Risk Factors

1. Objective

This document defines the Financial Risk Management Policy (“PGRM” or “Policy”) of Energisa S.A. (“Company”) and its direct and/or indirect subsidiaries in line with the best international practices and the Company’s strategic objectives. The policy uses consolidated limits to gauge the overall risks associated with the Company and its subsidiaries (collectively referred to as “Energisa Group”).

The PGRM is available on the Company’s website for viewing by stakeholders (creditors, investors and rating agencies).

This document is the eleventh version of the PGRM since its initial disclosure in May 2009, which has now been adapted to the new consolidated liquidity and debt position, while preserving the underlying guidelines of transparency and demonstrating the prudence and predictability of Energisa Group’s financial management

This document sets out a Financial Market-Derived Risk Management Policy (“PGRM” or “Policy”) for Energisa S.A. (“Company”) and its direct and/or indirect subsidiaries, in accordance with international best practices, in line with strategic objectives, and addressing limits on a consolidated basis, in order to measure the sum of the risks associated with the Company and its subsidiaries (jointly referred to as “Energisa Group” or “Group”).

The Policy will be available on the Company’s website, allowing broad access to stakeholders (commercial, credit and investment counterparties and rating agencies).

This document is the twelfth version of the Policy since its first release in May 2009. Once again, the Policy is adapted to the macroeconomic and sectoral context, preserving the main guideline of transparency, demonstrating prudence and predictability of the financial management of the Energisa Group.

Energisa’s Group must have a risk management policy (separate from PGRM) for Energisa Comercializadora to be approved by the Company’s management, conducted by a committee of experts appointed by the management and with review and follow-up to be determined by the audit and risk committee of the board of directors.

2. Validity

This policy will be valid until May 31, 2025, and may be revised at any time in case of improvements that ensure its purpose.

3. Management Finacial Risks

Briefly, the Energisa Group’s financial market risk management can be characterized as follows:

a) Focus:

• Risks arising from the financial market in general.

b) Fundamentals:

• Risk management is a process and not an isolated event. Therefore, the risk management shall involve several areas of the company (legal, financial and risk control);
• The implementation of risk management should be discussed, ratified and reviewed from time to time by the Board of Directors, as suggested by the Financial Vice Presidency;
• Risk management requires the disclosure of the risk culture, the pursuit for best practices and the continued participation of staff;
• The Company has a Corporate Risk Management Advisory, created to monitor the risks that may adversely affect the Energisa Group.​

c) Components of the financial market risk management policy:

• Definition of decision-making instances in relation to Energisa Group’s transactions;
• Definition of responsibilities of each hierarchical level, as well as respective powers;
• Definition of Energisa Group’s acceptable risk limits, consistent with its shareholders’ willingness to support them, and in order to optimize the risk-return ratio, to be approved by the Board of Directors;
• Implementation of the risk management process: risk policy, identification, prioritization and measurement of the extent and probability of risks, control activities, information, communication and monitoring.

d) Management process:

The main steps of the risk management process are as follows:

• Measurement of risks and results and the likelihood of occurrence;
• Preliminary analysis of the evaluation of alternatives;
• Policy definition;
• EExecution, information and communication, aiming at risk prevention and mitigation;
• Monitoring and control.

e) Market risk management organization:

The financial risk management process should be handled by the vice presidency of finances, while periodically consulting the Financial Risk Management Committee (“Committee”), which has to evaluate operations, processes and procedures and put forward the best alternatives. This committee can recommend operations to the Vice Presidency of Finances for evaluation and possible endorsement by the Board of Directors.

The Financial Risk Management Committee shall meet at least every quarter, and may hold extraordinary meetings if necessary. The committee will consist of the following, minimum members:

• Financial Vice-President of Energisa;
• Chief Controlling and Finance Officer of Energisa;
• External consultant specializing in risk management, in particular, cash and debt risks.

The Committee shall obtain, from time to time, independent support from macroeconomic and financial market specialists. The External Consultant shall be responsible for validating the Quarterly Monitoring Report of the “Financial Market Risk Management Policy” (“Quarterly Monitoring Report”), which shall certify compliance with the Policy, any waivers that might be necessary or current and the recommendation for adjustment, if necessary. Once validated, this Report shall be forwarded to the members of the Risk Management Committee.

f) Financial risk management model

The Office of the Financial Vice-President, supported by the Committee, the daily reports received that are prepared by independent consultants, and the Quarterly Monitoring Report, will be responsible for managing Energisa Group’s risk exposure, deciding on the execution of financial transactions. Such transactions shall always comply with the parameters defined in this policy and the authority limits set in the Board of Executive Officers’ Statutes and Internal Regulations. At least once a year, such report shall be reviewed by the Audit and Risk Committee of the Board of Directors. The Internal Audit will continuously oversee the group’s compliance with the policy.

The financial transactions will be carried out in accordance with Energisa Group’s internal procedures, which will establish the minimum number of financial institutions to be quoted (when applicable), the authority limits for contracts and the relevant formalization.

4. Origens of risks

This chapter will detail the sources of financial risks to be addressed.

4.1 Indebtedness
The indebtedness includes all Energisa Group’s loan and financing transactions, such as debt issued in the local and foreign financial markets, as well as installments and contingent liabilities.

4.2 Financial Investments
Energisa Group’s financial investments include all financial investments, including short, medium- and long-term transactions. Examples of financial investments include investments in investment funds, federal government securities and securities issued by financial institutions or public and private companies in domestic and foreign markets.

4.3 Derivatives
In order to eliminate specific exposures to indexes subject to adverse variations, controlling the volatility of the result, Energisa Group may design different derivative strategies.

The structuring of derivative transactions may also be carried out by seeking to adopt directional positions for the applications: assets/liabilities with pre- or post-fixed rates (inflation, interests.

Energisa’s Group must have a hedge management policy, to be approved by the Company’s management, for the acquisition of materials and services denominated in other currencies, to be conducted by specialists appointed by the management.

4.4 Financial guarantees granted
The financial guarantees granted aim to ensure the defense in lawsuits (labor, civil, tax, environmental, etc.), as well as increase the attractiveness and improve conditions agreed with suppliers, financiers and investors in transactions with the Energisa Group.

Based on the sound risk profile of the companies that are part of the Energisa Group, which are seen in their rating grades, we should avoid the provision of guarantees. In the limit, Energisa S/A can guarantee the transactions of its subsidiaries. Any guarantees to be provided must be formally approved, by email, by the Director of the requesting area and by the Director of Corporate Finance, except (i) for the guarantees requested by the contracts signed by the legal representatives and in force, (ii) for the guarantees requested in contracts of regulatory origin; (iii) for Energisa Comercializadora’s guarantees that fall within the aforementioned company’s Credit Policy.

If the use of guarantees in Energisa Group’s transactions cannot be avoided, we should prioritize the following, according to this exact order: (i) collateral by Energisa S/A, (ii) guarantee insurance (Seguro-garantia), (iii) bank guarantee, (iv) escrow deposit, (v) other possible guarantees.

4.5 Checking account resources
The amounts used by the treasury of the companies of the Group to make payments and receipts in general, may be transferred to the financial institution that acts as Banking as a Service (Baas) of companies of the Energisa’s Group, provided that such financial institution is previously approved by the of Risk Management arising from the Financial Market.

It is forbidden to maintain a balance in the Baas credited before the closing time of the Treasury operations of the companies of the Group.

5. Monitoring and Management

This topic refers to the monitoring of the financial risks considered. The forms of control suggested by this Policy will be detailed, as well as the specificities considered for each type of risk.

5.1 Indebtedness
The Energisa Group will seek to control its indebtedness by its quantity, average term (“term”), cost, guarantees and selection of creditors (subject to quality and concentration).

Despite the benefit of debt in a capital structure, limiting the amount of indebtedness is necessary to avoid excessive leverage of the project/company, besides reducing the risk of exceeding financial restraints (covenants) in most countries, which exists in financial contracts. Besides, the indebtedness limitation aims to reduce refinancing risk by making said risk compatible with the project/company’s cash generation, avoiding a negative perception by the capital market of the associated risk, thus preserving credit quality.

The distribution of debt per lender will also be monitored. Energisa Group, as far as possible, and in view of the high degree of concentration in the Brazilian market, may set indebtedness limits per lender, seeking not to concentrate positions (facilitating access to credit by higher number of possibilities), seeking alternatives that offer lower costs, longer terms and lower financial and operating restrictions (covenants).

The contracting of any indebtedness shall comply with: (i) adherence to the approved budget, (ii) the Internal Regulations of the Board of Executive Officers, which establishes the powers of the Company’s officers to contract transactions, (iii) the specific approvals of the Board of Directors, when necessary, already indicating the main conditions of the contracts to be executed, and (iv) the approvals of regulatory agencies, when necessary in connection with the connection of the guarantee of the concession.

The Indebtedness management should seek compliance with the following limits:

5.2 Financial Investments
The control of Energisa Group’s financial investments seeks to mitigate counterparties’ risk, that is, the risk associated with the possibility of the entity not meeting its payment commitments.

The limits set forth below shall be complied with by both direct investments and private investment funds in which Energisa Group invests, and are considered on a consolidated basis. ENERGISA continuously monitors the composition of the exclusive and non-exclusive investment funds that make up the resource allocation portfolio. By becoming a shareholder of a non-exclusive investment fund, ENERGISA assigns the management of the investment portfolio, respecting the manager’s discretion (subject to the restrictions and investment policy of the fund). Occasionally, some investments carried out by non-exclusive fund managers may differ on the limits and rules set forth in this Investment Policy, and ENERGISA shall evaluate, in its monitoring, the actions and procedures for redemption or maintenance of the investment.

5.3 Derivatives
The structuring of derivative operations is essential to mitigate the risks of adverse effects associated with the financial market.

Due to the market price, liquidity and counterparty risks, these operations should be monitored daily by independent cash and debt risk advisors. Energisa Group shall engage in independent specialized service, whenever there are debts denominated in foreign currency or positions in derivative financial instruments, and shall comply with the following limits and assumptions:

5.4 Financial Guarantees for the Benefit of Energisa
Financial guarantees required by the Energisa Group seek to mitigate counterparties’ risk, i.e. the risk associated with the entity’s ability to default on its payment commitments.

Eligible Guarantees

Financial guarantees required by the Energisa Group seek to mitigate counterparties’ risk, i.e. the risk associated with the entity’s ability to default on its payment commitments:

• Bank Guarantee: subject to the minimum Rating limit for Banks rated AA (Local) or equal to the local sovereign rating, whichever is lower, always observing the lowest rating existing when there is more than one coverage (S&P, Fitch and Moody’s);
• Security deposit: Top-tier Bank CDBs (defined by the Rating limit required for Bank Guarantees), Federal Government Securities or Fixed Income Investment Fund Shares or CDI, administered by Top-tier Banks. Deposits must have daily liquidity, so that they can be executed at any time;
• Guarantee Insurance (Seguro-Garantia): The insurance presented must be contracted with first-rate insurance companies, which are among the top 15 in the SUSEP (National Superintendence of Private Insurance) statistics report, generated according to the step by step below.

Step by step:

1.Enter the website ‘www.susep.gov.br’;
2. Select ‘Authorized Companies’;
3. In the ‘Market Statistics’ field, select ‘SES – SUSEP Statistics System’;
4. In the ‘Operations’ field, select ‘Insurance: Premiums and Claims’ and click on ‘Go to consultation’;
5. In the ‘Research Period’ field, enter the last 12 months available for consultation;
6. In the ‘Ramos’ field, select the type of insurance to be taken out;
7. In the ‘Data grouping’ field, select ‘Group by Company’.
8. After generating the report, export it to excel by selecting the ‘Export to Ms Excel’ button.
9. Sort the information in descending order by ‘Direct Award’;
10. The first 15 insurers on the list are those capable of contracting insurance.

Guarantee Insurance will only be accepted for signed and in force contracts, which were constituted in accordance with the Service Contracting Standard, for the modalities in which the contracting does not fit into said standard must be formally approved by the Director of the requesting area and by the Director of Controllership and Finance.

The guarantees should be prioritized in the following order: (i) bank guarantee, (ii) escrow deposit, (iii) guarantee insurance, (iv) corporate guarantee (depending on the credit analysis) and (v) other guarantees to be previously approved by the Controllership and Finance Board.

The guarantees can only be accepted after they have been reviewed and/or accepted by Grupo Energisa’s Corporate Legal Department.

5.5 Liquidity risk
In order to guarantee the liquidity of the Energisa Group’s commitments, the Office of the Financial Vice-President should maintain minimum resources in cash and cash equivalents, in order to guarantee short-term debt commitments, guarantee deposits, etc.

5.6 Revisions of the financial risk management policy
The Board of Directors shall order the revision of the Financial Market Risk Management Policy every two years, or extraordinarily, whenever required.

5.7 Dividend policy
The Energisa Group’s dividend policy is effective pursuant to the Results Distribution Policy approved by the Board of Directors Meeting of Energisa S.A. held on September 12, 2019.