This page presents the risk factors that may influence the investment decision. These risks are related to:

a. to the Company:

 

Pursuant to Federal Law 8,987 of February 13, 1995 (“Law of Concessions”) and the concession agreements in force between the Company and the Concession Authority, a concession is subject to early termination in certain circumstances, such as: expropriation, forfeiture, amicable or judicial rescission, annulment of Concession Agreement due to defects or irregularities found in the granting procedure or act, bankruptcy or dissolution of the concessionaire, with the possibility of the government intervening in the concession in certain situations, before its termination. In any of the above cases, the assets tied to the concession will be returned to the Concession Authority. Any early termination of the Concession Agreement, as well as the imposition of penalties on the Company due to such termination, would significantly affect the Company’s results and its capacity to pay and fulfill its financial obligations.

 

The Company’s main concession agreement has registration number 059/2001, which was extended until 2042, pursuant to its 5th amendment in accordance with Federal Law 12,783 of October 24, 2013 (“Federal Law 12,783/13”), which sets forth the payment for assets in operation on May 31, 2000 and not completely depreciated on December 31, 2012, called existing assets (“RBSE”) that were recorded by the concessionaire and recognized by the Brazilian Electricity Regulatory Agency (“ANEEL”). The amount approved by ANEEL on the baseline date of 12/31/2012 was R$4.1 billion, pursuant to ANEEL Order 1,484 of May 30, 2017 (“Order 1,484/2017”). As a result, the book value recorded on December 31, 2016 was R$8.8 billion, updated on December 31, 2018 to R$9.1 billion and on September 30, 2019 to R$8.7 billion.

On April 20, 2016, the Ministry of Mines and Energy issued Decree 120, which determined that the amounts approved by ANEEL for RBSE payments be included in the Regulatory Remuneration Base of power transmission concessionaires as from the 2017 tariff process and that the cost of capital be added to the respective Permitted Annual Revenues (“RAP”).

A meeting of the Board of ANEEL held on October 11, 2016, approved the holding of Public Hearing no. 68/2016 between October 14 and November 14, 2016, to obtain inputs and additional information to improve the calculation of the cost of capital to be added to the RAP of transmission concessionaires covered by Federal Law 12,783/13, in line with MME Ordinance 120/2016. The Public Hearing was based on White Paper no. 336/2016, published on October 13, 2016, which proposes the procedures and criteria to be used in said calculation.

At the 6th Ordinary Public Meeting held on February 21, 2017, the outcome of Public Hearing no. 068/2016 was approved, leading to the publication of ANEEL Normative Resolution 762/2017 (“REN 762/2017"), on March 9, 2017, which set the rules for calculating the cost of capital to be added to the RAP of transmission concessionaires, whose agreements were extended in accordance with Federal Law 12,783/13. According to White Paper 23/2017-SGT/ANEEL, such amounts would start being paid in July 2017, during an average term of 8 years, and the Company is entitled to an annual amount of R$1,738.1 million for the 2017/2018 cycle. Said amount was calculated based on an asset of R$3,896.3 million, at December 2012 prices.

However, on May 30, 2017, ANEEL issued Order 1,484/2017, approving the final amount in the RBSE valuation report, in the amount of R$4,094.4 million, also at December 2012 prices.

As per the material fact notice disclosed on April 11, 2017, a court injunction was issued in response to a lawsuit filed by three industry associations, which provisionally determined the exclusion of the “remuneration” portion set forth in article 15, paragraph 2 of Federal Law 12,783/13 and the consequent recalculation of Permitted Annual Revenues (RAPs) by ANEEL.

Subsequently, ANEEL issued Order 1,779 dated June 20, 2017, in which it extends to all transmission users the same tariff treatment as that granted to these business associations and under the same terms of the injunction that suspends the application of remuneration of cost of capital not included since the extension of the concessions until the start of their payment for the cost of shareholders’ equity – regulatory “Ke”, established in paragraph 3 of Ordinance 120/16.

Starting from July 1, 2017, the transmission concessionaires began receiving RBSE payment, as set forth in Order 1,779/2017. Thus, the amount allocated to CTEEP was R$1,552.4 thousand in the 2017/2018 cycle.

On October 2, 2019, the Mining and Energy Commission approved Bill 4636/2019, on the adjustment of the value of undepreciated assets of power transmission concessionaires in existence on May 31, 2000. The proposal to replace Ke with WACC for the remunerating the financial component aims to contribute to definitively overcoming the dispute related to the payment of power transmission concessionaires of amounts related to assets that were undepreciated when expiring concessions were extended for 30 years in December 2012.

On November 12, 2019, the Company informed that the decision handed down by the Federal Judge of the 5th Civil Court of the Federal District rejected the claims by the Brazilian Association of Large Free Energy Consumers (ABRACE), the Brazilian Technical Association of Automatic Glass Industries (ABIVIDRO) and the Brazilian Association of Ferroalloys and Silicon Metal Producers (ABRAFE) in the lawsuit filed by them against the Federal Government and ANEEL, seeking to suspend the effects on their tariffs for the payment of credits relating to the assets existing on May 31, 2000 (“RBSE”), due to the transmission concessionaires that renewed their concessions in 2013 in accordance with Federal Law 12,783/2013. With the interlocutory relief revoked, the Company believes that the amounts to be paid as RBSE shall be recalculated to include the installment established in article 1, paragraph 3 of MME Ordinance 120/2016. However, other similar injunctions on the same subject are still in force in other lawsuits filed by other associations and large consumers, which should make the aforementioned recalculation impossible.

Moreover, the Company classified the RBSE amounts as receivable, as better explained in Note 7 of the financial statements of December 31, 2019. Different interpretations regarding the legal framework of the concession renewal operation and the right to receive RBSE amounts may change the accounting classification of RBSE assets and consequently, affect the accounting measurement of these assets.

 

The Company records in its financial statements amounts receivable related to supplemental retirement plan installments for retirees covered by State Law 4,819/58, in an amount equivalent to the difference of the amount that the Company believes is owed by the São Paulo State Government pursuant to State Law 4,819/58 and the disallowed amount that the São Paulo State Government (SEFAZ/SP) effectively reimburses it monthly.

In light of the events in 2013, especially regarding the change in the expected time for the realization of a portion of assets resulting from the dismissal without judgement of merit by the trial court on the lawsuit for collecting the amounts owed by the São Paulo State Government, Management reviewed in the third quarter of 2013, the amounts receivable related to State Law 4,819/58 and established a provision for losses caused by the expected delays in realizing the credits, a part of the amounts receivable, in the amount of R$516 million (historical value), corresponding to the installments not recognized as the exclusive liability of SEFAZ-SP.

On December 31, 2019, the amounts receivable from the São Paulo State Treasury Department, net of the aforementioned provision, totaled R$1.6 billion. If the São Paulo State Government obtains a favorable final and unappealable decision, the Company may have to write off the amounts receivable booked in its financial statements and recognize a loss for the same amount.

If the Company has to recognize such loss, its operating results and financial health may be negatively affected. Moreover, the Company may have to continue making monthly payments related to social security benefits under State Law 4,819/59, even if it obtains a favorable decision in said collection lawsuit filed against the São Paulo State Treasury, given that the court order that included CTEEP in the monthly payments was issued on another lawsuit.

 

In 2008, in order to safeguard its rights, ISA CTEEP filed a suit for declaratory judgement against Eletrobras and Eletropaulo to declare that it was not a debtor or was responsible for the execution filed by Eletrobras in the collection suit regarding the financing agreement signed by Eletropaulo in 1986. The suit was dismissed, with the Court judging that such discussion already existed in the collection lawsuit (in which, later, in March 2018, there was an agreement between Eletrobras and Eletropaulo, excluding ISA CTEEP from the plaintiffs) and ISA CTEEP being ordered to pay a loss fee of one percent (1%) on the adjusted value of the claim. The Company made this payment of R$8.6 million in January 2019. However, Eletropaulo’s attorneys filed an appeal to increase the loss fees to between 10% and 20% of the adjusted value of the claim, in which the Company may be ordered by court to pay the difference being claimed, for a total of R$206 million.

 

Operating complex power transmission networks and systems involves numerous risks, such as operational difficulties and unexpected interruptions caused by events beyond the control of the Company and its subsidiaries. Such events include equipment or process failures, availability below levels expected for the Company’s transmission assets and systems, as well as extreme events such as fires, weather phenomena, sabotages and others. The Company’s insurance coverage may be insufficient to fully cover the costs and losses resulting from such events, which may cause a significant negative effect. On the other hand, the Company’s revenues from operating and maintaining its facilities are related to their availability.

Pursuant to the Concession Agreements, the Company is subject to reductions in the RAP, notably for the Basic Network facilities, due to unavailability of transmission functions and penalties applied by ANEEL depending on the level and duration of service unavailability. As such, the Company may be affected by lengthy interruptions in its transmission lines and substations.

The Company may also be held fully liable by the system for damages resulting from disruptions, especially in case of blackouts, that originate from its system, if investigations by the National Electricity System Operator (“ONS”) prove that the Company is solely responsible for such events. If the ONS is unable to ascribe responsibility solely to a particular agent or if such responsibility is tied to ONS itself, the amounts to be reimbursed to the affected consumers/companies will be proportionally allocated among the generation, transmission and distribution concessionaires, which may cause losses to the Company.

 

ANEEL may impose penalties on the Company and its subsidiaries for noncompliance with deadlines and obligations established in the Company’s concession agreements, which may result in regulatory penalties imposed by ANEEL that, in accordance with its Normative Resolution 846 of June 11, 2019, may include, depending on the severity of the issue: warnings; fines of up to 2% of net operating income (“NOI”) in the last twelve months prior to the Notice of Violation issued against the Company; embargoes on the establishment of infrastructure at new equipment or facilities; restrictions on the operation of existing facilities and equipment; temporary suspension of participation in bidding processes for new concessions; forfeiture of concession. Any of the above penalties, as well as ANEEL’s intervention in the concessions or authorizations granted, may have a significant and negative effect on the Company’s business and operational, economic and financial results.

Also, delays in the schedule for implementing the infrastructure and operational startup established by ANEEL may result in the execution of the guarantee for compliance furnished by the Company under the concession agreements, which could have a significant and negative effect on the Company’s economic results and financial health.

Moreover, the Concession Authority has the powers to fully or partially revoke any of the Company’s concessions or authorizations before the end of the concession term in case of bankruptcy or dissolution, or through forfeiture, for reasons of public interest. It can also intervene in the concessions to ensure adjustments in the provision of services, as well as strict compliance with contractual, regulatory and legal provisions, besides interfering in operations and revenues arising from operations of the facilities of the Company and its subsidiaries.

In case of early termination, the Company cannot assure that the indemnification established in the Concession Agreement (value of assets that have not been fully amortized or depreciated) will be enough to offset the loss of future earnings.

 

The interest held by the Company and its subsidiaries in projects, such as infrastructure implementation, as well as the maintenance, expansion and operation of power transmission facilities and equipment, involve numerous risks, including: Inability to obtain government approvals, licenses, authorizations and permits; unavailability of equipment; unavailability of distribution and/or transmission systems; supply outages; work stoppages; strikes and other labor disputes; social unrest; hydrological and meteorological interference; unexpected engineering and environmental issues; delays in infrastructure implementation and operations, or unexpected excess costs; changes in existing subsidies; need for heavy capital investments; unavailability of adequate financing; execution at an amount higher than determined by ANEEL; and financial capacity of partners to honor their investment commitments.

Such risks may result in loss of revenue, increased expenses and, ultimately, to the termination of the Concession Agreement.

 

The Company’s investment decisions are based on projections that may or may not materialize. The risks involving the Company’s interest in such projects may give rise to indemnity obligations to third parties, which may not be fully covered by the insurance policies contracted.

The Company may be liable for any losses and damages caused to the National Interconnected System due to failures solely in its transmission system. In such cases, the insurance policies contracted may be insufficient to cover said losses and damages.

According to Brazilian laws, the Company, as a public service provider, may be held fully liable civilly for any direct and indirect losses resulting from inadequate provision of services, such as: (i) losses and damages caused to the system due to failures in the transmission operation; or (ii) interruption or disruptions that cannot be attributed to any identified agent in the electricity sector.

The indemnity amounts in case of item (ii) above and the criteria for identifying the responsible party is carried out in accordance with the network procedures established by the ONS and approved by ANEEL. Depending on the severity of the case and the final assessment by the ONS, such fact may have a significant and negative effect on the Company’s business, operating results and financial health.

 

The Company’s ability to implement its business strategy depends on a number of factors, including its ability to grow with financial discipline and operational efficiency and as per the regulatory conditions established by ANEEL.

The Company cannot guarantee that any of these goals will be fully achieved. A critical element of the Company’s strategy is the capacity to expand its transmission lines under profitable terms and conditions through new projects, either by acquiring concessions already granted or by presenting successful proposals for new concessions. Furthermore, once it secures new concessions, the Company must also seek fresh financing for establishing the infrastructure of new transmission lines or for renovations and improvements.

If the Company is unsuccessful in its proposals, including if certain costs related to infrastructure or renovations and improvements are higher than the initially planned investments impacting the Company’s expected returns, its financial health and operating results may be negatively affected.

 

In view of funding agreements, the Company is subject to clauses and conditions that restrict its autonomy and capacity for fresh borrowings. Currently, the Company has financing agreements and debenture issues that set forth certain commitments for the maintenance of financial indices, pursuant to item 10.1.

The existence of limits on the Company’s borrowings may impact its ability to raise fresh funds to finance its operations and settle maturing obligations, which may affect the Company’s ability to honor its financial commitments. Moreover, in case of noncompliance with any of the aforementioned agreements, the maturing amounts (principal, interest and fine) of said agreements may become early payable.

On December 31, 2019, the Company’s gross debt comprising loans, financing, leasing and debentures (current and non-current) totaled R$3,293.8 million, and any early maturity of the Company’s liabilities would negatively affect its financial health.

 

The Company has agreements with service providers for specialized services to execute the Concession Agreement, as well as turnkey agreements for building transmission infrastructure assets. If one or more of these companies fail to comply with any of their labor, social security and/or tax obligations, the Company may be made secondarily liable by the courts to settle such obligations.

In addition, due to lawsuits, contractors who render services to the Company may be considered employees of the Company for purposes of applicable labor laws. Furthermore, Courts may rule that it is impossible to outsource certain operations in the electricity sector, which would prevent the Company from using outsourced services in such activities, as well as the characterization of employment relationship between contractors and the Company or the need to use its own staff to execute certain services. In such cases, the Company’s management model, results and/or financial health may be negatively affected.

 

Any changes in labor laws may lead to changes in labor regulations. Some of these changes may result in higher labor costs for the Company and restrictions on its autonomy to hire and allocate personnel.

Furthermore, any changes in tax, corporate, regulatory, environmental laws or any increase in tax rates or creation of new taxes on the Company’s activities, as well as the establishment of new obligations, among others, may impact the Company’s results.

 

The Company is a party in arbitrations, administrative and legal proceedings on diverse legal matters, including lawsuits related to civil liability, tax liability, labor and regulatory obligations and other matters. For certain lawsuits, estimating the potential liability may be impossible and/or the actual amounts of contingencies may be higher than those provisioned by the Company. An unfavorable ruling on any current or future lawsuit may have a significant negative effect on the Company’s operating results or financial health.

 

Through the CESP Foundation, a closed private multi-sponsored supplementary pension entity, the Company offers its employees the Retirement and Pension Supplementation Plan (“PSAP/CTEEP”). Given the Plan’s modality (BD – Defined Benefits), in case of inefficient management of the contributions and definition of actuarial premises that will determine the calculation of the annual funding plans, the Company may need to make extraordinary contributions, negatively affecting it.

 

The Company is aware of the debt level of some sponsors that maintain Retirement Plans with FUNCESP. If said Plans face liquidity issues over time and, subsequently, are taken to court, the net assets of PSAP/CTEEP may be pledged since there are not sufficient protection mechanisms that guarantee the equity independence of the plans managed by the Multi-Sponsored Entity, negatively affecting the Company.

 

During the ordinary course of business, the Company collects and stores data about employees and clients in its data centers. Any unauthorized access, disclosure or other loss of information can result in complaints or lawsuits under Brazilian laws that protect the privacy of information and affect the Company’s reputation.

 

Risks originating externally and with huge impact potential, such as earthquakes, armed conflicts, endemics, epidemics, pandemics, large-scale climatic events and other high-impact operational events may adversely affect the Company.

These events can trigger political, economic, social and public health crises, affecting the supply chain (suppliers and service providers) and the entire electricity sector, besides creating the need for new laws and emergency measures by the Brazilian government, which may not be favorable to the Company.   

b. to its direct or indirect controlling shareholder or control group:

 

ISA Capital do Brasil S/A (“ISA”), the parent company of the Company, may have interests that conflict with those of other investors. ISA has the power, among others, to elect the majority of the directors of the Company and to determine the outcome of deliberations that require the approval of shareholders, corporate reorganizations and payment of dividends.

The interests of ISA or its eventual successors may differ from the interests of other shareholders of the Company.

c. to its shareholders:

Not applicable, since the Company does not see any risk factors related to its shareholders.

d. to its subsidiaries and affiliate companies:

 

A part of the Company's results depends on the operations of its subsidiaries and joint ventures. Similarly, the Company’s results depend on the direct consolidation of the results of its subsidiaries, as well as indirect consolidation (through the equity method) of its joint ventures. As such, significant operational and financial impacts on its subsidiaries and joint ventures may adversely affect the Company's results.

e. to its suppliers:

 

The Company, its subsidiaries and joint ventures depend on third parties to supply the equipment used at their facilities and, hence, are subject to price increases and failures by said suppliers, such as delays in the delivery of equipment or the delivery of damaged equipment. Such failures could affect the operations of the Company, its subsidiaries and joint ventures and significantly affect the Company's results. Moreover, due to the technical characteristics of the equipment used at their facilities, the Company, its subsidiaries and joint ventures have few suppliers at their disposal.

If any supplier discontinues the production or interrupts the sale of any equipment acquired by the Company and its subsidiaries, the provision of electricity transmission services by the Company and its subsidiaries may be significantly affected and they may be forced to make unscheduled investments to acquire equipment from suppliers to be contracted and approved. In extreme cases, the Company may have to develop or fund the development of a new technology at a single supplier to replace the equipment not available, which could adversely affect the financial health and operating results of the Company and its subsidiaries.

f. to its clients:

 

Monthly payments made by agents accessing the transmission system are generally guaranteed by Guarantee Agreements (CCG) and bank guarantees. The guarantee mechanism established in the CCGs determines that users of the system give the National Electricity System Operator (ONS) or the transmission companies access to accounts held in the banks specified in the respective CCG.

In these accounts, a balance of deposits (from invoices paid by end consumers of users), equivalent to at least 110% of the average amount of the last three monthly invoices due to the transmission concessionaires, must be maintained. If the accessing agents fail to make the payment within two days of the due date, the ONS or the corresponding company will instruct the bank managing the guarantee to block the bank accounts of the defaulting user, transfer the amounts deposited in them, up to the limit of the amounts due (including interest and penalties), to a special account held at the managing bank, which will then transfer the amounts to the affected transmission companies. If a user of the transmission system fails to make the payments more than three consecutive times (or more than five times in all), the CCG establishes that said user must submit a letter of credit to ONS, for a term of six months and equivalent to two monthly invoices for transmission services.

Failure to comply with the warranty obligation pursuant to the CCGs could result in rescission of the Transmission System Use Agreement (CUST) and the Transmission Connection Agreement (CCT) related to such guarantee, and the corresponding default be resolved with the involvement of ANEEL, which could result in losses for the Company.

g. to the sectors of the economy in which the issuer operates:

 

In its bid notices, the government imposes certain requirements on all bidding participants for new concessions, including indicators of the financial stability of the participant and / or its shareholders. The Company cannot guarantee that it can satisfy all the requirements for acquiring new concessions or participating in new bidding processes. Concessions for the provision of public services may be subject to varying levels of political sensitivity. The rules for bidding processes for power transmission service concessions are subject to changes in the applicable regulatory framework. The Company cannot guarantee that the bidding processes related to power transmission services will actually take place. If such bidding processes are not held, are insignificant or held as per terms that are not economically viable or attractive to the Company and the Controlling Shareholder, the expansion and diversification of the sector may be adversely affected, also affecting the Company’s projections for growth through auctions.

 

The operations of the energy sector can cause adverse impacts and damage to the environment. Federal law, when dealing with absolute liability, imposes on those who directly or indirectly cause environmental degradation the obligation to remedy or indemnify the damages caused to the environment and third parties affected, regardless of the existence of guilt. Federal law also allows piercing the corporate veil of the polluting company and holding the administrators personally liable to reimburse the damages caused to the environment. As a result, the partners and administrators of the polluting company may be obliged to bear the cost of environmental remedy. The payment of substantial costs for recovering the environment and environmental indemnities may adversely affect the Company's financial situation. Moreover, major environmental damages, such as cases involving pollution or damage to human health, may adversely affect the Company's image.

h. to the regulation of sectors in which the issuer operates:

 

The Company's core activities - construction, operation and maintenance of power transmission facilities - are regulated and supervised by ANEEL with powers delegated by the Concession Authority (Ministry of Mines and Energy - MME) and supervised / operated under the coordination of ONS. These sector bodies have exercised a high degree of influence over the Company's activities. MME and ANEEL have discretionary powers to implement and change the regulations applicable to the Company's operations, including issues related to the remuneration and inspection of the Company's activities, while ONS is responsible for the operations, maintenance and operational safety aspects of the facilities and the system. Any regulatory measure defined by competent authorities may impose significant burden on the Company’s operations and adversely affect it if the entrenchment clause in the concession agreement, which assures the preservation of the Company's economic and financial balance, is not honored.

 

The determination of the RAP applicable to the Company for the provision of services is due to the Concession Agreement and includes adjustments and reviews in accordance with the agreement and supervenient regulations.

The concession agreement and Brazilian laws establish three types of tariff adjustments: (i) annual tariff adjustment; (ii) periodic tariff review every five years; and (iii) extraordinary tariff review.

The agreements are adjusted annually in July. In the annual tariff adjustment, which is approved by ANEEL, the effects of inflation on revenues are offset in order to ensure the economic and financial balance of the agreements. Also included are revenues from new investments that came into operation during the previous cycle.

The periodic tariff review is held by updating the asset remuneration base and calculating the respective revenue required for: (i) adequate remunerating the investments made, (ii) the efficient coverage of operating costs, (iii) transferring sector charges, (iv) depreciation and amortization costs.

The Company's operating results may be adversely affected if, in its tariff review inspection, ANEEL’s understanding differs from the Company’s understanding with regard to assets that are included in the Regulatory Remuneration Base and its measurement, the regulatory operating costs and the revised weighted cost of capital (WACC). Moreover, it cannot be assured that the rates established are favorable to the Company and that they enable all cost increases to be passed on to clients. If that does not happen, the Company, its results and business may be significantly affected.

 

On September 24, 2019, the new Law on Regulatory Agencies (Law 13,848 of June 25, 2019), came into force. The new Law guarantees autonomy and increases the efficiency of regulatory agencies, besides reducing political interference in their functioning despite the significant influence of the Executive Branch in selecting their top management. Any interference or new measures related to the aforementioned law could adversely affect the power transmission companies.

 

Electricity companies are subject to strict environmental laws at the federal, state and municipal spheres regarding the clearance of vegetation, solid waste management, interventions in specially protected areas, operations of potentially polluting activities, among other aspects. These companies require licenses and authorizations from government agencies to set up and run their projects.

In case of noncompliance with such laws, regulations, licenses and authorizations, the companies may be subject to administrative sanctions such as fines, suspension of operations, cancellation of licenses and authorizations, or even criminal sanctions (including their managers), without prejudice to civil obligations to repair the environmental damages caused. The Public Prosecutor's Office may launch civil investigation and/or immediately file a public civil action claiming compensation for damages to the environment and affected third parties.

Government agencies or other authorities may also issue new stricter rules or more restrictive interpretations of existing laws and regulations, which may force electricity companies, including the Company, to spend additional funds on environmental adequacy, including obtaining environmental licenses for facilities and equipment that did not previously require such environmental licenses.

Government agencies or other authorities may also significantly delay the issue of licenses and authorizations required for operating by electricity companies, including the Company, causing delays in project implementation schedules and, consequently, adverse effects on the business. Moreover, delays in the renewal of environmental licenses that had been applied for before the minimum advance period required by environmental agencies may adversely affect the Company's operations. Any action in this regard by government agencies may negatively affect business across the electricity sector, with potential adverse effects on the Company's results.

Power transmission activities are also subject to diverse laws and regulations on operational health and safety, which may even become more stringent in the future and require higher investments or penalties, which could affect adversely affect the Company's business.

i. to foreign countries in which the issuer operates:

Not applicable, since the Company does not operate in foreign countries.

j. to social and environmental questions:

 

There are social and environmental issues that can impact the Company's operations. These issues include: accidental forest fires or those caused by improper use of fire; irregular encroachments (of people and structures) and disposal of waste in areas under their responsibility; damages to biodiversity caused by their operations; noncompliance with laws and regulations; bottlenecks in environmental licensing; soil erosion; climate and natural factors that may affect the company's assets (e.g. storms, tornadoes, lightning strikes, fires); gatherings and events that could the company's infrastructure and operations; conflicts with owners of easement areas; unauthorized access to company facilities by third parties; accidents resulting from the interaction of surrounding community with the company's assets; violation of the human rights of employees and third parties, among others.

The occurrence of these risk events may have an impact on the Company, such as payments for compensation or compliance with conditions, cost of indemnities for material damage or physical or mental damage to employees or third parties, fines levied by competent bodies and market regulators (ANEEL and ONS), revocation of licenses, authorizations, permits and/or concessions, as applicable, as well as the suspension of operations.

The Constitution of Brazil establishes three types of accountability: civil, criminal and administrative, which could be applied independently and cumulatively.

Civil liability for an environmental damage caused by a specific agent has a reparatory or indemnity nature, which differs from the administrative and penal sanctions, which in turn differ from one another. While criminal liability is aimed at punishing conduct that violates legal assets, administrative sanctions are aimed at punishing conduct that is contrary to an administrative rule, which is embodied in a duty of general compliance or collaboration with government activity.

In the civil sphere, anyone who causes damage to the environment is liable for repairing or indemnifying the damage caused, regardless of guilt. All the parties directly or indirectly involved in causing the damage are fully and jointly liable. In this scenario, if more than one company contributed to the damage to the environment, or if the damage was caused by a service provider (e.g. responsible for disposing of the Company's waste or the company contracted for clearing vegetation), those who have better financial conditions will be ordered to remedy the damage or pay the indemnity and later recover the same from other companies involved. In Brazilian law, there is no ceiling or limit on the amount to be fixed as indemnity for environmental damage, which will be proportional to the damage caused.

In the administrative sphere, Federal Decree 6,514/2008 establishes the following sanctions for infractions: I - warning; II - simple fine; III - daily fine; IV - apprehension of animals, products and byproducts of biodiversity; IV - apprehension of animals, products and byproducts of flora and fauna; V - destruction or disablement of the product; VI - suspension of sale and manufacture of the product;; VII - embargo of work or operation and the respective areas; VIII - demolition of the worksite; IX - partial or total suspension of activities; and x – restrictions on rights.

Finally, the Environmental Crimes Law (Federal Law 9,605/1998) holds liable all those who, in any way, contribute to crimes against the environment, with each being penalized to the extent of their guilt. The law also holds the legal entity liable, as such characterized if the infraction is committed: (i) by decision of its legal or contractual representative or its collective decision-making body; or (ii) in the interest or benefit of the legal entity it represents. The liability of the legal entity does not exclude that of individuals, perpetrators and co-perpetrators or other participants, which extends the liability for such actions to members of legal entities that participated in such decisions or who are guilty of omission when they could have prevented the losses arising therefrom. In addition, the corporate veil may be pierced whenever the personality of the legal entity is an obstacle for indemnifying the damages caused to the environment, with the partners and administrators being held liable.

Updated on August 31, 2020.