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| Home Business
Management |
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| Economic Environment |
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In 2005, Brazil’s
GDP grew 2.6%, according to estimates of the Central Bank. The unemployment
rate declined slightly, going from 10.2% in January/05 to 9.6% in December/05,
according to
data from the Brazilian Institute of Geography and Statistics
(IBGE). The consumption of energy rose
4.6% compared to 2004, driven
by the commercial segment, which posted an increase of 7.2%.
This growth
led the consumption of electric energy to return to the levels seen
before rationing
was
instituted in 2001 for the first time. |
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Electric Power Consumption|
GWh
Jan|79 to Nov|05 |
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| Power Plant |
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| Selic (1) (Basic Domestic Interest Rate) |
| Exchange Rate (1) |
| Local Currency(Real) Appreciation (1) |
| IPCA (Extended Consumer Price Index) (2) |
| IGP-M (General Price Index– Market) (2) |
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| 2004 |
| |
| 18.00 |
| 2.34 |
| 11.82% |
| 5.69% |
| 1.21% |
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| 2005 |
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| 17.75 |
| 2.65 |
| 8.13% |
| 7.60% |
| 12.42% |
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(1) End of
Period
(2) Accumulated in the Period |
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The IGP-M (General
Price Index – Market) and the IPCA (Extended Consumer Price Index),
which
are part of the readjustment calculation for electric energy
contracts ended 2005 with
accumulated rates of 1.12% (lowest annual
rate of the historical series that began in 1989) and
5.69%, respectively.
AES Tietê is only influenced by the IGP-M, because both the price
of the
sale of its power as well as its financial commitments are pegged
to this index.
The Selic, which is the basic interest rate for the economy, ended
the year at 18.0% p.a.
The exchange rate for the U.S. dollar, which
was R$ 2.67 on January 3, 2005, reached the
end of the year at R$ 2.34.
Accumulated over 2005, the appreciation of the real was 11.8%.
The
foreign exchange situation and of the Selic reflected a combination
of factors, most notably
the real interest rates practiced in the country,
the strong international liquidity, the setting
of consecutive trade
balance records and the large volume of external funding operations
by
public and private companies. |
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| Business Performance |
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AES Tietê’s
operations are regulated and inspected by Aneel. According to its concession
contract,
the Company has a quota of 1,275 average MW of assured energy — an
amount available for
sale in long-term contracts, generated by its
10 hydroelectric power plants.
In 2005, the Company sold 12,800 GWh of power, of which 11,200 GWh
were sold through
Initial and Bilateral contracts, which is sufficient
to supply more than 5 million homes.
The Bilateral Contract
signed in 2000 with AES Eletropaulo absorbed 75% of this total. |
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Complying with the
process for the deregulation of the energy sector, the Initial Contracts
were
gradually reduced, as of 2003, by 25% in the annual volume of
supply. In this process, 75% of the
assured energy in 2003 was destined
for the distributors contracted before privatization;
50% of the production
obtained in 2004; and 25% of the total generated in 2005. As of 2006,
all of the available energy for sale will be supplied to AES Eletropaulo
under the Bilateral Contract. |
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| Operational Management |
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The generation of
12,800 GWh during 2005 exceeded the volume registered the previous
year
by 7.6%, and was 15% higher than the 11,100 GWh of assured energy
determined by Aneel.
This performance was a consequence of an intense preventive maintenance
program to
guarantee that the power plants maintained their reliability
rates, one of the best in the
Brazilian electricity sector. |
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| Commercial Strategy |
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In the commercial
area, AES Tietê chose to keep a single contract for commercializing
1.268 MW,
nearly the totality of the assured energy established by
Aneel. This option made the process simpler
and more predictable as
the long-term supply conditions are determined by a single bilateral
contract, approved by the regulatory bodies. From the financial side,
the guarantee of sales allows
the Company to develop long-term strategies
without credit risks.
The price practiced by the contract with AES Eletropaulo was determined
when it was signed
in 2000, having the normative value defined by Aneel
as a reference, and thereafter it has been
adjusted by inflation. Nevertheless,
the energy auctions held in 2005 presented prices lower than
the one
contracted between AES Tietê and AES Eletropaulo reflecting the
excess of energy available
since the last crisis, which shall not be
maintained over the medium and long terms.
Therefore, having a pre-agreed price through 2015 means guaranteed
revenues for AES Tietê and a
price hedge both for the generator,
distributor and its consumers. The comfort on selling in the
long term
grants the Company the availability of funds necessary to meet its
financial commitments
generate value to its shareholders and carry
out capital expenditures. |
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| Risk Management |
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AES Tietê has
adopted some procedures and initiatives to mitigate the risks inherent
to the business,
always looking forward to increase, improve and add
new methodologies, procedures and tools that
can reduce its exposure.
Among these actions, the following are noteworthy: |
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| Operational Risks |
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Product
Risk
New coming generators into the Brazilian Interconnected System will
not affect the performance of
the Company, which has its assured energy
contracted until 2015.
Market Risk
The Bilateral Agreement works as a hedge, both for the volumes as well
as for prices. There is a
risk of unexpected expenses, typical of the
activities of the Company, but the operational margin
allows the Company
to absorb any eventual need for extra disbursements, without major
impacts.
Operational Risk
Operational failures may occur, with an impact both on equipment and
volume of power generated;
but the financial consequences can be mitigated.
The Company carries an insurance policy for
those dams that present
greater hydrological risk and for its equipment, besides the
Energy
Reallocation Mechanism (MRE). The MRE is a financial mechanism for
risk sharing through
which all the volume generated above the assured
energy by each power plant is “transferred” to
other plants
whose performance was under the assured level at a minimum cost.
The
liquidation is invoiced by the Electric Energy Wholesale Market (CCEE)
at the end of each
accounting period.
Environmental Risk
There is a risk of contamination of the rivers due to oil spills and/or
the incorrect disposal of wastes
during the operation and maintenance
of the power plants. These risks are controlled by the
Environmental
Management System implemented in 2002, and use of state-of-the-art
technology.
In terms of its real estate holdings, the border of its
reservoirs, considered to be Permanent
Preservation Areas, run the
risk of invasion. In order to avoid this problem, the Company has a
Geographic Information System that allows the follow up and inspection
of eventual
occupation of its land.
Climate/Disaster Risk
The risks stemming from climate change are considerably minimized by
contingency plans,
insurance or backup systems. In the case of natural
disasters, such as flooding that could damage
structures, an action
plan is in place for opening up spillways. In situations of catastrophes,
there are no other feasible contingency plans. In order to reduce eventual
losses of such risks,
the Company has insurance coverage for Operational
Risks that protects equipment and
installations, and Civil Responsibility,
which seeks to minimize damages caused to third parties.
System, Management or Control Risk
There is also the risk of failure in support systems, both operational
and management. In such cases,
generating units can be operated via
local panels, independent of Operations Center coordination. |
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| Financial Risks |
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Interest
and Inflation
The cost of AES Tietê’s debt is determined by fixed interest
rates and its principal amount is
adjusted according to the IGP-M
performance. The fluctuation of interest rates on the
domestic market
has no direct influence on the results of the Company.
The Bilateral
Contract is readjusted by the IGP-M, representing a natural protection
for the
cost of the debt.
Liquidity
Since AES Tietê is a strong cash generator and as has a low
need for capital expenditures,
its cash situation is comfortable,
what minimizes liquidity risk.
Foreign Currency
The Company’s total debt is denominated in local currency as
are overall revenues.
The exchange risk is associated only to investments
denominated in foreign currency –
accounting for approximately
12% of total cash & equivalents, as of December 31, 2005. |
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