Energisa

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 is the sixth 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.

2. Validity

This policy is valid for two years as from the date of the approval by the Board of Directors, and is subject to changes and improvements.

3. Management Finacial Risks

Energisa Group’s financial risk management can be summarized as follows:

a) Focus

  • Risks posed by the financial market in general.

 

b) Fundamentals

  • Risk management is an ongoing process and not a single event. It should therefore involve several of the company’s departments (legal, financial and risk control);
  • The Board of Directors should periodically discuss, ratify and review the risk management processes that have been implemented, according to suggestions made by the vice presidency of finances;
  • Risk management requires the dissemination of a risk culture, the pursuit of best practices and ongoing participation by employees;
  • The Company has created a corporate risk management advisory board in order to monitor the risks that could adversely affect Energisa Group.

 

c) The financial risk management policy consists of

  • Defining the various decision-making hierarchies regarding Energisa Group’s operations;
  • Defining the responsibilities of each hierarchy and their limits of authority;
  • Defining the risk levels acceptable to Energisa Group, in accordance with its shareholders’ appetite for risk and in order to optimize the ratio between risk and return, to be endorsed by the Board of Directors;
  • Implementing a risk management process: risk policy; identifying, prioritizing and measuring the size and probability of risks; control activities, information, communication and monitoring.

 

d) Management process

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

  • Gauging risks and results and the probability of occurrence;
  • Preliminary analysis of evaluated alternatives;
  • Devising the policy;
  • Implementing, informing and communicating, with a view to risk prevention and mitigation;
  • Monitoring and control.

 

e) Handling risk management

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:

  • Energisa’s Vice President of Finances;
  • Energisa’s Corporate Finances Director;
  • Independent Specialist in risk management, especially cash and debt.

The committee shall periodically solicit independent advice from macroeconomy and financial market consultants. The Independent Specialist shall validate the quarterly Monitoring Report of the “Financial Risk Management Policy” (“Quarterly Monitoring Report”), which shall report on compliance with this policy, any existing waivers and actions necessary or recommended to ensure compliance, if applicable. After validation, this Report is to be sent to the members of the Risk Management Committee.

f) Financial risk management policy

The Vice Presidency of Finances shall use the daily reports received and prepared by independent advisors and the Quarterly Monitoring Report to monitor Energisa Group’s risk exposure, thereby assisting the decision-making process for risk prevention and mitigation. These initiatives and transactions should always comply with the parameters specified in this policy.

The Internal Audit shall constantly supervise the group’s compliance with this policy. The Quarterly Report shall be forwarded for the appreciation of the Audit and Risk Committee of the Board of Directors.

Financial transactions shall be secured in accordance with Energisa Group’s internal procedures, which establish the minimum number of financial institutions to obtain price quotes from, spending limits and the formal documentation required.

4. Risk Sources

This section provides information about the sources of the 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).

5. Monitoring and Management

​This section addresses the monitoring of the financial risks under analysis. It describes the means of control recommended by this Policy and the specifics considered for each type of risk.

5.1 Indebtedness

Energisa Group will seek to control its debt in terms of quantity, average duration, cost, guarantees and choice of creditor (considering quality and concentration).

Despite the advantages of the debt being in a capital structure, the size of a company’s debt must be kept in check in order to avoid excessive leverage of the venture/company and to mitigate the risk of breaching any covenants which exist in most financing loans. Keeping debt in check also mitigates the risk of refinancing, by ensuring sufficient cash generation, preventing capital market investors being deterred by the associated risk, thereby preserving credit quality.

The amount of debt held by each creditor will also be monitored. To the extent possible given the high level of market concentration in Brazil, Energisa Group will establish limits on the amount of debt held by each creditor, in order to prevent concentration of its debts (facilitating access to credit through greater dispersal), and to pursue cheaper alternatives with better duration and fewer financial and operational covenants.

The securing of any debt instrument shall take into account: (i) compliance with the approved budget, (ii) the internal regulations of the executive board that establish the authority of the Company’s executives for securing the operations (iii) the specific approval of the Board of Directors, where necessary, including for the main terms of the contracts to be signed and (iv) approval by regulatory agencies, when necessary as part of the concession guarantees.

Debt management will seek to comply with the following limits:

Leverage limit
  • The leverage limit is determined by the indicator Total Net Debt / Adjusted EBITDA for the past 12 months (“Net Debt Limit”). In cases of acquisitions of assets/companies or even the discontinuity of assets/companies, Debts and pro-forma EBITDAs shall be compiled, in order to view a fairer ratio for this calculation;
  • Consolidated Net Debt Limit: For the term of this review (until May 2020), the limit should reflect maximum leverage of 3.5x and should remain close to 3.0x. This limit can only be exceeded at specific times of acquisition of assets or significant investments in projects, preceded by the Board of Directors’ approval, adopting, in this case, a grace period of up to 36 months;
  • Energisa should also maintain minimum corporate ratings of BB- (Fitch and/or S&P) and Ba3 (Moody’s) global scale and AA- (Fitch and/or S&P) and Aa3 (Moody’s) on the Brazilian scale rating, or equivalent to one notch below the Brazil sovereign rating, whichever is lower;
  • The above limits should always abide by the covenants established in domestic and international financing contracts and debt issuances.

The Vice Presidency of Finances shall comply with the minimum leverage limit of the distribution companies’ controlled by the Company so as not to contravene the regulatory leverage and the commitments undertaken with the Regulator.

Average pursued minimum duration
  • To pursue an average consolidated net debt duration of longer than 4 (four) years, which needless to say depends on market conditions for new issuances. Bridge loans may be taken out with a view to a future issuance on better terms, subject to the leverage limit.
Limiting credit concentration
  • To pursue maximum leverage with domestic development banks and financiers, such as: Banco do Nordeste, Eletrobrás and BNDES, seeking a better average capital cost and suitable duration for companies operating with electricity infrastructure;
  • In normal market conditions development banks operate at maximum exposure limits equal to 30% of the total assets of borrower companies and/or economic groups with the same rating levels as the Company. We will strive to meet these limits, subject to the Leverage Limit;
  • Eletrobrás loans depend on the existence of dedicated funds to finance private companies, after the requirements of universal access and low income programs have been met. However, they are not as widespread and generally provide an opportunity for low-cost leverage (even if they involve shorter average durations);
  • Energisa Group should give priority to capital market operations, to the detriment of direct financing from commercial and investment banks. The Company should seek to maximize debt dispersal (avoiding exposure concentration). Priority should be given to clean operations, the main advantage of which is that receivables do not have to be provided as collateral. Receivables may be provided as collateral in order to reduce the financing cost or facilitate access thereto in times of credit shortages and high interest rates. Unless there are exceptional conditions or a creditor requires these operations from development institutions, we should always pursue the lowest exposure possible, maintaining at least 30% of the receivables free and clear;
  • Personal guarantees should not be obtained from executives or shareholders, in order to preserve the companies’ operational and financial independence;
  • Energisa S/A may provide guarantees for the financial transactions of its subsidiaries in lieu of guarantees submitted by third parties;
  • It is important to give Energisa Group a presence in all capital markets, including international markets, whilst limiting foreign-currency exposure to 25% (twenty-five percent) of the total remunerated debt. Any breaches of this limit should be remedied in 120 days, by either reducing the foreign-currency debt or contracting derivative financial instruments that securely and reasonably neutralize adverse exchange variance. Foreign-currency operations involving plain vanilla swaps are not considered to pose exchange rate exposure, and should pursue a hedge account to limit volatility in the balance sheet.

 

5.2 Financial Investments

Energisa Group controls its financial applications in order to mitigate the counterparty risk, i.e. the risk associated with the possibility of the entity not honoring its payment commitments.

The limits below must be upheld for both direct investments and funds Energisa Group invests in, and be considered on a consolidated basis.

Eligible groups and assets
  • Investments may be made in Federal Public Securities, CDBs, RDBs, Financial Bills and investment funds (subject to the limit below). Investments may not be made in redeemable shares, subordinated debt (except for quotas subordinated to the Group’s own FIDCs) and the subordinated CDBs/Financial Bills of first-rate banks with a rating of AAA (S&P/Fitch) or Aaa (Moody’s), or with the same national scale rating, total duration limited to two years) and “quasi-equity” (preferred shares with fixed dividends, in line with US practices) Investments in private securities of non-financial companies (including debentures, bonds, commercial papers, FIDCs, CCBs, among others) may only be made indirectly in non-exclusive investment funds managed by agents permitted by PGRM;
  • Energisa Group cannot acquire private securities outside the normal course of business, except for: (i) private securities issued by financial institutions subject to the PGRM limits; (ii) private securities acquired by this date which can remain as an asset of Energisa Group until their respective maturity; (Iii) investment in private securities of direct or indirect subsidiaries of Energisa, subject to the specific regulations of the National Electricity Regulatory Agency (“ANEEL”) and the evaluation of the Energisa Group’s Vice Presidency of Regulations; and (iv) investments in private securities issued by suppliers and/or consumers only in the event of refinancing, financing or any other form of renegotiating debt of suppliers and/or consumers with Energisa Group, by structuring debt securities;
  • Minimum rating limit for banks: rating equal to A+ (Local) or the local sovereign rating, always subject to the lowest existing rating, in the event of more than one coverage. In the case of foreign banks formally supporting their Brazilian subsidiaries or branches, a rating of A- (Global) is sufficient for the respective parent company of the foreign bank;
  • As funds usually are unrated, the following should be noted: (i) investment in managers with assets under management of more than R$ 5 billion (ii) financial institutions with recognized experience in the Brazilian market must manage the funds, and (iii) we must 9 have access to the composition of the fund’s portfolio, in order to assess the compliance with this policy;
  • Only ratings issued by S&P, Moody’s and Fitch shall be relied on.
Application limits
  • Maximum Concentration per Bank or Company: R$ 500 million or up to 30% (thirty percent), whichever is lower, of the total amount invested by the Energisa Group in the case of banks with the same sovereign rating (Brazil National Scale). R$ 150 million or up to 10% (ten percent), whichever is lower, of the total invested in the case of Banks rated one notch below the sovereign rating, subject to the lowest rating and still 15% (fifteen percent) to corporate debt securities, subject to the limits below;
  • Concentration Limits: 5% (five percent) of the financial institution or the company’s shareholders’ equity (in the case of indirect allocations via non-exclusive funds), as stated in the latest quarterly financial statements. For funds, the concentration limits should be 15% (fifteen percent) of the fund’s equity, at all times, except in the case of exclusive funds created by the Company itself. For small and middle-market banks (as defined in the list published by the Brazilian Central Bank based on the institution’s total assets, with the first 10 banks classified as large banks, those ranked 11 to 30 middle market and 31st onwards small), whose general transactions or with whom Energisa Group has the formal support of its overseas parent, the limit may be up to 10% of the local net assets, providing the parent company has a rating higher than A- (Global). Alternatively, if the CDB or RDB operation is DPGE operation, investments may be made up to the guaranteed limit, which currently stands at R$ 20 million for the sum total of this type of investment for each company (CNPJ), subject to the maximum exposure of 5% of the bank’s shareholders’ equity and providing it has a rating of at least A- (Local). All official procedures should be followed that assure the DPGE guarantee issued by the National Treasury is effective;
  • Financial applications which are not accessible for over 2 (two) years should be specifically approved by the Board of Directors, unless in financial treasury bills;
  • Any other concessions to be established must be approved by the Board of Directors;
  • The investments in funds should comply with the following additional limits:
    • DI-referenced Funds and Fixed-Income Funds – only subject to the aforesaid concentration limits;
    • Multimarket Fund – R$ 500 million or up to 15% of the consolidated amount invested by Energisa Group, whichever is less, except for exclusive funds;
    • Equity Funds and Foreign Exchange Funds – shall not be used except as a hedge of any corresponding liability position;
    • Funds that invest in other funds and Mixed Funds – should comply with the aforesaid limits in respect of the original funds.

 

5.3 Derivatives

The restructuring of derivative operations is important to mitigate adverse risks associated with the financial market.

Because of market price, liquidity and counterparty risks, these operations should be monitored daily by independent cash and debt risk specialists. Energisa Group shall retain a specialized independent service whenever it holds foreign-currency debts or derivative financial instruments and shall comply with the following limits and requirements:

Notional value
  • Energisa Group shall preferably use currency swaps or hedge operations for any foreign currency financing it holds in plain vanilla swaps. If they are not available at a reasonable cost, the minimum quantity for currency hedge and/or swap operations is 85% of the notional foreign currency debt, limited to 100% of this debt (leverage is not permitted);
  • The maximum contracted amount of interest-rate swaps (fixed rates, CDI, TJLP, among others) shall comply with the 100% limit of the financial applications’ notional value and/or 100% of the local currency debt’s notional value (Reais), whichever is higher;
  • Any interest rate swap (fixed interest, CDI, TJLP, amongst others), whose market value represents an immediate or potential loss in excess of R$ 10 (ten) million, should be submitted to the Risk Management Committee to evaluate early settlement;
  • Energisa Group may also carry out operations involving currency NDFs – Non Deliverable Forwards, with a view to additional hedging or arbitrage in periods of greater volatility, limited to a sum total arbitrated exposure of USD 50 (fifty) million;
  • The Marked-to-Market exposure per financial institution shall not exceed 5% of its shareholders’ equity, as stated in the latest financial statements. This exposure limit applies to all Energisa Group’s derivative operations, regardless of their structure;
  • Currency NDFs whose market value poses a loss of more than 15% of their acquisition value shall be settled in advance within 5(five) working days or submitted to the evaluation of the Risk Management Committee which will decide how to proceed, subject to this term.
Acceptable financial derivatives
  • Vanilla Swaps (Forex, Interest and Inflation);
  • European Options (Exchange);
  • Non-Deliverable Forwards (NDFs) (Foreign Exchange).

 

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

Three types of guarantee will be accepted, with a coverage factor of at least 100% on the guaranteed asset/credit/contract, considering in the guarantee the same criteria for correction of the guaranteed asset/credit/contract:

  • 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 insurances presented should be contracted with insurance companies that are ranked among the top 10 insurers in the ranking of the National Federation of Private Insurance Companies – FENASEG, and that are rated “very good” in the Rating of the National Federation of Insurance Brokers. Private Capitalization and Private Pension Insurance – FENACOR, always subject to the most recent publication. The use of guarantee insurance shall be formally approved by the Business Unit’s President, the Vice-President or the Chief Financial and Controlling Officer;

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

Guarantees may only be accepted after review and/or acceptance by the Energisa Group’s Legal Corporate Board.

5.5 Liquidity risk

To ensure the liquidity of Energisa Group’s commitments, the Vice Presidency of Finances shall maintain minimum cash equivalents and financial applications in order to guarantee short-term debt obligations, guarantee deposits, margin calls through derivative operations etc.

Minimum Cash Limit equal to the higher of
  • Thirty (30) days’ gross billing in the previous year; or
  • 50% (fifty percent) of the Adjusted EBITDA of the previous year; or
  • Sufficient cash equivalents so that the ratio Cash and equivalents / short-term debt is higher than 1.25 (one point two five).

 

5.6 Revisions of the financial risk management policy

The Board of Directors shall have the Financial Risk Management Policy revised every two years or as and when necessary.

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.

Last updated 27 de April de 2020