balance as of January 1, 2017 | 586,706 |
Transfers to electricity grid use charges - customers | (62,387) |
Interest (Note 31) | 82,160 |
Balance as of December 31, 2017 | 606,479 |
Transfers to electricity grid use charges - customers | (66,693) |
Interest (Note 31) | 85,986 |
Balance as of December 31, 2018 | 625,772 |
On January 5, 2016, Copel GeT entered into a 30-year concession agreement of HPP GPS, in accordance with Law No. 12,783/2013, with payment of the Bonus from the Grant - BO to the Concession Grantor, amounting to R$ 574,827, as per ANEEL Invitation to Bid 12/2015.
F-43
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
The electric energy in 2016 was fully sold to the Regulated Contracting Environment - ACR under the Assured Power Quota System - CGF or“quota regime”and, as from 2017 to the end of the concession, in the proportion of 70% of the power in the ACR and 30% in the free environment - ACL.
The amount of the bonus for the grant was recognized asafinancial asset due to the Copel GeT’s unconditional right to receive the amount paid with inflation adjustment based on IPCA and interest during the concession period.
10.4 Power transmission concession
|
|
Balance as of January 1, 2017 | 1,342,055 |
Transfers to electricity grid use charges - customers | (81,497) |
Transfers to property, plant and equipment | (29,264) |
Remuneration | 129,769 |
Construction income | 136,336 |
Balance as of December 31, 2017 | 1,497,399 |
Transfers to contract assets (Note 11.3) | (1,497,399) |
Balance as of December 31, 2018 | - |
10.5 Remeasurement of RBSE assets
|
|
Balance as of January 1, 2017 | 1,186,985 |
Gain on remeasurement of the cash flow from the RBSE assets | 178,141 |
Increase in the estimated amount due to the approval of the report on RBSE assets | 183,015 |
Transfers to electricity grid use charges - customers | (129,771) |
Balance as of December 31, 2017 | 1,418,370 |
Transfers to contract assets (Note 11.3) | (635,292) |
Gain on the cash flow from the RBSE assets | 82,640 |
Transfers to electricity grid use charges - customers | (111,892) |
Balance as of December 31, 2018 | 753,826 |
Copel GeT extended the concession agreement 060/2001, pursuant to Law No. 12,783/2013, and recognized receivables related to the electricity transmission assets of the Existing Basic Network System (RBSE) and the connecting facilities and Other Transmission Facilities - RPC existing in May 2000 and not yet depreciated or amortized.
On April 20, 2016, MME Ordinance No. 120 was published, determining that the amounts of assets not yet depreciated and/or amortized, shall comprise the Regulatory Remuneration Base (BRR) for electricity transmission concession operators as of the 2017 tariff review process, in order to define the Annual Permitted Revenue (RAP). The Ordinance addressed issues related to updating, remuneration and period for receiving the amounts, which are regulated by ANEEL Normative Resolution No. 762/2017, by means of Public Hearing 068/2016.
F-44
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
On April 12, 2017, ANEEL issued Technical Note No. 61/2017 - SFF, which concluded the audit of the assets appraisal report and recognized the amount of R$ 667,637 as the net value of the assets at December 31, 2012. ANEEL’s board approved the inspection results on May 9, 2017, with no recognition of R$ 214,663 in relation to the amount originally requested of R$ 882,300, considering that the main disallowance is related to assets of Substation SF6 of Salto Caxias.
Moreover, on June 27, 2017 ANEEL published Resolution No. 2,258 establishing the Annual Permitted Revenue (RAP), for the 2017/2018 tariff cycle, considering a court decision on the injunction of April 11, 2017 related to a lawsuit filed by three business associations, which determines the deduction of the“compensation”, provided for in article 15, paragraph 2 of Law 12,783/2013. The same decision was applied for the current 2018-2019 cycle, according to ANEEL Resolution 2,408 of June 26, 2018.
The compensation, being challenged in court, related to the cost of equity calculated for the RBSE assets from January 2013 to June 2017, temporarily reduced the RAP of this cycle from R$ 136,790 to R$ 102,514, and the amount deducted from the RAP by ANEEL in the eight tariff cycles is R$ 201,795.
Based on the opinion of its legal counsel, Copel GeT understands that this is a provisional decision and is not against Copel GeT’s right to receive the amounts related to RSBE assets, which are guaranteed by Law. Therefore, the receivables related to the compensation by the cost of equity considered in the receipt flow of this asset are recorded in non-current assets.
Until December 31, 2017, RBSE assets were classified as a financial asset under the scope of IAS 39 and IFRIC 12.
With theadoption of IFRS 15 on January 1, 2018 which brought the concept of the receivable right conditioned to the fulfillment of performance obligations to operate and maintain the infrastructure and not only over time, the Company changed the classification to contract assets for the part related to RBSE assets approved for receipt after the first RAP cycle that began in July 2017. As a result, the balance as of January 1, 2018 is now classified as contract assets along with the other power transmission concession agreements (NE 11.3), with no effect on their measurement.
The part of RAP restated by the Concession Grantor, for the period from January 2013 to June 2017, approved for receipt in 8 years from the cycle that began in July 2017 was maintained with the classification of financial asset due to the unconditional right to receive the amount paid with updating by the IPCA and remuneration interest during the agreed period.
F-45
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
10.6 Power generation concession contract
|
|
Balance as of December 31, 2016 | 67,401 |
Gain on remeasurement of the cash flow | 341 |
Reversal of impairment (note 32.4) | 1,117 |
Balance as of December 31, 2017 | 68,859 |
Transfers to other current receivables - disposal of assets | (9,053) |
Gain on remeasurement of the cash flow | 1,247 |
Reversal of impairment (note 32.4) | 4,758 |
Balance as of December 31, 2018 | 65,811 |
The balance refers to generation assets and as a result of the expiration of the GPS and Mourão I HPP concessions. Copel GeT depreciated the plants up to the expiration dates of the concessions, and the remaining balance was reclassified to Accounts Receivable Related to Concession Compensation. Although the Concession Grantor has not yet disclosed the means of remunerating these assets and there are uncertainties as to the approval of the investments made, Management believes that compensation for these assets indicates the recoverability of the recorded balance, based on the compensation methodology determined by ANEEL.
The variation in the remeasurement of the cash flow from these assets has a corresponding entry in Other operating income, in Other operational income (expenses) group.
Copel GeT submitted to ANEEL, in a timely manner, its interest in receiving the indemnifiable amount. Proof of the investments made was formalized with the regulatory agency on December 17, 2015. The new replacement value methodology was used to prepare the information, as defined in ANEEL Normative Resolution No. 596/2013.
On December 11, 2018, the Company signed the contractual commitment for the purchase and sale of the remaining assets of the extinguished Rio dos Patos HPP, as recommended in ANEEL's Authorizing Resolution No. 7,050 of June 5, 2018. The negotiation price was R$ 9,053.
11 Contract assets
| 12.31.2018 | 12.31.2017 |
Power distribution service concession (11.1) | 640,500 | - |
Piped gas distribution service concession (11.2) | 25,718 | - |
Power transmission concession (11.3) | 2,767,012 | - |
| 3,433,230 | - |
Current | 85,019 | - |
Noncurrent | 3,348,211 | - |
F-46
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
11.1 Power distribution service concession contract
|
|
|
|
| Assets | Special liabilities | Total |
Balance as of December 31, 2017 | - | - | - |
Transfers from intangible assets (Note 19.1) | 714,446 | (26,100) | 688,346 |
Acquisitions | 797,832 | - | 797,832 |
Customers contributions | - | (106,764) | (106,764) |
Provision for legal claims added to the cost of the works | 4,320 | - | 4,320 |
Transfers to intangible assets (Note 19.1) | (775,701) | 107,679 | (668,022) |
Transfers to accounts receivable related to concession (Note 10.1) | (67,310) | 930 | (66,380) |
Loss on disposal | (8,832) | - | (8,832) |
Balance as of December 31, 2018 | 664,755 | (24,255) | 640,500 |
These assets consist of works in progress related mainly to the construction and expansion of substations, lines and distribution networks, measured at historical cost, net of the Special Obligations.
During the construction phase, the costs of borrowings and debentures are capitalized. In 2018 these costs totaled R$ 5,435 at the average rate of 0.26% p.a. (R$ 4,497 at the average rate of 0.25% p.a. in 2017,capitalized in intangible assets in progress).
Until 31.12.2017, they were classified as intangible assets under the scope of IFRIC 12. With the IFRS 15 adoption, on January 1, 2018 and the revision of IFRIC 12, the Company became to classify the electricity distribution works during the construction period as contract assets. The adoption of this standard was made prospectively (Note 4.17.2).
11.2 Piped gas distribution service concession contract
|
|
Balance as of December 31, 2017 | - |
Transfers from intangible assets (Note 19.3) | 19,471 |
Acquisitions | 15,618 |
Transfers to intangible assets (Note 19.3) | (2,042) |
Transfers to accounts receivable related to concession (Note 10.2) | (6,399) |
Loss on disposal | (930) |
Em 31.12.2018 | 25,718 |
Until December 31, 2017, they were classified as intangible assets within the scope of IFRIC 12. With theadoptionof IFRS 15 on January 1, 2018 and the revision of IFRIC 12, the Company began to classify the electricity distribution works during the construction period as contract assets prospectively (Note 4.17.2).
F-47
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
11.3 Transmission service concession contract
|
|
Balance as of December 31, 2017 | - |
Transfers from accounts receivable related to concession (Note 10.4) | 1,497,399 |
Transfers from accounts receivable related to concession - RBSE (Note 10.5) | 635,292 |
Effect of acquisition of control of Costa Oeste and Marumbi | 258,908 |
Transfers to electricity grid use charges - customers | (243,247) |
Transfers to property, plant and equipment | (501) |
Transfers from judicial deposits and litigations | 8,277 |
Remuneration | 268,904 |
Construction income | 341,980 |
Balance as of December 31, 2018 | 2,767,012 |
Until December 31, 2017, electricity transmission concession agreements were classified as financial assets within the scope of IAS 39 and IFRIC 12.
With theadoptionof IFRS 15 on January 1, 2018, which brought the concept of the right to receive infrastructure built conditioned to the fulfillment of performance obligations to operate and maintain the infrastructure and not only by the passage of time, the Company changed the classification of electricity transmission concession agreements in accordance with the new standard. The balance started being classified as contract assets, with no effect on its measurement as from January 1, 2018,prospectively (Note 4.17.2).
F-48
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
12 Other Receivables
|
|
|
| 12.31.2018 | 12.31.2017 |
Services in progress (a) | 165,973 | 141,959 |
Credits on purchases of gas (12.1) | 112,003 | 77,279 |
CDE Transfer (12.2) | 107,472 | 136,559 |
Tariff flag - CCRTB | 28,725 | 14,536 |
Advance payments to suppliers (b) | 22,096 | 29,016 |
Advance payments to employees | 21,201 | 25,928 |
Advance for severance estate | 19,591 | 19,230 |
Decommissioning in progress | 19,457 | 53,348 |
Fair value in the purchase and sale of power in the active market (NE nº 35.2.12) | 14,793 | - |
Other receivables | 80,833 | 60,912 |
592,144 | 558,767 | |
Current | 363,250 | 409,351 |
Noncurrent | 228,894 | 149,416 |
CCRTB - Centralizing account of Tariff Flag Resources. | ||
(a) This item refers to services currently in progress within the Company, most of which are related to the Research andDevelopment and Energy Efficiency programs, which upon conclusion are offset against the respective liability recorded forthis purpose. | ||
(b) Advances to suppliers provided on contractual clauses. |
12.1 Credits on purchases of gas - Compagás
This balance refers to the gas acquisition of contracted and guaranteed volumes, higher than those actually withdrawn and used, and contains a future compensation clause. Compagás has the right to use the gas in subsequent months, and can compensate the volume contracted and not consumed until 2022. According to the contractual provisions and consumption perspectives, derived from the review of the projects and scenarios for the next years, Compagás estimates to fully offset the contracted volumes in the course of its operation. The contracts with Petrobras provide for the right to dispose of this asset. The expiration date of the concession is in discussion with the Concession Grantor, as described in Note 2.1.1
12.2 CDE Transfer
Balance to be transferred by the CDE referring to tariff discounts on the tariffs applicable to users defined in accordance with art. 13, item VII, of Law 10,438/2002 and Decree No. 7,891/2013. The amount transferred to Copel DIS for the period from June 2017 to May 2018, in accordance with Resolution No. 2,255/2017, was R$ 49,304 per month. As from June 2018, this amount was changed to R$ 62,699 per month, by Ratifying Resolution No. 2,402, dated 6/19/2018, which approved the result of the last Annual Tariff Adjustment.
F-49
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
13 Taxes
13.1 Income Tax and Social Contribution
The taxation on profit comprises income tax and social contribution calculated based on the taxable profits (adjusted profit) of each taxable entity at the applicable tax rates according to prevailing legislation, namely, at 15%, plus 10% surtax on the amount exceeding R$ 240 per year, for income tax and at 9% for social contribution.
Income tax and social contribution losses can be offset against future taxable profits, considering the limit of 30% of the taxable profit for the period, and can be carried forward indefinitely.
13.2 Deferred income tax and social contribution
The Company, based on its profitability history and the expectation of generating future taxable profits, based on its internal projections prepared for reasonable periods for its business, sets up a deferred tax asset on temporary differences between the tax bases.
The deferred income tax and social contribution are recognized on temporary differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used for tax calculation purposes to the extent that it is probable that there will be sufficient taxable profits against which the temporary differences can be utilized and the tax losses can be offset.
Deferred tax assets and liabilities may be offset if there is a legal right to offset the current tax assets and liabilities and they relate to the same taxing authority.
13.2.1 Changes in deferred income tax and social contribution
. | |||||||||
|
|
| Recognized |
|
|
|
| Recognized |
|
Balance as of | Recognized | comprehensive | Balance as of | Recognized | Effects of applying | Business | comprehensive | Balance as of | |
| January 1, 2017 | in income | income | December 31, 2017 | in income | new IFRS | combination effect | income | December 31, 2018 |
Noncurrent assets |
|
|
|
|
|
|
|
|
|
Provisions for legal claims | 438,538 | 75,820 | - | 514,358 | 55,123 | - | 3,696 | - | 573,177 |
Post-employment benefits | 260,068 | 16,716 | 16,827 | 293,611 | 15,080 | - | - | 19,994 | 328,685 |
Impairment of assets | 289,617 | 20,944 | - | 310,561 | 17,450 | - | - | - | 328,011 |
Research and development and energy efficiency programs | 142,279 | 14,046 | - | 156,325 | (1,834) | - | - | - | 154,491 |
Provision for energy purchases | 115,257 | 14,620 | - | 129,877 | 25,693 | - | - | - | 155,570 |
Expected credit losses | 129,638 | (16,258) | - | 113,380 | (6,838) | 7,468 | - | - | 114,010 |
Tax losses and negative tax basis | 51,113 | 59,545 | - | 110,658 | (39,518) | - | - | - | 71,140 |
Social security contributions - injunction on judicial deposit | 54,750 | 6,106 | - | 60,856 | 6,154 | - | - | - | 67,010 |
Amortization - concession | 44,131 | 4,591 | - | 48,722 | 4,617 | - | - | - | 53,339 |
Provision for tax losses | 23,176 | 739 | - | 23,915 | 11,518 | - | - | - | 35,433 |
Provision for profit sharing | 21,331 | 939 | - | 22,270 | 8,278 | - | - | - | 30,548 |
Concession contracts | 26,206 | (1,300) | - | 24,906 | (1,300) | - | - | - | 23,606 |
Financial instruments | 12,923 | 2,795 | - | 15,718 | (3,486) | - | - | - | 12,232 |
Others | 91,337 | (33,878) | - | 57,459 | 41,641 | 1,006 | - | - | 100,106 |
1,700,364 | 165,425 | 16,827 | 1,882,616 | 132,578 | 8,474 | 3,696 | 19,994 | 2,047,358 | |
(-) Noncurrent liabilities |
|
|
|
|
|
|
|
|
|
Concession contracts | 440,522 | 95,204 | - | 535,726 | 68,475 | - | 9,457 | - | 613,658 |
Deemed cost | 486,795 | (36,911) | - | 449,884 | (34,559) | - | - | - | 415,325 |
Escrow deposits monetary variation | 62,538 | (7,210) | - | 55,328 | 8,839 | - | - | - | 64,167 |
Transaction cost on borrowings and debentures | 9,642 | 11,896 | - | 21,538 | 9,589 | - | - | - | 31,127 |
Deferment of capital gains | 11,320 | - | - | 11,320 | - | - | - | - | 11,320 |
Capitalization of financial charges | 5,357 | - | - | 5,357 | (3,459) | - | - | - | 1,898 |
Others | 48,265 | (2,811) | (853) | 44,601 | 15,621 | - | - | - | 60,222 |
1,064,439 | 60,168 | (853) | 1,123,754 | 64,506 | - | 9,457 | - | 1,197,717 | |
Net | 635,925 | 105,257 | 17,680 | 758,862 | 68,072 | 8,474 | (5,761) | 19,994 | 849,641 |
Assets presented in the Statement of Financial Position | 814,355 |
|
| 915,492 |
|
|
|
| 1,007,061 |
(-) Liabilities presented in the Statement of Financial Position | (178,430) |
|
| (156,630) |
|
|
|
| (157,420) |
F-50
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
13.2.2 Realization of deferred taxes
The projection of deferred tax credits realization recorded in noncurrent assets and liabilities arising from temporary differences is based on the average realization period of each item of deferred assets and liabilities and tax losses, also based on projections of future results. These projections were evaluated by the Supervisory Board and approved by the Board of Directors on March 28, 2019. The breakdown of the main credits is as follows:
-Amounts recorded on provisions for post-employment benefits will be realized as the payments are made to the Copel Foundation or reversed according to new actuarial estimates;
- Amounts set up on the provisions for legal claims will be realized according to court decisions;
- Amounts set up on the provision for impairment of assets will be realized through the amortization and/or depreciation of the impaired asset;
- Amounts set up on the provision for purchase of energy will be realized in the immediately following period by the recording of the tax document of the purchase;
- Amounts set up on the provisions for R&D and PEE will be realized through the expenses incurred in the projects carried out;
-Amounts recorded on the deemed cost will be realized through the amortization and/or depreciation of the valued asset;
- Amounts related to the concession agreement will be realized over the term of the agreement;
- The other amounts set up will be realized according to the tax realization of each of the tax bases. On March 28, 2019, the Company’s Supervisory Board examined and the Board of Directors approved the technical study which points out to the realization of deferred taxes.
The projected realization of the deferred taxes is shown below:
|
|
|
| Assets | Liabilities |
2019 | 528,769 | (82,554) |
2020 | 263,907 | (82,937) |
2021 | 164,724 | (83,423) |
2022 | 131,876 | (100,484) |
2023 | 103,979 | (68,853) |
2024 to 2026 | 216,854 | (188,881) |
2027 to 2029 | 637,249 | (590,585) |
| 2,047,358 | (1,197,717) |
13.2.3 Unrecognized tax credits
As of December 31, 2018, UEG Araucária did not recognize income tax and social contribution credits on income tax and social contribution tax losses in the amount of R$ 34.567 because at present there is no reasonable assurance of generation of future taxable profits sufficient to allow the utilization of these tax credits.
F-51
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
13.3 Other taxes recoverable and other tax obligations
|
|
|
| 12.31.2018 | 12.31.2017 |
Current assets |
|
|
Recoverable ICMS (VAT) | 96,072 | 68,773 |
Recoverable PIS/Pasep and Cofins taxes | 64,200 | 128,888 |
Other recoverable taxes | 570 | 571 |
160,842 | 198,232 | |
Noncurrent assets |
|
|
Recoverable ICMS (VAT) | 50,306 | 36,740 |
PIS/Pasep and Cofins taxes | 147,380 | 46,858 |
Other recoverable taxes | 33,714 | 33,376 |
231,400 | 116,974 | |
Current liabilities |
|
|
ICMS (VAT) payable | 185,634 | 151,928 |
PIS/Pasep and Cofins payable | 115,345 | 17,632 |
IRRF on JSCP | 23,687 | 54,047 |
Special Tax Regularization Program - Pert (13.3.1) | 46,777 | 45,108 |
Ordinary financing of taxes with the federal tax authorities | 64,974 | 63,791 |
Other taxes | 15,016 | 12,981 |
451,433 | 345,487 | |
Noncurrent liabilities |
|
|
Social security contributions - injunction on judicial deposit | 197,413 | 179,373 |
Special Tax Regularization Program - Pert (13.3.1) | 471,665 | 488,563 |
Ordinary financing of taxes with the federal tax authorities | 21,658 | 85,054 |
TCFRH (a) | 101,821 | 53,349 |
Other taxes | 4,175 | 3,237 |
| 796,732 | 809,576 |
(a) Fee for Control, Monitoring and Inspection of Activities of Exploitation and Use of Water Resources - payment suspended due to injunction. |
Sales and services revenues are subject to value-added tax (Imposto sobre Circulação de Mercadorias e Serviços or ICMS, in Portuguese) and service tax (Imposto sobre Serviços or ISS, in Portuguese), at the applicable rates, and to the PIS (Social Integration Program) and COFINS (Contribution for Social Security Funding).
Credits resulting from non-cumulative PIS and COFINS charges are accounted foras reduction to operating costs in the statement of income.
Credits arising from non-cumulative ICMS, PIS and COFINS related to the purchase of assets are presented as reductions to the acquisition cost of these assets.
Prepayments or amounts that can be offset are presented in current and non-current assets, according to their expected realization.
13.3.1 Special Regime for Tax Regularization (PERT)
Copel DIS joined PERT in 2017, considering the benefits offered by the program in the face of the change in the CVA tax regime, from a billing regime to an accrual basis. The payment of 20% of the debt occurred in 2017 and as of January 2018 the payment of the balance began in 145 monthly installments of R$ 3,572, adjusted by the Selic rate.
F-52
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
13.4 Reconciliation of provision for income tax (IRPJ) and social contribution (CSLL)
|
|
|
|
| 12.31.2018 | 12.31.2017 | 12.31.2016 |
Income before IRPJ and CSLL | 1,955,997 | 1,392,941 | 1,394,162 |
IRPJ and CSLL (34%) | (665,039) | (473,600) | (474,015) |
Tax effects on: |
|
|
|
Equity in income | 46,203 | 36,555 | 66,899 |
Interest on own capital | 98,917 | 90,440 | 96,202 |
Dividends | 280 | 497 | 838 |
Non deductible expenses | (9,322) | (26,292) | (11,624) |
Tax incentives | 16,465 | 14,973 | 16,567 |
Unrecognized income and social contribution tax loss carry-forwards | (15,383) | (5,645) | - |
Setting up and/or offset of income tax and social contribution losses of prior years | 5,037 | 90,804 | - |
Difference between the calculation bases of deemed profit and taxable profit | 11,076 | (19,680) | (114,149) |
Others | (227) | 17,262 | (100,408) |
Current IRPJ and CSLL | (580,065) | (379,943) | (589,322) |
Deferred IRPJ and CSLL | 68,072 | 105,257 | 69,632 |
Effective rate - % | 26.2% | 19.7% | 37.3% |
14 Prepaid Expenses
| 12.31.2018 | 12.31.2017 |
Risk premium - GSF renegotiation (14.1) | 12,574 | 28,033 |
Others | 31,535 | 24,518 |
| 44,109 | 52,551 |
Current | 40,819 | 39,867 |
Noncurrent | 3,290 | 12,684 |
14.1 Hydrological risk renegotiation (GSF)
In accordance with Hydrological Risk Renegotiation Term and previously mentioned regulations, the companies acquired the right to partially recover the cost with MRE (GSF) in 2015, in the amount of R$ 33.55 per average MW of electricity for SP100 product class, based on the risk premium contracted by them (NE nº 4.9.2).
The amounts originally recognized on the renegotiation of the hydrological risk were as follows:
Power Plant | Physical guarantee | Eligible amount of energy (Average MW ) | Amortization period | Grant extension period | Asset value | Value of prepaid expenses to | Value of intangible assets amortization over the concession period |
Mauá | 100.827 | 97.391 | 01.01.2016 to 06.30.2020 | not applicable | 28,623 | 28,623 | - |
Foz do Areia | 576,000 | 226.705 | 01.01.2016 to 12.31.2016 | 05.24.2023 to 09.17.2023 | 66,628 | 17,222 | 49,406 |
Santa Clara and Fundão | 135,400 | 134.323 | 01.01.2016 to 04.22.2019 | 10.25.2036 to 05.28.2037 | 39,369 | 30,326 | 9,043 |
|
| 458.419 |
|
| 134,620 | 76,171 | 58,449 |
F-53
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
A breakdown of these items as at December 31, 2018 and 2017 is presented below:
| Balance as of |
|
| Balance as of |
|
| Balance as of |
| January 1, 2017 | Amortization | Transfers | December 31, 2017 | Amortization | Transfers | December 31, 2018 |
Risk premium - current asset | 15,459 | (12,876) | 12,876 | 15,459 | (15,459) | 9,394 | 9,394 |
Risk premium - noncurrent asset | 25,450 | - | (12,876) | 12,574 | - | (9,394) | 3,180 |
Intangible | 53,186 | (7,441) | - | 45,745 | (7,038) | - | 38,707 |
| 94,095 | (20,317) | - | 73,778 | (22,497) | - | 51,281 |
Risk premium to be amortized - prepaid expenses | 40,909 |
|
| 28,033 |
|
| 12,574 |
Grant extension period - intangible | 53,186 |
|
| 45,745 |
|
| 38,707 |
15 Receivables from Related Parties
|
|
|
| 12.31.2018 | 12.31.2017 |
Controlling shareholders |
|
|
State of Paraná (15.1) | - | 130,417 |
|
| |
Joint Ventures |
|
|
Voltalia São Miguel do Gostoso (15.2) | - | 38,169 |
Structure sharing | - | 405 |
| - | 168,991 |
Current | - | 38,835 |
Noncurrent | - | 130,156 |
15.1 State of Paraná
15.1.1 Luz Fraterna (Fraternal Light in Portuguese) Program
The credit of R$ 115,890 related to Luz Fraterna Program as of December 31, 2017 was fully paid in March 2018.A lawsuit was filed on November 5, 2018 against the State of Paraná, responsible for the payment of the bills regarding interest, fines and inflation adjustments on the electricity bills for the period from September 2010 to June 2015 (Note 36.a).
15.1.2 2014 Construction Works for the World Cup
Regarding the credit related to the 2014 World Soccer Cup of R$ 14,266 (R$ 14,266 as of December 31, 2017), through the 2,119th Meeting held on July 28, 2014, Copel’s executive board approved the transfer of the credit rights of the costs related to mobility projects for the FIFA 2014 World Soccer Cup made by Copel DIS and under the responsibility of the Paraná State government. ANEEL agreed to the transaction through Order No. 3,483/2015 and a Credit Assignment Agreement that transfers Copel DIS rights to Copel was executed.
In addition, State Law No. 18,875, dated September 27, 2016, authorized the State of Paraná to pay debts due and unpaid to Copel relating to services rendered up to the date of publication of said Law.
After the issuance of said law, there were several administrative negotiations in order to settle this debt with the appropriate bodies. However, in view of the administrative procedures adopted at the time of such works and other documentary hindrances, Management reassessed the issue and decided to establish a provision for the event of non-receipt of this asset. Management stresses that it will continue making all necessary efforts and taking all appropriate measures to preserve the Company’s interests.
F-54
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
15.2 Voltalia São Miguel do Gostoso Participações S.A. – Loan agreements
On May 14, 2015, a loan agreement was entered into by and between Copel (lender) and Voltalia São Miguel do Gostoso Participações S.A. (borrower), aiming at providing working capital for funding the borrower’s activities and business. A limit of R$ 29,400 was established, plus IOF (tax on financial transactions) and interest of 111.5% of the CDI. Of the limit approved, the borrower used R$ 27,950. The initial term of two years was extended to February 6, 2018, the date on which the contract was settled, with finance income recorded in 2018 in the amount of R$ 294 (R$ 3,513 in 2017).
16 Judicial Deposits
|
|
|
| 12.31.2018 | 12.31.2017 |
Taxes claims | 369,423 | 337,909 |
Labor claims | 84,908 | 120,463 |
. |
|
|
Civil |
|
|
Civil | 63,484 | 110,495 |
Easements | 3,280 | 6,114 |
Customers | 1,861 | 2,522 |
68,625 | 119,131 | |
. |
|
|
Others | 5,334 | 5,026 |
| 528,290 | 582,529 |
F-55
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
17 Investments
17.1 Changes in investments
|
|
|
|
|
|
| Effects of |
|
|
|
| Investiment/ |
|
| Proposed | applying |
|
| |
Balance as of |
| Advance for future | Capital |
| dividends | new IFRS |
| Balance as of | |
| January 1, 2018 | Equity | capital increase | decrease | Amortization | and JCP | (Note 4.17.3) | Other (a) | December 31, 2018 |
Joint Ventures (17.3) |
|
|
|
|
|
|
|
|
|
Voltalia São Miguel do Gostoso I | 74,998 | (3,964) | 39,534 | - | - | - | - | - | 110,568 |
Voltalia São Miguel do Gostoso - authorization rights | 10,773 | - | - | - | (368) | - | - | - | 10,405 |
Paraná Gás | 3 | (3) | - | - | - | - | - | - | - |
Costa Oeste (Note 1.2) | 33,646 | 3,041 | - | - | - | - | - | (36,687) | - |
Marumbi (Note 1.2) | 85,341 | 6,971 | - | - | - | - | - | (92,312) | - |
Transmissora Sul Brasileira (Note 1.2) | 64,360 | 1,161 | - | - | - | - | - | (65,521) | - |
Caiuá | 56,037 | 5,034 | - | - | - | (1,324) | 14,892 | - | 74,639 |
Integração Maranhense | 113,401 | 9,238 | - | - | - | (2,022) | 9,067 | - | 129,684 |
Matrinchã | 835,819 | 50,411 | - | - | - | (9,131) | (203,883) | - | 673,216 |
Guaraciaba | 418,320 | 35,321 | - | - | - | (4,328) | (92,372) | - | 356,941 |
Paranaíba | 162,273 | (16,510) | - | - | - | (2,976) | 17,797 | - | 160,584 |
Mata de Santa Genebra | 459,374 | (2,541) | 48,096 | - | - | 3,264 | (23,931) | - | 484,262 |
Cantareira | 200,018 | 24,564 | - | (35,280) | - | (1,461) | 129,682 | - | 317,523 |
2,514,363 | 112,723 | 87,630 | (35,280) | (368) | (17,978) | (148,748) | (194,520) | 2,317,822 | |
Associates |
|
|
|
|
|
|
|
|
|
Dona Francisca Energética (17.4) | 29,821 | 9,989 | - | - | - | (10,666) | - | - | 29,144 |
Foz do Chopim Energética (17.4) | 13,084 | 13,214 | - | - | - | (18,071) | - | - | 8,227 |
Dominó Holdings | 2,457 | (15) | - | - | - | - | - | - | 2,442 |
Other | 9,556 | (23) | 9 | - | - | - | - | (427) | 9,115 |
54,918 | 23,165 | 9 | - | - | (28,737) | - | (427) | 48,928 | |
Investment property | 1,362 | - | - | - | (5) | - | - | (15) | 1,342 |
Other investments | - | - | 142 | - | - | - | - | - | 142 |
| 2,570,643 | 135,888 | 87,781 | (35,280) | (373) | (46,715) | (148,748) | (194,962) | 2,368,234 |
(a) Of the total, the amounts of R$ 36,687 and R$ 92,312 refers to investments that are now subsidiaries; R$ 65,521 refers to investment written off; R$ 427 from the sale of the associated company Dois Saltos Empreendimentos de Geração de Energia Elétrica Ltda ; and R$ 15 refers to the transfer to Other receivables. | |||||||||
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| Investment/ |
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| Advance |
| Proposed |
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| |
Balance as of |
| for future | dividends |
| Balance as of | ||
| January 1, 2017 | Equity | capital increase | Amortization | and JCP | Other (a) | December 31, 2017 |
Joint Ventures (17.3) |
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|
Dominó Holdings (a) | 81,526 | (568) | - | - | (5,144) | (75,814) | - |
Voltalia São Miguel do Gostoso I | 75,563 | (565) | - | - | - | - | 74,998 |
Voltalia São Miguel do Gostoso - authorization rights | 11,140 | - | - | (367) | - | - | 10,773 |
Paraná Gás | 37 | (34) | - | - | - | - | 3 |
Costa Oeste (Note 1.2) | 37,232 | (2,566) | - | - | (1,020) | - | 33,646 |
Marumbi (Note 1.2) | 94,878 | (9,537) | - | - | - | - | 85,341 |
Transmissora Sul Brasileira (Note 1.2) | 69,369 | (5,009) | - | - | - | - | 64,360 |
Caiuá | 60,057 | (4,020) | - | - | - | - | 56,037 |
Integração Maranhense | 122,253 | (8,852) | - | - | - | - | 113,401 |
Matrinchã | 792,069 | 57,376 | - | - | (13,626) | - | 835,819 |
Guaraciaba | 398,969 | 25,377 | - | - | (6,026) | - | 418,320 |
Paranaíba | 147,213 | 17,020 | 2,082 | - | (4,042) | - | 162,273 |
Mata de Santa Genebra | 232,240 | 19,477 | 210,920 | - | (3,263) | - | 459,374 |
Cantareira | 161,855 | 3,879 | 35,205 | - | (921) | - | 200,018 |
2,284,401 | 91,978 | 248,207 | (367) | (34,042) | (75,814) | 2,514,363 | |
Associates |
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Dona Francisca Energética (17.4) | 32,766 | 8,876 | - | - | (11,821) | - | 29,821 |
Foz do Chopim Energética (17.4) | 13,967 | 6,645 | - | - | (7,528) | - | 13,084 |
Dominó Holdings | - | 4 | - | - | - | 2,453 | 2,457 |
Other | 12,016 | (5,764) | 36 | 2,872 | - | 396 | 9,556 |
58,749 | 9,761 | 36 | 2,872 | (19,349) | 2,849 | 54,918 | |
Other investments | 1,362 | - | - | - | - | - | 1,362 |
| 2,344,512 | 101,739 | 248,243 | 2,505 | (53,391) | (72,965) | 2,570,643 |
(a) Of the total amount of R$75,814, R$73,361 refers to capital decrease and R$2,453 refers to the change in the investment of a Joint venture to an Associate. |
F-56
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
17.2 Subsidiaries with non-controlling interests
17.2.1 Summarized financial information
| Compagás | Elejor | UEG Araucária | ||||||
| 12.31.2018 | 12.31.2017 | 12.31.2016 | 12.31.2018 | 12.31.2017 | 12.31.2016 | 12.31.2018 | 12.31.2017 | 12.31.2016 |
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| |
ASSETS | 675,286 | 632,910 | 526,477 | 652,175 | 675,450 | 708,688 | 436,137 | 507,060 | 529,251 |
Current assets | 204,725 | 151,966 | 135,292 | 80,990 | 77,216 | 76,231 | 33,573 | 99,101 | 162,814 |
Noncurrent assets | 470,561 | 480,944 | 391,185 | 571,185 | 598,234 | 632,457 | 402,564 | 407,959 | 366,437 |
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LIABILITIES | 675,286 | 632,910 | 526,477 | 652,175 | 675,450 | 708,688 | 436,137 | 507,060 | 529,251 |
Current liabilities | 133,769 | 147,743 | 180,133 | 124,880 | 164,574 | 142,222 | 42,185 | 38,386 | 62,253 |
Noncurrent liabilities | 106,900 | 87,409 | 46,716 | 473,318 | 449,149 | 486,765 | 23,290 | 22,470 | 20,422 |
Equity | 434,617 | 397,758 | 299,628 | 53,977 | 61,727 | 79,701 | 370,662 | 446,204 | 446,576 |
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| |
STATEMENT OF INCOME |
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Operating revenues | 588,532 | 515,563 | 542,822 | 293,942 | 291,597 | 263,686 | 524 | 129,084 | 57,432 |
Operating costs and expenses | (515,594) | (309,213) | (534,817) | (89,931) | (93,230) | (96,321) | (94,970) | (121,883) | (259,324) |
Financial results | (2,411) | (25,612) | (1,422) | (89,301) | (54,254) | (93,717) | 2,275 | 5,302 | 18,499 |
Equity in earnings of investees | - | - | - | - | - | - | - | (5,777) | (55,284) |
Income tax and social contribution | (10,909) | (66,785) | (1,632) | (38,379) | (47,893) | (24,525) | 16,316 | (7,098) | 46,358 |
Net income (loss) | 59,618 | 113,953 | 4,951 | 76,331 | 96,220 | 49,123 | (75,855) | (372) | (192,319) |
Other comprehensive income | 187 | (251) | 132 | - | - | - | - | - | - |
Total comprehensive income | 59,805 | 113,702 | 5,083 | 76,331 | 96,220 | 49,123 | (75,855) | (372) | (192,319) |
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| |
STATEMENTS OF CASH FLOWS |
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Cash flows from operational activities | 66,017 | 83,661 | 32,714 | 127,108 | 143,911 | 104,136 | (26,980) | (86,840) | 65,203 |
Cash flows from investment activities | (15,961) | (14,268) | (25,975) | (2,659) | (1,461) | (1,465) | (2,768) | 118,460 | 21,587 |
Cash flows from financing activities | (43,980) | (20,623) | (751) | (119,468) | (143,028) | (105,843) | - | - | (200,000) |
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TOTAL EFFECTS ON CASH AND CASH EQUIVALENTS | 6,076 | 48,770 | 5,988 | 4,981 | (578) | (3,172) | (29,748) | 31,620 | (113,210) |
Cash and cash equivalents at the beginning of the year | 84,079 | 35,309 | 29,321 | 37,905 | 38,483 | 41,655 | 51,264 | 19,644 | 132,854 |
Cash and cash equivalents at the end of the year | 90,155 | 84,079 | 35,309 | 42,886 | 37,905 | 38,483 | 21,516 | 51,264 | 19,644 |
CHANGE IN CASH AND CASH EQUIVALENTS | 6,076 | 48,770 | 5,988 | 4,981 | (578) | (3,172) | (29,748) | 31,620 | (113,210) |
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17.2.2 Changes in equity attributable to non-controlling shareholders
Participation in capital stock | Compagás: 49% | Elejor: 30% | UEG Araucária: 20% | Consolidated |
Balance as of January 1, 2016 | 144,904 | 22,200 | 150,849 | 317,953 |
Net income (loss) | 2,425 | 14,736 | (38,461) | (21,300) |
Other comprehensive income | 65 | - | - | 65 |
Deliberation of additional dividends proposed | - | - | (23,072) | (23,072) |
Distribution of dividends with retained earnings | - | (9,342) | - | (9,342) |
Dividends | (576) | (3,684) | - | (4,260) |
Balance as of December 31, 2016 | 146,818 | 23,910 | 89,316 | 260,044 |
Net income (loss) | 55,837 | 28,866 | (74) | 84,629 |
Other comprehensive income | (123) | - | - | (123) |
Deliberation of additional dividends proposed | - | (11,053) | - | (11,053) |
Dividends | (7,631) | (23,205) | - | (30,836) |
Balance as of December 31, 2017 | 194,901 | 18,518 | 89,242 | 302,661 |
Net income (loss) | 29,213 | 22,899 | (15,171) | 36,941 |
Other comprehensive income | 91 | - | 63 | 154 |
Dividends | (11,243) | (25,224) | - | (36,467) |
Balance as of December 31, 2018 | 212,962 | 16,193 | 74,134 | 303,289 |
F-57
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
17.3 Total balances of the groups of assets, liabilities, profit or loss and equity interest in commitments and contingent liabilities of the main joint ventures
| Voltalia | Caiuá | Integração Maranhense | Matrinchã | Guaraciaba | Paranaíba | Mata de Santa Genebra | Cantareira |
12.31.2018 | ||||||||
. |
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ASSETS | 227,867 | 261,951 | 465,801 | 2,199,434 | 1,295,670 | 1,574,846 | 2,365,160 | 1,443,693 |
Current assets | 2,344 | 26,471 | 47,347 | 326,557 | 229,693 | 165,072 | 202,253 | 161,328 |
Cash and cash equivalents | 205 | 1,128 | 1 | 116,634 | 136,191 | 13,931 | 19,568 | 301 |
Other current assets | 2,139 | 25,343 | 47,346 | 209,923 | 93,502 | 151,141 | 182,685 | 161,027 |
Noncurrent assets | 225,523 | 235,480 | 418,454 | 1,872,877 | 1,065,977 | 1,409,774 | 2,162,907 | 1,282,365 |
. |
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LIABILITIES | 227,867 | 261,951 | 465,801 | 2,199,434 | 1,295,670 | 1,574,846 | 2,365,160 | 1,443,693 |
Current liabilities | 2,216 | 24,955 | 73,856 | 137,627 | 79,701 | 104,599 | 124,606 | 60,964 |
Financial liabilities | - | 7,615 | 13,228 | 70,192 | 27,950 | 55,968 | 33,964 | 46,329 |
Other current liabilities | 2,216 | 17,340 | 60,628 | 67,435 | 51,751 | 48,631 | 90,642 | 14,635 |
Noncurrent liabilities | - | 84,672 | 127,284 | 687,897 | 487,520 | 814,798 | 1,273,962 | 734,724 |
Financial liabilities | - | 57,028 | 91,342 | 683,316 | 482,125 | 612,854 | 934,650 | 532,179 |
Other noncurrent liabilities | - | 27,644 | 35,942 | 4,581 | 5,395 | 201,944 | 339,312 | 202,545 |
Equity | 225,651 | 152,324 | 264,661 | 1,373,910 | 728,449 | 655,449 | 966,592 | 648,005 |
. |
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|
STATEMENT OF INCOME |
|
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|
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Net operating income | - | 25,129 | 42,379 | 272,103 | 181,665 | (14,331) | 514,591 | 195,441 |
Operating costs and expenses | (103) | (4,785) | (7,732) | (47,771) | (27,273) | (23,244) | (462,839) | (60,529) |
Financial results | (170) | (5,017) | (7,817) | (61,910) | (35,036) | (57,977) | (59,507) | (58,402) |
Equity in income of subsidiaries | (7,815) | - | - | - | - | - | - | - |
Income tax and social contribution | - | (5,053) | (7,974) | (59,544) | (47,273) | 28,163 | 2,685 | (26,379) |
Net income (loss) | (8,088) | 10,274 | 18,856 | 102,878 | 72,083 | (67,389) | (5,070) | 50,131 |
Other comprehensive income | - | - | - | - | - | - | - | - |
Total comprehensive income | (8,088) | 10,274 | 18,856 | 102,878 | 72,083 | (67,389) | (5,070) | 50,131 |
. |
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|
Investment interest - % | 49.0 | 49.0 | 49.0 | 49.0 | 49.0 | 24.5 | 50.1 | 49.0 |
Investment book value | 110,568 | 74,639 | 129,684 | 673,216 | 356,941 | 160,584 | 484,262 | 317,523 |
| Voltalia | Transmissora Sul Brasileira | Caiuá | Integração Maranhense | Matrinchã | Guaraciaba | Paranaíba | Mata de Santa Genebra | Cantareira |
12.31.2017 | |||||||||
. |
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ASSETS | 155,272 | 659,464 | 230,743 | 466,783 | 2,774,973 | 1,428,247 | 1,698,213 | 1,722,063 | 952,670 |
Current assets | 2,141 | 56,604 | 22,895 | 44,594 | 297,331 | 139,920 | 233,065 | 107,568 | 6,046 |
Cash and cash equivalents | 3 | 25,547 | 1,626 | 2,224 | 116,256 | 34,364 | 29,066 | 96,244 | 5,169 |
Other current assets | 2,138 | 31,057 | 21,269 | 42,370 | 181,075 | 105,556 | 203,999 | 11,324 | 877 |
Noncurrent assets | 153,131 | 602,860 | 207,848 | 422,189 | 2,477,642 | 1,288,327 | 1,465,148 | 1,614,495 | 946,624 |
. |
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LIABILITIES | 155,272 | 659,464 | 230,743 | 466,783 | 2,774,973 | 1,428,247 | 1,698,213 | 1,722,063 | 952,670 |
Current liabilities | 2,214 | 220,845 | 23,608 | 71,563 | 140,515 | 71,818 | 124,764 | 12,630 | 9,706 |
Financial liabilities | - | 212,618 | 7,427 | 13,240 | 48,686 | 32,627 | 53,317 | - | - |
Other current liabilities | 2,214 | 8,227 | 16,181 | 58,323 | 91,829 | 39,191 | 71,447 | 12,630 | 9,706 |
Noncurrent liabilities | - | 116,818 | 92,774 | 163,790 | 928,706 | 502,713 | 911,107 | 792,519 | 534,764 |
Financial liabilities | - | 106,174 | 64,081 | 103,755 | 712,198 | 388,806 | 638,779 | 703,897 | 439,192 |
Other noncurrent liabilities | - | 10,644 | 28,693 | 60,035 | 216,508 | 113,907 | 272,328 | 88,622 | 95,572 |
Equity | 153,058 | 321,801 | 114,361 | 231,430 | 1,705,752 | 853,716 | 662,342 | 916,914 | 408,200 |
. |
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|
STATEMENT OF INCOME |
|
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Net operating income | - | 53,374 | (2,904) | (14,460) | 403,891 | 208,444 | 320,302 | 588,123 | 392,766 |
Operating costs and expenses | (113) | (63,752) | (5,194) | (4,245) | (183,660) | (93,369) | (150,984) | (434,779) | (347,771) |
Financial results | 9 | (26,994) | (6,017) | (9,070) | (47,331) | (36,981) | (59,132) | (94,512) | (35,207) |
Equity in income of subsidiaries | (1,048) | - | - | - | - | - | - | - | - |
Income tax and social contribution | - | 12,330 | 5,908 | 9,709 | (55,808) | (26,303) | (40,717) | (19,955) | (1,871) |
Net income (loss) | (1,152) | (25,042) | (8,207) | (18,066) | 117,092 | 51,791 | 69,469 | 38,877 | 7,917 |
Other comprehensive income | - | - | - | - | - | - | - | - | - |
Total comprehensive income | (1,152) | (25,042) | (8,207) | (18,066) | 117,092 | 51,791 | 69,469 | 38,877 | 7,917 |
. |
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Investment interest - % | 49.0 | 20.0 | 49.0 | 49.0 | 49.0 | 49.0 | 24.5 | 50.1 | 49.0 |
Investment book value | 74,998 | 64,360 | 56,037 | 113,401 | 835,819 | 418,320 | 162,273 | 459,374 | 200,018 |
. |
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| Dominó (a) | Voltalia | Costa Oeste | Marumbi | Transmissora Sul Brasileira | Caiuá | Integração Maranhense | Matrinchã | Guaraciaba | Paranaíba | Mata de Santa Genebra | Cantareira |
12.31.2016 | ||||||||||||
. |
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ASSETS | 180,049 | 156,422 | 112,601 | 185,888 | 696,381 | 255,276 | 513,186 | 2,583,118 | 1,247,036 | 1,284,733 | 1,050,330 | 525,446 |
Current assets | 24,725 | 2,177 | 9,892 | 12,614 | 51,963 | 26,820 | 49,355 | 273,185 | 107,429 | 41,648 | 59,160 | 1,242 |
Cash and cash equivalents | 5,340 | 41 | 4,323 | 3,324 | 23,295 | 1,435 | 115 | 118,196 | 16,284 | 3,051 | 47,792 | 157 |
Other current assets | 19,385 | 2,136 | 5,569 | 9,290 | 28,668 | 25,385 | 49,240 | 154,989 | 91,145 | 38,597 | 11,368 | 1,085 |
Noncurrent assets | 155,324 | 154,245 | 102,709 | 173,274 | 644,418 | 228,456 | 463,831 | 2,309,933 | 1,139,607 | 1,243,085 | 991,170 | 524,204 |
. |
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LIABILITIES | 180,049 | 156,422 | 112,601 | 185,888 | 696,381 | 255,276 | 513,186 | 2,583,118 | 1,247,036 | 1,284,733 | 1,050,330 | 525,446 |
Current liabilities | 13,669 | 2,212 | 8,003 | 17,760 | 33,949 | 26,776 | 76,137 | 120,886 | 41,099 | 83,078 | 523,351 | 140,759 |
Financial liabilities | - | - | 3,110 | 5,190 | 25,153 | 7,387 | 13,188 | 52,625 | 9,928 | 45,939 | 489,017 | 65,697 |
Other current liabilities | 13,669 | 2,212 | 4,893 | 12,570 | 8,796 | 19,389 | 62,949 | 68,261 | 31,171 | 37,139 | 34,334 | 75,062 |
Noncurrent liabilities | - | - | 31,594 | 49,531 | 315,589 | 105,934 | 187,554 | 845,764 | 391,712 | 600,784 | 63,427 | 54,373 |
Financial liabilities | - | - | 27,426 | 43,171 | 308,859 | 70,633 | 115,732 | 747,709 | 378,528 | 561,700 | - | - |
Other noncurrent liabilities | - | - | 4,168 | 6,360 | 6,730 | 35,301 | 71,822 | 98,055 | 13,184 | 39,084 | 63,427 | 54,373 |
Equity | 166,380 | 154,210 | 73,004 | 118,597 | 346,843 | 122,566 | 249,495 | 1,616,468 | 814,225 | 600,784 | 463,552 | 330,314 |
. |
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STATEMENT OF INCOME |
|
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Net operating income | - | - | 20,433 | 37,559 | 56,553 | 38,148 | 64,428 | 433,833 | 310,380 | 322,855 | 570,237 | 337,614 |
Operating costs and expenses | (969) | (122) | (3,341) | (11,906) | (12,042) | (4,008) | (2,851) | (237,779) | (204,412) | (185,789) | (497,852) | (321,966) |
Financial results | (24,062) | 5 | (1,213) | (3,596) | (32,674) | (6,432) | (10,934) | (66,462) | (73,693) | (58,703) | (80,255) | 225 |
Equity in income of subsidiaries | 101,543 | 8,987 | - | - | - | - | - | - | - | - | - |
|
Income tax and social contribution | - | - | (1,426) | (1,822) | (2,810) | (11,355) | (18,125) | (44,061) | (9,429) | (25,924) | 2,724 | (5,354) |
Net income (loss) | 76,512 | 8,870 | 14,453 | 20,235 | 9,027 | 16,353 | 32,518 | 85,531 | 22,846 | 52,439 | (5,146) | 10,519 |
Other comprehensive income | (9,669) | - | - | - | - | - | - | - | - | - | - | - |
Total comprehensive income | 76,512 | 8,870 | 14,453 | 20,235 | 9,027 | 16,353 | 32,518 | 85,531 | 22,846 | 52,439 | (5,146) | 10,519 |
. |
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Investment interest - % | 49.0 | 49.0 | 51.0 | 80.0 | 20.0 | 49.0 | 49.0 | 49.0 | 49.0 | 24.5 | 50.1 | 49.0 |
Investment book value | 81,526 | 75,563 | 37,232 | 94,878 | 69,369 | 60,057 | 122,253 | 792,069 | 398,969 | 147,213 | 232,240 | 161,855 |
. |
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F-58
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
As of December 31, 2018, Copel's interest in the commitments assumed from its joint ventures is equivalent to R$ 81,263 (R$ 141,744 in 2017) and in contingent liabilities is equivalent to R$ 40.324 (R$ 38,218 in 2017).
17.4 Total balances of the groups of assets, liabilities, profit or loss and equity interest in contingent liabilities of the main associates
| Dona Francisca | Foz do Chopim | ||||
| 12.31.2018 | 12.31.2017 | 12.31.2016 | 12.31.2018 | 12.31.2017 | 12.31.2016 |
. |
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ASSETS | 134,141 | 138,079 | 151,563 | 106,736 | 61,163 | 48,937 |
Current assets | 12,493 | 10,304 | 19,311 | 73,786 | 21,553 | 11,043 |
Noncurrent assets | 121,648 | 127,775 | 132,252 | 32,950 | 39,610 | 37,894 |
. |
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LIABILITIES | 134,141 | 138,079 | 151,563 | 106,736 | 61,163 | 48,937 |
Current liabilities | 4,231 | 4,144 | 5,306 | 57,603 | 1,808 | 2,336 |
Noncurrent liabilities | 3,361 | 4,443 | 3,982 | 26,133 | 22,776 | 7,553 |
Equity | 126,549 | 129,492 | 142,275 | 23,000 | 36,579 | 39,048 |
. |
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|
STATEMENT OF INCOME |
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Net operating income | 70,716 | 70,716 | 70,208 | 46,479 | 40,441 | 40,762 |
Operating costs and expenses | (25,268) | (30,379) | (34,074) | (2,020) | (21,124) | (10,130) |
Financial income (expense) | 366 | 835 | 1,453 | (638) | 809 | 795 |
Income tax and social contribution | (2,446) | (2,632) | (3,275) | (6,880) | (1,547) | (1,580) |
Net income | 43,368 | 38,540 | 34,312 | 36,941 | 18,579 | 29,847 |
Other comprehensive income | - | - | - | - | - | - |
Total comprehensive income | 43,368 | 38,540 | 34,312 | 36,941 | 18,579 | 29,847 |
. |
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|
Investment interest - % | 23.0303 | 23.0303 | 23.0303 | 35.77 | 35.77 | 35.77 |
Investment book value | 29,144 | 29,821 | 32,766 | 8,227 | 13,084 | 13,967 |
|
|
|
|
|
|
|
As of December 31, 2018, Copel's interest in the contingent liabilities of its associates is equivalent to R$ 61,341 (R$ 58,194 in 2017).
18 Property, Plant and Equipment
The Company and its subsidiaries record assets used in administrative and commercial facilities for generation of electric power and telecommunication services in property, plant and equipment account. Investments in electric power transmission and distribution and in piped gas distribution are recorded in financial assets and/or intangible assets accounts as per IAS 38, IFRS 15 and IFRIC 12. (Notes 4.4, 4.5 and 4.9).
Upon initial adoption of IFRS, property, plant and equipment were measured at fair value with recognition of their deemed cost.
F-59
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
Under the regulation relating to the concession of public electric energy services, the assets and facilities used mostly in the generation of power are attached to these services and cannot be withdrawn, sold, assigned, or mortgaged without the prior written consent of the regulatory agency. ANEEL Resolution No. 691/2015, however, regulates the release of assets from the concessions of the Public Electric Power Service, granting prior authorization to release the property and other fixed assets not usable by the concession when they are destined for sale, and also determining that the sales proceeds less respective charges be deposited in a restricted bank account to be invested in the concession.
18.1 Property, plant and equipment by asset class
|
| Accumulated |
|
| Accumulated |
|
| Cost | depreciation | 12.31.2018 | Cost | depreciation | 12.31.2017 |
In service |
|
|
|
|
|
|
Reservoirs, dams and aqueducts | 6,643,087 | (4,216,613) | 2,426,474 | 6,638,348 | (4,071,621) | 2,566,727 |
Machinery and equipment | 5,648,292 | (2,674,150) | 2,974,142 | 5,320,736 | (2,654,801) | 2,665,935 |
Buildings | 1,500,990 | (1,021,783) | 479,207 | 1,500,144 | (989,221) | 510,923 |
Land | 375,286 | (18,184) | 357,102 | 277,665 | (15,287) | 262,378 |
Vehicles and aircraft | 47,744 | (41,978) | 5,766 | 59,101 | (48,759) | 10,342 |
Furniture and tools | 22,057 | (12,642) | 9,415 | 16,990 | (11,476) | 5,514 |
(-) Provision for impairment (18.7) | (3,489) | - | (3,489) | (4,986) | - | (4,986) |
(-) Special Obligations | (68) | 27 | (41) | (56) | 18 | (38) |
14,233,899 | (7,985,323) | 6,248,576 | 13,807,942 | (7,791,147) | 6,016,795 | |
|
|
|
|
|
| |
In progress |
|
|
|
|
|
|
Cost | 5,789,780 | - | 5,789,780 | 5,023,013 | - | 5,023,013 |
(-) Provision for impairment (18.7) | (1,197,693) | - | (1,197,693) | (1,210,358) | - | (1,210,358) |
4,592,087 | - | 4,592,087 | 3,812,655 | - | 3,812,655 | |
| 18,825,986 | (7,985,323) | 10,840,663 | 17,620,597 | (7,791,147) | 9,829,450 |
18.2 Changes in property, plant and equipment
| Balance as of | Additions/Reversal |
| Loss on |
| Transfers/ | Balance as of |
| January 1, 2018 | Depreciation | disposal | Capitalizations | Reclassifications | December 31, 2018 | |
In service |
|
|
|
|
|
|
|
Reservoirs, dams and aqueducts | 2,566,727 | - | (144,991) | (1) | 4,739 | - | 2,426,474 |
Machinery and equipment | 2,665,935 | - | (199,846) | (61,959) | 760,887 | (190,875) | 2,974,142 |
Buildings | 510,923 | - | (35,932) | (500) | 4,716 | - | 479,207 |
Land | 262,378 | - | (2,897) | (83) | 97,704 | - | 357,102 |
Vehicles and aircraft | 10,342 | - | (4,484) | (392) | 300 | - | 5,766 |
Furniture and tools | 5,514 | - | (1,171) | (24) | 5,047 | 49 | 9,415 |
(-) Provision for impairment (18.7) | (4,986) | 1,497 | - | - | - | - | (3,489) |
(-) Special Obligations | (38) | - | 9 | - | (12) | - | (41) |
6,016,795 | 1,497 | (389,312) | (62,959) | 873,381 | (190,826) | 6,248,576 | |
In progress |
|
|
|
|
|
|
|
Cost | 5,023,013 | 1,455,318 | - | (5,491) | (873,381) | 190,321 | 5,789,780 |
(-) Provision for impairment (18.7) | (1,210,358) | 12,665 | - | - | - | - | (1,197,693) |
3,812,655 | 1,467,983 | - | (5,491) | (873,381) | 190,321 | 4,592,087 | |
| 9,829,450 | 1,469,480 | (389,312) | (68,450) | - | (505) | 10,840,663 |
F-60
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
| Balance as of | Additions/Reversal |
| Loss on | Transfers/ | Balance as of |
| January 1, 2017 | Depreciation | disposal | Reclassifications | December 31, 2017 | |
In service |
|
|
|
|
|
|
Reservoirs, dams and aqueducts | 2,683,512 | - | (144,484) | (2,160) | 29,859 | 2,566,727 |
Machinery and equipment | 2,663,971 | - | (188,988) | (37,685) | 228,637 | 2,665,935 |
Buildings | 544,372 | - | (36,347) | (773) | 3,671 | 510,923 |
Land | 264,761 | - | (2,935) | (3) | 555 | 262,378 |
Vehicles and aircraft | 15,671 | - | (5,492) | (6) | 169 | 10,342 |
Furniture and tools | 5,782 | - | (803) | (12) | 547 | 5,514 |
(-) Provision for impairment (18.7) | (77,318) | 72,332 | - | - | - | (4,986) |
(-) Special Obligations | (46) | - | 8 | - | - | (38) |
6,100,705 | 72,332 | (379,041) | (40,639) | 263,438 | 6,016,795 | |
In progress |
|
|
|
|
|
|
Cost | 3,969,703 | 1,318,336 | - | (23,869) | (241,157) | 5,023,013 |
(-) Provision for impairment (18.7) | (1,136,105) | (74,253) | - | - | - | (1,210,358) |
2,833,598 | 1,244,083 | - | (23,869) | (241,157) | 3,812,655 | |
| 8,934,303 | 1,316,415 | (379,041) | (64,508) | 22,281 | 9,829,450 |
18.3 Costs of borrowings and debentures capitalized
The costs of borrowings and debentures capitalized during 2018 amounted to R$ 4,229, at an average rate of 0.11% p.a. (R$ 2,297, at an average rate of 0.09% p.a. during 2017)
18.4 HPP Colíder
On July 30, 2010, on the ANEEL Auction of Power from New Projects 003/10, Copel GeT won the rights to the concession of the Colíder Hydroelectric Power Plant, valid for 35 years from the date of signature of Concession Agreement No. 001/11-MME-HPP Colíder, which took place on January 17, 2011.
This project will comprise a main powerhouse of 300 MW, which is enough to supply approximately one million people. The facility will take advantage of the hydroelectric potential discovered on the Teles Pires River, between the towns of Nova Canaã do Norte and Itaúba, in the northern region of the State of Mato Grosso.
The National Bank for Economic and Social Development (BNDES) approved the classification of the HPP Colíder project for financial support in the total amount of R$ 1,041,155 (Note 22). The amounts released until December 31, 2018 totaled R$ 1,005,108.
Due to acts of God and force majeure, such as fire at the construction site, public power acts, delays involving environmental licenses, among other setbacks, such as delays in delivery of equipment, in electromechanical assembly services and in the construction of the transmission line of the power plant, the project timeframe was adversely affected, leading to postponement of the commercial generation of the power plant. The first generating unit started operation in March 2019, while the third and last one is expected to July 2019. As a result of these events, the assets were reduced for impairment as shown in Note 18.7.
F-61
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
The Colíder Hydroelectric Power Plant’s power output was sold on an ANEEL auction at a final price of R$ 103.40/MWh, as of July 1, 2010, restated according to the variation of IPCA inflation index to R$ 169.52 as of December 31, 2018. 125 MW – mean were sold for supply starting on January 2015, for 30 years. Copel GeT submitted an application to ANEEL to exclude its responsibility, so that the obligation to supply energy could be postponed. In a first judgment, the request was not accepted. Copel GeT filed an application for reconsideration of the decision, which was also denied on March 14, 2017. Not agreeing with the decision, Copel GeT filed another application for reconsideration, which was definitely denied on July 4, 2017. Copel GeT filed a common lawsuit with the Court on December 18, 2017 applying for a preliminary injunction and requesting the reversal of the decision of the Agency. On April 6, 2018, the Federal Court of the 1st Region fully granted the preliminary injunction required by Copel Get in the Interlocutory Appeal to exempt it from any burden, charges or restrictions to the right arising from the delay in the implementation schedule of the Colíder HPP.
Copel GeT has complied with its commitments of energy supply as follows:
· | From January 2015 to June 2016 - with energy surpluses not contracted in its other plants; |
· | In June 2016 - with partial reduction through a bilateral agreement; and |
· | From July 2016 to December 2018, with reduction of all supply contracts of the CCEARs - Energy Trading Agreement in the Regulated Environment, through a bilateral agreement and participation in the New Energy and Decrease Clearing Facility (“Mecanismo de Compensação de Sobras e Déficits de Energia Nova - MCSD-EN”). |
On July 14, 2017, the assured power of the project was revised by MME Ordinance No. 213/SPE, going to 178.1 MW mean, after full set-up.
18.5 Joint operations - consortiums
The amounts recorded under property, plant and equipment referring to the share of interest of Copel GeT in consortiums are shown below:
| Share | Annual average |
|
|
Joint operations | Copel GeT (%) | depreciation rate (%) | 12.31.2018 | 12.31.2017 |
In service |
|
|
|
|
HPP Mauá (Consórcio Energético Cruzeiro do Sul) | 51.00 |
| 859,917 | 859,917 |
(-) Accumulated depreciation |
| 3.43 | (176,546) | (147,086) |
|
|
| 683,371 | 712,831 |
In progress |
|
|
|
|
HPP Baixo Iguaçu (18.5.1) | 30.00 |
| 717,599 | 640,178 |
|
|
| 717,599 | 640,178 |
|
|
| 1,400,970 | 1,353,009 |
F-62
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
18.5.1 Consórcio Empreendedor Baixo Iguaçu - Cebi
Copel holds a 30% interest in Consórcio Empreendedor Baixo Iguaçu–Cebi.The purpose of the consortium is to build and operate the project known as Baixo Iguaçu Hydroelectric Plant, with installed capacity of 350.2 MW and physical guarantee of 171.3 MW mean located on the Iguaçu River between the municipalities of Capanema and Capitão Leônidas Marques, and between the Governador José Richa Hydroelectric Plant and the Iguaçu National Park, in the State of Paraná. With total estimated investment of R$ 2,477,000, the start of commercial operation of unit 1 and 2occurred inFebruary 2019, and unit 3occured in April 2019.
The construction works started in July 2013, and the previous schedule has been changed due to the suspension of the Installation License, as per the decision of the Federal Court of the 4th Region (TRF-RS), rendered on June 16, 2014, that stopped the construction work as from July of that year. The work was resumed on February 1, 2016.
In August 2016, ANEEL published the 2nd Amendment to the Concession Agreement with the purpose of formalizing the redefinition of the schedule of HPP Baixo Iguaçu as well as the final date of termination. ANEEL also acknowledged in favor of Cebi the exclusion of responsibility for the delay in implementing the project for a period of 756 days. ANEEL recommended to the MME the extension of the grant period and determined CCEE to postpone the start of the supply period for the CCEARs for the period of exclusion of responsibility acknowledged.
On November 7, 2017, ANEEL acknowledged additional 46 days of exclusion of responsibility for the delay in implementing HPP Baixo Iguaçu, dismissing the application of any penalties and contractual, commercial or regulatory obligations derived from the delay. Accordingly, the project, which already counted with exclusion of responsibility for 756 days, now has a termination date for its concession on October 30, 2049, and the start of supply of Energy Sale Agreements on November 12, 2018.
On December 18, 2018 the filling of the reservoir was finalized, which made it possible to start the commercial operation of the first two generating units in February 2019.
18.6 Cutia wind farm project
The largest Copel wind farm called Cutia is under construction. Cutia wind farm project is divided into two large complexes:
F-63
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
· | Cutia Complex: composed of seven wind farms (Guajiru, Jangada, Potiguar, Cutia, Maria Helena, Esperança do Nordeste and Paraíso do Ventos do Nordeste), with 180.6 MW of total installed capacity, 71.4 MW-mean of assured power, all located in the State of Rio Grande do Norte. The power that will be generated by the farms was sold on the 6th Reserve Auction that was held on October 31, 2014, at an average historical price of R$ 144.00/MWh, inflation adjusted according to the variation of the IPCA to R$ 183.26 as of December 31, 2018. Starting in the last fortnight of December 2018, wind farms began to operate commercially on a phased basis by each wind turbine; and |
· | Bento Miguel Complex: composed of 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) with a total installed capacity of 132.3 MW, 58.7 MW-mean of assured power, all also located in the State of Rio Grande do Norte. The power that will be generated by the wind farms was sold on the 20th Reserve Auction that was held on November 28, 2014, at an average historical price of R$ 142.03/MWh, inflation adjusted according to the variation of the IPCA to R$ 179.84 as of December 31, 2018. Starting on January 29, 2019, wind farms began to operate commercially on a phased basis by each wind turbine. |
As a result of the review of the recoverable amount of these projects, a balance of estimated losses on impairment of assets is recorded as described in Note 18.7.
F-64
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
18.7 Estimated losses on impairment of generation segment assets
During the year, the Company reviewed the recoverable amount of the generation assets as a result of the changes in the implementation schedules of the projects, budgets, estimates of future energy sales prices and discount rates. From these previous indicators, a number of power plants or cash generating units of the generation segment were tested.
The calculation of the value in use was based on discounted operating cash flows over the time of concessions, maintaining the Company’s current commercial conditions. The rate used to discount the cash flows was set in light of the WACC (Weighted Average Cost of Capital) methodology and CAPM (Capital Asset Pricing Model) methodology for the generation business, considering usual market parameters.
Internal references such as the budget approved by the Company, historical or past data, updating of the timeframe of work and amount of investments for projects in course support the design of key assumptions by Company Management. In the same framework, external references such as level of consumption of electric power, expansion of the economic activity in Brazil and the availability of water resources support the key information about estimated cash flows.
A number of assumptions used by Company Management when determining future cash flows can be affected by uncertain events, which, in turn, may give rise to variation in results. Changes in the political and economic model, for example, may lead to upward trend when projecting country risk-rating, increasing the discount rates used in tests.
The tests considered the following key assumptions:
· Growth compatible with historical data and perspective for the Brazilian economy growth;
· Specific after-tax discount rates for the segments tested, obtained through the methodology usually applied by the market, taking into consideration the weighted average cost of capital;
· Projected revenue in accordance with the agreements in force, without any expectation for renewal of concession/authorization; and
· Expenses broken into cash generating units, projected in view of the budget approved by the Company.
The Company considered all its generation projects as independent cash generating units.
The projects with impairment balances recorded at December 31, 2018 are the following:
F-65
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
|
| Property, Plant and Equipment | Value in use | |
| Cost | Depreciation | Impairment | |
HPP Colíder | 2,334,223 | (2,497) | (731,265) | 1,600,461 |
Wind power complex Cutia | 1,217,079 | - | (167,875) | 1,049,204 |
Wind power complex Bento Miguel | 823,045 | - | (84,621) | 738,424 |
Consórcio Tapajós (a) | 14,464 | - | (14,464) | - |
Power plants in Paraná | 961,887 | (46,607) | (202,957) | 712,323 |
| 5,350,698 | (49,104) | (1,201,182) | 4,100,412 |
(a) Project under development | ||||
The Company reviewed the recoverable amount of property, plant and equipment and, as a result of these analyses, the impairment changed as follows:
| Balance as of | Impairment | Balance as of | Impairment | Balance as of |
| January 1, 2017 | December 31, 2017 | December 31, 2018 | ||
In service |
|
| |||
UEG Araucária | (69,073) | 69,073 | - | - | - |
Power plants in Paraná | (8,245) | 3,259 | (4,986) | 1,497 | (3,489) |
(77,318) | 72,332 | (4,986) | 1,497 | (3,489) | |
In progress |
|
| |||
HPP Colíder (18.7.1) | (595,489) | (87,532) | (683,021) | (48,244) | (731,265) |
Wind power complex Cutia (18.7.2) | (232,827) | 8,317 | (224,510) | 56,635 | (167,875) |
Wind power complex Bento Miguel (18.7.2) | (81,637) | (16,594) | (98,231) | 13,610 | (84,621) |
Consórcio Tapajós | (14,464) | - | (14,464) | - | (14,464) |
Power plants in Paraná (18.7.3) | (211,688) | 21,556 | (190,132) | (9,336) | (199,468) |
| (1,136,105) | (74,253) | (1,210,358) | 12,665 | (1,197,693) |
| (1,213,423) | (1,921) | (1,215,344) | 14,162 | (1,201,182) |
18.7.1 HPP Colíder
In December 2018, the calculation of the value in use considered the Company’s assumptions and budgets and pre-tax discount rate in constant currency of 5.36% p.a. (5.35% p.a. in 2017), which derives from the WACC methodology for the electricity generation segment. Although the current estimate for start-up of the first turbine has been postponed to March 2019 (in 2018 the tentative date was May 2018), and the construction’s budget changes, an additional impairment was recognized.
18.7.2 Cutia and Bento Miguel Wind Farms
In December 2018, the calculation of the value in use considered the Company’s assumptions and budgets and pretax discount rate in constant currency of 7.13%, which derives from the WACC methodology for the electric power generation segment, adjusted for the specific condition of taxation of those projects.
The reversal observed in both complexes is justified by the increase in generation expectancy changed to 100% of the physical guarantee of the P-50 (in 2017, 95% of the P-50)and by the variations in the long-term projection of the PLD and the selling price in the ACL.
F-66
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
18.7.3 Power plants of Paraná
In December 2018, for the power plants of Paraná with indicators of impairment, the calculation of value in use of generation assets in the State of Paraná considered: (i) the Company’s assumptions and budgets; and (ii) after-tax discount rate in constant currency of 5.36% p.a. (5.35% p.a. in 2017), which derives from the WACC methodology for the electricity generation segment. Additional impairment was recorded based on: (i) postponement of the start-up of thehydroelectric plant to March 2019, and the thermal plant to March 2019 (in 2017 both were for October 2018); and (ii) changes in the construction budget of the HPPs.
18.7.4 Cash generating units with no provision for impairment
The table below presents the cash-generating units that did not present impairment as of December 31, 2018. Also, the Company performed a sensitivity analysis, increasing the discount rate by 5% and by 10% for impairment risk, and it was verified that none of the power plants presented a risk of impairment since the recoverable amount (“VR”) exceeds carrying amount (“VC”) of PP&E, as shown below:
Cash generating unit |
|
| VR/VC-1 | VR/VC-1 | Impairment |
Discount rate | VR/VC-1 | (5% Variation) | (10% Variation) | ||
Wind power Assets |
|
|
|
|
|
Complex EOL São Bento (a) | 7.13% | 60.49% | 55.82% | 51.36% | - |
Complex EOL Brisa I (b) | 7.13% | 22.47% | 18.97% | 15.64% | - |
Complex EOL Brisa II (c) | 7.13% | 18.77% | 14.74% | 10.93% | - |
Thermal Assets |
|
|
|
|
|
UEG Araucária | 7.67% | 70.74% | 67.36% | 64.08% | - |
Hydric Assets |
|
|
|
|
|
Foz do Areia | 5.36% | 232.59% | 230.48% | 228.39% | - |
Segredo | 5.36% | 168.12% | 164.07% | 160.11% | - |
Caxias | 5.36% | 131.38% | 127.72% | 124.14% | - |
Guaricana | 5.36% | 22.57% | 21.25% | 19.96% | - |
Chaminé | 5.36% | 59.22% | 57.54% | 55.89% | - |
Apucaraninha | 5.36% | 15.44% | 14.07% | 12.72% | - |
Chopim I | 5.36% | 99.24% | 95.35% | 91.58% | - |
São Jorge | 5.36% | 3.22% | 2.24% | 1.27% | - |
Melissa | 5.36% | 23.18% | 21.15% | 19.20% | - |
Mauá | 5.36% | 56.90% | 53.26% | 49.75% | - |
Cavernoso II | 5.36% | 7.60% | 4.92% | 2.35% | - |
Elejor | 7.00% | 66.64% | 62.63% | 58.78% | - |
(a) Contemplates the GE Boa Vista, GE Farol, GE Olho D’Água and GE São Bento do Norte wind farms. | |||||
(b) Contemplates the Nova Asa Branca I, Nova Asa Branca II, Nova Asa Branca III and Nova Eurus IV wind farms. | |||||
(c) Contemplates the Santa Maria, Santa Helena and Ventos de Santo Uriel wind farms. |
F-67
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
18.8 Average depreciation rates
Average rate of depreciation (%) | 12.31.2018 | 12.31.2017 |
Generation |
|
|
General equipment | 6.25 | 6.33 |
Machinery and equipment | 3.56 | 3.59 |
Generators | 3.34 | 3.21 |
Reservoirs, dams and ducts | 2.21 | 2.11 |
Hydraulic turbines | 2.60 | 2.61 |
Gas and steam turbines | 2.00 | 2.30 |
Water cooling and treatment | 4.00 | 4.00 |
Gas conditioner | 4.00 | 4.00 |
Wind power plant unit | 3.71 | 3.85 |
Central management |
|
|
Buildings | 3.35 | 3.33 |
Machinery and office equipment | 6.25 | 6.25 |
Furniture and fixtures | 6.25 | 6.25 |
Vehicles | 14.29 | 14.29 |
Telecommunications |
|
|
Transmission equipment | 4.77 | 6.36 |
Terminal equipment | 9.96 | 12.09 |
Infrastructure | 10.37 | 7.45 |
In 2018, the Company's Management deemed it necessary to reassess the estimated useful lives of assets related to the telecommunications business. As a result, some depreciation rates were changed, which were applied in 2018 and prospectively, without significant impact on the result.
Depreciation of assets which are part of the original project of Mauá, Colíder, Cavernoso II, Santa Clara and Fundão HPPs
The assets of the original project of the Mauá, Colíder and Cavernoso II Hydroelectric Power Plants of Copel Get, and the Santa Clara and Fundão Hydroelectric Power Plants of Elejor are considered by the Concession Grantor, without full guarantee of indemnification of the residual value at the end of the concession term. This interpretation is based on Law 8,987/95 and Decree 2,003/96, which regulate the production of electricity by independent producers.
Accordingly, from the date these assets start operations they are depreciated at the rates set by ANEEL, limited to the concession term.
As established in concession agreements, subsequent investments not forecast in the original project, provided that they are approved by the Concession Grantor and have not yet been amortized, will be indemnified at the end of the concessions and these assets will be depreciated at the rates set by ANEEL, from the date they start operations.
F-68
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
19 Intangible Assets
| 12.31.2018 | 12.31.2017 |
Concession agreement - distribution of electricity (19.1) | 5,390,063 | 5,750,873 |
Generation concession agreements/ authorization (19.2) | 593,852 | 619,221 |
Concession agreement - piped gas distribution (19.3) | 3,619 | 43,888 |
Others (19.4) | 41,563 | 38,842 |
| 6,029,097 | 6,452,824 |
19.1 Power distribution service concession
|
|
| Special liabilities | ||
| in service | in progress | in service | in progress | Total |
Balance as of January 1, 2017 | 7,537,158 | 849,715 | (2,845,024) | (28,468) | 5,513,381 |
Acquisitions | - | 757,709 | - | - | 757,709 |
Customers contributions | 628 | - | (579) | (125,983) | (125,934) |
Provision for claims added to the cost of the works | - | (1,587) | - | - | (1,587) |
Transfers to accounts receivable related to concession (Note 10.1) | - | (56,853) | - | - | (56,853) |
Capitalizations for intangible in service | 822,472 | (822,472) | (128,351) | 128,351 | - |
Amortization of quotas - concession (a) | (411,575) | - | 125,740 | - | (285,835) |
Amortization of quotas - PIS/Pasep and Cofins credits | (11,014) | - | - | - | (11,014) |
Loss on disposal | (29,704) | (12,066) | 2,776 | - | (38,994) |
Balance as of December 31, 2017 | 7,907,965 | 714,446 | (2,845,438) | (26,100) | 5,750,873 |
Transfers to contract assets (Note 11.1) | - | (714,446) | - | 26,100 | (688,346) |
Transfers from contract assets (Note 11.1) | 775,701 | - | (107,679) | - | 668,022 |
Amortization of quotas - concession (a) | (431,963) | - | 130,388 | - | (301,575) |
Amortization of quotas - PIS/Pasep and Cofins credits | (10,813) | - | - | - | (10,813) |
Loss on disposal | (28,098) | - | - | - | (28,098) |
Balance as of December 31, 2018 | 8,212,792 | - | (2,822,729) | - | 5,390,063 |
(a) Amortization during the concession as of the start of commercial operations of the enterprises or based on the useful life of the assets, of the two the shortest. | |||||
In accordance with IFRIC 12 - Service Concession Arrangements, the portion of infrastructure that will be used during concession was recorded in intangible assets, net of special obligations.
The Special Obligations represent the resources related to the financial participation of consumers, the Federal, State and Municipal Governments, destined to investments in projects related to the concession, and are not onerous liabilities or shareholder credits.
Amortization of Intangible Assets is initiated upon transfer to Intangible Assets under the straight-line method based on the estimated useful life of the asset and will be fully amortized over the term of the concession.
As a result of the initial adoption of IFRS 15 on January 1, 2018, the balance of construction in progress was transferred to contract assets (Note 11.1).
F-69
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
19.2 Generation concession agreements
. |
|
|
|
|
Concession contract (a) | Concession and | |||
| in service | in progress | authorization rights | Total |
Balance as of January 1, 2017 | 254,280 | 6,299 | 403,133 | 663,712 |
ANEEL grant - use of public property | - | 678 | - | 678 |
Amortization of quotas - concession and authorization (b) | (17,837) | - | (13,139) | (30,976) |
Transfer to property, plant and equipment | - | - | (14,193) | (14,193) |
Balance as of December 31, 2017 | 236,443 | 6,977 | 375,801 | 619,221 |
ANEEL grant - use of public property | - | 302 | - | 302 |
Business combination (Note 1.2) | - | - | 4,845 | 4,845 |
Amortization of quotas - concession and authorization (b) | (17,311) | - | (13,205) | (30,516) |
Capitalizations for intangible in service | 7,279 | (7,279) | - | - |
Balance as of December 31, 2018 | 226,411 | - | 367,441 | 593,852 |
(a) Includes the balances of use of public asset and hydrological risk renegotiation | ||||
(b) Amortization during the concession/authorization as of the start of commercial operations of the enterprises. | ||||
19.3 Piped gas distribution service concession
| in service | in progress | Total |
Balance as of January 1, 2017 | 198,271 | 40,238 | 238,509 |
Acquisitions | - | 13,745 | 13,745 |
Transfers to accounts receivable related to concession | (154,908) | (24,501) | (179,409) |
Capitalizations for intangible in service | 10,011 | (10,011) | - |
Amortization of quotas - concession (a) | (28,753) | - | (28,753) |
Loss on disposal | (204) | - | (204) |
Balance as of December 31, 2017 | 24,417 | 19,471 | 43,888 |
Transfers to contract assets (Note 11.2) | - | (19,471) | (19,471) |
Transfers from contract assets (Note 11.2) | 2,042 | - | 2,042 |
Amortization of quotas - concession (a) | (22,759) | - | (22,759) |
Loss on disposal | (81) | - | (81) |
Balance as of December 31, 2018 | 3,619 | - | 3,619 |
(a) Amortization during the concession as of the start of commercial operations of the enterprises or based on the useful life of the assets, of the two the shortest. |
As a result of the initial adoption of IFRS 15, on January 1, 2018, the balance of construction in progress was transferred to contract assets (Note 11.2).
F-70
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
19.4 Other intangible assets
. |
|
|
|
| in service | in progress | Total |
Balance as of January 1, 2017 | 25,725 | 18,485 | 44,210 |
Acquisitions | - | 6,932 | 6,932 |
Transfers from property, plant and equipment | 105 | - | 105 |
Capitalizations for intangible in service | 5,744 | (5,744) | - |
Amortization of quotas (b) | (8,809) | - | (8,809) |
Amortization of quotas - PIS/Pasep and Cofins credits | (54) | - | (54) |
Loss on disposal | (18) | (3,524) | (3,542) |
Balance as of December 31, 2017 | 22,693 | 16,149 | 38,842 |
Effect of acquisition of control of Costa Oeste and Marumbi | - | 37 | 37 |
Acquisitions | - | 7,589 | 7,589 |
Transfers from property, plant and equipment | 112 | 1,979 | 2,091 |
Capitalizations for intangible in service | 9,448 | (9,448) | - |
Amortization of quotas (a) | (6,410) | - | (6,410) |
Amortization of quotas - PIS/Pasep and Cofins credits | (23) | - | (23) |
Loss on disposal | (190) | (373) | (563) |
Balance as of December 31, 2018 | 25,630 | 15,933 | 41,563 |
(a) Annual amortization rate: 20%. | |||
20 Payroll, Social Charges and Accruals
| 12.31.2018 | 12.31.2017 |
Social security liabilities |
|
|
Taxes and social contribution | 54,653 | 49,748 |
Social security charges on paid vacation and 13th salary | 30,010 | 32,686 |
84,663 | 82,434 | |
Labor liabilities |
|
|
Payroll, net | 1,308 | 1,796 |
Vacation | 101,327 | 106,450 |
Provisons for profit sharing | 91,526 | 68,817 |
Voluntary retirement program | 5,349 | 38,642 |
Other liabilities | 6 | 15,828 |
199,516 | 231,533 | |
| 284,179 | 313,967 |
21 Accounts payable to suppliers
| 12.31.2018 | 12.31.2017 |
Energy supplies | 819,792 | 986,689 |
Materials and supplies | 384,300 | 521,969 |
Natural gas for resale | 95,478 | 101,026 |
Charges for use of grid system | 169,629 | 117,362 |
| 1,469,199 | 1,727,046 |
Current | 1,419,243 | 1,683,577 |
Noncurrent | 49,956 | 43,469 |
F-71
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
22 Borrowings
|
|
| Issue | Number of | Final | Annual rate p.y. | Finance |
| 12.31.2018 | 12.31.2017 |
Contracts | Company | Date | installment | maturity | (interest + commission) | charges | Principal | |||
Foreign currency |
|
|
|
|
|
|
|
|
| |
National Treasury Department - STN |
|
|
|
|
|
|
|
|
| |
(Secretaria do Tesouro Nacional) |
|
|
|
|
|
|
|
|
| |
(1) | Par Bond | Copel | 05.20.1998 | 1 | 04.11.2024 | 6.0% + 0.20% | Half-yearly | 17,315 | 42,914 | 52,768 |
(1) | Discount Bond | Copel | 05.20.1998 | 1 | 04.11.2024 | 3.3125% + 0.20% | Half-yearly | 12,082 | 61,837 | 36,502 |
Total foreign currency |
|
|
|
|
|
|
| 104,751 | 89,270 | |
|
|
|
|
|
|
|
|
|
| |
Local currency |
|
|
|
|
|
|
|
|
| |
Banco do Brasil |
|
|
|
|
|
|
|
|
| |
(2) | 21/02155-4 | Copel DIS | 09.10.2010 | 2 | 08.15.2018 | 109.0% of DI | Half-yearly | 116,667 | - | 60,049 |
(3) | 21/02248-8 | Copel DIS | 06.22.2011 | 2 | 05.16.2018 | 109.0% of DI | Half-yearly | 150,000 | - | 75,601 |
(4) | CCB 21/11062X | Copel DIS | 08.26.2013 | 3 | 07.27.2018 | 106.0% of DI | Half-yearly | 151,000 | - | 51,932 |
(5) | CCB 330.600.773 | Copel DIS | 07.11.2014 | 3 | 07.11.2019 | 111.8% of DI | Half-yearly | 116,667 | 40,023 | 80,699 |
(6) | CFX 17/35959-7 | Copel DIS | 05.16.2017 | 2 | 05.06.2019 | 12.0% | Quarterly | 75,000 | 37,973 | 75,291 |
(7) | CCB 21/00851-5 | Copel DIS | 06.30.2017 | 2 | 06.13.2019 | 11.0% | Quarterly | 38,889 | 19,340 | 38,241 |
(8) | CCB 17/35960-0 | Copel DIS | 07.27.2017 | 2 | 07.17.2019 | 11.0% | Quarterly | 50,333 | 51,473 | 51,073 |
(9) | CFX 17/35958-9 | Copel DIS | 08.15.2017 | 2 | 08.05.2019 | 11.0% | Quarterly | 58,333 | 59,102 | 58,636 |
(10) | NCI 330.600.132 | Copel HOL | 02.28.2007 | 3 | 02.28.2019 | 107.8% of DI | Half-yearly | 231,000 | 78,669 | 157,707 |
(11) | CCB 306.401.381 | Copel HOL | 06.21.2018 | 4 | 07.21.2021 | 120.0% of DI | Quarterly | 640,005 | 641,530 | 660,949 |
(12) | NCI 306.401.445 | Copel HOL | 02.24.2017 | 2 | 02.15.2020 | 124.5% of DI | Half-yearly | 77,000 | 78,435 | 78,186 |
|
|
|
|
|
|
|
| 1,006,545 | 1,388,364 | |
Eletrobras |
|
|
|
|
|
|
|
|
| |
(13) | 980/95 | Copel DIS | 12.22.1994 | 80 | 11.15.2018 | 8.0% | Quarterly | 11 | - | 3 |
(13) | 981/95 | Copel DIS | 12.22.1994 | 80 | 08.15.2019 | 8.0% | Quarterly | 1,169 | 49 | 115 |
(13) | 982/95 | Copel DIS | 12.22.1994 | 80 | 11.15.2019 | 8.0% | Quarterly | 1,283 | 24 | 48 |
(13) | 983/95 | Copel DIS | 12.22.1994 | 80 | 11.15.2020 | 8.0% | Quarterly | 11 | 51 | 77 |
(13) | 984/95 | Copel DIS | 12.22.1994 | 80 | 11.15.2020 | 8.0% | Quarterly | 14 | 22 | 33 |
(13) | 985/95 | Copel DIS | 12.22.1994 | 80 | 08.15.2021 | 8.0% | Quarterly | 61 | 17 | 23 |
(14) | 142/06 | Copel DIS | 05.11.2006 | 120 | 09.30.2018 | 5.0% + 1.0% | Monthly | 74,340 | - | 2,730 |
(14) | 206/07 | Copel DIS | 03.03.2008 | 120 | 08.30.2020 | 5.0% + 1.0% | Monthly | 109,642 | 14,839 | 23,746 |
(14) | 273/09 | Copel DIS | 02.18.2010 | 120 | 12.30.2022 | 5.0% + 1.0% | Monthly | 63,944 | 6,577 | 8,222 |
|
|
|
|
|
|
|
| 21,579 | 34,997 | |
Caixa Econômica Federal |
|
|
|
|
|
|
|
|
| |
(14) | 415.855-22/14 | Copel DIS | 03.31.2015 | 120 | 12.08.2026 | 6.0% | Monthly | 16,984 | 15,298 | 5,087 |
(15) | 3153-352 | Copel DIS | 11.01.2016 | 36 | 12.15.2021 | 5.5 % above TJLP | Quarterly | 489 | 496 | 498 |
|
|
|
|
|
|
|
| 15,794 | 5,585 | |
Finep |
|
|
|
|
|
|
|
|
|
|
(16) | 21120105-00 | Copel Tel | 07.17.2012 | 81 | 10.15.2020 | 4.0% | Monthly | 35,095 | 5,730 | 8,855 |
(16) | 21120105-00 | Copel Tel | 07.17.2012 | 81 | 10.15.2020 | 3.5% + TR | Monthly | 17,103 | 4,842 | 7,482 |
|
|
|
|
|
|
|
| 10,572 | 16,337 | |
BNDES |
|
|
|
|
|
|
|
|
|
|
(17) | 820989.1 | Copel GeT | 03.17.2009 | 179 | 01.15.2028 | 1.63% above TJLP | Monthly | 169,500 | 107,326 | 118,370 |
(18) | 1120952.1-A | Copel GeT | 12.16.2011 | 168 | 04.15.2026 | 1.82% above TJLP | Monthly | 42,433 | 23,098 | 26,078 |
(19) | 1120952.1-B | Copel GeT | 12.16.2011 | 168 | 04.15.2026 | 1.42% above TJLP | Monthly | 2,290 | 1,246 | 1,407 |
(20) | 1220768.1 | Copel GeT | 09.28.2012 | 192 | 07.15.2029 | 1.36% above TJLP | Monthly | 73,122 | 50,908 | 55,357 |
(21) | 13211061 | Copel GeT | 12.04.2013 | 192 | 10.15.2031 | 0% and 1.49% above TJLP | Monthly | 1,041,155 | 841,871 | 871,022 |
(22) | 13210331 | Copel GeT | 12.03.2013 | 168 | 08.15.2028 | 1.49% and 1.89% above TJLP | Monthly | 17,644 | 12,659 | 13,878 |
(23) | 15206041 | Copel GeT | 12.28.2015 | 168 | 06.15.2030 | 2.42% above TJLP | Monthly | 34,265 | 23,984 | 25,899 |
(24) | 15205921 | Copel GeT | 12.28.2015 | 168 | 12.15.2029 | 2.32% above TJLP | Monthly | 21,584 | 14,518 | 15,734 |
(25) | 18205101 | Copel GeT | 11.22.2018 | 192 | 06.15.2035 | 1.94% above TJLP | Monthly | 194,000 | 158,659 | - |
(26) | 14205611-A | Copel DIS | 12.15.2014 | 72 | 01.15.2021 | 2.09% above TJLP | Annual | 41,583 | 14,450 | 21,267 |
(26) | 14205611-B | Copel DIS | 12.15.2014 | 6 | 02.15.2021 | 2.09 above TR BNDES | Monthly | 17,821 | 11,992 | 15,384 |
(27) | 14205611-C | Copel DIS | 12.15.2014 | 113 | 06.15.2024 | 6.0% | Monthly | 78,921 | 43,097 | 50,949 |
(28) | 14205611-D | Copel DIS | 12.15.2014 | 57 | 02.15.2021 | TJLP | Monthly | 750 | 20 | 29 |
(29) | 14.2.1271.1 | Santa Maria | 06.01.2015 | 192 | 08.15.2031 | 1.66% above TJLP | Monthly | 59,462 | 48,125 | 51,578 |
(29) | 14.2.1272.1 | Santa Helena | 06.01.2015 | 192 | 08.15.2031 | 1.66% above TJLP | Monthly | 64,520 | 52,188 | 55,932 |
(30) | 11211521 | GE Farol | 03.19.2012 | 192 | 06.15.2030 | 2.34% above TJLP | Monthly | 54,100 | 45,158 | 48,741 |
(30) | 11211531 | GE Boa Vista | 03.19.2012 | 192 | 06.15.2030 | 2.34% above TJLP | Monthly | 40,050 | 33,385 | 36,034 |
(30) | 11211541 | GE S.B. do Norte | 03.19.2012 | 192 | 06.15.2030 | 2.34% above TJLP | Monthly | 90,900 | 75,715 | 81,723 |
(30) | 11211551 | GE Olho D'Água | 03.19.2012 | 192 | 06.15.2030 | 2.34% above TJLP | Monthly | 97,000 | 80,863 | 87,278 |
(31) | 18204611 | Cutia | 10.25.2018 | 192 | 07.15.2035 | 2.04% above TJLP | Monthly | 619,405 | 505,368 | - |
(32) | 13212221 - A | Costa Oeste | 12.03.2013 | 168 | 11.30.2028 | 1.95% + TJLP | Monthly | 23,634 | 21,291 | - |
(33) | 13212221 - B | Costa Oeste | 12.03.2013 | 106 | 09.30.2023 | 3.5% | Monthly | 9,086 | 3,789 | - |
(34) | 14205851 - A | Marumbi | 07.08.2014 | 168 | 06.30.2029 | 2.00% + TJLP | Monthly | 33,460 | 27,134 | - |
(35) | 14205851 - B | Marumbi | 07.08.2014 | 106 | 04.30.2024 | 6.00% | Monthly | 21,577 | 12,076 | - |
|
|
|
|
|
|
|
| 2,208,920 | 1,576,660 | |
(36) | Promissory notes | Copel GeT | 05.12.2017 | 1 | 05.12.2019 | 117% of DI | Single | 500,000 | 571,822 | 529,919 |
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
| 571,822 | 529,919 | |
Banco do Brasil |
|
|
|
|
|
|
|
|
| |
BNDES Transfer |
|
|
|
|
|
|
|
|
| |
(37) | 21/02000-0 | Copel GeT | 04.16.2009 | 179 | 01.15.2028 | 2.13% above TJLP | Monthly | 169,500 | 107,324 | 118,373 |
|
|
|
|
|
|
|
| 107,324 | 118,373 | |
Total local currency |
|
|
|
|
|
|
| 3,942,556 | 3,670,235 | |
|
|
|
|
|
|
|
|
| 4,047,307 | 3,759,505 |
|
|
|
|
|
|
| Current | 1,113,047 | 784,666 | |
|
|
|
|
|
|
|
| Noncurrent | 2,934,260 | 2,974,839 |
F-72
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
Allocation: |
(1) The restructuring of medium and long-term debt in connection w ith the financing received under Law No. 4,131/1962. |
(2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) Working capital. |
(13) National Program for Watering - Proni. |
(14) Rural Electricity Program - Luz para Todos. |
(15) Operation for the acquisition of machinery and/or equipment and IT and automation equipment. |
(16) BEL project - ultra wide band intranet service (Ultra Wide Band - UWB). |
(17) (37) Construction of the Mauá Hydroelectric Power Plant and its transmission system, in consortium with Eletrosul. |
(18) Implementation of transmission line between substations Foz do Iguaçu and Cascavel Oeste. |
(19) Purchase of machinery and equipment for implementation of the transmission line described above. |
(20) Implementation of Cavernoso II SHP. |
(21) Implementation of HPP Colíder and associated transmission system. |
(22) Implementation of the 230/138kV Cerquilho III Substation. |
(23) Implementation of transmission line Assis – Paraguaçu Paulista II. |
(24) Implementation of transmission lines Londrina – Figueira and Salto Osório – Foz do Chopim C2. |
(25) Implementation of HPP Baixo Iguaçu and associated transmission system. |
(26) Investment in preservation of businesses, improvements, operational support and general investments in expansion. |
(27) National machinery and equipment accredited by BNDES. |
(28) Implementation, expansion and consolidation of projects and Enterprises Social Investment Programs (ISE). |
(29) (30) (31) Construction and implementation of wind generating plant. |
(32) Implementation of Transmission Line 230 kV between SE Cascavel Oeste and SE Umuarama Sul and |
implementation of SE Umuarama Sul 230/138 kV |
(33) Acquisition of domestic machinery and equipment for implementation of the aforementioned project. |
(34) Implementation of Transmission Line 525 kV between SE Curitiba Leste and implementation of SE Curitiba Leste 525/230 kV |
(35) Acquisition of domestic machinery and equipment for implementation of the aforementioned project. |
(36) Payment of the first installment of debentures and cash enhancement of Copel Get. |
Guarantees: |
(1) Company’s centralized revenues account. Deposited Collateral (23.1). |
(2) (3) Pledge until 360 days. |
(2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (19) Credit assignment. |
(13) (14) Own revenue, supported by power of attorney granted by a public instrument, and the issue of promissory notes and commercial duplicates equal to the number of installments falling due. |
(15) Fiduciary assignment of trade notes. |
(16) Withhold the amounts from the checking account in which revenues are deposited. |
(17) (20) (37) Total revenue from the sale and/or transaction of CCEAR energy, related to the project, through Concession Agreement of |
(18) (19) Fiduciary assignment of rights under the Concession Agreement No. 027/2009-ANEEL, Transmission Service Provision Contract No. |
(21) Fiduciary assignment of rights under the Concession Agreement No. 01/2011MME-HPP Colíder and fiduciary assignment due to the Purchase and Sale of Electricity (CCVEE) between Copel and BRF - Brasil Foods S.A. |
(22) Fiduciary assignment of rights under the Public Service Concession Agreement for Electric Power Transmission No. 015/2010-ANEEL, signed between Copel and the Federal Government. |
(23) Assignment of credit rights deriving from Concession Agreement No. 002/2013 - ANEEL. |
(24) Assignment of credit rights deriving from Concession Agreement No. 022/2012 - ANEEL. |
(25) Fiduciary assignment, pursuant to paragraph 3 of article 66-B of Law 4,728, dated July 7, 1965, (i) of its share of the rights from the concession it holds as a result of the Concession Agreement of Use of Public Property for the generation of Electric Energy nº 02/2012-MME-UHE Baixo Iguaçu, of August 20, 2012. |
(26) (27) (28) Surety of Companhia Paranaense de Energia; fiduciary assignment of income and indemnity rights of the concession. |
(29) Guarantee from Companhia Paranaense de Energia; pledge of shares; assignment of credit rights deriving from Electricity Agreement Reservation No. 153/2011; assignment of revenues arising from the project. |
(30) Pledge of shares (GE Farol, GE Boa Vista, GE São Bento do Norte and GE Olho D'Água); assignment of receivables arising from the sale of electricity produced by the project; assignment of machinery and equipment assembled or built with the funds pegged to it. |
(31) Pledge of shares; assignment of fiduciary receivables. |
(32) (33) Fiduciary Assignment of the rights arising from the Concession Agreement 001/2012 and 100% of the shares seized in favor of the BNDES until the loan is discharged. |
(34) (35) Fiduciary Assignment of the rights arising from the Concession Agreement 008/2012 and 100% of the shares seized in favor of the BNDES until the loan is discharged. |
(36) Surety of Companhia Paranaense de Energia. |
F-73
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
22.1 Collateral and escrow deposits - STN
These are guarantees provided in the form of cash deposits, Par Bonds of R$ 52,717 (R$ 44,548 in 2017) and Discount Bonds in the amount of R$ 36,838 (R$ 31,117 in 2017), to be used to repay amounts of principal corresponding to STN contracts, when these payments are due on April 11, 2024. The amounts are updated by applying the weighted average percentage changes of United States Treasury Zero Coupon bond prices, by the share of each series of the instrument in the portfolio of collateral for principal, provided in the context of the Brazilian Financing Plan enacted in 1992.
22.2 Breakdown of borrowings by currency and index
|
|
|
|
|
|
|
| 12.31.2018 | % | 12.31.2017 | % |
Foreign currency - change in currencies in the period (%) |
|
|
|
|
|
U.S. Dollar | 17.13 | 104,751 | 2.59 | 89,270 | 2.37 |
| 104,751 | 2.59 | 89,270 | 2.37 | |
Local currency - accumulated index in the period (%) |
|
|
|
|
|
CDI | 6.40 | 1,410,479 | 34.85 | 1,695,042 | 45.09 |
TJLP | 7.03 | 2,245,786 | 55.49 | 1,629,198 | 43.34 |
TR | 0.00 | 4,842 | 0.12 | 7,482 | 0.20 |
IPCA | 3.75 | 11,992 | 0.30 | 15,384 | 0.41 |
Without indexer (annual fixed rate) | - | 269,457 | 6.65 | 323,129 | 8.59 |
| 3,942,556 | 97.41 | 3,670,235 | 97.63 | |
|
| 4,047,307 | 100.00 | 3,759,505 | 100.00 |
22.3 Maturity of non-current installments
|
|
|
|
12.31.2018 | Foreign currency | Local currency | Total |
2020 | - | 558,069 | 558,069 |
2021 | - | 503,246 | 503,246 |
2022 | - | 190,244 | 190,244 |
2023 | - | 188,586 | 188,586 |
2024 | 103,646 | 184,691 | 288,337 |
After 2024 | - | 1,205,778 | 1,205,778 |
| 103,646 | 2,830,614 | 2,934,260 |
F-74
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
22.4 Changes in borrowings
| Foreign currency | Local currency | Total |
Balance as of January 1, 2017 | 90,505 | 3,955,788 | 4,046,293 |
Funding | - | 800,044 | 800,044 |
Charges | 3,868 | 395,081 | 398,949 |
Monetary and exchange variations | (1,184) | 18,623 | 17,439 |
Amortization - principal | - | (971,187) | (971,187) |
Payment - charges | (3,919) | (528,114) | (532,033) |
Balance as of December 31, 2017 | 89,270 | 3,670,235 | 3,759,505 |
Effect of acquisition of control of Costa Oeste and Marumbi | - | 66,775 | 66,775 |
Funding | - | 1,314,766 | 1,314,766 |
Charges | 5,038 | 289,365 | 294,403 |
Monetary and exchange variations | 15,161 | 11,936 | 27,097 |
Amortization - principal | - | (1,126,144) | (1,126,144) |
Payment - charges | (4,718) | (284,377) | (289,095) |
Balance as of December 31, 2018 | 104,751 | 3,942,556 | 4,047,307 |
22.5 Covenants
The Company and its subsidiaries signed borrowings agreements containing covenants that require economic and financial ratios to be maintained within pre-determined parameters, requiring annual fulfillment and other conditions to be complied with, such as not changing the Company’s interest in the capital stock of subsidiaries that would represent change of control without prior consent. Failing to fulfill these conditions may lead to accelerated debt repayment and/or fines.
As of December 31, 2018, the Company is in compliance with all covenants.
The financial covenants contained in the borrowings agreements are presented below:
Company | Contract | Annual financial index | Limit |
Copel GeT | BNDES Finem nº 820989.1 - Mauá | EBITDA / Net financial results | ≥ 1.3 |
Banco do Brasil nº 21/02000-0 - Mauá | |||
3rd issue of Promissory Notes | Consolidated net debt / Consolidated EBITDA | ≤ 3.5 | |
Copel DIS | BNDES Finem nº 14205611 | Financial indebtedness / adjusted EBITIDA | ≤ 4.0 |
Santa Maria | BNDES Finem nº 14212711 | Debt service coverage ratio | ≥ 1.3 |
Santa Helena | BNDES Finem nº 14212721 | ||
São Bento Energia, Investimento e Participações | BNDES Assignment Agreement | Debt service coverage ratio | ≥ 1.3 |
GE Boa Vista S.A. | BNDES Finem nº 11211531 | ||
GE Farol S.A. | BNDES Finem nº 11211521 | ||
GE Olho D´Água S.A. | BNDES Finem nº 11211551 | ||
GE São Bento do Norte S.A. | BNDES Finem nº 11211541 | ||
Cutia | BNDES Finem nº 18204611 | Debt service coverage ratio | ≥ 1.2 |
Costa Oeste | BNDES Finem nº 14205851 - A | Debt service coverage ratio | ≥ 1.3 |
Marumbi | BNDES Finem nº 14205851 - B | Debt service coverage ratio | ≥ 1.3 |
Financing for businesses - Finem |
F-75
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
23 Debentures
| |||||||||
|
| Issue | Number of | Maturity | Annual rate p.y. |
|
|
| |
Issue | Company | Date | installment | initial | final | (interest) | Principal | 12.31.2018 | 12.31.2017 |
(1) 5th | Copel | 05.13.2014 | 3 | 05.13.2017 | 05.13.2019 | 111.5% of DI | 1,000,000 | 336,139 | 672,537 |
(2) 6th | Copel | 06.28.2017 | 1 | - | 06.28.2019 | 117.0% of DI | 520,000 | 585,540 | 542,944 |
(3) 7th | Copel | 01.19.2018 | 2 | 01.19.2020 | 01.19.2021 | 119.0% of DI | 600,000 | 616,401 | - |
(4) 1st | Copel GeT | 05.15.2015 | 3 | 05.15.2018 | 05.15.2020 | 113.0% of DI | 1,000,000 | 695,328 | 1,059,822 |
(5) 2nd | Copel GeT | 07.13.2016 | 2 | 07.13.2018 | 07.13.2019 | 121.0% of DI | 1,000,000 | 514,993 | 1,037,570 |
(6) 3rd | Copel GeT | 10.20.2017 | 3 | 10.20.2020 | 10.20.2022 | 126.0% of DI | 1,000,000 | 1,003,715 | 999,442 |
(7) 4th | Copel GeT | 07.23.2018 | 3 | 07.23.2021 | 07.23.2023 | 126.0% of DI | 1,000,000 | 1,017,858 | - |
(8) 5th | Copel GeT | 09.25.2018 | 5 | 09.15.2021 | 09.15.2025 | IPCA + 7.6475% | 290,000 | 286,199 | - |
(9) 2nd | Copel DIS | 10.27.2016 | 2 | 10.27.2018 | 10.27.2019 | 124.0% of DI | 500,000 | 250,943 | 502,179 |
(10) 3rd | Copel DIS | 10.20.2017 | 2 | 10.20.2021 | 10.20.2022 | 126.0% of DI | 500,000 | 502,640 | 501,810 |
(11) 4th | Copel DIS | 09.27.2018 | 3 | 09.27.2021 | 09.27.2023 | DI + spread 2.70% | 1,000,000 | 1,003,524 | - |
(12) 1st | Copel TEL | 10.15.2015 | 5 | 10.15.2020 | 10.15.2024 | IPCA + 7.9633% | 160,000 | 186,783 | 184,506 |
(13) 2nd | Copel TEL | 07.15.2017 | 1 | - | 07.15.2022 | IPCA + 5.4329% | 220,000 | 232,131 | 215,675 |
(14) 2nd | (a) | 03.24.2016 | 192 | 08.15.2016 | 07.15.2032 | TJLP + 2.02% | 147,575 | 128,243 | 135,662 |
(15) 2nd | (a) | 03.24.2016 | 192 | 08.15.2016 | 07.15.2032 | IPCA + 9.87% | 153,258 | 140,043 | 145,786 |
(16) 2nd | Elejor | 09.26.2013 | 60 | 10.26.2013 | 09.26.2018 | DI + Spread 1.00% | 203,000 | - | 30,370 |
(17) 1st | Compagás | 12.16.2013 | 40 | 09.15.2015 | 12.15.2018 | TJLP+1.7% p.y.+1.0% | 66,626 | - | 19,214 |
(18) 2nd | Compagás | 04.15.2016 | 54 | 07.15.2017 | 12.15.2021 | TJLP/Selic + 2.17% | 33,620 | 17,651 | 23,461 |
|
|
|
|
|
|
|
| 7,518,131 | 6,070,978 |
| Current | 2,184,881 | 1,632,062 | ||||||
|
|
|
|
|
|
| Noncurrent | 5,333,250 | 4,438,916 |
(a) Nova Asa Branca I, Nova Asa Branca II, Nova Asa Branca III, Nova Eurus IV e Ventos de Santo Uriel. | |||||||||
Characteristics: | |||||||||
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (16) Simple debentures, single series, not convertible into shares, unsecured, for public | |||||||||
distribution with restricted placement efforts, according to CVM No. 476. | |||||||||
(14) Simple debentures, 1st serie, issued privately and not convertible into shares. | |||||||||
(15) Simple debentures, 2nd serie, issued privately and not convertible into shares. | |||||||||
(17) (18) Simple floating debentures, issued privately in a single series and not convertible into shares. | |||||||||
Finance charges: | |||||||||
(1) Half-yearly interest - May and November. | |||||||||
(2) Interest on the maturity of the agreement - June | |||||||||
(3) (7) (13) Half-yearly interest - January and July. | |||||||||
(4) Annual interest - May. | |||||||||
(5) Annual interest - July. | |||||||||
(6) (10) (12) Half-yearly interest - April and October. | |||||||||
(8) (11) Half-yearly interest - March and September. | |||||||||
(9) Annual interest - October. | |||||||||
(14) (15) (16) Monthly interest. | |||||||||
(17) (18) Quarterly interest - March, June, September and December. | |||||||||
Allocation: | |||||||||
(1) (2) (3) (4) (5) (6) (9) (10) Working capital or used to make investments in the issuer. | |||||||||
(7) Full early redemption of the 4th issue of the Company’s trade promissory notes and partial payment of the 1st amortization | |||||||||
installment of the 2nd issue of debentures. | |||||||||
(8) Reimbursement of expenses related to the Construction Project of the Transmission Lines in: Araraquara II - Taubaté, Assis - Londrina and Foz do Chopim. | |||||||||
(11) Working capital and payment of the 1st installment of amortization of the 2nd issue of debentures. | |||||||||
(12) (13) Deployment, expansion and modernization of the telecommunication network. | |||||||||
(14) (15) Implementation of wind farms and associated transmission systems. | |||||||||
(16) Full settlement of the loan agreement with Copel. | |||||||||
(17) (18) Fund investment plan of the issuer. | |||||||||
Collaterals: | |||||||||
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (16) Personal guarantee | |||||||||
(14) (15) Real and personal guarantee and pledge of Copel Geração e Transmissão's shares. | |||||||||
(17) (18) Floating | |||||||||
Guarantor: | |||||||||
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14) (15) Copel. | |||||||||
(16) Copel, at the ratio of 70% and Paineira Participações S.A., at the ratio of 30%. | |||||||||
(17) (18) Compagás. | |||||||||
Trustee: | |||||||||
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (16) Pentágono S.A. DTVM. | |||||||||
(14) (15) None. | |||||||||
(17) (18) BNDES Participações S.A. - BNDESPAR. |
F-76
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
23.1 Maturity of non-current installments
| |
12.31.2018 |
|
2020 | 995,390 |
2021 | 1,631,912 |
2022 | 1,588,014 |
2023 | 784,214 |
2024 | 128,112 |
After 2024 | 205,608 |
| 5,333,250 |
23.2 Changes in debentures
|
|
Balance as of January 1, 2017 | 4,790,809 |
Funding | 2,242,521 |
Charges and monetary variations | 575,468 |
Amortization - principal | (915,005) |
Payment - charges | (622,815) |
Balance as of December 31, 2017 | 6,070,978 |
Funding | 2,890,283 |
Charges and monetary variations | 549,539 |
Amortization - principal | (1,491,667) |
Payment - charges | (501,002) |
Balance as of December 31, 2018 | 7,518,131 |
23.3 Covenants
Copel and its subsidiaries issued debentures containing covenants that require the maintenance of certain economic and financial ratios within pre-determined parameters, requiring annual fulfillment and other conditions to be complied with, such as not changing the Company’s interest in the capital stock that would represent change of control without prior consent from the debenture holders; not paying out dividends or interest on capital if it is in arrears in relation to honoring any of its financial obligations or not maintaining the financial ratios as determined without prior written consent of the debenture holders. Failing to fulfill these conditions may lead to accelerated redemption of debentures and regulatory penalties.
As of December 31, 2018, the subsidiaries Nova Asa Branca I Energias Renováveis S.A., Nova Asa Branca II Energias Renováveis S.A., Nova Asa Branca III Energias Renováveis S.A., Nova Eurus IV Energias Renováveis S.A. and Ventos de Santo Uriel did not comply with the Debt Service Coverage Ratio - ICSD of 1.3, when calculating the rate without considering the value of the compensation to suppliers of goods (NE 32.6 – b). On December 28, 2018, the Company requested preventively and received a letter from BNDES, referring to AE/DEENE2 No. 101/2018, not declaring accelerated maturity of the debentures in 2018. Except for the foregoing, as of December 31, 2018,the Company is in compliance with all covenants.
The financial covenants contained in the debenture agreements are presented as follow:
F-77
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
Company | Contract | Annual financial index | Limit |
Copel | 5th issue de Debentures | Consolidated net debt / Consolidated EBITDA | ≤ 3.5 |
6th issue de Debentures | |||
7th issue de Debentures | |||
Copel GeT | 1st issue de Debentures | ||
2nd issue de Debentures | |||
3rd issue de Debentures | |||
4th issue de Debentures | |||
5th issue de Debentures | |||
Copel DIS | 2nd issue de Debentures | ||
3rd issue de Debentures | |||
4th issue de Debentures | |||
Copel TEL | 1st issue de Debentures | ||
2nd issue de Debentures | |||
Compagás | 1st issue de Debentures | Net debt / EBITDA | ≤ 3.5 |
2nd issue de Debentures | General Indebtedness | ≤ 0.7 | |
Nova Asa Branca I | 2nd issue de Debentures | Debt service coverage ratio | ≥ 1.3 |
Nova Asa Branca II | |||
Nova Asa Branca III | |||
Nova Eurus IV | |||
Ventos de Santo Uriel |
24 Post-employment benefits
The Company sponsors private retirement and pension plans (Unified Plan and Plan III) and Healthcare Plan for medical and dental care (“ProSaúde II”and“ProSaúde III”Plans) for their active employees and their dependents. The lifetime sponsorship of the Healthcare Plan for retirees, pensioners and legal dependents is only applied to“Prosaúde II”plan participants.
The amounts of these actuarial obligations (contributions, costs, liabilities, and/or assets) are calculated annually by an independent actuary at year end.
The benefits plan assets are measured at market values (mark-to-market).
The amount of the net assistance liability is recognized at the present value of the actuarial liability, less the fair value of the plan assets.
Under the projected credit unit method adopted, each year of service triggers an additional benefit unit, which are added up to determine the final liability.
Other actuarial assumptions are used, which take into account biometric and economic tables in addition to historical data from the benefits plans, obtained from the manager of these plans, Fundação Copel de Previdência e Assistência Social.
Actuarial gains or losses caused by changes in assumptions and/or actuarial adjustments are recognized in other comprehensive income.
F-78
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
24.1 Pension Plan
The Unified Plan is a Defined Benefit plan - BD in which the income is predetermined, according to each individual’s salary. This plan has been a closed plan for new participants since 1998.
The Plan III is a Variable Contribution plan–CV, being the only plan available for new participants.
The costs assumed by the sponsors for these plans are recognized according to the actuarial evaluation prepared annually by independent actuaries in accordance with IAS 19 and IFRIC 14. The economic and financial assumptions for purposes of the actuarial valuation are discussed with the independent actuaries and approved by management.
24.2 Healthcare Plan
The Company and its subsidiaries allocate resources for the coverage of healthcare expenses incurred by their employees and their dependents, within rules, limits and conditions set in“ProSaúde II”and“ProSaúde III”Plans’regulations. Coverage includes periodic medical exams in both plans and is only extended to all retirees and pensioners for life in the“ProSaúde II”plan.
24.3 Balance sheet and statement of income
Amounts recognized in liabilities, under Post-employment Benefits, are summarized below:
|
|
|
| 12.31.2018 | 12.31.2017 |
Pension plans | 1,149 | 1,069 |
Healthcare plans | 967,614 | 865,034 |
| 968,763 | 866,103 |
Current | 58,478 | 53,225 |
Noncurrent | 910,285 | 812,878 |
Amounts recognized in the statement of income are shown below:
|
|
|
|
| 12.31.2018 | 12.31.2017 | 12.31.2016 |
Employees |
|
| |
Pension plans | 78,209 | 78,680 | 75,407 |
Healthcare plan - post employment | 97,866 | 97,511 | 129,647 |
Healthcare plan - active employees | 86,580 | 81,617 | 75,578 |
(-) Transfers to construction in progress | (20,630) | (21,901) | (22,268) |
242,025 | 235,907 | 258,364 | |
Management |
|
| |
Pension plans | 1,598 | 1,500 | 1,175 |
Healthcare plan | 127 | 190 | 228 |
| 1,725 | 1,690 | 1,403 |
| 243,750 | 237,597 | 259,767 |
F-79
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
24.4 Changes in post-employment benefits
| Total |
Balance as of January 1, 2017 | 769,865 |
Appropriation of actuarial calculation | 97,511 |
Pension and healthcare contributions | 153,069 |
Adjustment related to actuarial gains (loss) | 46,506 |
Amortizations | (200,848) |
Balance as of December 31, 2017 | 866,103 |
Appropriation of actuarial calculation | 97,900 |
Appropriation of pension and healthcare contributions | 151,215 |
Adjustment related to actuarial gains (loss) | 58,354 |
Amortizations | (204,809) |
Balance as of December 31, 2018 | 968,763 |
24.5 Actuarial valuation in accordance with IAS 19
24.5.1 Actuarial assumptions
The actuarial assumptions used to determine the amounts of liabilities and costs for 2018 and 2017 are shown below:
| 2018 | 2017 | ||
| Real | Nominal | Real | Nominal |
Economic |
|
|
|
|
Inflation p.y. | - | 4.00% | - | 4.50% |
Expected rate of discount/return p.y. |
|
|
|
|
Unified Plan | 4.60% | 8.78% | 5.11% | 9.84% |
Plan III | 4.60% | 8.78% | 5.24% | 9.97% |
Assistance Plan | 4.60% | 8.78% | 5.20% | 9.94% |
Salary growth |
|
|
|
|
Salary growth Unified Plan p.y. | 2.00% | 6.08% | 2.00% | 6.59% |
Salary growth Plan III p.y. | 1.50% | 5.56% | 1.50% | 6.07% |
Demographic |
|
|
|
|
Mortality Table |
| AT - 2000 |
| AT - 2000 |
Mortality table of individuals with permanent disability |
| WINKLEVOSS |
| WINKLEVOSS |
Table of new disability benefit vested |
| TASA 1927 |
| TASA 1927 |
24.5.2 Number of participants and beneficiaries
| Social Security Plans |
| ||||
Unified Plan | Plan III | Assistance Plan | ||||
| 12.31.2018 | 12.31.2017 | 12.31.2018 | 12.31.2017 | 12.31.2018 | 12.31.2017 |
Number of active participants | 33 | 37 | 8,180 | 8,540 | 7,427 | 8,172 |
Number of Inactive participants | 4,368 | 4,435 | 3,843 | 3,509 | 8,174 | 7,703 |
Number of dependent people | - | - | - | - | 22,472 | 23,081 |
Total | 4,401 | 4,472 | 12,023 | 12,049 | 38,073 | 38,956 |
F-80
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
24.5.3 Life expectancy after the average age of participants - Annuity Table AT-2000 (in years)
| Unified Plan | Plan III |
As of 12.31.2018 |
|
|
Retired participants | 14.37 | 22.74 |
Pensioner participants | 15.68 | 27.21 |
As of 12.31.2017 |
|
|
Retired participants | 14.92 | 23.01 |
Pensioner participants | 16.37 | 27.99 |
The average age of inactive participants of the healthcare and pension plans of the Company is 67.3 and 66.8 years, respectively.
24.5.4 Actuarial evaluation
Based on the review of the assumptions, the amounts of the Unified Plan and Plan III as of December 31, 2018, respectively, totaled a surplus of R$ 376,077 and R$ 32,732, while, as of December 31, 2017, the position was, respectively, R$ 481,678 and R$ 86,487. The current applicable legislation does not permit any significant reduction in contributions or reimbursements to the Company based on the current surplus in this plan. For this reason, the Company did not record assets on its December 31, 2018 balance sheet that reflect any such right to reduce contributions or refund surplus or other amounts.
| Unified Plan | Plan III | Assistance Plan | 12.31.2018 | 12.31.2017 |
Total liabilities or partially covered | 5,914,764 | 2,145,661 | 1,140,605 | 9,201,030 | 8,123,419 |
Fair value of the plan assets | (6,290,841) | (2,178,236) | (172,991) | (8,642,068) | (7,826,550) |
Plan coverage status | (376,077) | (32,575) | 967,614 | 558,962 | 296,869 |
Unrecognized asset | 376,077 | 32,575 | - | 408,652 | 568,165 |
| - | - | 967,614 | 967,614 | 865,034 |
The Company made adjustments to their assistance liabilities through the actuarial report issued on December 31, 2018, when an actuarial gain of R$ 58,354 was recorded in other comprehensive income, corresponding to an increase ascertained on that base date.
F-81
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
24.5.5 Changes in actuarial liabilities
| Unified Plan | Plan III | Assistance Plan |
Present value of net actuarial obligations as of January 1, 2016 | 4,174,885 | 1,170,528 | 756,282 |
Cost of services | 203 | 10,174 | 44,942 |
Cost of interest | 601,259 | 170,531 | 108,465 |
Benefits paid | (381,274) | (109,146) | (88,259) |
Actuarial (gain) losses | 556,005 | 323,034 | 112,484 |
Present value of net actuarial obligations as of December 31, 2016 | 4,951,078 | 1,565,121 | 933,914 |
Cost of services | 329 | 10,502 | 9,225 |
Cost of interest | 563,257 | 176,878 | 105,987 |
Benefits paid | (406,023) | (122,841) | (7) |
Actuarial (gain) losses | 244,253 | 104,908 | (13,162) |
Present value of net actuarial obligations as of December 31, 2017 | 5,352,894 | 1,734,568 | 1,035,957 |
Cost of services | 589 | 9,604 | 11,633 |
Cost of interest | 533,201 | 195,991 | 102,916 |
Benefits paid | (414,256) | (133,281) | (7) |
Actuarial (gain) losses | 442,336 | 338,779 | (9,894) |
Present value of net actuarial obligations as of December 31, 2018 | 5,914,764 | 2,145,661 | 1,140,605 |
24.5.6 Changes in actuarial assets
| Unified Plan | Plan III | Assistance Plan |
Fair value of the Plan's assets as of January 1, 2016 | 4,487,550 | 1,162,969 | 162,630 |
Return estimated for assets | 637,541 | 169,429 | 23,749 |
Contributions and distributions | 25,724 | 10,174 | - |
Benefits paid | (381,274) | (109,146) | - |
Actuarial gain (losses) | 709,261 | 560,090 | (21,078) |
Fair value of the Plan's assets as of December 31, 2016 | 5,478,802 | 1,793,516 | 165,301 |
Return estimated for assets | 546,699 | 202,691 | 23,934 |
Contributions and distributions | 30,520 | 10,505 | - |
Benefits paid | (406,023) | (122,841) | - |
Actuarial gain (losses) | 184,574 | (62,816) | (18,312) |
Fair value of the Plan's assets as of December 31, 2017 | 5,834,572 | 1,821,055 | 170,923 |
Return estimated for assets | 593,572 | 230,703 | 16,579 |
Contributions and distributions | 24,011 | 9,184 | - |
Benefits paid | (414,256) | (133,281) | - |
Actuarial gain (losses) | 252,942 | 250,575 | (14,511) |
Fair value of the Plan's assets as of December 31, 2018 | 6,290,841 | 2,178,236 | 172,991 |
24.5.7 Estimated costs
The estimated net periodic plan costs (gains) for 2019 for each plan are shown below:
| Unified Plan | Plan III | Assistance Plan | 2019 |
Cost of current service | 560 | 4,098 | 14,306 | 18,964 |
Estimated cost of interest | 477,731 | 128,060 | 106,004 | 711,795 |
Expected return on plan assets | (584,972) | (180,750) | (20,733) | (786,455) |
Expected employee contributions | (213) | (2,049) | - | (2,262) |
Costs (income or loss) | (106,894) | (50,641) | 99,577 | (57,958) |
F-82
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
24.5.8 Sensitivity Analysis
The following tables set out a sensitivity analysis, which shows the effect of a one percent increase or decrease in the assumed care costs, in the aggregate of the cost of service and cost of interest components and the accumulated post-employment benefit obligation.
. | Projected scenarios | |
| Increase by 1% | Decrease in 1% |
Sensitivity of long-term interest rate |
|
|
Impacts on the obligations of the pension | (382,458) | 587,106 |
Impacts on the obligations of healthcare program | (182,573) | 182,573 |
Sensitivity of growth rate of the medical costs |
|
|
Impacts on the obligations of healthcare program | 79,801 | (74,557) |
Impact on cost of service for the following financial year of healthcare program | 982 | (918) |
Sensitivity of the service cost |
|
|
Impacts on the obligations of the pension | (64) | 98 |
Impacts on the obligations of healthcare program | (2,260) | 2,260 |
24.5.9 Benefits payable
The estimated benefits to be paid by the Company in the next five years and the total benefits for the following fiscal years are shown below:
| Unified Plan | Plan III | Assistance Plan | Total |
2019 | 354,069 | 148,236 | 47,519 | 549,824 |
2020 | 340,372 | 192,004 | 52,063 | 584,439 |
2021 | 326,924 | 198,083 | 51,821 | 576,828 |
2022 | 313,390 | 199,913 | 51,146 | 564,449 |
2023 | 300,346 | 198,714 | 49,950 | 549,010 |
2024 a 2048 | 3,072,612 | 3,110,140 | 645,610 | 6,828,362 |
24.5.10 Asset allocation and investment strategy
The asset allocation for the Company pension and healthcare plans at the end of 2018 and the allocation goal for 2019, by asset category, are shown below:
| Goal for 2019 | 2018 |
Fixed income | 77.8% | 87.8% |
Variable income | 5.7% | 7.0% |
Loans | 2.0% | 1.6% |
Real estate | 3.8% | 1.6% |
Investment structuring | 8.1% | 2.0% |
Foreign investments | 2.6% | 0.0% |
| 100.0% | 100.0% |
F-83
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
In addition, information on the allocation of assets of pension plans sponsored by the Company:
| Unified Plan | Plan III | ||
| target (%)(*) | minimum (%) | target (%) | minimum (%) |
Fixed income | 91.0% | 57.0% | 60.0% | 33.0% |
Variable income | 2.5% | 1.0% | 10.0% | 7.0% |
Loans | 0.5% | 0.0% | 4.0% | 1.0% |
Real estate | 3.0% | 1.0% | 5.0% | 0.0% |
Investment structuring | 3.0% | 0.0% | 15.0% | 0.0% |
Foreign investments | 0.0% | 0.0% | 6.0% | 0.0% |
(*) Target based on the total investment of each plan. | ||||
Management of Fundação Copel decided to keep a more conservative approach investing in variable income in relation to the allowed legal limit, which is 70%. |
As of December 31, 2018 and 2017, the pension plan assets included the following securities issued by Copel:
| Social Security Plans | |||
Unified Plan | Plan III | |||
| 31.12.2018 | 31.12.2017 | 31.12.2018 | 31.12.2017 |
Debentures | - | - | 4,166 | 6,729 |
Shares | 5 | - | 13 | - |
| 5 | - | 4,179 | 6,729 |
24.5.11 Additional information
The Company made contributions to Plan III (variable contribution plan) for all active employees at December 31, 2018 and 2017, in the amounts of R$ 77,797 and R$ 80,727, respectively.
25 Sectorial Charges Due
| 12.31.2018 | 12.31.2017 |
Energy Development Account - CDE | 73,549 | 121,912 |
Tariff flags | - | 22,427 |
Global Reversal Reserve - RGR | 6,323 | 5,686 |
| 79,872 | 150,025 |
26 Research and Development and Energy Efficiency
In accordance with Law No. 9,991/2000 and supplementary regulations, concession operators and licensees of electric power generation and transmission are required to allocate annually the percentage of 1% of their net operating regulatory revenue to research and development of the electricity sector activities, and the electric power distribution concession operators must segregate this same percentage into the research and development and energy efficiency programs of the electricity sector.
F-84
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
26.1 Balances recognized for investment in Research and Development (R&D) activities and the Energy Efficiency Program (EEP)
| Amounts payable, before any related prepayments | Amounts payable to regulatory agencies | Other amounts payable |
|
|
| 12.31.2018 | 12.31.2017 | |||
Research and Development - R&D |
|
|
|
|
|
National Fund for Scientific and Technological Development - FNDCT | - | 4,725 | - | 4,725 | 5,232 |
Ministry of Mines and Energy-MME | - | 2,361 | - | 2,361 | 2,616 |
R&D | 129,159 | - | 198,467 | 327,626 | 316,121 |
129,159 | 7,086 | 198,467 | 334,712 | 323,969 | |
Energy efficiency program - EEP |
|
|
|
|
|
National Program of Electricity Conservation - Procel | - | 15,792 | - | 15,792 | 6,041 |
EEP | 22,326 | - | 219,905 | 242,231 | 202,465 |
| 22,326 | 15,792 | 219,905 | 258,023 | 208,506 |
| 151,485 | 22,878 | 418,372 | 592,735 | 532,475 |
Current | 270,429 | 282,766 | |||
|
|
| Noncurrent | 322,306 | 249,709 |
26.2 Changes in R&D and EEP balances
| FNDCT | MME | R&D | Procel | EEP | Total |
Balance as of January 1, 2017 | 4,603 | 2,302 | 294,088 | 4,932 | 177,964 | 483,889 |
Additions | 29,956 | 14,978 | 29,956 | 8,500 | 34,000 | 117,390 |
Performance agreement | - | - | - | - | 1,363 | 1,363 |
Selic interest rate (Note 33) | - | - | 19,544 | (128) | 14,929 | 34,345 |
Payments | (29,327) | (14,664) | - | (7,263) | - | (51,254) |
Concluded projects | - | - | (27,467) | - | (25,791) | (53,258) |
Balance as of December 31, 2017 | 5,232 | 2,616 | 316,121 | 6,041 | 202,465 | 532,475 |
Effect of acquisition of control |
|
|
|
|
| |
of Costa Oeste and Marumbi | 23 | 9 | 467 | - | - | 499 |
Additions | 31,186 | 15,595 | 31,188 | 9,067 | 36,270 | 123,306 |
Performance agreement | - | - | - | - | 2,063 | 2,063 |
Selic interest rate (Note 33) | - | - | 12,627 | 684 | 12,096 | 25,407 |
Payments | (31,716) | (15,859) | - | - | - | (47,575) |
Concluded projects | - | - | (32,777) | - | (10,663) | (43,440) |
Balance as of December 31, 2018 | 4,725 | 2,361 | 327,626 | 15,792 | 242,231 | 592,735 |
F-85
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
27 Accounts Payable Related to Concessions
|
|
|
|
| Discount | Annual |
|
|
| Company | Grant | Signature | Closing | Rate | Adjustment | 12.31.2018 | 12.31.2017 |
(1) HPP Mauá | Copel GeT | 06.29.2007 | 07.03.2007 | 07.2042 | 5.65% p.y. | IPCA | 16,709 | 16,384 |
(2) HPP Colider | Copel GeT | 12.29.2010 | 01.17.2011 | 01.2046 | 7.74% p.y. | IPCA | 23,864 | 23,188 |
(3) HPP Baixo Iguaçu | Copel GeT | 07.19.2012 | 08.20.2012 | 01.2047 | 7.74% p.y. | IPCA | 7,412 | 6,977 |
(4) SHP Cavernoso | Copel GeT | 07.11.2013 | 07.11.2013 | 07.2018 | 7.74% p.y. | IPCA | - | 27 |
(5) HPP Apucaraninha | Copel GeT | 07.11.2013 | 07.11.2013 | 07.2018 | 7.74% p.y. | IPCA | - | 185 |
(6) HPP Chaminé | Copel GeT | 07.11.2013 | 07.11.2013 | 07.2018 | 7.74% p.y. | IPCA | - | 320 |
(7) HPP Derivação Rio Jordão | Copel GeT | 07.11.2013 | 02.24.2014 | 02.2019 | 7.74% p.y. | IPCA | 47 | 313 |
(8) HPP Fundão e HPP Santa Clara | Elejor | 10.23.2001 | 10.25.2001 | 10.2036 | 11.00% p.y. | IGPM | 536,131 | 507,560 |
|
|
|
|
|
|
| 584,163 | 554,954 |
|
|
|
|
|
| Current | 67,858 | 62,624 |
|
|
|
|
|
| Noncurrent | 516,305 | 492,330 |
Discount rate in the calculation of the present value | ||||||||
Real and net discount rate, compatible with the estimated long-term rate, not being linked to the expectation of returnfrom the project. | ||||||||
Payment to the Union | ||||||||
Monthly Instalments equivalent to 1/12 of the annual adjusted payment, according to the concession contract. |
27.1 Nominal value and present value of accounts payable related to concessions
| Nominal value | Present value |
2019 | 68,001 | 67,858 |
2020 | 66,754 | 60,138 |
2021 | 66,754 | 54,296 |
2022 | 66,754 | 49,025 |
After 2022 | 1,027,917 | 352,846 |
| 1,296,180 | 584,163 |
27.2 Changes in accounts payable related to concessions
|
|
Balance as of January 1, 2017 | 565,542 |
Additions | 678 |
Adjust to present value | 1,432 |
Monetary variations | 53,173 |
Payments | (65,871) |
Balance as of December 31, 2017 | 554,954 |
Additions | 302 |
Adjust to present value | (114) |
Monetary variations | 93,386 |
Payments | (64,365) |
Balance as of December 31, 2018 | 584,163 |
F-86
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
28 Other Accounts Payable
| 12.31.2018 | 12.31.2017 |
Customers (a) | 70,713 | 33,380 |
Obligations to customers in gas sales operations | 55,048 | 33,221 |
Investment acquisition | 32,200 | 12,307 |
Public lighting rate collected | 28,337 | 24,101 |
Aneel Order No. 084/2017 provision | 24,314 | 22,132 |
Financial offset for the use of water resources | 20,820 | 21,467 |
Fair value in the purchase and sale of power in the active market (NE nº 35.2.12) | 11,007 | - |
Pledges in guarantee | 10,026 | 8,837 |
Reimbursements to customer contributions | 5,036 | 5,481 |
Other liabilities | 51,523 | 33,328 |
| 309,024 | 194,254 |
Current | 192,070 | 121,405 |
Noncurrent | 116,954 | 72,849 |
(a) Of the balance of Customers, R$32,639 refers to amounts transferred from the Federal Government to Copel, in accordance with ANEEL Directive Release No. 565/2018, for the reimbursement of consumers due to the exceeding amount collected from the Net Operating Revenue in the period from January 2010 to December 2012. |
29 Provisions for Legal Claims and Contingent Liabilities
The Company is defendant in various judicial and administrative proceedings before different courts. Based on assessments made by the Company’s legal counsel, Management makes provisions for legal claims in which losses are rated probable, thus meeting the criteria for recognition of provisioning described in Note 4.11.
The Company’s Management believes that it is not practicable to provide information regarding the expected timing of any cash outflows resulting from these lawsuits in which the Company and its subsidiaries are involved, due to the slow pace and unpredictability of Brazilian legal, tax and regulatory systems, and since final resolution of the proceedings for which a provision has been registered depends on the conclusions of court proceedings. Therefore, this information is not being provided.
F-87
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
29.1 Provision for tax and civil risks
29.1.1 Changes in provisions for legal claims rated as involving probable losses
|
| Income |
|
|
|
| ||
| Provision | Construction |
|
|
|
| ||
Balances as of | for litigations | cost | Additions |
| Transfers/ | Balances as of | ||
| January 1, 2018 | Additions | Reversals | Additions/(Rev.) | to assets | Discharges | Others | December 31, 2018 |
Tax |
|
|
|
|
|
|
|
|
Cofins (a) | 79,748 | 22,855 | - | - | - | - | - | 102,603 |
Others (b) | 58,793 | 7,722 | (26,695) | - | - | (6,325) | 20,999 | 54,494 |
138,541 | 30,577 | (26,695) | - | - | (6,325) | 20,999 | 157,097 | |
Labors (c) | 475,631 | 232,195 | (2,400) | - | - | (92,644) | - | 612,782 |
Employee benefits (d) | 89,439 | 11,089 | (10,062) | - | - | (5,267) | - | 85,199 |
Civil |
|
|
|
|
|
|
|
|
Civil and administrative claims (e) | 527,613 | 119,633 | (118,652) | - | - | (36,005) | 345 | 492,934 |
Easements (f) | 110,936 | 2,179 | (305) | (4,600) | 8,477 | (1,474) | 2,934 | 118,147 |
Expropriations and property (g) | 95,627 | 156 | (1,350) | 4,032 | 18,168 | (232) | - | 116,401 |
Customers (h) | 8,377 | 464 | (1,469) | - | - | (2,163) | - | 5,209 |
Environmental (i) | 1,584 | 2,570 | (562) | - | - | (61) | - | 3,531 |
744,137 | 125,002 | (122,338) | (568) | 26,645 | (39,935) | 3,279 | 736,222 | |
Regulatory (j) | 64,316 | 9,296 | (139) | - | - | - | - | 73,473 |
| 1,512,064 | 408,159 | (161,634) | (568) | 26,645 | (144,171) | 24,278 | 1,664,773 |
Current | 112,000 | Current | - | |||||
Noncurrent | 1,400,064 |
|
|
|
|
| Noncurrent | 1,664,773 |
|
| Income |
|
|
|
| ||
Balances as of | Provision for litigations | Construction cost |
|
|
| Balances as of | ||
| January 1,2017 | Additions | Reversals | Additions | Additions to assets | Discharges | Transfers | December 31, 2017 |
Tax |
|
|
|
|
|
|
|
|
Cofins (a) | 93,892 | 8,888 | (23,032) | - | - | - | - | 79,748 |
Others (b) | 142,985 | 21,890 | (113,739) | - | - | (433) | 8,090 | 58,793 |
236,877 | 30,778 | (136,771) | - | - | (433) | 8,090 | 138,541 | |
Labors (c) | 458,901 | 122,992 | (18,518) | - | - | (87,744) | - | 475,631 |
Employee benefits (d) | 42,366 | 61,765 | (7,194) | - | - | (7,498) | - | 89,439 |
Civil |
|
|
|
|
|
|
|
|
Civil and administrative claims (e) | 295,484 | 255,280 | (3,240) | - | - | (28,074) | 8,163 | 527,613 |
Easements (f) | 99,380 | 4,593 | - | 4,503 | 2,641 | (181) | - | 110,936 |
Expropriations and property (g) | 65,712 | 848 | (701) | 24,285 | 5,499 | (16) | - | 95,627 |
Customers (h) | 5,228 | 3,884 | (286) | - | - | (449) | - | 8,377 |
Environmental (i) | 1,432 | 960 | (808) | - | - | - | - | 1,584 |
467,236 | 265,565 | (5,035) | 28,788 | 8,140 | (28,720) | 8,163 | 744,137 | |
Regulatory (j) | 67,958 | 1,648 | (5,290) | - | - | - | - | 64,316 |
| 1,273,338 | 482,748 | (172,808) | 28,788 | 8,140 | (124,395) | 16,253 | 1,512,064 |
Current | 112,000 | |||||||
|
|
|
|
|
|
| Noncurrent | 1,400,064 |
29.1.2 Description of nature and/or details of the principal lawsuits
a) Contribution for Social Security Funding (COFINS)
Plaintiff:Federal Revenue of Brazil
Cofins payables and respective interest and fines from August 1995 to December 1996 due to the termination of a judicial decision that had recognized the Company’s exemption from Cofins.
Current status: awaiting judgment.
F-88
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
b) Other tax provisions
Lawsuits relating to federal, state and municipal taxes, fees and other charges.
c) Labor
Labor claims comprise claims filed by employees and former employees of Copel and its subsidiaries in connection with the payment of overtime differences, hazardous working conditions, transfer bonuses, salary equality/reclassification and other matters, and also claims by former employees of contractors and third- parties (secondary responsibility) involving indemnity and other matters.
d) Employee benefits
Labor claims comprise claims filed by retired former employees of the Company and its wholly-owned Controlled Companies against the Copel Foundation, which will have consequential impact on the Company and its wholly-owned subsidiaries, since additional contributions will be required.
e) Civil and administrative claims
Lawsuits involving billing, irregular procedures, administrative contracts and contractual fines, indemnity for accidents with the electric power network or vehicles.
The balance also contains amounts being discussed by arbitration under confidentiality, in the discovery phase, with no decision having been handed down to date.
The principal lawsuit is described below:
Plaintiff: Tradener Ltda. | Estimated amount:R$ 128,481 |
Class lawsuit No. 588/2006 has already been rendered final and unappeasable, and the ruling recognized as valid commissions payable by the Company to Tradener. In the civil public lawsuit No. 0000219- 78.2003.8.16.0004, filed by the Prosecution Office, a decision has also been rendered ruling on the absence of irregularities in the electric power purchase agreement. Therefore, Tradener brought recovery lawsuits, seeking to receive its commissions.
Current status: Case record 0005990.22.2012.8.16.0004 - the Company was ordered to pay the amount of R$ 107,955, the restated amount by reference to the INPC/IBGE variation, from the maturity of the commissions, plus interest of 1% per month, as from the date of notification (October 31, 2012), as well as attorneys’fees. The Company filed an appeal against this decision, however, on November 8, 2016, by majority voting, the Court dismissed the appeal. Copel filed an application for Clarification of Ruling, which was partially granted for the ruling obscurity to be dispelled, although without changing the result of the appeal. Copel filed a Special Appeal, which was dismissed. Copel filed an Appeal to the Higher Court of Justice, which is pending judgment.
F-89
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
f) Easements
Lawsuits are filed challenging expropriation when there is a difference between the amount determined by Copel for payment and the amount claimed by the property owner and/or when the owner's documentation supporting title to the property may not be registered (when probate proceedings are still in progress, properties have no registry number with the land registry, etc.).
Cases may also arise from intervention in third-party adverse possession, either as a confronter, or in case of a property where there are areas of easement of passage, in order to preserve the limits and boundaries of expropriated areas.
g) Expropriations and property
Lawsuits are filed challenging expropriation when there is a difference between the amount determined by Copel for payment and the amount claimed by the property owner and/or when the owner's documentation supporting title to the property may not be registered (in case probate proceedings are still in progress, properties have no registry number with the land registry, etc.).
Possessory lawsuits include those for repossession of property owned by the concession operator. Litigation arises when there is a need to repossess properties invaded or occupied by third parties in areas owned by the Company. Cases may also arise from intervention in third-party adverse possession, or owners or occupants of contiguous properties or even in cases of properties to preserve limits and boundaries of expropriated areas.
The main lawsuits are as follows:
Plaintiff: property owner | Estimated value: R$ 39,399 |
Expropriation lawsuit for construction of electric substation discussing the indemnity amount.
Current status: lawsuit awaiting judgment at higher court.
Plaintiff: property owner | Estimated value: R$ 22,449 |
Lawsuit for the expropriation of the area used for the reservoir of the Mauá Plant filed by Consórcio Energético Cruzeiro do Sul, in which Copel GeT participates with 51%, which discusses the indemnity amount of the property that is in a submerged part.
Current status: Lower court decision, motions to clarify were filed, which have not yet been judged.
F-90
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
h) Consumers
Lawsuits seeking compensation for damages caused in household appliances, industrial and commercial machines, lawsuits claiming damages for pain and suffering caused by service interruption and lawsuits filed by industrial consumers challenging the lawfulness of the increase in electricity prices while Plano Cruzado (anti-inflation economic plan) was in effect and claiming reimbursement for the amounts paid by the Company.
i) Environmental
Class lawsuits whose purpose is to obstruct the progress of environmental licensing for new projects or to recover permanent preservation areas located around the hydroelectric power plant dams unlawfully used by private individuals. If the outcome of the lawsuits is unfavorable to the Company, Management estimates only the cost to prepare new environmental studies and to recover the areas owned by Copel GeT.
They also include the Commitment Agreements (TAC), which refer to the commitments agreed-upon and approved between the Company and the relevant bodies for noncompliance with any condition provided for by the Installation and Operating Licenses.
j) Regulatory
The Company is challenging, both at the administrative and judicial levels, notifications issued by the Regulatory Agency of alleged violations against regulations. The principal action is described below:
Plaintiffs: Companhia Estadual de Energia Elétrica - CEEE and Dona Francisca Energética S.A.
Estimated amount: R$ 53.120
Copel, Copel GeT and Copel DIS are challenging lawsuits filed against ANEEL's decision No. 288/2002 involving these companies.
Current status: awaiting judgment.
29.2 Contingent liabilities
29.2.1 Classification of lawsuits rated as possible losses
Contingent liabilities are present obligations arising from past events for which no provisions are recognized because it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation. The following information concerns the nature of the Company’s contingent liabilities and potential losses arising therefrom:
F-91
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
|
|
|
| 12.31.2018 | 12.31.2017 |
Tax (a) | 568,512 | 858,082 |
Labor (b) | 311,777 | 360,322 |
Employee benefits (c) | 19,099 | 20,262 |
Civil (d) | 1,286,466 | 1,091,122 |
Regulatory (e) | 866,836 | 793,720 |
| 3,052,690 | 3,123,508 |
29.2.2 Description of nature and/or details of the principal lawsuits
a) Tax
Lawsuits relating to federal, state and municipal taxes, fees and other charges in which the Company challenges their applicability, calculation bases and amounts due to be collected. The main lawsuits are as follows:
Plaintiff: National Institute of Social Security (INSS) | Estimated amount:R$ 108,493 |
Tax requirements related to the social security contribution.
Current status: awaiting judgment in the Administrative Council of Tax Appeals - CARF.
Plaintiff: State Tax Authority (SEFAZ) | Estimated amount:R$ 78,402 |
Copel Distribution received tax deficiency notice 6.587.156-4 from the State of Paraná for allegedly failing to pay ICMS (VAT) tax on the‘metered demand’line in the electricity bills issued to a major consumer between May 2011 and December 2013.
The Company maintains its illegitimacy to appear in the taxable position of this tax assessment, since it was not included in the judicial proceeding, thus it cannot suffer the effects of the ruling rendered thereon, which would entail its illegitimacy to appear as liable taxpayer in tax deficiency notice 6.587.156-4.
Plaintiff:Copel | Estimated amount:R$ 76,475 |
Tax Requirement on Urban Territorial Property - IPTU on properties affected by the public electricity service. The case is pending judgment at first instance.
Plaintiff:City Hall | Estimated amount:R$ 55,735 |
City halls tax requirement as ISS in construction services provided by third parties. Current status: awaiting the decision on the appeal.
Plaintiff:Brazilian Federal Revenue Office | Estimated amount:R$ 116,086 |
F-92
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
Requirement and administrative question related to federal taxes, mostly still pending management review.
b) Labor
Labor claims comprise claims filed by employees and former employees of Copel and its subsidiaries in connection with the payment of overtime differences, hazardous working conditions, transfer bonuses, salary equality/reclassification, and other matters, and also claims by former employees of contractors and third- parties (secondary responsibility) involving indemnity and other matters.
c) Employee benefits
Labor claims comprise claims filed by retired former employees of the Company and its wholly-owned subsidiaries against the Copel Foundation, which will have consequential impact on the Company and its wholly-owned subsidiaries, since additional contributions will be required.
d) Civil
Lawsuits involving billing, irregular procedures, administrative contracts and contractual fines, indemnity for accidents with the electric power network or vehicles, easements of passage, expropriations, patrimonial and environmental.
The balance also contains amounts being discussed by arbitration under confidentiality, in the discovery phase, with no decision having been handed down to date.
The main lawsuits are as follows:
Plaintiff: Mineradora Tibagiana Ltda. | Estimated amount:R$ 172,583 |
Lawsuit claiming compensation for alleged losses when this mining company was involved in the construction of the Mauá plant by the Energético Cruzeiro do Sul consortium in which Copel GeT has a 51% stake. The action challenges the validity of the mining permit granted by Mineradora Tibagiana for the Mauá job site and the indemnifying effects arising therefrom.
Current status: action awaiting judgment by lower court.
Plaintiff:franchises of the Agency/Copel store | Estimated amount:R$ 44,717 |
Filing of two individual claims against Copel Distribuição regarding the franchise contracts of Copel branches/stores, with the main petition claiming an extension of the term of the contract and secondary petition to recognize the existence of a sub concession, with transfer of the services provided and full pass-through of the fees, amongst other amounts, with related appeals currently awaiting trial.
Current status: awaiting judgment.
Plaintiff: Copel Distribuição | Estimated amount:R$ 78,277 |
F-93
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
The Department of Roads and Roadworks - DER issued a tax assessment notice to Copel Distribuição, as a consequence, the Company filed a lawsuit challenging DER’s Charge for Use or Occupancy of Highway Domain Range, since the Company understands that this charge is unconstitutional because it has a confiscatory nature. Currently, the process awaits decision on the production of expert evidence.
e) Regulatory
The Company is challenging, both at the administrative and judicial levels, notifications issued by the Regulatory Agency of alleged violations against regulations. The principal action is described below:
Plaintiff: Energia Sustentável do Brasil S.A. - ESBR | Estimated amount:R$ 729,609 |
ESBR filed Ordinary Lawsuit No. 10426-71.2013.4.01.4100 against ANEEL in the federal courts of Rondônia, the decision on which: (i) excludes liability for the 535-day schedule overrun in the construction of the Jirau Hydropower Station; (ii) declares any obligations, penalties and costs imposed on ESBR as a result of the schedule overrun to be unenforceable, and (iii) annuls ANEEL Resolution No. 1,732/2013, which recognized a schedule overrun of only 52 days. An appeal has been brought by ANEEL, pending judgment by the TRF of the 1st Region.
The practical outcome of the decision is that, by exempting ESBR, it exposed the distribution utilities with which it had concluded regulated power trading contracts (CCEARs), including Copel DIS, to the spot market and spot prices during the period. The reason is that electricity trading rules require that all electricity consumed be covered by a contract.
If the lawsuits are judged unfavorably against Copel, the amount will be classified as Sectorial Financial Asset to be recovered through tariff rates.
30 Equity
30.1 Capital
Capital consists of common and preferred shares. Each common share entitles its holder to one vote in the general shareholders’meetings. Preferred shares do not have voting rights and have two classes“A”and“B”.
According to Article 17 and following paragraphs of Federal Law No. 6,404/76, dividends paid to preferred shares must be at least 10% higher than those paid to common shares.
Class“A”preferred shares have priority in the reimbursement of capital and in the distribution of minimum dividends of 10% p.a. (non-cumulative), calculated based on the capital represented by this class of shares.
F-94
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
Class“B”preferred shares have priority in the reimbursement of capital and the right to the distribution of dividends, calculated as 25% of adjusted profit or loss for the year, pursuant to the corporate legislation and to the Company’s by-laws, calculated proportionately to the capital represented by the shares of this class. Dividends for Class“B”have priority only over the common shares and are only paid out of the remaining profits payment of priority dividends of class“A”shares.
The paid-in share capital is R$ 7,910,000. The different classes of shares (with no par value) and main shareholders are detailed below:
| Number of shares in units | |||||||
Shareholders | Common | Class "A” Preferred | Class “B” preferred | Total | ||||
| in share | % | in share | % | in share | % | in share | % |
State of Paraná | 85,028,598 | 58.63 | - | - | - | - | 85,028,598 | 31.07 |
BNDES | 38,298,775 | 26.41 | - | - | 27,282,006 | 21.26 | 65,580,781 | 23.96 |
Eletrobrás | 1,530,774 | 1.06 | - | - | - | - | 1,530,774 | 0.56 |
Free float: | - | - | - | - | - | - |
| - |
B3 | 19,186,634 | 13.23 | 76,763 | 23.36 | 69,782,600 | 54.39 | 89,045,997 | 32.54 |
NYSE | 649,508 | 0.45 | - | - | 30,973,304 | 24.15 | 31,622,812 | 11.56 |
Latibex | - | - | - | - | 208,846 | 0.16 | 208,846 | 0.08 |
Municipalities | 178,393 | 0.12 | 9,326 | 2.84 | 3,471 | - | 191,190 | 0.07 |
Other shareholders | 158,398 | 0.10 | 242,538 | 73.80 | 45,441 | 0.04 | 446,377 | 0.16 |
| 145,031,080 | 100.00 | 328,627 | 100.00 | 128,295,668 | 100.00 | 273,655,375 | 100.00 |
30.2 Equity valuation adjustments
Fair values of fixed assets–deemed costs–were recognized on the first-time adoption of IFRS. The line item“Equity value adjustments”was the balancing item of this adjustment, net of deferred income tax and social contribution. The realization of such adjustments is recorded in the retained earnings line item, to the extent of the depreciation or possible disposal of the measured fixed assets.
Adjustments arising from the changes in fair value involving financial assets, as well as actuarial gains and losses, are also recorded in this line item.
F-95
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
| Equity | Accumulated Other | Total |
As of January 1, 2016 | 1,051,044 | 126,328 | 1,177,372 |
Adjustments to financial assets available for sale |
| ||
Financial investments | - | (2) | (2) |
Equity interest investments | - | 3,614 | 3,614 |
Taxes on adjustments | - | (1,229) | (1,229) |
Adjustments related to actuarial liabilities |
|
| |
Post employment benefits | - | (88,906) | (88,906) |
Taxes on adjustments | - | 30,174 | 30,174 |
Post employment benefits - equity | - | (852) | (852) |
Realization of equity evaluation adjustment |
|
| |
Deemed cost of fixed assets | (154,102) | - | (154,102) |
Taxes on the adjustments | 52,395 | - | 52,395 |
Actuarial liabilities - investment realization | (19,933) | - | (19,933) |
Attributed to non-controlling interest | - | (65) | (65) |
As of December 31, 2016 | 929,404 | 69,062 | 998,466 |
Adjustments to financial assets available for sale |
| ||
Financial investments | - | 3 | 3 |
Taxes on adjustments | - | (1) | (1) |
Equity interest investments | - | 26,135 | 26,135 |
Taxes on adjustments | - | (8,887) | (8,887) |
Adjustments related to actuarial liabilities |
|
| |
Post employment benefits | - | (46,506) | (46,506) |
Taxes on adjustments | - | 16,827 | 16,827 |
Realization of equity evaluation adjustment |
|
| |
Deemed cost of fixed assets | (108,561) | - | (108,561) |
Taxes on the adjustments | 36,911 | - | 36,911 |
Gains on Investments in equity investments (Note 16.1) | - | (28,650) | (28,650) |
Taxes on adjustments | - | 9,741 | 9,741 |
Attributed to non-controlling interest | - | 123 | 123 |
As of December 31, 2017 | 857,754 | 37,847 | 895,601 |
Adjustments related to actuarial liabilities |
|
| |
Post employment benefits | - | (58,354) | (58,354) |
Taxes on adjustments | - | 19,994 | 19,994 |
Realization of equity evaluation adjustment |
|
| |
Deemed cost of fixed assets | (101,645) | - | (101,645) |
Taxes on the adjustments | 34,559 | - | 34,559 |
Reclassification by the adoption of IFRS 9 |
|
| - |
Equity interest investments | - | (4,391) | (4,391) |
Attributed to non-controlling interest | - | (154) | (154) |
As of December 31, 2018 | 790,668 | (5,058) | 785,610 |
30.3 Legal reserve and profit retention reserve
The amount of 5% of profit for the year is allocated to the legal reserve, before any other allocation, limited to 20% of capital.
The profit retention reserve is earmarked for covering the Company's investment program, according to Article 196 of Law No. 6,404/1976. It is funded by retaining the remaining profit or loss after setting up the legal reserve, interest on capital and dividends proposed.
F-96
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
30.4 Proposed dividend distribution
| 12.31.2018 | 12.31.2017 | 12.31.2016 |
Calculation of minimum mandatory dividend (25%) - (1) |
|
|
|
Net income for the year | 1,407,063 | 1,033,626 | 958,650 |
Legal Reserve (5%) | (70,353) | (51,681) | (47,933) |
Realization of equity evaluation adjustment | 67,086 | 71,650 | 101,707 |
Calculation basis for minimum mandatory dividends | 1,403,796 | 1,053,595 | 1,012,424 |
350,949 | 263,399 | 253,106 | |
|
|
| |
Total proposed distribution - (2) (3 + 5) | 378,542 | 289,401 | 282,947 |
|
|
| |
Interest on own capital, net - (3) | 280,000 | 266,000 | 282,947 |
Tax on interest on own capital | (27,593) | (26,002) | (29,841) |
Interest on own capital, net - (4) | 252,407 | 239,998 | 253,106 |
|
|
| |
Dividends proposed - (5) | 98,542 | 23,401 | - |
|
|
| |
Total proposed distribution, net - (6) (4 + 5) | 350,949 | 263,399 | 253,106 |
|
|
| |
Gross value of dividends per share: |
|
|
|
Ordinary shares | 1.31950 | 1.00801 | 0.98539 |
Class “A” preferred shares | 2.89050 | 2.89050 | 2.89050 |
Class “B” preferred shares | 1.45151 | 1.10883 | 1.08410 |
|
|
| |
Gross amount of dividends per class of shares: |
|
|
|
Ordinary shares | 191,369 | 146,193 | 142,912 |
Class “A” preferred shares | 950 | 950 | 949 |
Class “B” preferred shares | 186,223 | 142,258 | 139,086 |
In accordance with the legal and statutory provisions in effect, the basis for calculating mandatory dividends is obtained from net income, less the quota allocated to the legal reserve. However, Management decided to add to the calculation basis the realization of the equity valuation adjustments, which is dealt with in IAS 16, 40 and IFRS 1, in order to void the effect of the increase in depreciation expense arising from the adoption accounting standards, as well as IAS 16 - Property, Plant and Equipment. This procedure reflects the Company's shareholder remuneration policy, which will be practiced during the realization of the entire reserve for equity valuation adjustments.
The distribution of the minimum mandatory dividend isincluded in Dividend payable in the Company’s financial statements at year-end.
The tax benefit of interest on capital is recorded in the statement of income upon its recognition in accounts payable.
F-97
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
30.5 Earnings per share - basic and diluted
| 12.31.2018 | 12.31.2017 | 12.31.2016 |
Basic and diluted numerator |
|
|
|
Basic and diluted earnings allocated by classes of shares, allocated to controlling shareholders: |
|
|
|
Common shares | 712,234 | 523,206 | 453,427 |
Class “A” preferred shares | 1,775 | 1,304 | 1,197 |
Class “B” preferred shares | 693,054 | 509,116 | 441,148 |
1,407,063 | 1,033,626 | 895,772 | |
Basic and diluted denominator |
|
|
|
Weighted average of shares (in thousands): |
|
|
|
Common shares | 145,031,080 | 145,031,080 | 145,031,080 |
Class “A” preferred shares | 328,627 | 328,627 | 348,531 |
Class “B” preferred shares | 128,295,668 | 128,295,668 | 128,275,764 |
273,655,375 | 273,655,375 | 273,655,375 | |
Basic and diluted earnings per share attributable to shareholders of parent company |
|
|
|
Common shares | 4.91091 | 3.60754 | 3.12641 |
Class “A” preferred shares | 5.40201 | 3.96830 | 3.43906 |
Class “B” preferred shares | 5.40201 | 3.96830 | 3.43906 |
31 Net Operating Revenue
| Gross | PIS/Pasep |
| Sectorial | Service tax | Net revenues |
| revenues | and Cofins | ICMS (VAT) | charges (31.2) | (ISSQN) | 12.31.2018 |
Electricity sales to final customers | 10,104,045 | (931,771) | (2,315,030) | (1,308,660) | - | 5,548,584 |
Residential | 3,262,212 | (301,885) | (892,053) | (471,575) | - | 1,596,699 |
Industrial | 2,863,086 | (261,692) | (486,614) | (260,416) | - | 1,854,364 |
Trade, services and other activities | 2,172,540 | (201,047) | (625,123) | (313,744) | - | 1,032,626 |
Rural | 897,606 | (83,064) | (71,665) | (131,494) | - | 611,383 |
Public entities | 263,827 | (24,415) | (52,208) | (38,337) | - | 148,867 |
Public lighting | 279,767 | (25,890) | (80,768) | (40,399) | - | 132,710 |
Public service | 365,007 | (33,778) | (106,599) | (52,695) | - | 171,935 |
Electricity sales to distributors | 3,136,244 | (318,368) | - | (51,960) | - | 2,765,916 |
Bilateral contracts | 2,002,077 | (242,828) | - | (34,759) | - | 1,724,490 |
Electric Energy Trade Chamber - CCEE | 663,024 | (23,448) | - | (11,511) | - | 628,065 |
CCEAR (auction) | 327,759 | (39,753) | - | (5,690) | - | 282,316 |
Interest (Note 10.3) | 85,986 | - | - | - | - | 85,986 |
Quota system | 57,398 | (12,339) | - | - | - | 45,059 |
Use of the main distribution and transmission grid | 6,867,274 | (657,679) | (1,643,593) | (1,096,942) | - | 3,469,060 |
Residential | 2,222,621 | (209,406) | (624,777) | (371,351) | - | 1,017,087 |
Industrial | 1,179,534 | (104,588) | (436,421) | (184,179) | - | 454,346 |
Trade, services and other activities | 1,416,111 | (132,444) | (425,030) | (234,558) | - | 624,079 |
Rural | 363,296 | (34,180) | (28,206) | (61,378) | - | 239,532 |
Public entities | 185,383 | (17,466) | (35,497) | (31,146) | - | 101,274 |
Public lighting | 184,530 | (17,386) | (53,502) | (30,814) | - | 82,828 |
Public service | 141,556 | (13,337) | (40,160) | (23,647) | - | 64,412 |
Free consumers | 795,105 | (74,912) | - | (135,166) | - | 585,027 |
Basic network, BN connections, and connection grid | 1,411 | (133) | - | (240) | - | 1,038 |
Operating and maintenance income - O&M | 58,578 | (25,526) | - | (11,536) | - | 21,516 |
Interest income | 319,149 | (28,301) | - | (12,927) | - | 277,921 |
Construction income | 1,097,313 | - | - | - | - | 1,097,313 |
Fair value of assets from the indemnity for the concession | 47,499 | - | - | - | - | 47,499 |
Telecommunications | 512,540 | (19,248) | (125,229) | - | (1,884) | 366,179 |
Distribution of piped gas | 753,222 | (69,382) | (126,530) | - | (124) | 557,186 |
Sectorial financial assets and liabilities result | 985,344 | (91,656) | - | - | - | 893,688 |
Other operating revenue | 222,329 | (29,696) | - | - | (3,278) | 189,355 |
Leasing and rent (31.1) | 132,682 | (17,722) | - | - | - | 114,960 |
Income from rendering of services | 59,280 | (7,918) | - | - | (3,278) | 48,084 |
Charged service | 18,475 | (2,468) | - | - | - | 16,007 |
Other income | 11,892 | (1,588) | - | - | - | 10,304 |
| 23,725,810 | (2,117,800) | (4,210,382) | (2,457,562) | (5,286) | 14,934,780 |
CCEAR - Agreements for Power Trade on the Regulated Market |
F-98
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
| Gross | PIS/Pasep |
| Sectorial | Service tax | Net revenues |
| revenues | and Cofins | ICMS (VAT) | charges (31.2) | (ISSQN) | 12.31.2017 |
Electricity sales to final customers | 8,689,516 | (749,683) | (2,039,245) | (1,219,055) | - | 4,681,533 |
Residential | 2,829,626 | (242,916) | (771,902) | (433,080) | - | 1,381,728 |
Industrial | 2,382,314 | (208,226) | (433,088) | (252,531) | - | 1,488,469 |
Trade, services and other activities | 1,908,426 | (163,834) | (548,328) | (291,798) | - | 904,466 |
Rural | 772,465 | (66,314) | (75,137) | (119,645) | - | 511,369 |
Public entities | 236,719 | (20,322) | (46,506) | (36,418) | - | 133,473 |
Public lighting | 244,381 | (20,979) | (70,811) | (37,359) | - | 115,232 |
Public service | 315,585 | (27,092) | (93,473) | (48,224) | - | 146,796 |
Electricity sales to distributors | 3,529,770 | (300,003) | - | (53,413) | - | 3,176,354 |
Bilateral contracts | 1,947,862 | (203,994) | - | (30,656) | - | 1,713,212 |
Electric Energy Trade Chamber - CCEE | 1,077,943 | (45,889) | - | (16,966) | - | 1,015,088 |
CCEAR (auction) | 367,970 | (38,537) | - | (5,791) | - | 323,642 |
Interest (Note 10.3) | 82,160 | - | - | - | - | 82,160 |
Quota system | 53,835 | (11,583) | - | - | - | 42,252 |
Use of the main distribution and transmission grid | 6,442,761 | (588,290) | (1,488,323) | (748,207) | - | 3,617,941 |
Residential | 2,025,400 | (189,915) | (572,269) | (252,691) | - | 1,010,525 |
Industrial | 1,076,613 | (96,059) | (385,725) | (126,842) | - | 467,987 |
Trade, services and other activities | 1,310,903 | (122,168) | (386,320) | (162,367) | - | 640,048 |
Rural | 342,195 | (32,056) | (25,811) | (43,365) | - | 240,963 |
Public entities | 174,427 | (16,355) | (33,384) | (21,922) | - | 102,766 |
Public lighting | 167,907 | (15,744) | (48,668) | (20,935) | - | 82,560 |
Public service | 126,795 | (11,889) | (36,146) | (15,816) | - | 62,944 |
Free consumers | 663,248 | (62,190) | - | (84,633) | - | 516,425 |
Basic network, BN connections, and connection grid | 1,387 | (130) | - | (177) | - | 1,080 |
Operating and maintenance income - O&M | 113,324 | (16,733) | - | (7,793) | - | 88,798 |
Interest income | 440,562 | (25,051) | - | (11,666) | - | 403,845 |
Construction income | 868,001 | - | - | - | - | 868,001 |
Fair value of assets from the indemnity for the concession | 57,080 | - | - | - | - | 57,080 |
Telecommunications | 426,773 | (15,854) | (99,460) | - | (2,507) | 308,952 |
Distribution of piped gas | 621,992 | (58,959) | (107,912) | - | (306) | 454,815 |
Sectorial financial assets and liabilities result | 767,040 | (48,214) | - | - | - | 718,826 |
Other operating revenue | 171,356 | (27,710) | - | - | (2,575) | 141,071 |
Leasing and rent (31.1) | 109,230 | (10,956) | - | - | - | 98,274 |
Income from rendering of services | 30,247 | (5,789) | - | - | (2,575) | 21,883 |
Charged service | 15,981 | (5,758) | - | - | - | 10,223 |
Other income | 15,898 | (5,207) | - | - | - | 10,691 |
| 21,574,289 | (1,788,713) | (3,734,940) | (2,020,675) | (5,388) | 14,024,573 |
F-99
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
|
|
|
|
|
|
|
Gross | PIS/Pasep |
| Sectorial | Service tax | Net revenues | |
| revenues | and Cofins | ICMS (VAT) | charges (31.2) | (ISSQN) | 12.31.2016 |
Electricity sales to final customers | 9,606,133 | (884,681) | (2,426,940) | (1,063,007) | - | 5,231,505 |
Residential | 2,841,218 | (298,659) | (790,401) | (380,973) | - | 1,371,185 |
Industrial | 3,029,411 | (273,901) | (674,630) | (284,922) | - | 1,795,958 |
Trade, services and other activities | 2,130,228 | (194,630) | (622,946) | (247,449) | - | 1,065,203 |
Rural | 815,079 | (48,216) | (120,854) | (61,557) | - | 584,452 |
Public entities | 236,550 | (21,881) | (48,148) | (27,986) | - | 138,535 |
Public lighting | 229,182 | (21,199) | (66,481) | (26,962) | - | 114,540 |
Public service | 324,465 | (26,195) | (103,480) | (33,155) | - | 161,635 |
Electricity sales to distributors | 2,963,349 | (239,531) | - | (47,746) | - | 2,676,072 |
Bilateral contracts | 1,366,552 | (134,439) | - | (23,361) | - | 1,208,752 |
Electric Energy Trade Chamber - CCEE | 753,392 | (23,116) | - | (12,879) | - | 717,397 |
CCEAR (auction) | 673,154 | (66,223) | - | (11,508) | - | 595,423 |
Interest (Note 10.2) | 96,783 | - | - | - | - | 96,783 |
Quota system | 73,468 | (15,753) | - | - | - | 57,715 |
Use of the main distribution and transmission grid | 6,974,829 | (575,166) | (1,511,601) | (911,479) | - | 3,976,583 |
Residential | 2,060,305 | (192,823) | (584,025) | (306,096) | - | 977,361 |
Industrial | 1,246,575 | (112,443) | (391,804) | (177,993) | - | 564,335 |
Trade, services and other activities | 1,409,771 | (131,352) | (402,233) | (208,471) | - | 667,715 |
Rural | 339,438 | (31,752) | (15,451) | (51,196) | - | 241,039 |
Public entities | 168,823 | (15,800) | (33,369) | (25,224) | - | 94,430 |
Public lighting | 167,255 | (15,653) | (48,489) | (24,839) | - | 78,274 |
Public service | 125,928 | (11,786) | (36,230) | (18,703) | - | 59,209 |
Free consumers | 398,024 | (37,251) | - | (60,242) | - | 300,531 |
Basic network, BN connections, and connection grid | 1,494 | (140) | - | (226) | - | 1,128 |
Operating and maintenance income - O&M | 151,984 | (5,456) | - | (8,026) | - | 138,502 |
Interest income (a) | 905,232 | (20,710) | - | (30,461) | - | 854,061 |
Construction income | 1,279,642 | - | - | - | - | 1,279,642 |
Fair value of assets from the indemnity for the concession | 132,741 | - | - | - | - | 132,741 |
Telecommunications | 357,361 | (13,872) | (79,582) | - | (2,326) | 261,581 |
Distribution of piped gas | 647,579 | (62,037) | (113,657) | - | - | 471,885 |
Sectorial financial assets and liabilities result | (1,079,662) | - | - | - | - | (1,079,662) |
Other operating revenue | 179,820 | (26,072) | - | - | (2,342) | 151,406 |
Leasing and rent (31.1) | 103,793 | (15,049) | - | - | - | 88,744 |
Income from rendering of services | 32,575 | (4,723) | - | - | (2,342) | 25,510 |
Charged service | 10,148 | (1,471) | - | - | - | 8,677 |
Other income | 33,304 | (4,829) | - | - | - | 28,475 |
| 21,061,792 | (1,801,359) | (4,131,780) | (2,022,232) | (4,668) | 13,101,753 |
(a) Of the total gross revenue from Interest income, R$809,639 refers to the gain on RBSE assets.
31.1 Leases and rentals
31.1.1 Revenues from leases and rentals
| 12.31.2018 | 12.31.2017 | 12.31.2016 |
Equipment and framework | 131,409 | 106,790 | 103,490 |
Facilities sharing | 1,003 | 2,159 | 248 |
Real estate | 270 | 281 | 55 |
| 132,682 | 109,230 | 103,793 |
31.1.2 Receivables from non-cancelable leases
| Less than |
| Over | Total |
| 1 year | 1 to 5 years | 5 years | 12.31.2018 |
Facilities sharing | 1,142 | 5,710 | 16,811 | 23,663 |
F-100
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
31.2 Regulatory charges
| 12.31.2018 | 12.31.2017 | 12.31.2016 |
Energy Development Account - "CDE " - Power distribution service concession (31.2.1) | 1,840,283 | 1,415,738 | 1,634,017 |
Other charges - rate flags | 423,098 | 420,027 | 203,671 |
Research and development and energy efficiency - R&D and EEP | 123,306 | 117,390 | 100,039 |
Global Reversion Reserve - RGR quota | 48,512 | 46,825 | 42,887 |
Energy Development Account - "CDE " - Power transmission concession | 12,211 | 10,971 | 32,461 |
Inspection fee | 10,152 | 9,723 | 9,157 |
| 2,457,562 | 2,020,674 | 2,022,232 |
31.2.1 Energy Development Account - CDE
The CDE was created by Law 10,438/2002, amended by Law 12,783/2013 and, in order to meet its objectives, it has among its sources of funds, quotas paid by agents that negotiate energy with final consumers, in tariffs.
Currently, the Company makes payments for the “CDE USO” charge, intended to cover the CDE 's objectives set forth by law, and the annual quota of “CDE ENERGIA”, composed of:
a)Regulated Contracting Environment Account – “CONTA ACR”: the purpose of this account is to cover costs incurred by the distribution concession operators relating to involuntary spot market exposure and the costs of thermal power dispatching in 2014, linked to CCEAR in the modality due to the availability of electric energy.
b)“CDE ENERGIA”: destined to the return of the resources received by the distribution concession operators, from January 2013 to January 2014, to cover costs relating to involuntary spot market exposure and the hydrological risk of the plants contracted on a regime of quotas, and the costs of thermal power dispatching for reasons of energy security, in compliance with Decree 7,895/2013 and Decree 8,203/2014.
The annual quotas for each distributor are defined by ANEEL through resolutions enacted by it. The balance at December 31, 2018 is as follows:
Resolutions | Period | 12.31.2018 |
"CDE USO" |
|
|
Resolution No. 2,368/2018 | January to August | 594,972 |
Resolution No. 2,446/2018 | September to December | 445,075 |
(-) Preliminary injunctions | January to December | (2) |
|
| 1,040,045 |
"CONTA ACR" |
|
|
Resolution No. 2,231/2017 | January to December | 557,981 |
|
| 557,981 |
"CDE ENERGIA" |
|
|
Resolution No. 2,202/2017 | January to May | 100,692 |
Resolution No. 2,358/2017 | June to December | 145,007 |
(-) Preliminary injunctions | January to December | (3,442) |
|
| 242,257 |
|
| 1,840,283 |
102
F-101
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
Preliminary injunctions
As a result of preliminary injunctions in favor of the Brazilian Association of Large Industrial Consumers and Free Consumers - Abrace, and of the National Association of Energy Consumers - Anace and other associates, which challenge at court the tariff components of CDE-Use and CDE-Electricity, ANEEL, through Resolutions 1,967/2015, 1,986/2015 and 2,083/2016, ratified the tariff calculation, deducting these charges from associates of those entities, as long as the preliminary injunctions granted in Judicial Proceedings are not overthrown. By Decree No. 1,576/2016, the associated distributors are assured of the right of non-transfer, deducting from the portion of CDE-Use and CDE-Electricity the amounts not collected.
The unbilled amounts resulting from these injunctions do not impact the distributor's result.
31.3 Copel DIS annual tariff adjustment
The annual tariff adjustment, which occurs between tariff reviews, is approved by ANEEL based on a formula defined in the concession agreement and on regulations established in Proret, which consider for unmanageable costs (Portion A) the variations incurred in the period and for manageable costs (Portion B) the IPCA variation, adjusted by applying the Factor X.
In 2018, ANEEL’s Resolution No. 2,402 of June 19, 2018, approved the result of Copel DIS Annual Tariff Review and authorized a 15.99% (5.85% in 2017) average rate increase to consumers, consisting of: 6.52% related to the inclusion of financial components; 0.31% from updating Portion B; 7.49% from adjusting Portion A; and 1.67% reflecting the withdrawal of the financial components from the previous tariff process.
This adjustment was fully applied to Copel DIS tariffs as from June 24, 2018.
32 Operating Costs and Expenses
|
|
| General and | Other |
|
Operational | Selling | administrative | operating |
| |
| costs | expenses | expenses | expenses, net | 12.31.2018 |
Electricity purchased for resale (32.1) | (6,361,178) | - | - | - | (6,361,178) |
Charge of the main distribution and transmission grid | (1,176,780) | - | - | - | (1,176,780) |
Personnel and management (32.2) | (978,878) | (18,460) | (360,447) | - | (1,357,785) |
Pension and healthcare plans (Note 24.3) | (176,102) | (2,447) | (65,201) | - | (243,750) |
Materials and supplies | (68,920) | (655) | (12,182) | - | (81,757) |
Materials and supplies for power electricity | (19,729) | - | - | - | (19,729) |
Natural gas and supplies for gas business | (412,618) | - | - | - | (412,618) |
Third-party services (32.3) | (392,869) | (23,266) | (156,092) | - | (572,227) |
Depreciation and amortization | (709,575) | (15) | (26,015) | (13,574) | (749,179) |
Credit losses, provisions and reversals (32.4) | 18,920 | (81,936) | - | (243,681) | (306,697) |
Construction cost (32.5) | (1,052,208) | - | - | - | (1,052,208) |
Other operating costs and expenses, net (32.6) | (171,751) | (21,930) | (103,597) | (45,435) | (342,713) |
| (11,501,688) | (148,709) | (723,534) | (302,690) | (12,676,621) |
F-102
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
|
|
| General and | Other |
|
Operational | Selling | administrative | operating |
| |
| costs | expenses | expenses | expenses, net | 12.31.2017 |
Electricity purchased for resale (32.1) | (6,165,450) | - | - | - | (6,165,450) |
Charge of the main distribution and transmission grid | (712,030) | - | - | - | (712,030) |
Personnel and management (32.2) | (984,011) | (20,435) | (338,898) | - | (1,343,344) |
Pension and healthcare plans (Note 24.3) | (175,479) | (2,424) | (59,694) | - | (237,597) |
Materials and supplies | (71,535) | (968) | (10,621) | - | (83,124) |
Materials and supplies for power electricity | (97,360) | - | - | - | (97,360) |
Natural gas and supplies for gas business | (309,542) | - | - | - | (309,542) |
Third-party services (32.3) | (386,435) | (18,826) | (116,254) | - | (521,515) |
Depreciation and amortization | (686,007) | (16) | (32,070) | (13,506) | (731,599) |
Credit losses, provisions and reversals (32.4) | 122,782 | (90,478) | - | (397,843) | (365,539) |
Construction cost (32.5) | (1,003,881) | - | - | - | (1,003,881) |
Other operating costs and expenses, net (32.6) | (196,942) | (35,903) | (128,138) | (52,967) | (413,950) |
| (10,665,890) | (169,050) | (685,675) | (464,316) | (11,984,931) |
|
|
| General and | Other |
|
Operational | Selling | administrative | operating | ||
| costs | expenses | expenses | expenses, net | 12.31.2016 |
Electricity purchased for resale (32.1) | (4,685,604) | - | - | - | (4,685,604) |
Charge of the main distribution and transmission grid | (866,243) | - | - | - | (866,243) |
Personnel and management (32.2) | (976,027) | (17,314) | (311,077) | - | (1,304,418) |
Pension and healthcare plans (Note 24.3) | (192,880) | (2,616) | (64,271) | - | (259,767) |
Materials and supplies | (71,747) | (851) | (8,865) | - | (81,463) |
Materials and supplies for power electricity | (33,352) | - | - | - | (33,352) |
Natural gas and supplies for gas business | (325,413) | - | - | - | (325,413) |
Third-party services (32.3) | (369,442) | (53,659) | (127,392) | - | (550,493) |
Depreciation and amortization | (664,470) | (31) | (30,290) | (13,505) | (708,296) |
Credit losses, provisions and reversals (32.4) | (567,112) | (184,610) | - | (16,974) | (768,696) |
Construction cost (32.5) | (1,280,745) | - | - | - | (1,280,745) |
Other operating costs and expenses, net (32.6) | (201,080) | 8,633 | (199,250) | (23,159) | (414,856) |
| (10,234,115) | (250,448) | (741,145) | (53,638) | (11,279,346) |
32.1 Energy purchased for resale
| 12.31.2018 | 12.31.2017 | 12.31.2016 |
Purchase of Energy in the Regulated Environment - CCEAR | 2,599,345 | 2,693,976 | 3,219,900 |
Electric Energy Trade Chamber - CCEE | 1,850,021 | 1,766,091 | 535,656 |
Itaipu Binacional | 1,272,177 | 1,117,957 | 1,089,804 |
Bilateral contracts | 928,741 | 766,803 | 20,006 |
Program for incentive to alternative energy sources - Proinfa | 228,295 | 217,646 | 242,910 |
Micro and mini generators and repurchase of customers | 12,373 | 3,892 | 561 |
(-) PIS/Pasep/Cofins taxes on electricity purchased for resale | (529,774) | (400,915) | (423,233) |
| 6,361,178 | 6,165,450 | 4,685,604 |
F-103
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
32.2 Personnel and Management
|
|
|
|
| 12.31.2018 | 12.31.2017 | 12.31.2016 |
Personnel |
|
|
|
Wages and salaries | 794,966 | 806,119 | 801,789 |
Social charges on payroll | 261,459 | 266,183 | 257,519 |
Meal assistance and education allowance | 113,177 | 119,881 | 109,999 |
Provisions for profit sharing (a) | 91,526 | 68,817 | 64,814 |
Voluntary retirement program | 69,289 | 53,468 | 44,276 |
1,330,417 | 1,314,468 | 1,278,397 | |
Management |
|
|
|
Wages and salaries | 21,422 | 22,895 | 20,639 |
Social charges on payroll | 5,695 | 5,635 | 5,136 |
Other expenses | 251 | 346 | 246 |
| 27,368 | 28,876 | 26,021 |
| 1,357,785 | 1,343,344 | 1,304,418 |
(a) According to Federal Law No. 10,101/2000, State Decree No. 1,978/2007 and State Law No. 16,560/2010. |
32.3 Third party services
| 12.31.2018 | 12.31.2017 | 12.31.2016 |
Maintenance of electrical system | 144,211 | 135,265 | 160,720 |
Communication, processing and transmission of data | 115,397 | 94,230 | 61,317 |
Maintenance of facilities | 91,872 | 95,176 | 90,451 |
Meter reading and bill delivery | 43,968 | 49,647 | 49,462 |
Consulting and audit | 41,615 | 21,589 | 41,396 |
Consumer service | 34,502 | 29,789 | 21,000 |
Other services | 100,662 | 95,819 | 126,147 |
| 572,227 | 521,515 | 550,493 |
32.4 Credit losses, provisions and reversals
|
|
|
|
| 12.31.2018 | 12.31.2017 | 12.31.2016 |
Provision for litigations | 219,636 | 386,373 | (21,408) |
Impairment of assets |
|
|
|
Accounts receivable related to the concession compensation (Note 11.1) | (4,758) | (1,117) | 75 |
Credits on sales and purchases of gas | - | (123,586) | 87,479 |
Property, plant and equipment (Note 18.7) | (14,162) | 1,921 | 494,023 |
Expected credit losses (Trade accounts and Other current receivables) | 96,202 | 90,478 | 184,610 |
Tax credits estimated losses | 9,779 | 11,470 | 23,917 |
| 306,697 | 365,539 | 768,696 |
32.5 Construction costs
| |||
| 12.31.2018 | 12.31.2017 | 12.31.2016 |
Materials and supplies | 507,899 | 387,278 | 588,414 |
Third party services | 400,680 | 437,788 | 495,309 |
Personnel | 124,469 | 143,266 | 135,272 |
Others | 19,160 | 35,549 | 61,750 |
| 1,052,208 | 1,003,881 | 1,280,745 |
F-104
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
32.6 Other operating costs and expenses, net
| 12.31.2018 | 12.31.2017 | 12.31.2016 |
Losses in the decommissioning and disposal of assets | 106,675 | 58,569 | 43,496 |
Financial offset for the use of water resources | 105,310 | 110,971 | 183,014 |
Taxes | 84,492 | 87,759 | 29,443 |
Leasing and rent (32.6.1) | 40,016 | 32,037 | 35,453 |
Compensation | 30,949 | 45,712 | 89,531 |
Advertising and publicity | 22,135 | 27,768 | 37,451 |
Losses in business combination (Note 1.2.3) | 3,769 | - | - |
Gain (loss) on sale of investments (a) | (8,174) | (28,650) | - |
Results of the change in the investment valuation method | - | - | (52,107) |
Other net income, costs and expenses (b) | (42,459) | 79,784 | 48,575 |
| 342,713 | 413,950 | 414,856 |
(a) In 2018, the gain on the sale of the associated company Dois Saltos Empreendimentos de Geração de Energia Elétrica Ltda. was R$ 11,000 and the loss on the disposal of the jointly-owned subsidiary Transmissora Sul Brasileira de Energia S.A. was R$ 2,826 (Note 1.2). In 2017, the gain on the disposal of the shares of Companhia de Saneamento do Paraná – Sanepar was R$ 28,650. | |||
(b) This balance of 2018 includes the revenue of R$ 72,068 related to the reimbursement with suppliers of assets of windfarms of the Brisa Complex. |
32.6.1 Leases and rentals
| 12.31.2018 | 12.31.2017 | 12.31.2016 |
Real estate | 29,216 | 29,749 | 29,911 |
Others | 12,237 | 3,588 | 6,919 |
(-) PIS and Cofins credits | (1,437) | (1,300) | (1,377) |
| 40,016 | 32,037 | 35,453 |
32.6.2 Commitments from leases and rents
| Less than |
| Over | Total |
| 1 year | 1 to 5 years | 5 years | 12.31.2018 |
Real Estate | 26,457 | 66,886 | 178,550 | 271,893 |
Vehicles | 17,003 | 50,241 | - | 67,244 |
Equipments | 773 | 2,900 | - | 3,673 |
| 44,233 | 120,027 | 178,550 | 342,810 |
The balance includes land lease values for which, after the start-up of the project, payments are variable, applying a percentage of the gross revenue less the deductions foreseen in the contract (taxes, fees and contributions).
F-105
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
33 Financial Results
|
|
|
|
| 12.31.2018 | 12.31.2017 | 12.31.2016 |
Financial income |
|
|
|
Arrears charges on bills | 226,050 | 191,554 | 221,673 |
Interest and monetary variation of CRC transfer (Note 8.1) | 214,627 | 141,923 | 194,153 |
Return on financial investments | 98,841 | 114,523 | 196,247 |
Recognition of tax credit (33.1) | 55,096 | - | - |
Remuneration of net sectorial assets and liabilities (Note 9.2) | 43,966 | 20,493 | 27,734 |
Monetary variation over the Itaipu power purchase | 24,658 | 17,777 | 39,283 |
Monetary variation and adjust to present value of accounts |
|
|
|
payable related to the concession (Note 27.2) | 1,047 | 10,813 | 1,116 |
Other financial income | 149,630 | 202,227 | 223,730 |
813,915 | 699,310 | 903,936 | |
( - ) Financial expenses |
|
|
|
Monetary and cambial variation and debt charges | 871,397 | 993,970 | 1,072,875 |
Monetary variation and adjust to present value of accounts |
|
|
|
payable related to the concession (Note 27.2) | 94,319 | 65,418 | 90,480 |
Monetary variation over the Itaipu power purchase | 50,203 | 12,264 | 20,597 |
Interest and monetary variation of CRC transfer (Note 8.1) | 25,830 | 51,211 | 5,235 |
Interest on R&D and EEP (Note 26.2) | 25,407 | 34,345 | 41,781 |
Remuneration of net sectorial assets and liabilities (Note 9.2) | 23,747 | 29,622 | 13,947 |
PIS/Pasep/Cofins taxes on interest on capital | 13,636 | 45,196 | 40,607 |
Other financial expenses | 147,426 | 215,724 | 213,070 |
1,251,965 | 1,447,750 | 1,498,592 | |
Net | (438,050) | (748,440) | (594,656) |
33.1 Recognition of tax credit
On February 14, 2018 the Federal Revenue of Brazil recognized tax credit for the restated amount of R$ 80,225 in favor of the Company, regarding the disputed tax levy on Pasep from July 1988 to July 1995, in connection with the effects of Federal Senate Resolution 49, of October 9, 1995, which suspended the effects of Decree-Laws 2,445/1988 and 2,449/1988, deemed to be unconstitutional by the Federal Supreme Court. From the total amount recognized, R$ 55,096 were recorded in finance income and R$ 25,129 in other operating income.
34 Operating Segments
Operating segments are business activities that generate revenues and incur expenses, whose operating results are regularly reviewed by the executive boards of the Parent Company and subsidiaries and by key strategic decision-makers responsible for allocating funds and assessing performance.
F-106
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
34.1 Products and services from which we generate revenues from the reportable segments
The Company operates in reportable segments identified by Management, through the chief officers of each business area, taking into consideration the regulatory environments, the strategic business units and the different products and services. These segments are managed separately, since each business and each company requires different technologies and strategies.
In 2018 and 2017, all sales have been to customers within the Brazilian territory, in addition, all non-current assets are also located in national territory.
The Company did not identify any customer who individually accounts for more than 10% of their total net revenues in 2018.
The Company evaluates the performance of each segment based on information derived from the accounting records.
The accounting policies of the operating segments are the same as those described in Note 4.
34.2 The Company’s reportable segments
The reportable segments of the Company, in accordance with IFRS 8, are:
Power generation and transmission (GET) - this segment comprises the generation of electric energy from hydraulic, wind, and thermal projects(GER) and the transmission and transformation of the power generated by the Company, and the construction, operation and maintenance of all power transmission substations and lines(TRA); for managers, the assets and liabilities of the generation and transmission segments are shown on an aggregate basis while their result is shown separately;
Power distribution (DIS) - this segment comprises the distribution of electric energy, the operation and maintenance of the distribution infrastructure and related services;
Telecommunications (TEL) - this segment comprises telecommunications and general communications services;
GAS - this segment comprises the public service of piped natural gas distribution.;
Power sale (COM) - this segment comprises the sale of electric energy and related services; and
Holding Company (HOL) - this segment comprises participation in other companies.
F-107
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
34.3 Assets by reportable segment
ASSETS | Electric Energy | TEL | GAS | COM | HOL | Intersegment operations | Total | |
12.31.2018 | GET | DIS | ||||||
TOTAL ASSETS | 18,573,953 | 12,331,603 | 1,264,748 | 675,286 | 227,287 | 3,359,407 | (502,184) | 35,930,100 |
CURRENT ASSETS | 1,722,519 | 3,971,915 | 88,239 | 204,725 | 181,077 | 1,214,523 | (705,152) | 6,677,846 |
NON-CURRENT ASSETS | 16,851,434 | 8,359,688 | 1,176,509 | 470,561 | 46,210 | 2,144,884 | 202,968 | 29,252,254 |
Long term assets | 4,660,867 | 2,968,282 | 88,798 | 466,942 | 43,564 | 1,950,280 | (164,473) | 10,014,260 |
Investments | 2,212,271 | 1,343 | - | - | 2,442 | 152,178 | - | 2,368,234 |
Property, plant and equipment | 9,728,872 | - | 1,071,489 | - | 51 | 40,251 | - | 10,840,663 |
Intangible assets | 249,424 | 5,390,063 | 16,222 | 3,619 | 153 | 2,175 | 367,441 | 6,029,097 |
ASSETS | Electric Energy | TEL | GAS | COM | HOL | Intersegment operations | Total | |
12.31.2017 | GET | DIS | ||||||
TOTAL ASSETS | 17,110,518 | 11,529,588 | 1,054,741 | 632,910 | 208,369 | 3,211,162 | (584,911) | 33,162,377 |
CURRENT ASSETS | 1,461,512 | 3,609,663 | 102,002 | 151,966 | 187,966 | 1,035,545 | (846,820) | 5,701,834 |
NON-CURRENT ASSETS | 15,649,006 | 7,919,925 | 952,739 | 480,944 | 20,403 | 2,175,617 | 261,909 | 27,460,543 |
Long term assets | 4,037,312 | 2,167,690 | 69,543 | 437,056 | 17,703 | 2,019,192 | (140,870) | 8,607,626 |
Investments | 2,424,081 | 1,362 | - | - | 2,457 | 115,765 | 26,978 | 2,570,643 |
Property, plant and equipment | 8,924,508 | - | 866,489 | - | 57 | 38,396 | - | 9,829,450 |
Intangible assets | 263,105 | 5,750,873 | 16,707 | 43,888 | 186 | 2,264 | 375,801 | 6,452,824 |
34.4 Statement of income by reportable segment
STATEMENT OF INCOME | Electric Energy | TEL | GAS | COM | HOL | Intersegment operations | Total | ||
GET |
| ||||||||
12.31.2018 | GER | TRA | DIS | ||||||
NET OPERATING REVENUES | 3,007,565 | 904,826 | 9,972,442 | 421,408 | 588,532 | 1,341,162 | - | (1,301,155) | 14,934,780 |
Net operating revenues - third-parties | 2,116,875 | 680,567 | 9,932,267 | 364,741 | 582,895 | 1,341,162 | - | (83,727) | 14,934,780 |
Net operating revenues - between segments | 890,690 | 224,259 | 40,175 | 56,667 | 5,637 | - | - | (1,217,428) | - |
OPERATING COSTS AND EXPENSES | (1,619,431) | (561,850) | (9,474,473) | (369,201) | (515,594) | (1,354,578) | (57,993) | 1,276,499 | (12,676,621) |
Energy purchased for resale | (417,918) | - | (5,577,719) | - | - | (1,338,473) | - | 972,932 | (6,361,178) |
Charges for use of the main transmission grid | (408,347) | - | (1,012,062) | - | - | - | - | 243,629 | (1,176,780) |
Personnel and management | (214,855) | (147,139) | (837,728) | (92,472) | (34,896) | (13,734) | (16,961) | - | (1,357,785) |
Pension and healthcare plans | (36,379) | (25,884) | (159,842) | (13,892) | (3,881) | (1,507) | (2,365) | - | (243,750) |
Materials and supplies | (11,637) | (5,054) | (60,379) | (1,763) | (2,110) | (65) | (749) | - | (81,757) |
Raw materials and supplies for generation | (25,367) | - | - | - | - | - | - | 5,638 | (19,729) |
Natural gas and supplies for gas business | - | - | - | - | (412,618) | - | - | - | (412,618) |
Third party services | (119,668) | (33,489) | (339,399) | (91,127) | (17,034) | (1,700) | (32,311) | 62,501 | (572,227) |
Depreciation and amortization | (353,916) | (11,386) | (301,581) | (58,209) | (22,759) | (16) | (1,312) | - | (749,179) |
Provision (reversal) for litigations | 18,059 | 7,879 | (222,057) | (12,844) | (154) | 9 | (10,528) | - | (219,636) |
Impairment of assets | 22,312 | - | - | - | - | - | 1,648 | (5,040) | 18,920 |
Other estimated losses, provisions and reversals | 55,457 | (49,486) | (77,985) | (12,749) | (6,017) | (935) | (14,266) | - | (105,981) |
Construction cost | - | (277,259) | (741,855) | - | (13,478) | - | - | (19,616) | (1,052,208) |
Other operating costs and expenses, net | (127,172) | (20,032) | (143,866) | (86,145) | (2,647) | 1,843 | 18,851 | 16,455 | (342,713) |
EQUITY IN EARNINGS OF INVESTEES | 5,514 | 123,676 | - | - | - | (15) | 6,713 | - | 135,888 |
PROFIT (LOSS) BEFORE FINANCIAL INCOME AND TAX | 1,393,648 | 466,652 | 497,969 | 52,207 | 72,938 | (13,431) | (51,280) | (24,656) | 2,394,047 |
Financial income | 119,196 | 29,163 | 335,377 | 16,808 | 29,454 | 6,065 | 305,344 | (27,492) | 813,915 |
Financial expenses | (517,832) | (136,455) | (308,319) | (41,713) | (31,865) | (104) | (243,169) | 27,492 | (1,251,965) |
OPERATING PROFIT (LOSS) | 995,012 | 359,360 | 525,027 | 27,302 | 70,527 | (7,470) | 10,895 | (24,656) | 1,955,997 |
Income tax and social contribution | (327,598) | (75,361) | (148,244) | (2,853) | (10,909) | 2,632 | 41,957 | 8,383 | (511,993) |
NET INCOME (LOSS) | 667,414 | 283,999 | 376,783 | 24,449 | 59,618 | (4,838) | 52,852 | (16,273) | 1,444,004 |
F-108
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
STATEMENT OF INCOME | Electric Energy | TEL | GAS | COM | HOL | Intersegment operations | Total | ||
GET |
| ||||||||
12.31.2017 | GER | TRA | DIS | ||||||
NET OPERATING REVENUES | 3,176,811 | 819,623 | 9,358,664 | 380,550 | 515,563 | 664,495 | - | (891,133) | 14,024,573 |
Net operating revenues - third-parties | 2,851,644 | 640,199 | 9,324,633 | 306,473 | 510,010 | 664,495 | - | (272,881) | 14,024,573 |
Net operating revenues - between segments | 325,167 | 179,424 | 34,031 | 74,077 | 5,553 | - | - | (618,252) | - |
OPERATING COSTS AND EXPENSES | (1,868,390) | (546,510) | (9,071,359) | (286,363) | (309,213) | (654,445) | (139,784) | 891,133 | (11,984,931) |
Energy purchased for resale | (390,019) | - | (5,717,970) | - | - | (654,026) | - | 596,565 | (6,165,450) |
Charges for use of the main transmission grid | (352,958) | - | (554,805) | - | - | - | - | 195,733 | (712,030) |
Personnel and management | (218,456) | (122,515) | (822,963) | (107,874) | (35,761) | (12,993) | (22,782) | - | (1,343,344) |
Pension and healthcare plans | (38,782) | (22,733) | (154,285) | (14,800) | (3,577) | (1,415) | (2,005) | - | (237,597) |
Materials and supplies | (12,463) | (4,732) | (60,320) | (2,978) | (1,936) | (27) | (668) | - | (83,124) |
Raw materials and supplies for generation | (102,719) | - | - | - | - | - | - | 5,359 | (97,360) |
Natural gas and supplies for gas business | - | - | - | - | (309,542) | - | - | - | (309,542) |
Third party services | (120,993) | (24,609) | (347,393) | (67,612) | (22,670) | (1,280) | (15,089) | 78,131 | (521,515) |
Depreciation and amortization | (368,987) | (7,201) | (285,835) | (39,553) | (28,753) | (9) | (1,261) | - | (731,599) |
Provision (reversal) for litigations | (39,733) | (81,210) | (168,600) | (3,648) | 854 | (156) | (93,880) | - | (386,373) |
Impairment of assets | 3,886 | - | - | - | 123,586 | - | (4,690) | - | 122,782 |
Other estimated losses, provisions and reversals | (9,397) | 1,107 | (83,916) | (8,309) | (1,433) | - | - | - | (101,948) |
Construction cost | - | (272,216) | (717,351) | - | (14,314) | - | - | - | (1,003,881) |
Other operating costs and expenses, net | (217,769) | (12,401) | (157,921) | (41,589) | (15,667) | 15,461 | 591 | 15,345 | (413,950) |
EQUITY IN EARNINGS OF INVESTEES | (5,777) | 93,145 | - | - | - | (564) | 14,935 | - | 101,739 |
PROFIT (LOSS) BEFORE FINANCIAL INCOME AND TAX | 1,302,644 | 366,258 | 287,305 | 94,187 | 206,350 | 9,486 | (124,849) | - | 2,141,381 |
Financial income | 73,433 | 13,313 | 380,597 | 11,828 | 38,821 | 6,515 | 186,660 | (11,857) | 699,310 |
Financial expenses | (565,837) | (123,707) | (343,540) | (30,691) | (64,433) | (322) | (331,077) | 11,857 | (1,447,750) |
OPERATING PROFIT (LOSS) | 810,240 | 255,864 | 324,362 | 75,324 | 180,738 | 15,679 | (269,266) | - | 1,392,941 |
Income tax and social contribution | (191,899) | (30,515) | 22,893 | (21,272) | (66,785) | (2,638) | 15,530 | - | (274,686) |
NET INCOME (LOSS) | 618,341 | 225,349 | 347,255 | 54,052 | 113,953 | 13,041 | (253,736) | - | 1,118,255 |
STATEMENT OF INCOME | Electric Energy | TEL | GAS | HOL | Intersegment operations | Total | ||
GET |
| |||||||
12.31.2016 | GER | TRA | DIS | |||||
NET OPERATING REVENUES | 2,927,680 | 1,491,547 | 8,344,765 | 325,115 | 542,822 | 6,238 | (536,414) | 13,101,753 |
Net operating revenues - third-parties | 2,618,869 | 1,406,335 | 8,313,141 | 258,794 | 498,376 | 6,238 | - | 13,101,753 |
Net operating revenues - between segments | 308,811 | 85,212 | 31,624 | 66,321 | 44,446 | - | (536,414) | - |
OPERATING COSTS AND EXPENSES | (2,032,767) | (605,202) | (8,502,377) | (241,848) | (534,817) | 101,251 | 536,414 | (11,279,346) |
Energy purchased for resale | (92,050) | - | (4,893,230) | - | - | (9,119) | 308,795 | (4,685,604) |
Charges for use of the main transmission grid | (322,849) | - | (642,753) | - | - | - | 99,359 | (866,243) |
Personnel and management | (208,887) | (116,966) | (804,974) | (101,397) | (32,765) | (39,429) | - | (1,304,418) |
Pension and healthcare plans | (43,251) | (24,171) | (163,329) | (18,827) | (3,596) | (6,593) | - | (259,767) |
Materials and supplies | (12,768) | (5,017) | (59,178) | (2,044) | (1,768) | (688) | - | (81,463) |
Raw materials and supplies for generation | (77,797) | - | - | - | - | - | 44,445 | (33,352) |
Natural gas and supplies for gas business | - | - | - | - | (325,413) | - | - | (325,413) |
Third party services | (157,602) | (24,030) | (348,479) | (46,552) | (20,082) | (26,755) | 73,007 | (550,493) |
Depreciation and amortization | (369,352) | (3,697) | (274,180) | (34,645) | (25,251) | (1,171) | - | (708,296) |
Provision (reversal) for litigations | (1,086) | (9,234) | (128,899) | (4,653) | (1,036) | 166,316 | - | 21,408 |
Impairment of assets | (494,098) | - | - | - | (87,479) | - | - | (581,577) |
Other estimated losses, provisions and reversals | (30,700) | (975) | (171,045) | (2,598) | (3,209) | - | - | (208,527) |
Construction cost | - | (406,345) | (849,275) | - | (25,125) | - | - | (1,280,745) |
Other operating costs and expenses, net | (222,327) | (14,767) | (167,035) | (31,132) | (9,093) | 18,690 | 10,808 | (414,856) |
EQUITY IN EARNINGS OF INVESTEES | (55,284) | 117,970 | - | - | - | 103,725 | - | 166,411 |
PROFIT (LOSS) BEFORE FINANCIAL INCOME AND TAX | 894,913 | 1,004,315 | (157,612) | 83,267 | 8,005 | 211,214 | - | 2,044,102 |
Financial income | 130,077 | 21,339 | 396,880 | 13,489 | 13,551 | 331,646 | (3,046) | 903,936 |
Financial expenses | (617,341) | (108,538) | (401,863) | (23,100) | (14,973) | (335,823) | 3,046 | (1,498,592) |
OPERATING PROFIT (LOSS) | 407,649 | 917,116 | (162,595) | 73,656 | 6,583 | 207,037 | - | 1,449,446 |
Income tax and social contribution | (205,027) | (220,512) | (17,851) | (15,324) | (1,632) | (59,344) | - | (519,690) |
NET INCOME (LOSS) | 202,622 | 696,604 | (180,446) | 58,332 | 4,951 | 147,693 | - | 929,756 |
34.5 Additions to non-current assets by reportable segment
| Electric Energy | TEL | GAS | COM | HOL | Total | |
12.31.2018 | GET | DIS | |||||
Contract Assets | - | 797,832 | - | 15,618 | - | - | 813,450 |
Property, plant and equipment | 1,160,967 | - | 308,242 | - | 4 | 267 | 1,469,480 |
Intangible assets | 6,351 | - | 1,235 | - | - | 3 | 7,589 |
F-109
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
| Electric Energy | TEL | GAS | COM | HOL | Total | |
12.31.2017 | GET | DIS | |||||
Property, plant and equipment | 1,077,088 | - | 238,944 | - | 7 | 376 | 1,316,415 |
Intangible assets | 3,996 | 757,709 | 2,200 | 13,745 | 101 | 635 | 778,386 |
| Electric Energy | TEL | GAS | HOL | Total | |
12.31.2016 | GET | DIS | ||||
Property, plant and equipment | 619,964 | - | 187,313 | - | 556 | 807,833 |
Intangible assets | �� 3,207 | 892,693 | 6,447 | 25,847 | 533 | 928,727 |
35 Financial Instruments
35.1 Categories and determination of fair value of financial instruments
|
|
|
|
|
| |
|
|
|
| 12.31.2018 | 12.31.2017 | |
| Note | Level | Book value | Fair value | Book value | Fair value |
Financial assets |
|
|
|
|
|
|
Fair value through profit or loss |
|
|
|
|
|
|
Cash and cash equivalents (a) | 5 | 1 | 1,948,409 | 1,948,409 | 1,040,075 | 1,040,075 |
Bonds and securities (b) | 6 | 1 | 696 | 696 | 687 | 687 |
Bonds and securities (b) | 6 | 2 | 343,600 | 343,600 | 218,976 | 218,976 |
Accounts receivable related to the distribution concession (c) | 10.1 e 10.2 | 3 | 1,105,282 | 1,105,282 | 987,874 | 987,874 |
Accounts receivable related to the transmission concession (c) | 10.4 | 1 | - | - | 99,969 | 99,969 |
Accounts receivable related to the concession compensation (d) | 10.6 | 3 | 65,811 | 65,811 | 68,859 | 68,859 |
Other temporary investments (e) |
| 1 | 11,557 | 11,557 | 8,958 | 8,958 |
Other temporary investments (e) |
| 2 | 7,954 | 7,954 | 9,769 | 9,769 |
|
|
| 3,483,309 | 3,483,309 | 2,435,167 | 2,435,167 |
Amortized cost |
|
|
|
|
|
|
Pledges and restricted deposits linked (a) |
| 1 | 203 | 203 | 59,372 | 59,372 |
Collaterals and escrow accounts STN (f) | 22.1 | 2 | 89,555 | 76,524 | 75,665 | 57,188 |
Trade accounts receivable (a) | 7 | 1 | 3,107,006 | 3,107,006 | 2,994,322 | 2,994,322 |
CRC Transferred to the State Government of Paraná (g) | 8 | 2 | 1,445,042 | 1,546,469 | 1,516,362 | 1,620,212 |
Sectorial financial assets (a) | 9 | 1 | 678,819 | 678,819 | 343,218 | 343,218 |
Accounts receivable related to the transmission concession (c) | 10.4 | 1 | - | - | 1,397,430 | 1,397,430 |
Accounts receivable related to the concession - RBSE (c) | 10.5 | 1 | 753,826 | 753,826 | 1,418,370 | 1,418,370 |
Accounts receivable related to the concession - bonus from the grant (h) | 10.3 | 2 | 625,772 | 714,880 | 606,479 | 694,463 |
State of Paraná - Government Programs (a) | 15.1 | 1 | - | - | 130,417 | 130,417 |
|
|
| 6,700,223 | 6,877,727 | 8,541,635 | 8,714,992 |
Total financial assets |
|
| 10,183,532 | 10,361,036 | 10,976,802 | 11,150,159 |
Financial liabilities |
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|
Amortized cost |
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|
Sectorial financial liabilities (a) | 9 | 1 | 96,531 | 96,531 | 283,519 | 283,519 |
Ordinary financing of taxes with the federal tax authorities (f) | 13.3 | 2 | 86,632 | 84,383 | 148,845 | 142,702 |
Special Tax Regularization Program - Pert (f) | 13.3 | 2 | 518,442 | 469,304 | 533,671 | 431,036 |
Suppliers (a) | 21 | 1 | 1,469,199 | 1,469,199 | 1,727,046 | 1,727,046 |
Loans and financing (f) | 22 | 2 | 4,047,307 | 4,012,621 | 3,759,505 | 3,569,856 |
Debentures (i) | 23 | 1 | 7,518,131 | 7,518,133 | 6,070,978 | 6,070,978 |
Payable related to concession (j) | 27 | 3 | 584,163 | 687,869 | 554,954 | 645,904 |
Total financial liabilities |
|
| 14,320,405 | 14,338,040 | 13,078,518 | 12,871,041 |
Different levels are defined as follows: | ||||||
Level 1: Obtained from quoted prices (not adjusted) in active markets for identical assets and liabilities; | ||||||
Level 2: obtained through other variables in addition to quoted prices included in Level 1, which are observable for the assets or liabilities; | ||||||
Level 3: obtained through assessment techniques which include variables for the assets or liabilities, which however are not based on observable market data. |
The financial instruments classification changes, as of the adoption of IFRS 9, on 01.01.2018, is described in Note 4.17.1
Determining fair values
a) | Equivalent to their respective carrying values due to their nature and terms of realization. |
b) | Fair value is calculated based on information made available by the financial agents and the market values of the bonds issued by the Brazilian government. |
F-110
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
c) | The criteria are disclosed in Note 4.4. |
d) | The fair values of generation assets approximate their carrying amounts, according to Note 4.4. |
e) | Calculated according to the price quotations published in an active market, for assets classified as level 1 and determined in view of the comparative assessment model for assets classified as level 2. |
f) | The cost of the last borrowing taken out by the Company is used as a basic assumption, namely TJLP plus spread of 1.94% p.a., for discount of the expected payment flows. |
g) | The Company based its calculation on the comparison with a long-term and post-fixed National Treasury Bond (NTN-B) maturing on August 15, 2024, which yields approximately 4.29% p.a. plus the IPCA inflation index. |
h) | Receivables related to the concession agreement for providing electricity generation services under quota arrangements at their fair value calculated by expected cash inflows discounted at the rate established in ANEEL auction notice 12/2015 (9.04%). |
i) | Calculated from the Unit Price quotation (PU) for December 31, 2018, obtained from the Brazilian Association of Financial and Capital Markets (ANBIMA), net of unamortized financial cost. |
j) | Actual net discount rate of 8.13% p.a., in line with the Company’s estimated rate for long-term projects. |
35.2 Financial risk management
The Company's business activities are exposed to the following risks arising from financial instruments:
35.2.1 Credit risk
Credit risk is the risk of the Company incurring losses due to a customer or financial instrument counterparty, resulting from failure in complying with contractual obligations.
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Exposure to credit risk | 12.31.2018 | 12.31.2017 |
Cash and cash equivalents (a) | 1,948,409 | 1,040,075 |
Bonds and securities (a) | 344,296 | 219,663 |
Pledges and restricted deposits linked (a) | 89,758 | 135,037 |
Trade accounts receivable (b) | 3,107,006 | 2,994,322 |
CRC Transferred to the State Government of Paraná (c) | 1,445,042 | 1,516,362 |
Sectorial financial assets (d) | 678,819 | 343,218 |
Accounts receivable related to the concession (e) | 1,859,108 | 3,903,643 |
Accounts receivable related to the concession - Bonus from the grant (f) | 625,772 | 606,479 |
Accounts receivable related to the concession compensation (g) | 65,811 | 68,859 |
State of Paraná - Government Programs | - | 130,417 |
Loans - related parties | - | 38,169 |
Other temporary investments (h) | 19,511 | 18,727 |
| 10,183,532 | 11,014,971 |
F-111
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
a) | The Company’s Management manages the credit risk of its assets in accordance with the Group's policy of investing virtually all of its funds in federal banking institutions. As a result of legal and/or regulatory requirements, in exceptional circumstances the Company may invest funds in prime private banks. |
b) | The risk arises from the possibility that the Company might incur losses resulting from difficulties to receive its billings to customers. This risk is closely related to internal and external factors of Copel. To mitigate this type of risk, the Company manages its accounts receivable, detecting defaulting consumers, implementing specific collection policies and suspending the supply and/or recording of energy and the provision of service, as established in the agreement. |
c) | Management believes this credit risk is low because repayments are secured by funds from dividends. |
d) | Management believes this risk is low because these contracts assure an unconditional right to be paid in cash by the concession Grantor at the end of the concession period for any infrastructure investments not recovered through tariffs. |
e) | Management considers the risk of this credit to be reduced, since the agreements signed guarantee the unconditional right to receive cash at the end of the concession to be paid by theConcession Grantor, referring to investments in infrastructure not recovered through the tariff. |
Management also considers the credit risk reduced to the balance of RBSE assets, even in light of the injunctions that temporarily reduced the RAP to be received, as described in Note 10.5. | |
f) | Management considers the risk of this credit to be low, as the contract for the sale of energy by quota guarantees the receipt of an Annual Generation Revenue - RAG guaranteed which includes the annual amortization of this amount during the concession term. |
g) | For the generation concession assets, ANEEL published Normative Resolution No. 596/2013, which deals with the definition of criteria for calculating the VNR, for the purposes of indemnification. Management's expectation regarding the indemnification of these assets indicates the recoverability of the balances recorded, as described in Note 10.6. |
F-112
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
h) | The risk arises from the possibility that the Company might incur losses resulting from the volatility on the stock market. This type of risk involves external factors and has been managed through periodic assessment of the variations occurred in the market. |
35.2.2 Liquidity risk
The Company's liquidity risk consists of the possibility of having insufficient funds, cash or other financial assets to settle obligations on their scheduled maturity dates.
The Company manages liquidity risk relying on a set of methodologies, procedures and instruments applied to secure ongoing control over financial processes to ensure proper management of risks.
Investments are financed by incurring medium and long-term debt with financial institutions and capital markets.
Short, medium and long-term business projections are made and submitted to Management bodies for evaluation. The budget for the next fiscal year is annually approved.
Medium and long-term business projections cover monthly periods over the next five years. Short-term projections consider daily periods covering only the next 90 days.
The Company permanently monitors the volume of funds to be settled by controlling cash flows to reduce funding costs, the risk involved in the renewal of loan agreements and compliance with the financial investment policy, while concurrently keeping minimum cash levels.
The following table shows the expected undiscounted settlement amounts in each time range. Projections were based on financial indicators linked to the related financial instruments and forecast according to average market expectations as disclosed in the Central Bank of Brazil's Focus Report, which provides the average expectations of market analysts for these indicators for the current year and the following year. As from 2022, 2021 indicators are repeated on an unaltered basis throughout the forecast period.
| Interest (a) | Less than | 1 to 3 | 3 months |
| Over | Total |
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| 1 month | months | to 1 year | 1 to 5 years | 5 years | liabilities |
12.31.2018 |
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Loans and financing | Note 22 | 213,934 | 178,471 | 990,005 | 2,051,613 | 1,846,702 | 5,280,725 |
Debentures | Note 23 | 74,834 | 62,755 | 2,473,208 | 6,317,116 | 550,901 | 9,478,814 |
Payable related to concession | Rate of return + |
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use of public property | IGP-M and IPCA | 5,924 | 11,825 | 53,605 | 312,422 | 1,347,527 | 1,731,303 |
Suppliers | - | 1,058,074 | 211,709 | 145,317 | 28,986 | 25,113 | 1,469,199 |
Ordinary financing of taxes |
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with the federal tax authorities | Selic | 5,796 | 11,660 | 53,634 | 18,293 | - | 89,383 |
Special Tax Regularization Program - Pert | Selic | 3,916 | 7,889 | 36,498 | 223,421 | 440,857 | 712,581 |
Sectorial financial liabilities | Selic | - | - | - | 106,796 | - | 106,796 |
|
| 1,362,478 | 484,309 | 3,752,267 | 9,058,647 | 4,211,100 | 18,868,801 |
(a) Effective interest rate - weighted average. |
F-113
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
As disclosed in Notes 22.5 and 23.3, the Company has borrowings agreements and debentures with covenants that if breached may have their payment accelerated.
As at December 31, 2018, the Company recorded negative net working capital of R$ 17,268 (R$ 408,080 in 2017). Management has been monitoring the liquidity and taking actions to balance the short-term financial capacity, preserving the Company's investment programs, as well as seeking debt repayment extension.
35.2.3 Market risk
Market risk is the risk that fair value or the future cash flows of a financial instrument shall oscillate due to changes in market prices, such as currency rates, interest rates and stock price. The purpose of managing this risk is to control exposures within acceptable limits, while optimizing return.
a) Foreign currency risk (US Dollar)
This risk comprises the possibility of losses due to fluctuations in foreign exchange rates, which may reduce assets or increase liabilities denominated in foreign currencies.
The Company’s foreign currency indebtedness is not significant and it is not exposed to foreign exchange derivatives. The Company monitors all relevant foreign exchange rates.
The effect of the exchange rate variation resulting from the power purchase agreement with Eletrobras (Itaipu) is transferred to customers in Copel DIS's next tariff adjustment.
The exchange rate risk posed by the purchase of gas arises from the possibility of Compagas reporting losses on the fluctuations in foreign exchange rates, increasing the amount in Reais of the accounts payable related to the gas acquired from Petrobras. This risk is mitigated by the monitoring and transfer of the price fluctuation through tariff, when possible. Compagás monitors these fluctuations on an ongoing basis.
Sensitivity analysis of foreign currency risk
The Company has developed a sensitivity analysis in order to measure the impact of the devaluation of the U.S. dollar on its borrowings subject to currency risk.
The baseline scenario takes into account the existing balances in each account as of December 31, 2018 and the probable scenario assumes a variation in the foreign exchange rate – prevailing at the end of the period (R$/USD 3.70) based on the median market expectation for 2019 reported in the Central Bank’s Focus report of February8, 2019. For the scenarios 1 and 2, deteriorations of 25% and 50%, respectively, were considered for the main risk factor for the financial instrument compared to the rate used in the probable scenario.
F-114
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
. |
| Baseline | Projected scenarios - Dec.2019 | ||
Foreign exchange risk | Risk | 12.31.2018 | Probable | Scenario 1 | Scenario 2 |
. |
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|
Financial assets |
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|
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|
|
Collaterals and escrow accounts - STN | USD depreciation | 89,555 | (4,040) | (25,419) | (46,798) |
. |
| 89,555 | (4,040) | (25,419) | (46,798) |
Financial liabilities |
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|
Loans and financing - STN | USD appreciation | (104,751) | 4,726 | (20,281) | (45,287) |
Suppliers |
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Eletrobras (Itaipu) | USD appreciation | (145,098) | 6,546 | (28,092) | (62,731) |
Acquisition of gas | USD appreciation | (66,808) | 3,014 | (12,935) | (28,883) |
|
| (316,657) | 14,286 | (61,308) | (136,901) |
In addition to the sensitivity analysis required by CVM Resolution No. 475/2008, the Company evaluates its financial instruments considering the possible effects on profit and loss and equity of the risks evaluated by the Company’s Management on the reporting date for the financial instruments, as recommended by IFRS – 7 - Financial Instruments: Disclosure. Based on the equity position and the notional value of the financial instruments held as of December 31, 2018, it is estimated that these effects will approximate the amounts stated in the above table in the column for the forecast probable scenario, since the assumptions used by the Company are similar to those previously described.
b) Interest rate and monetary variation risk
This risk comprises the possibility of losses due to fluctuations in interest rates or other indicators, which may reduce financial income or financial expenses or increase the financial expenses related to the assets and liabilities raised in the market.
The Company has not engaged in transactions with derivatives to cover this risk, but it has continually monitored interest rates and market indicators, in order to assess the potential need for such transactions.
Sensitivity analysis of interest rate and monetary variation risk
The Company has developed a sensitivity analysis in order to measure the impact of variable interest rates and monetary variations on its financial assets and liabilities subject to these risks.
The baseline scenario takes into account the existing balances in each account as of December 31, 2018 while the‘probable’scenario assumes balances reflecting varying indicators as follows: CDI/Selic - 6.50%, IPCA - 3.87%, IGP-DI - 4.04%, IGP-M - 3.90% and TLP - 6.50%, estimated as market average projections for 2019 according to the Focus Report issued by the Central Bank of Brazil as of February 8, 2019, except TLP that considers the Company’s internal projection.
For the scenarios 1 and 2, deteriorations of 25% and 50%, respectively, were considered for the main risk factor for the financial instrument compared to the rate used in the probable scenario.
F-115
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
. |
| Baseline | Projected scenarios - Dec.2019 | ||
Interest rate risk and monetary variation | Risk | 12.31.2018 | Probable | Scenario 1 | Scenario 2 |
Financial assets |
|
|
|
|
|
Bonds and securities | Low CDI/SELIC | 344,296 | 24,100 | 18,075 | 12,052 |
Collaterals and escrow accounts | Low CDI/SELIC | 203 | 13 | 10 | 7 |
CRC transferred to the State Government of Paraná | Low IGP-DI | 1,445,042 | 58,380 | 43,785 | 29,190 |
Sectorial financial assets | Low Selic | 678,819 | 44,123 | 33,092 | 22,062 |
Accounts receivable related to the concession | Low IPCA | 2,484,880 | 96,165 | 72,124 | 48,082 |
Accounts receivable related to the concession compensation | Undefined (a) | 65,811 | - | - | - |
|
| 5,019,051 | 222,781 | 167,086 | 111,393 |
Financial liabilities |
|
|
|
|
|
Loans and financing |
|
|
|
|
|
Banco do Brasil | High CDI | (838,657) | (54,513) | (68,141) | (81,769) |
BNDES | High TJLP | (2,137,966) | (138,968) | (173,710) | (208,452) |
BNDES | High IPCA | (11,992) | (464) | (580) | (696) |
Promissory notes | High CDI | (571,822) | (37,168) | (46,461) | (55,753) |
Banco do Brasil - Distribution of Funds from BNDES | High TJLP | (107,324) | (6,976) | (8,720) | (10,464) |
Caixa Econômica Federal | High TJLP | (496) | (32) | (40) | (48) |
Other | No risk | (274,299) | - | - | - |
Debentures | High CDI/SELIC | (6,535,759) | (424,824) | (531,030) | (637,237) |
Debentures | High IPCA | (845,156) | (32,708) | (40,884) | (49,061) |
Debentures | High TJLP | (137,216) | (8,919) | (11,149) | (13,378) |
Suppliers - renegotiation of gas | High IGP-M | (28,670) | (1,118) | (1,398) | (1,677) |
Sectorial financial liabilities | High Selic | (96,531) | (6,275) | (7,843) | (9,412) |
Ordinary financing of taxes with the federal tax authorities | High Selic | (86,632) | (5,631) | (7,039) | (8,447) |
Special Tax Regularization Program - Pert | High Selic | (518,442) | (33,699) | (42,123) | (50,548) |
Payable related to concession | High IGP-M | (536,131) | (20,909) | (26,136) | (31,364) |
Payable related to concession | High IPCA | (48,032) | (1,859) | (2,324) | (2,788) |
. |
| (12,775,125) | (774,063) | (967,578) | (1,161,094) |
(a) Risk assessment still requires ruling by the Granting Authority. |
In addition to the sensitivity analysis required by CVM Resolution No. 475/2008, the Company evaluates its financial instruments considering the possible effects on profit and loss and equity of the risks evaluated by the Company’s Management on the reporting date for the financial instruments, as recommended by IFRS 9 - Financial Instruments: Disclosures. Based on the equity position and the notional value of the financial instruments held as of December 31, 2018, it is estimated that these effects will approximate the amounts stated in the above table in the column for the forecast probable scenario, since the assumptions used by the Company are similar to those previously described.
35.2.4 Electricity shortage risk
Approximately 64% of installed capacity in Brazil currently comes from hydroelectric generation, as informed by the Generation Information Bank of ANEEL, which makes Brazil and the geographic region in which we operate subject to hydrological conditions that are unpredictable, due to non-cyclical deviations of mean precipitation. Unsatisfactory hydrological conditions may cause, among other things, the implementation of comprehensive programs of electricity savings, such as rationalization or even a mandatory reduction of consumption, which is the case of rationing.
F-116
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
Since 2014, the reservoirs of the Southeast/Midwest, North and Northeast Brazilian regions have been subject to adverse climate situations, leading agencies responsible for this industry to adopt water resources optimization measures to guarantee fully meeting electricity demand.
The Electric Sector Monitoring Committee (CMSE) has maintained the energy deficit risk indicators within the safety margin in short-term projections. The same position is adopted by ONS regarding the risk of deficit in the medium term, as stated in the 2018-2022 Energy Operation Plan.
Although dam storage levels are not ideal, from the standpoint of regulatory agencies, when combined with other variables, they are sufficient to keep the risk of deficit within the safety margin established by the National Energy Policy Council - CNPE (maximum risk of 5%) in all subsystems.
35.2.5 Risk of GSF impacts
The Energy Reallocation Mechanism (MRE) is a system of redistribution of electric power generated, characteristic of the Brazilian electric sector, which has its existence by the understanding, at the time, of the need for a centralized operation associated with a centrally calculated optimum price known as PLD. Since generators have no control over their production, each plant receives a certain amount of virtual energy which can be compromised through contracts. This value, which enables the registration of bilateral contracts, is known as Physical Guarantee - GF and is also calculated centrally. Unlike PLD, which is calculated on a weekly basis, GF, as required by Law, is recalculated every five years, with a limit of increase or decrease, restricted to 5% by revision or 10% in the concession period.
The contracts need tohave an energy physical guarantee basis. This is done, especially, through the allocation of power generated received from the MRE or purchase. The GSF is the ratio of the entire hydroelectric generation of the MRE participants to the GF sum of all the MRE plants. Basically, the GSF is used to calculate how much each plant will receive from generation to back up its GF. Thus, knowing the GSF of a given month the company will be able to know if it will need to back up its contracts through purchases.
Whenever GSF multiplied by GF is less than the sum of contracts, the company will need to buy the difference in the spot market. However, whenever GSF multiplied by GF is greater than the total contracts, the company will receive the difference to the PLD.
The low inflows that have been recorded since 2014, as well as problems with delays in the expansion of the transmission system have resulted in low GSF values, resulting in heavy losses for the companies holding MRE participating hydroelectric projects.
For plants with contracts in the Free Contracting Environment - ACL, the main way to manage the low GSF risk is not to compromise the entire GF with contracts, approach currently adopted by the Company.
F-117
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
For the contracts in the ACR, Law 13,203/2015, allowed the generators to contract insurance for electricity demand (load), by means of payment of a risk premium. Copel adopted this approach to protect contracts related to energy generated by the Mauá, Santa Clara, Fundão, Baixo Iguaçu and Cavernoso II Thermoelectric Plants.
For the distribution segment, the effects of the GSF are perceived in the costs associated with quotas of Itaipu, of Angra and the plants whose concessions were renewed in accordance with Law 12,783/2013. This is a financial risk, since there is guarantee of neutrality of expenses with energy purchases through a tariff transfer.
35.2.6 Risk of non-renewal of concessions - generation and transmission
Decree 9,187 of November 1, 2017 regulates the extension of the thermoelectric power generation concessions set forth in Law 12,783/2013. Currently, there are two bills in progress that intend to reduce the deadline to file for intention to extend from 60 to 36 months and to terminate the possibility of extending the physical guarantee quotas regime established by said law.
By 2023, two generation plants will have their concessions overdue: the Usina Termelétrica de Figueira – UTE Figueira (20 MW) in March 2019 and the Governor Bento Munhoz hydroelectric power plant at Rocha Netto-GBM plant (1676 MW), in September 2023.
Regarding the HPP Figueira concession, the Company awaits a manifestation of the Concession Grantor regarding the request for extension of this Concession, required in March 2017. The plant is undergoing a modernization process and will have as direct benefits the improvement in energy efficiency and the reduction of pollutant emissions in the atmosphere, in comparison with the old plant.
Regarding the HPP GBM, the Company did not express an interest in extending this concession. Under Law 12,783/2013, the option for extension is conditioned to a change in the plant operation regime, which may occur within 60 months before its final term. Internal studies indicated that the extension through change of the anticipated operation regime is economically and financially disadvantageous in relation to the exploration of the plant in the present regime until its final term. The plant must be tendered by the Concession Grantor and the Company may participate in the auction, if it meets the qualification conditions.
According to the law, the Company may express its intention to extend the concession of the São Jorge HPP in 2019, the Apucaraninha HPP in 2020, and the Guaricana and Chaminé HPPs in 2021. If the Company does not express an interest in the extension of the current regime, the concession of the São Jorge HPP may, at its final term, be granted to the Company in the condition of registration, and the other concessions, at their final term, shall be tendered by the Concession Grantor.
Copel GeT does not have any transmission concession ending in the next ten years.
F-118
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
35.2.7 Risk of non-renewal of concessions - distribution of electricity
On December 9, 2015, pursuant to the Concession Agreement Amendment No. 46/1999 of Copel DIS, the concession was extended, provided that quality and efficiency parameters for provision of distribution services are met, measured by indicators that consider duration and frequency of service interruptions (DECi and FECi) and efficiency in the Company’s economic and financial management.
The fifth amendment to the concession agreement imposes indexes of economic and financial efficiency and quality. Failure to comply with the indexes for two consecutive years or any limits at the end of the first five years will result in the termination of the concession (clause 18, sub clause 1), observing the agreement terms, specifically the right to full defense and reconsideration.
Non-compliance with the global electricity supply quality indicators (DEC and FEC) for two consecutive years or three times in five years, depending on ANEEL’s regulation, may limit the payment of dividends or interest on capital (clause 2, sub clause 8), while the breach of the economic and financial sustainability indicators may require a capital contribution from the controlling shareholders (clause 13, sub clause 4).
From the sixth year following the signing of the agreement, the breach of quality criteria for three consecutive years or of economic and financial management criteria for two consecutive years will result in the opening of an expiration process (clause 12, sub clause 14), causing the end of the concession.
The following table sets forth the minimum parameters of economic and financial sustainability defined for Copel DIS in the first five years of the renewal:
|
|
| Quality - limits (a) | Quality (Performed) | ||
Year | Economic and Financial Management | Realized | DECi(b) | FECi(b) | DECi | FECi |
2016 |
|
| 13.61 | 9.24 | 10.80 | 7.14 |
2017 | EBITDA ≥ 0(d) | 661.4 | 12.54 | 8.74 | 10.41 | 6.79 |
2018 | EBITDA (-) QRR ≥ 0(e) (f) |
| 11.23 | 8.24 | 10,29 (c) | 6,20 (c) |
2019 | {Net Debt / [EBITDA (-) QRR]} ≤ 1 / (0.8 * SELIC)(e) (g) |
| 10.12 | 7.74 | - | - |
2020 | {Net Debt / [EBITDA (-) QRR]} ≤ 1 / (1.11 * SELIC)(e) (g) |
| 9.83 | 7.24 | - | - |
(a) According to Aneel’s Technical Note No. 0335/2015. | ||||||
(b) DECi - Equivalent Time of Interruption Caused by Internal Source per Consumer Unit; and FECi - Equivalent Frequency of Interruption Caused by Internal Source per Consumer Unit. | ||||||
(c) Preliminary data. | ||||||
(d) Regulatory EBTIDA adjusted for non-recurring events (PDV, post-employment benefit, provisions and reversals) according to clause six, of the Fifth Amendment to the Concession Agreement. | ||||||
(e) QRR: Regulatory Reintegration Quota or Regulatory Depreciation Expense. This is the value defined in the most recent Periodical Tariff Review (RTP), plus IPCA between the month preceding the RTP and the month preceding the twelve-month period of the economic and financial sustainability measurement. | ||||||
(f) Data will be disclosed in Copel DIS's Regulatory Financial Statements. | ||||||
(g) Selic: limited to 12.87% p.y. |
35.2.8 Risk of non-extension of the gas distribution concession
As presented in Note 2.1.1, the expiration date of the gas distribution concession of the subsidiary Compagás is under discussion with the concession grantor.
In the event of non-extension of the concession, Compagás will be entitled to compensation for investments made in the last 10 years prior to the end of the concession at their depreciated replacement value, according to the contractual clause.
F-119
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
35.2.9 Risk of overcontracting and undercontracting of electricity
Under the current regulatory model, the agreement for purchase of electric power by distributors is regulated by Law No. 10,484/2014 and Decree No. 5,163/2004, which determine that distributors must purchase the volume required to serve 100% of their market.
The contracting of the total output available in the market is verified by observing the period comprising the calendar year, and the difference between the costs remunerated by the tariff and those actually incurred in the power purchases are fully passed on to captive consumers, as long as the Distributor presents a contracting level between 100% and 105% of its market. However, if distributors determine contracting levels lower or higher than the regulatory limits, there is the assurance of neutrality if it is identified that such violation derives from extraordinary and unforeseen events that are not manageable by the buyer.
Since 2016, the distribution segment has been exposed to a general overcontracting scenario, as most companies determined contracting levels higher than 105%. Considering that several factors that have contributed to this situation are extraordinary and unavoidable by the distributors, such as the involuntary allocation of physical guarantee quotas and the broad migration of consumers to the free market, ANEEL and MME implemented a series of measures aiming at the mitigation of overcontracting, among which we can highlight:
•Normative Resolution No. 700/2016, which regulated the recognition of involuntary overcontracting arising from the reallocation of assured power quota of plants renewed pursuant Law 12,783/2013;
•Normative Resolution No. 693/2015, which regulated the New Energy and Decrease Clearing Facility (“Mecanismo de Compensação de Sobras e Déficits - MCSD-EN”), for the contracts arising from new generation projects, which permits reallocation of energy between distributors and generators;
•Normative Resolution No. 711/2016, which established criteria and conditions for bilateral agreements between distributors and generators, under the modalities of temporary total or partial reduction in the contracted power, permanent partial reduction, and also of contractual termination.
•Decree 9,143/2017 was published, which, among other measures, changes Decree 5,163/2014, recognizing: i) the involuntary contractual exposures arising from the migration of special consumers to the free market, provided that the evaluation of the maximum effort by distributors is considered by ANEEL; and ii) the contractual right to the reduction of existing power auctions, by the amounts related to the migration of special consumers to the free market. Eligible contracts are those arising from power auctions held after June 2016, pursuant to Normative Resolution No. 726/2016;
•Normative Resolution No. 824/2018, which established criteria for the processing of the Mechanism for Sale of Energy Surplus.
F-120
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
In relation to the contracting of 2018, preliminary, still in 2017, and throughout 2018, Copel Distribuição's indicators often indicated overcontracting scenarios. During this period, the monitoring of indicators of contracting levels prevailed, and mitigating actions were required.
All tools available were used to manage the power contracting by distributors, seeking to meet the requirement of endeavoring to adjust its contracting level to regulatory limits. In this context, we can highlight the following actions by the Company:
a) It reported surpluses of New Energy and Free Power Exchanges, under the Mechanism for Compensation of Power Surpluses and Deficits (MCSD), related to exceeding amounts of energy of physical guarantee quotas and of which the contracting by special consumers has been cancelled (disengaged);
b) It fully returned under the MCSD mechanism, the maximum variation of 4% in the contracted amounts of existing electricity;
c) It fully returned, under the monthly MCSD mechanism, the available amounts of energy existing in Distributor's portfolio, related to the disengaging of potentially free consumers; and
d) It established agreements with generators for the reduction of contracts, entering into bilateral agreements in accordance with Normative Resolution No. 711/2016;
According to the most up-to-date market data, Copel Distribuição closed 2018 year within the regulatory limits of 100% to 105% contracting, thus ensuring the neutrality of the costs associated with the energy purchase.
35.2.10 Gas shortage risk
This risk involves potential periods of shortage of natural gas supply to meet the Company’s gas distribution and thermal generation business requirements.
Long periods of gas shortage could result in losses due to lower revenues by subsidiaries Compagas and UEG Araucária.
The natural gas supply contract between Brazil and Bolivia is effective for twenty years, ending in 2019. Due to the non-use of all contracted natural gas in recent years, the Ministry of Mines and Energy considers the extension of the term of this contract by two years in its Ten Year Planning. In the event of non-renewal of this contract, currently centralized in Petrobras, direct consumers or state distributors must directly negotiate the fuel supply with producers, importers or suppliers of natural gas.
On the other hand, the volume of natural gas produced in the pre-salt has increased. The Brazilian’s current net output is 67 million m³/day and with growing trend.
In addition to the gas from Bolivia and from the pre-salt, there is the alternative of importing the Liquified Natural Gas (LNG). Currently, Petrobras has tree regasification stations with total capacity of 41 million m³/day.
F-121
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
There are also projects of new regasification stations in all Brazilian regions, with stations located in the South region of Brazil capable of serving the consumption of this region of the country without the need for large investments in transport infrastructure and reducing the level of capacity utilization of the Gasbol Sul line, which would increase the supply of natural gas in Paraná.
In the international market, the natural gas price has remained stable, indicating a balance between supply and demand.
In this scenario, the natural gas shortage risk can be considered low.
35.2.11 Risk of non-performance of wind farms
The power generation authorization contracts for wind power are subject to performance clauses, which provide for a minimum annual and four-year generation of the physical guarantee committed in the auction. Ventures are subject to climatic factors associated with wind velocity uncertainties, and non-compliance with what is stated in the agreement may jeopardize future revenues of the Company.
35.2.12 Risk related to price of power purchase and sale transactions in the active market
The Company operates in the market for the purchase and sale of energy in the active market (NE nº 4.15), with the objective of achieving results with changes in energy prices, subject to the risk limits established by Management. This activity, therefore, exposes the Company to the risk of future energy price.
The purchase and sale of energy are recognized at fair value through profit or loss, based on the difference between the contracted price and the market price of the transactions at the balance sheet date.
Based on the notional value of R$ 222,928 for purchase contracts and R$ 95,382 for contracts for the sale of electricity, outstanding on December 31 of 2018, the fair value was estimated using the prices defined by the Company in the last week of December 2018, which represented the best estimate of the future market price. The discount rate uses the return rate of the NTN-B disclosed by ANBIMA as of December 31, 2018, adjusted by a credit risk rate.
The balances relating to these outstanding transactions at December 31, 2018 are presented below.
| 12.31.2018 | ||
| Assets | Liabilities | Net |
Current | 10,748 | (6,991) | 3,757 |
Noncurrent | 4,045 | (4,016) | 29 |
| 14,793 | (11,007) | 3,786 |
Sensitivity analysis on the power purchase and sale transactions in the active market
The main risk factor is the exposure to variation of energy market prices. The variation of the discount rate does not have a relevant impact on the fair value determined, especially in view of the short-term for the settlement of contracts.
F-122
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
The sensitivity analyses were prepared in accordance with CVM Instruction 475/08, considering, for scenarios 1 and 2, the increase or decrease of 25% and 50% in future prices, applied to market prices of December 31, 2018. The results obtained are as follows:
| Price | Baseline | Projected scenarios | |
| variation | 31.12.2018 | Scenario 1 | Scenario 2 |
|
|
| ||
Gains (losses) on purchase and sale of energy in active market | Elevation | 3,786 | 31,356 | 58,926 |
|
|
| ||
| Reduction | 3,786 | (23,784) | (51,354) |
35.3 Capital management
The Company seeks to maintain a strong capital base to maintain the trust of investors, creditors and market and ensure the future development of the business. Management also strives to maintain a balance between the highest possible returns with more adequate levels of borrowings and the advantages and the assurance afforded by a healthy capital position. Thus, it maximizes the return for all stakeholders in its operations, optimizing the balance of debts and equity.
The Company monitors capital by using an index represented by adjusted consolidated net debt divided by adjusted consolidated EBITDA (Earnings before interest, taxes, depreciation and amortization), for the last twelve months. The corporate goal established in the strategic planning provides for maintenance of ratio below 3.5 while any expectation of failing to meet this target will prompt Management to take steps to correct its course by the end of each reporting period.
As of December 31, 2018, the ratio attained is shown below:
| 12.31.2018 | 12.31.2017 |
Loans and financing | 4,047,307 | 3,759,505 |
Debentures | 7,518,131 | 6,070,978 |
(-) Cash and cash equivalents | (1,948,409) | (1,040,075) |
(-) Bonds and securities (current) | (124,862) | (1,341) |
(-) Bonds and securities (noncurrent) | (119,574) | (112,604) |
(-) Collaterals and escrow accounts STN | (89,555) | (75,665) |
Adjusted net debt | 9,283,038 | 8,600,798 |
Net income | 1,444,004 | 1,118,255 |
Equity in earnings of investees | (135,888) | (101,739) |
Deferred IRPJ and CSLL | (68,072) | (105,257) |
Provision for IRPJ and CSLL | 580,065 | 379,943 |
Financial expenses (income), net | 438,050 | 748,440 |
Depreciation and amortization | 749,179 | 731,599 |
Adjusted ebitda | 3,007,338 | 2,771,241 |
Adjusted net debt / Adjusted ebitda | 3.09 | 3.10 |
F-123
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
35.3.1 The equity to debt ratio is shown below:
|
|
|
Indebtedness | 12.31.2018 | 12.31.2017 |
Loans and financing | 4,047,307 | 3,759,505 |
Debentures | 7,518,131 | 6,070,978 |
(-) Cash and cash equivalents | 1,948,409 | 1,040,075 |
(-) Bonds and securities (current) | 124,862 | 1,341 |
Net debt | 9,492,167 | 8,789,067 |
Equity | 16,336,214 | 15,510,503 |
Equity indebtedness | 0.58 | 0.57 |
F-124
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
36 Related Party Transactions
|
| Assets |
| Liabilities |
|
| Revenue |
|
| Cost / Expense |
Related parties / Nature of operation | 12.31.2018 | 12.31.2017 | 12.31.2018 | 12.31.2017 | 12.31.2018 | 12.31.2017 | 12.31.2016 | 12.31.2018 | 12.31.2017 | 12.31.2016 |
Controlling shareholder |
|
|
|
|
|
|
|
|
|
|
State of Paraná - dividends payable | - | - | 112,196 | 85,710 | - | - | - | - | - | - |
CRC Transfer (Note 8) | 1,445,042 | 1,516,362 | - | - | 188,797 | 90,712 | 188,918 | - | - | - |
"Luz Fraterna" Program (a) | 10,353 | 168,405 | - | - | - | - |
| - | - | - |
2014 World Cup construction work (Note 15.1.2) | - | 14,266 | - | - | - | - |
| - | - | - |
Morar Bem Paraná Program | - | 261 | - | - | - | 1,165 | 5,502 | - | - | - |
Remuneration and employ social security charges assigned (b) | 1,248 | 56 | - | - | - | - |
| - | - | - |
Telecommunication services (c) | 15,788 | 28,750 | - | - | 41,375 | 40,396 | 29,763 | - | - | - |
Sistema Meteorológico do Paraná - Simepar (d) | - | - | 181 | - | - | - | - | (1,559) | (1,752) | (1,799) |
. |
|
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|
Entities with significant influence |
|
|
|
|
|
|
|
|
|
|
BNDES and BNDESPAR -dividends payable (e) | - | - | 80,144 | 59,366 | - | - | - | - | - | - |
Financing (Note 22) | - | - | 2,208,920 | 1,576,660 | - | - | - | (131,379) | (140,537) | (149,794) |
Debentures - Compagás (Note 23) | - | - | 17,651 | 42,675 | - | - | - | (2,625) | (5,242) | (2,883) |
Debentures - wind farms (Note 23) (f) | - | - | 268,286 | 281,448 | - | - | - | (30,316) | (30,540) | (14,415) |
|
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| |
State of Paraná investee |
|
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|
Sanepar (c) (g) | - | 24 | 273 | - | 4,200 | 3,699 | 3,319 | (5,227) | (1,783) | (1,455) |
Use of water withdrawn from plants’ reservoirs | 144 | - | - | - | - | - | - | - | - | - |
Dividends | - | 12,095 | - | - | - | - | - | - | - | - |
|
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| |
Joint ventures |
|
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|
|
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|
|
Voltalia São Miguel do Gostoso(Note 15.4) | - | 38,169 | - | - | 294 | 3,513 | 3,509 | - | - | - |
Dividends | 1,032 | 1,032 | - | - | - | - | - | - | - | - |
|
|
|
|
|
|
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|
|
| |
Caiuá Transmissora de Energia (h) (i) (j) | 329 | 320 | 285 | 271 | 4,250 | 3,792 | 2,066 | (14,869) | (13,700) | (15,595) |
Dividends | 3,316 | 1,991 | - | - | - | - |
| - | - |
|
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| |
Integração Maranhense Transmissora (h) (j) | - | - | 58 | 43 | - | - | - | (1,797) | (1,468) | (1,910) |
Dividends | 6,033 | 4,012 | - | - | - | - | - | - | - | - |
|
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| |
Matrinchã Transmissora de Energia (h) (j) | - | - | 316 | 220 | - | - | - | (9,514) | (6,636) | (4,043) |
Dividends | 21,470 | 36,840 | - | - | - | - | - | - | - | - |
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| |
GuaraciabaTransmissora de Energia (h) (j) | - | - | 136 | 74 | - | - | - | (4,475) | (3,202) | (966) |
Dividends | 15,869 | 11,541 | - | - | - | - | - | - | - | - |
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Paranaíba Transmissora de Energia(h) | - | - | 212 | 159 | - | - | - | (6,595) | (3,642) | (283) |
Dividends | 8,544 | 7,093 | - | - | - | - | - | - | - | - |
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|
| |
Cantareira Transmissora de Energia(h) | - | - | 170 | - | - | - | - | (1,618) | - | - |
Dividends | 1,461 | 2,146 | - | - | - | - | - | - | - | - |
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|
|
|
|
|
|
| |
Mata de Santa Genebra Transmissão(h) | 5,126 | 78 | - | - | 6,600 | 1,950 | - | - | - | - |
Dividends | - | 3,264 | - | - | - | - | - | - | - | - |
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| |
Associates |
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Dona Francisca Energética S.A.(k) | - | - | 1,436 | 1,436 | - | - | - | (16,903) | (17,031) | (16,949) |
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| |
Foz do Chopim Energética Ltda. (c) (h) | 193 | 163 | - | - | 2,668 | 2,063 | 2,178 | - | - | - |
Dividends | 18,071 | - | - | - | - | - | - | - | - | - |
Acquisition of power plant projects | - | - | 19,461 | - | - | - | - | - | - | - |
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| |
Sercomtel S.A. Telecomunicações (c) (l) | 2,226 | 3,778 | - | - | 8,051 | 8,153 | 8,210 | (4) | (4) | (6) |
. |
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Key management staff |
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|
|
|
Fees and social security charges (Note 32.2) | - | - | - | - | - | - | - | (27,368) | (28,876) | (26,021) |
Pension and healthcare plans (Note 24.3) | - | - | - | - | - | - | - | (1,725) | (1,690) | (1,403) |
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Other related parties |
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Fundação Copel (c) | 20 | 38 | - | - | 299 | 316 | 305 | - | - | - |
Administrative property rental | - | - | 312 | 349 | - | - | - | (15,396) | (16,347) | (13,519) |
Pension and healthcare plans (Note 24.3) | - | - | 968,763 | 866,103 | - | - | - | - | - | - |
. |
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Lactec (m) | - | - | 1,601 | 1,762 | - | - | - | (4,026) | (15,912) | (12,911) |
F-125
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
a) | The Luz Fraterna Program, created under Law No. under ticker 491/2013 and No. 17,639/2013 allows the State Government to pay for the electricity bills of low income families in Paraná,which have duly applied for the program and providedthattheir consumption does not exceed 120 kWh per month. This benefit is available to residential customers with single-phase connections, rural customers with single-phase connections or two-phase connections with circuit breakers of up to 50 amperes. Applicants must not have more than one electricity bill under their names and must not have any pending debts to the Company. |
In March 2018 the amount of R$ 159,274 was deducted. The principal interest, fine and monetary restatement, at December 31, 2011, totaled R$ 158,849. For these charges on electricity bills for the period of September 2010 to June 2015, a lawsuit filed against the State of Paraná was filed on November 5, 2018, relating to the payment of invoices pursuant to State Law No. 14,087/2003. We highlight that despite the negotiations maintained by the Management, seeking to settle this debt, uncertainties still exist regarding the realization of this asset and therefore, in view of this condition, this asset was not recognized, therefore, in accordance with the current accounting standards. For the tax treatment, as determined by the Federal Revenue of Brazil in the Instruction Normative No. 1,753/2017, the Company has taxed this revenue. Management further emphasizes that it is making all necessary efforts and taking all necessary measures to preserve the Company’s interests. | |
b) | Reimbursement of wages and social charges for employees transferred to the Paraná State Government. Balances presented are net of expected credit loss. |
c) | Revenue of Copel TEL from telecommunications services and lease of equipment and infrastructure. |
d) | The Meteorological System of Paraná - Simepar is a supplementary unit of the Independent Social Service Paraná Technology, linked to the State Department of Science, Technology and Higher Education. Simepar had contracts with Copel for services of weather forecast, meteorological reports, ampacity analysis, mapping and analyses of winds and atmospheric discharges. |
e) | BNDES is the parent company of BNDES Participações S.A. - BNDESPAR, which owns Copel shares (Note 30.1). On December 22, 2018, it was ended the shareholder agreement between the State of Paraná and BNDESPAR, signed on December 22, 1998. |
f) | BNDES and BNDESPAR acquired all the debentures issued by the subsidiaries Nova Asa Branca I, Nova Asa Branca II, Nova Asa Branca III, Nova Eurus IV and Ventos de Santo Uriel (Note 23). |
g) | Basic sanitation provided by Sanepar. |
h) | Charges for the use of the Transmission System and revenue from operating and maintenance contracts, engineering services and sharing of facilities with Copel GeT. |
F-126
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
i) | Copel DIS has Contracts for Connecting to the Transmission System - CCT with Caiuá Transmissora de Energia, with expiration until the concession of the distributor or transmitter expires, whichever occurs first. |
j) | Copel DIS maintains a Contract for the Use of Transmission System (Cust) with ONS and power transmission concession operators whose subject matter is the contracting of Transmission System Use Amount (Must). Contracting is permanent and is regulated by ANEEL Normative Resolution No. 666/2015. Amounts are defined for four subsequent years, with annual reviews. |
k) | Power purchase and sale agreement signed by Dona Francisca Energética and Copel GeT, expiring on March 31, 2025. |
l) | Light pole sharing agreement, signed between Sercomtel S.A. Telecomunicações and Copel DIS. |
m) | The Institute of Technology for Development (Lactec) is a Public Interest Civil Society Organization (OSCIP), in which Copel is an associate. Lactec has service and R&D contracts with Copel GeT and Copel DIS, which are subject to prior or later control and approval by ANEEL. |
Transactions arising from operations in a regulated environment are billed according to the criteria and definitions established by the regulatory agents.
36.1 Guarantees awarded to related parties
Sureties and guarantees granted by Copel to its subsidiaries for financing and debentures are informed in Notes 22 and 23.
Copel provided financial guarantees, in the form of corporate guarantee letter, for power purchase agreements made by Copel GeT, in the total amount of R$ 3,246 (R$ 3,645 in 2017) and made by Copel Energia, in the amount of R$ 79,358 (R$ 49,584 in 2017).
Sureties and guarantees granted by Copel and Copel GeT for financing, debentures and insurance contracts of joint ventures are shown below:
F-127
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
|
|
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|
|
|
|
|
|
|
| Date | Final | Amount | Balance | Interest | Amount | |
| Company | Operation | issued | maturity | approved | 12.31.2018 | % | guarantees |
(1) | Caiuá Transmissora | Financing | 12.23.2013 | 02.15.2029 | 84,600 | 64,643 | 49.0 | 35,843 |
(2) | Guaraciaba Transmissora | Financing | 09.28.2016 | 01.15.2031 | 440,000 | 510,075 | 49.0 | 191,133 |
(3) | Integração Maranhense | Financing | 12.30.2013 | 02.15.2029 | 142,150 | 104,570 | 49.0 | 58,797 |
(4) | Mata de Santa Genebra | Financing | 11.30.2017 | 07.15.2033 | 1,018,500 | 968,614 | 50.1 | 353,205 |
(5) | Matrinchã Transmissora | Financing | 12.27.2013 | 05.15.2029 | 691,440 | 550,181 | 49.0 | 284,036 |
(6) | Matrinchã Transmissora | Debentures | 05.15.2016 | 06.15.2029 | 180,000 | 203,327 | 49.0 | 97,740 |
(7) | Paranaíba Transmissora | Financing | 10.21.2015 | 10.15.2030 | 606,241 | 559,720 | 24.5 | 143,925 |
(8) | Paranaíba Transmissora | Debentures | 01.15.2017 | 03.15.2028 | 120,000 | 109,102 | 24.5 | 26,041 |
(9) | Voltália São Miguel do Gostoso Participações S.A. (a) | Debentures | 01.15.2016 | 12.15.2028 | 57,000 | 49,424 | 49.0 | 26,569 |
(10) | Usina de Energia Eólica Carnaúba S.A. (a) | Financing | 08.24.2015 | 11.15.2031 | 74,000 | 60,303 | 49.0 | 26,829 |
(11) | Usina de Energia Eólica Reduto S.A. (a) | Financing | 08.24.2015 | 11.15.2031 | 70,000 | 56,547 | 49.0 | 26,827 |
(12) | Usina de Energia Eólica Santo Cristo S.A. (a) | Financing | 08.24.2015 | 11.15.2031 | 74,000 | 59,234 | 49.0 | 25,220 |
(13) | Usina de Energia Eólica São João S.A. (a) | Financing | 08.24.2015 | 11.15.2031 | 68,000 | 55,074 | 49.0 | 25,569 |
(14) | Cantareira Transmissora de Energia | Financing | 12.28.2016 | 09.15.2032 | 426,834 | 471,449 | 49.0 | 208,101 |
(15) | Cantareira Transmissora de Energia | Debentures | 01.09.2018 | 08.15.2032 | 100,000 | 107,059 | 49.0 | 49,000 |
|
|
|
|
|
|
|
| 1,578,835 |
(a) Subsidiaries of Voltália São Miguel do Gostoso I Participações S.A. | ||||||||
Financial institution (fund provider): | ||||||||
BNDES: (1) (2) (3) (4) (5) (7) (10) (11) (12) (13) (14) | ||||||||
Allocation: | ||||||||
Investment Program and/or Working capital. | ||||||||
Endorsement/Security: | ||||||||
Provided by Copel Geração e Transmissão: (1) (3); | ||||||||
Provided by Copel: (2) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14) (15) | ||||||||
Securities offered for the transaction: | ||||||||
Pledge of shares of Copel Geração e Transmissão proportional to the interest in projects. |
Performance bond | Final | Amount | % endorsement | Amount |
Company | maturity | Insured | Copel GeT | endorsement |
Matrinchã Transmissora | 09.30.2019 | 90,000 | 49.0 | 44,100 |
Guaraciaba Transmissora | 04.30.2020 | 47,000 | 49.0 | 23,030 |
Mata de Santa Genebra | 11.29.2019 | 78,300 | 50.1 | 39,228 |
Cantareira Transmissora | 08.31.2019 | 31,200 | 49.0 | 15,288 |
|
|
|
| 121,646 |
37 Commitments
Commitments related to long-term contracts not yet incurred, and therefore not recognized in the financial statements, are as follows:
| 12.31.2018 | 12.31.2017 |
Energy purchase and transportation contracts | 140,638,024 | 118,588,046 |
Additions to property, plant and equipment | ||
Construction of transmission grid and substations | 214,086 | 292,601 |
Construction of HPP Colíder power plant | 36,303 | 42,653 |
Construction of HPP Baixo Iguaçu | 202,668 | 193,156 |
Construction of Cutia wind farm | 40,392 | 701,191 |
Telecommunications works | 115,710 | 131,557 |
Acquisition of assets for electricity distribution | 528,109 | 161,337 |
Gas purchase contracts | 1,339,848 | 2,346,046 |
F-128
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
38 Insurance
Details by peril type and effective date of the main insurance policies can be seen below:
| End | Insured |
Policy | of term | amount |
Nominated Risks | 08.24.2019 | 2,226,749 |
Operational risks - UHE Colíder | 11.01.2019 | 988,398 |
Operational risks - UEG Araucária (a) | 11.30.2019 | 849,558 |
Operational risks - HPP Governador Jayme Canet Junior | 11.23.2019 | 799,290 |
Operational risks - Brisa Potiguar | 06.27.2019 | 770,713 |
Fire - owned and rented facilities | 08.24.2019 | 619,414 |
Operational risks - São Bento | 06.27.2019 | 489,357 |
Operational risks - Elejor | 03.11.2020 | 302,616 |
Legal guarantee - Office of the General Counsel to the National Treasury | 05.10.2020 | 326,712 |
(a) The values of the insured of operating risks - UEG Araucária have been translated from USD into BRL, with the current | ||
rate R$ 3.8748 as of December 31, 2018. |
In addition to the insurance policies listed above, the Company takes out other insurance policies with lower values, such as: for liability of Directors and Officers (D&O), general civil liability, payment guarantee, sundry perils, national and international transportation, life, aircraft and vehicles. The guarantee insurance taken out by the subsidiaries, joint ventures and associates have Copel and/or Copel GeT as guarantor, within the limits of their share of interest in each project.
39 Additional information to the Statement of Cash Flows
39.1 Transactions not involving cash
Among the transactions carried out in the line item Contract assets, specified in Notes 11.1 and 11.2, the acquisitions totaled R$ 813,450(R$778,386 in 2017, presented in Notes 19.1, 19.3 and 20.4). Of this amount, R$ 50,927(R$30,312 in 2017) represent the amount of purchases made in installments and not settled through the end of the reporting period.
As mentioned in Note 17.1, the total amount of contributions in the line item Investments was R$ 87,781. This amount includes R$ 36,224 related to the capital increase in joint venture Voltalia São Miguel do Gostoso I, made through the conversion and settlement of the loan agreement between the parent company Copel and the mentioned investee.
In turn, according to information in Note 18.2, property, plant and equipment acquisitions totaled R$ 1,455,318(R$1,318,336 in 2017). Of this amount, R$ 71,454(R$123,268 in 2017) represent the amount of purchases made in installments and not settled through the end of the reporting period.
The mentioned transactions did not involve cash and, for this reason, are not being presented in the statement of cash flows.
F-129
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
40 Subsequent events
40.1 SPE Uirapuru Transmissora de Energia S.A.
In March 2019 Copel GeT signed an Agreement for the Purchase and Sale of Shares – CCVA with Centrais Elétricas Brasileiras S.A. – Eletrobrás and the Eletrosul Foundation for Social Security and Assistance – ELOS to transfer 100% of the shares of SPE Uirapuru Transmissora de Energia S.A., subject to approval by the National Electric Energy Agency – Aneel and by Administrative Council for Economic Defese – CADE. The Company awaits completion of the pending suspensive conditions, from which time it can obtain control of the company within 15 business days.
40.2 Commercial start-up of projects
Usina Hidrelétrica Baixo Iguaçu
On February 8nd, 2019, the first generating unit, of 116.7 MW of installed capacity, according to ANEEL dispatch number 384/2019 started production operations; on the February 21, 2019 was followed by the second generating unit of 116.7 MW of installed capacity, according to ANEEL dispatch number 461/2019; and on April 10, 2019, the third and last generating unit started production operations, according to ANEEL dispatch number 1037/2019, totalizing 350.2 MW of installed capacity of the plant.
Usina Hidrelétrica Colíder
On March 9, 2019, the first generating unit, of 100 MW of installed capacity, according to ANEEL dispatch number 673/2019 started production operations
Complexo Eólico Cutia e Bento Miguel
In January 2019, the Paraíso dos Ventos do Nordeste wind farm, belonging to the Cutia Complex, started its operations.
In January, February and April 2019, the Bento Miguel Complex wind farms started to operate.
SPE Mata de Santa Genebra
On February 2nd, 2019, all the steps programmed for the period of operations in tests of the Santa Bárbara d’Oeste substation, belonging to SPE Mata de Santa Genebra, were completed, allowing the operation of the substation in a commercial operation. SPE Mata de Santa Genebra still awaits the issuance of the Provisional Release Agreement (TLP) by ONS, without prejudice to the date already started of the commercial operation. The TLP will provide to SPE Mata de Santa Genebra the receipt of a portion of the Annual Revenue Allowed – RAP, related to the Santa Bárbara d’Oeste substation, in the amount of R$ 10,800. The total RAP foreseen for the project is R$ 233,800.
F-130
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
40.3 Mata de Santa Genebra Transmissão S.A.
On April 22, 2019, Mata de Santa Genebra Transmissão S.A. completed the issue of simple non-convertible debentures in accordance with Law 12,431 of June 24, 2011 (“Infrastructure Debentures”) for public distribution with restricted placement efforts, pursuant to CVM Ruling 476/2009, in the total amount of R$210,000. The Company issued 210,000 debentures, with par value of R$1 each, maturing within 11 years and 8 months, with semi-annual amortization and interest, both as from November 15, 2020. The debentures will earn interest corresponding to the variation of the IPCA, plus surcharge of 4.95% p.a. Copel’s corporate guarantee was provided for this transaction, at the percentage of Copel GeT’s interest in Mata de Santa Genebra (50.1%). The funds raised will be used for implementation of the project or reimbursement of expenditures, expenses or debts related to its implementation.
41 Condensed unconsolidated financial information of Companhia Paranaense de Energia - Copel
Since the condensed unconsolidated financial information required by Rule 12-04 of Regulation S-X is not required under IFRS issued by the International Accounting Standards Board - IASB, such information was not included in the original financial statements filed with the Brazilian Securities and Exchange Commissions – CVM in March, 28, 2019. In order to attend the specific requirements of the Securities and Exchange Commission (the “SEC”), Management has incorporated the condensed unconsolidated information in these financial statements as part of the Form 20-F. The condensed unconsolidated financial information of Companhia Paranaense de Energia - Copel, presented herein were prepared considering the same accounting policies as described in Note 3 and 4 to Company’s consolidated financial statements.
(a) Condensed statements of financial position as of December 31, 2018 and 2017
|
|
|
Assets | 12.31.2018 | 12.31.2017 |
Current assets |
| |
Cash and cash equivalents | 315,003 | 56,833 |
Bonds and securities | 123,560 | 90 |
Collaterals and escrow accounts | 129 | 129 |
Dividends receivables | 519,100 | 459,464 |
CRC transferred to the State Government of Paraná | 190,876 | 167,109 |
Other current receivables | 7,027 | 8,287 |
Income tax and social contribution | 6,130 | 14,055 |
Other current recoverable taxes | 321 | 276 |
Prepaid expenses | 40 | - |
Receivable from related parties | 8,134 | 292,051 |
1,170,320 | 998,294 | |
Noncurrent assets |
| |
Other temporary investments | 19,511 | 18,727 |
CRC transferred to the State Government of Paraná | 1,254,166 | 1,349,253 |
Judicial deposits | 131,840 | 119,167 |
Other current receivables | 7,444 | - |
Income Tax and Social Contribution | 148,140 | 158,808 |
Deferred tax assets | 147,368 | 102,236 |
Other noncurrent recoverable taxes | 86,110 | 15 |
Receivables from related parties | 104,751 | 219,426 |
1,899,330 | 1,967,632 | |
| ||
Investments | 16,070,567 | 14,987,607 |
Property, Plant and Equipment, net | 996 | 830 |
Intangible Assets | 1,593 | 1,603 |
16,073,156 | 14,990,040 | |
| ||
Total assets | 19,142,806 | 17,955,966 |
F-131
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
|
|
|
Liabilities | 12.31.2018 | 12.31.2017 |
Current liabilities |
| |
Payroll, social charges and accruals | 6,747 | 6,977 |
Related parties | 755 | 3,936 |
Suppliers | 2,731 | 2,096 |
Income tax and social contribution | - | 2,467 |
Other taxes payable | 152 | 476 |
Loans and financing | 129,401 | 322,092 |
Debentures | 941,677 | 339,341 |
Dividends payable | 354,203 | 267,988 |
Post employment benefits | 87 | 57 |
Other accounts payable | 135 | 249 |
Provisions for legal claims | - | 112,000 |
1,435,888 | 1,057,679 | |
Noncurrent liabilities |
| |
Other taxes due | 2,602 | 2,365 |
Loans and financing | 773,984 | 664,020 |
Debentures | 596,403 | 876,140 |
Post employment benefits | 4,867 | 3,995 |
Other accounts payable | 3,957 | 830 |
Provisions for legal claims | 292,180 | 143,095 |
1,673,993 | 1,690,445 | |
Equity |
| |
Share capital | 7,910,000 | 7,910,000 |
Equity valuation adjustments | 785,610 | 895,601 |
Legal reserves | 914,751 | 844,398 |
Retained earnings | 6,422,564 | 5,557,843 |
16,032,925 | 15,207,842 | |
| ||
Total liabilities and equity | 19,142,806 | 17,955,966 |
(b) Condensed statements of operations for the years ended December 31, 2018, 2017 e 2016
| 12.31.2018 | 12.31.2017 | 12.31.2016 |
Other operating revenues (expenses) |
|
| |
General and administrative expenses | (67,292) | (59,601) | (107,761) |
Other revenues (expenses), net | 11,696 | (68,788) | 231,651 |
Result of equity in investees | 1,356,375 | 1,291,434 | 839,853 |
1,300,779 | 1,163,045 | 963,743 | |
|
| ||
Operating income before financial results | 1,300,779 | 1,163,045 | 963,743 |
|
| ||
Financial income (expenses) |
|
| |
Financial revenues | 301,729 | 181,312 | 321,056 |
Financial expenses | (238,355) | (327,855) | (334,113) |
63,374 | (146,543) | (13,057) | |
|
| ||
Operating income | 1,364,153 | 1,016,502 | 950,686 |
|
| ||
Income tax and social contribution |
|
| |
Income tax and social contribution | (2,083) | (36,803) | (4,882) |
Deferred income tax and social contribution | 44,993 | 53,927 | (50,032) |
42,910 | 17,124 | (54,914) | |
|
| ||
Net income for the period | 1,407,063 | 1,033,626 | 895,772 |
|
| ||
Basic and diluted net earning per share attributed do parent company shareholders - in reais |
|
| |
Class A preferred shares | 5.40201 | 3.96830 | 3.43906 |
Class B preferred shares | 5.40201 | 3.96830 | 3.43906 |
Common shares | 4.91091 | 3.60754 | 3.12641 |
F-132
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
(c) Condensed statement of comprehensive income for the years ended December 31, 2018, 2017 e 2016
| 12.31.2018 | 12.31.2017 | 12.31.2016 |
NET INCOME | 1,407,063 | 1,033,626 | 895,772 |
Other comprehensive income |
|
| |
Items that will never be reclassified to profit or loss |
|
| |
Gain (losses) on actuarial liabilities |
|
| |
Post employment benefits | (408) | 18 | 6,460 |
Post employment benefits - equity | (38,245) | (29,567) | (63,913) |
Taxes on other comprehensive income | 139 | (7) | (2,196) |
Items that are or maybe reclassified to profit or loss |
|
| |
Adjustments related to financial assets: | - | 11,661 | 3,612 |
Adjustments related to financial assets - equity | - | 9,554 | - |
Taxes on other comprehensive income | - | (3,965) | (1,229) |
Realization - gain on financial assets, net of taxes | - | (9,355) | - |
Realization - gain on financial assets - equity | - | (9,554) | - |
Total comprehensive income, net of taxes | (38,514) | (31,215) | (57,266) |
TOTAL COMPREHENSIVE INCOME | 1,368,549 | 1,002,411 | 838,506 |
(d) Condensed statements of cash flows for the years ended December 31, 2018, 2017 and 2016
|
|
|
|
| 12.31.2018 | 12.31.2017 | 12.31.2016 |
Net cash generated from operating activities | 653,230 | 440,406 | 1,905,189 |
|
| ||
Cash flow from investing activities |
|
| |
Financial investments | (124,254) | 24 | 23 |
Loans and financing granted to related parties | (192,445) | (251,856) | (87,272) |
Receipt of loans and financing granted to related parties | 560,877 | 124,122 | 5,112 |
Disposal of investments | - | 397,572 | - |
Additions in investments | (608,934) | (574,347) | (1,489,563) |
Capital reduction of investees. | 45,000 | 170,000 | - |
Additions to property, plant and equipment | (267) | (282) | (224) |
Additions to intangible | (3) | (499) | (122) |
|
| ||
Net cash used in investing activities | (320,026) | (135,266) | (1,572,046) |
|
| ||
Cash flow from financing activities |
|
| |
Loans and financing obtained from third parties | - | 77,000 | - |
Issue of Debentures | 600,000 | 520,000 | - |
Amortization of principal - loans and financing | (77,000) | (83,000) | (6,000) |
Amortization of principal - debentures | (333,300) | (333,300) | - |
Dividends and interest on capital paid | (264,734) | (475,103) | (306,700) |
|
| ||
Net cash used in financing activities | (75,034) | (294,403) | (312,700) |
|
| ||
Total effects on cash and cash equivalents | 258,170 | 10,737 | 20,443 |
|
| ||
Cash and cash equivalents at the beginning of the period | 56,833 | 46,096 | 25,653 |
Cash and cash equivalents at the end of the period | 315,003 | 53,833 | 46,096 |
|
| ||
Change in cash and cash equivalents | 258,170 | 10,737 | 20,443 |
As at December 31, 2018, Copel recorded negative net working capital of R$ 265,568 (R$ 59,385 in 2017). Management has been monitoring the liquidity and taking actions to balance the short-term financial capacity, preserving the Company's investment programs, as well as seeking debt repayment extension.
During the years ended December 31, 2018, 2017 and 2016, we received R$ 609,219 (of which R$588,540 by consolidated subsidiaries and R$20,679 of unconsolidated investees), R$ 669,179 (of which R$639,796 by consolidated subsidiaries and R$29,463 of unconsolidated investees) and R$ 2,006,220 (of which R$1,981,352 by consolidated subsidiaries and R$24,868 of unconsolidated investees), respectively, from dividends and interest on own capital paid by our investees.
F-133
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
• Related Parties: The Company has the following balances outstanding with related parties:
| 12.31.2018 | 12.31.2017 |
Estado do Paraná | - | 130,156 |
Copel Distribuição | 104,751 | 89,296 |
Copel Telecomunicações | - | 5,189 |
Eólicas | - | 221,327 |
Investees and Subsidiaries - Structure sharing | 8,134 | 27,273 |
Voltalia | - | 38,169 |
Joint Ventures - Structure sharing | - | 67 |
Total | 112,885 | 511,477 |
• Investments - As of December 31, 2018 and 2017, investments in subsidiaries are comprised as follows:
|
|
|
| 12.31.2018 | 12.31.2017 |
Copel Geração e Transmissão | 8,911,964 | 8,409,370 |
Copel Distribuição | 5,908,755 | 5,452,703 |
Copel Telecomunicações | 638,873 | 483,195 |
Copel Energia | 83,468 | 133,511 |
Compagas | 221,654 | 202,857 |
UEG Araucária | 74,132 | 89,240 |
Other investments | 79,542 | 85,549 |
| 15,918,388 | 14,856,425 |
The information regarding joint ventures, associates and other investments are presented in note17.1 – Changes in investments.
• Dividends receivable - The dividends receivable are comprised as follows:
|
|
|
| 12.31.2018 | 12.31.2017 |
Investees and subsidiaries |
| |
Copel Geração e Transmissão | 368,950 | 297,500 |
Copel Distribuição | 89,486 | 98,967 |
Copel Telecomunicações | 29,260 | 15,405 |
Copel Comercialização | - | 3,717 |
Compagas | 9,996 | 7,942 |
Elejor | 13,358 | 16,838 |
UEG Araucária | 6,143 | 6,143 |
Nova Asa Branca I | - | 114 |
Nova Asa Branca II | - | 157 |
Nova Asa Branca III | - | 75 |
Nova Eurus IV | - | 48 |
Santa Maria | - | 186 |
Santa Helena | - | 214 |
Ventos de Santo Uriel | - | 235 |
| ||
Joint Ventures |
| |
Voltália |
| |
1,032 | 1,032 | |
Other investments |
| |
Sanepar | - | 10,087 |
Other investments | 875 | 804 |
| 519,100 | 459,464 |
• Reserve for risks - Companhia Paranaense de Energia - Copel recorded reserves for risks mainly related to Cofins and PIS/PASEP. The provisions for risks are shown below:
F-134
COMPANHIA PARANAENSE DE ENERGIA – COPEL and Subsidiaries
Notes to the Consolidated Financial Statements, continued
For the years ended December 31, 2018, 2017 and 2016
All amounts expressed in thousands of Brazilian reais, unless otherwise stated
|
|
|
| 12.31.2018 | 12.31.2017 |
Regulatory | 16,176 | 15,042 |
Labor | 588 | 518 |
Civil | 142,773 | 135,422 |
Tax Claim | 132,643 | 104,113 |
| 292,180 | 255,095 |
Restriction of transfer of funds from subsidiaries - The subsidiaries described below qualify as either concessionaires of public services or independent power producers. As such, any transfer of funds to the respective parent company, in the form of loans or advances, requires approval by Aneel. This regulatory restriction does not apply to cash dividends determined in accordance with the Brazilian Corporate Law.
In addition, Copel G&T has certain financing agreements with the Brazilian National Development Bank (“BNDES”) under which BNDES approval is required for Copel GeT to pay cash dividends exceeding 30% of its net profit. Since BNDES has always approved Copel GeT requests to pay cash dividends in excess of 30% of its net profit and this restriction has not affected Copel GeT ability to pay cash dividends or parent company’s ability to meet its cash obligations, management deemed it to be a perfunctory clause.
As of December 31, 2018, total restricted subsidiaries net assets amount to R$ 15,245,358 composed as follows:
|
|
|
| 12.31.2018 | 12.31.2017 |
Copel Geração e Transmissão S.A. | 8,911,964 | 8,409,370 |
Copel Distribuição S.A. | 5,908,755 | 5,452,703 |
UEG Araucária Ltda. | 370,662 | 446,204 |
Centrais Elétricas Rio Jordão - Elejor | 53,977 | 61,727 |
Total | 15,245,358 | 14,370,004 |
The following table shows the expected undiscounted settlement values of the liabilities, in each time range:
| Interest (a) | Less than | 1 to 3 | 3 to 5 | Over |
|
|
| 1 year | years | years | 5 years | Total |
12.31.2018 |
|
|
|
|
|
|
Loans and financing | Note 22 | 180,301 | 740,523 | 9,261 | 105,293 | 1,035,378 |
Debentures | Note 23 | 1,004,944 | 647,816 | - | - | 1,652,760 |
Suppliers | - | 2,731 | - | - | - | 2,731 |
|
| 1,187,976 | 1,388,339 | 9,261 | 105,293 | 2,690,869 |
(a) Effective interest rate - weighted average. |
F-135