Entrevista Fernando Flach - BNamericas | Parte 1 | From law to power
From law to power: How Flach-Philippsen became an energy trader in Brazil
In this first part of a two-part interview, Fernando Flach, founding partner of Flach-Philippsen Associates, spoke to BNamericas about how the Brazilian law firm has moved on from a law consultancy specialized in the electricity sector to becoming an investor and operator in this market.
Flach explains that the company sees great potential in the market, and has recently expanded its operations by creating an energy trading company that has already been authorized by energy regulator Aneel to operate in the Brazilian market.
BNamericas: In what context did Flach-Philippsen Associates decide to become an active participant in the Brazilian energy sector, considering it was originally a law firm?
Flach: In recent years, Flach-Philippsen has worked its way up to become a reference in the energy sector. We have been working to consolidate our progress in this market more and more. I believe that the company's move is directly related to the professionals who are part of the team, who helped to improve the position of our business with their technical knowledge of the Brazilian electricity industry.
Nowadays, the company lives for the energy sector. Our decision to invest is the final result of a long process that started with sponsoring conferences related to the energy market. Every year, even now, Flach-Philippsen takes part in courses abroad and seeks to strengthen our institutional relationship with the Brazilian government. Entering the energy sector was a natural process, which I believe is strongly related to the successful experiences of our team in power generation projects and also transmission lines in the south of Brazil. This certainly had a great influence on the process.
Another contributing factor was our diagnosis that there is a gap in the market considering a growing demand from companies that are interested in the Brazilian market. Currently, for the most part, law schools in Brazil prepare professionals to litigate in courts and don't develop their critical sense, legal reasoning, skills and competences towards coming up with solutions that are related to the real world of business.
Because we see great potential, Flach-Philippsen has recently expanded its operations by creating an energy trading company that has already been authorized by Aneel [the energy regulator] to operate in the Brazilian market.
BNamericas: How was the company's first power generation project developed?
Flach: The first really remarkable project on which we worked for was a small hydroelectric plant [SHP], with a generation capacity of 21MW in rural Santa Catarina state. The project was partially developed in 2010. At the time, our client made an investment of approximately 20mn reais [US$6.4mn], but the company ended up lacking financial resources and the works weren't finished on time. Flach-Philippsen assumed the full-service legal management of the SHP that same year. Back then, the works were paralyzed for more than five years and there was an imminent risk that the project would have its authorization cancelled.
BNamericas: Which kind of solution was found for the project?
Flach: At that time, we proposed a work plan, which was called a 'management shock'. The idea was to restructure the entire project, including the renegotiation of all contracts, making adjustments to environmental licensing, corporate restructuring, extension of the concession period of the SHP with the regulatory agency, as well as mapping out opportunities for tax relief and prospecting in the market for a strategic partner with the right expertise to leverage the project again.
We conducted the selection process to find a partner and received seven proposals from companies interested in taking part in that project. Based on previously defined criteria for technical qualification, accounting, finances and experience, we selected one of these companies. We then created a special purpose company [SPE, by the Portuguese acronym] and we were able to leverage 50mn reais at almost zero additional cost.
BNamericas: And what was the final result? Has the project become profitable now?
Flach: Yes. At that time of the financial issues, in 2010, our client owned 100% of a project that only existed on paper. Today, the same company has 50% of a profitable business that is already in commercial operation. This was possible because Flach-Philippsen worked together with our client to come up with a solution to make the project feasible. The small hydroelectric plant was contracted in an energy auction and it is now profitable. It was extremely rewarding to work on this project and it gave us a lot of expertise to start out on our own.